10-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________

FORM 10-K

(Mark One)

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

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     

Commission	Registrants; State of Incorporation;	IRS Employer
File Number	Addresses; and Telephone Number	Identification No.
1-8962	PINNACLE WEST CAPITAL CORPORATION	86-0512431
	(An Arizona corporation)
	400 North Fifth Street, P.O. Box 53999
	Phoenix, Arizona 85072-3999
	(602) 250-1000
1-4473	ARIZONA PUBLIC SERVICE COMPANY	86-0011170
	(An Arizona corporation)
	400 North Fifth Street, P.O. Box 53999
	Phoenix, Arizona 85072-3999
	(602) 250-1000

Securities registered pursuant to Section 12(b) of the Act:

	Title Of Each Class	Name Of Each Exchange On Which Registered
PINNACLE WEST CAPITAL CORPORATION	Common Stock,	New York Stock Exchange
	No Par Value	Pacific Stock Exchange
ARIZONA PUBLIC SERVICE COMPANY	None	None

Securities registered pursuant to Section 12(g) of the Act: None.

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or in any amendment to this Form 10-K. o

     Indicate by check mark whether each registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

PINNACLE WEST CAPITAL CORPORATION	Yes x	No o
ARIZONA PUBLIC SERVICE COMPANY	Yes o	No þ

     State the aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of each registrant’s most recently completed second fiscal quarter:

PINNACLE WEST CAPITAL CORPORATION	$3,673,440,593 as of June 30, 2004
ARIZONA PUBLIC SERVICE COMPANY	$0 as of June 30, 2004

The number of shares outstanding of each registrant’s common stock as of March 14, 2005

PINNACLE WEST CAPITAL CORPORATION	92,080,964 shares
ARIZONA PUBLIC SERVICE COMPANY	Common Stock, $2.50 par value, 71,264,947 shares. Pinnacle West Capital Corporation is the sole holder of Arizona Public Service Company’s Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Pinnacle West Capital Corporation’s definitive Proxy Statement relating to its Annual Meeting of Shareholders to be held on May 18, 2005 are incorporated by reference into Part III hereof.

     Arizona Public Service Company meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format allowed under that General Instruction.

     This combined Form 10-K is separately filed by Pinnacle West Capital Corporation and Arizona Public Service Company. Each registrant is filing on its own behalf all of the information contained in this Form 10-K that relates to such registrant. Neither registrant is filing any information that does not relate to such registrant, and therefore makes no representation as to any such information.

TABLE OF CONTENTS

			Page
GLOSSARY			1
PART I			4
	Item 1.	Business	4
	Item 2.	Properties	19
	Item 3.	Legal Proceedings	24
	Item 4.	Submission of Matters to a Vote of Security Holders	24
	Supplemental Item.
		Executive Officers of Pinnacle West	25
PART II			27
	Item 5.	Market for Registrants’ Common Equity, Pinnacle West Related Stockholder Matters and Issuer Purchases of Equity Securities	27
	Item 6.	Selected Financial Data	28
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
	Item 7A.	Quantitative and Qualitative Disclosures about Market Risk.	62
	Item 8.	Financial Statements and Supplementary Data	63
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	148
	Item 9A.	Controls and Procedures	148
	Item 9B.	Other Information	149
PART III			149
	Item 10.	Directors and Executive Officers of Pinnacle West	149
	Item 11.	Executive Compensation	149
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	149
	Item 13.	Certain Relationships and Related Transactions	152
	Item 14.	Principal Accountant Fees and Services	152
PART IV			153
	Item 15.	Exhibits and Financial Statement Schedules	153
SIGNATURES			191
Exhibit 10.1
Exhibit 10.79.2
Exhibit 10.95
Exhibit 10.96
Exhibit 10.97
Exhibit 10.98
Exhibit 10.99
Exhibit 10.100
Exhibit 10.101
Exhibit 10.102
Exhibit 10.103
Exhibit 10.104
Exhibit 10.105
Exhibit 12.1
Exhibit 12.2
Exhibit 21.1
Exhibit 23.1
Exhibit 23.2
Exhibit 31.1
Exhibit 31.2
Exhibit 31.3
Exhibit 31.4
Exhibit 32.1
Exhibit 32.2
Exhibit 99.31
Exhibit 99.32

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GLOSSARY

ACC – Arizona Corporation Commission

ADEQ – Arizona Department of Environmental Quality

AFUDC – allowance for funds used during construction

AISA – Arizona Independent Scheduling Administrator

ALJ – Administrative Law Judge

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

APS – Arizona Public Service Company, a subsidiary of the Company

APS Energy Services – APS Energy Services Company, Inc., a subsidiary of the Company

CC&N – Certificate of Convenience and Necessity

Cholla – Cholla Power Plant

Citizens – Citizens Communications Company

Clean Air Act – Clean Air Act, as amended

Company – Pinnacle West Capital Corporation

CPUC – California Public Utility Commission

DOE – United States Department of Energy

EITF – FASB’s Emerging Issues Task Force

El Dorado – El Dorado Investment Company, a subsidiary of the Company

EPA – United States Environmental Protection Agency

ERMC – Energy Risk Management Committee

FASB – Financial Accounting Standards Board

FERC – United States Federal Energy Regulatory Commission

FIN – FASB Interpretation

Financing Order – ACC Order that authorized APS’ $500 million loan to Pinnacle West Energy in May 2003

FIP – Federal Implementation Plan

Four Corners – Four Corners Power Plant

FSP – FASB Staff Position

GAAP – accounting principles generally accepted in the United States of America

IRS – United States Internal Revenue Service

ISO – California Independent System Operator

kW – kilowatt, one thousand watts

kWh – kilowatt-hour, one thousand watts per hour

Moody’s – Moody’s Investors Service

MW – megawatt, one million watts

MWh – megawatt-hours, one million watts per hour

NAC – collectively, NAC Holding Inc. and NAC International Inc., subsidiaries of El Dorado that were sold in November 2004

Native Load – retail and wholesale sales supplied under traditional cost-based rate regulation

1999 Settlement Agreement – comprehensive settlement agreement related to the implementation of retail electric competition

NRC – United States Nuclear Regulatory Commission

Nuclear Waste Act – Nuclear Waste Policy Act of 1982, as amended

OCI – other comprehensive income

Palo Verde – Palo Verde Nuclear Generating Station, also known as ANPP

PG&E – PG&E Corporation

Pinnacle West – Pinnacle West Capital Corporation, the Company

Pinnacle West Energy – Pinnacle West Energy Corporation, a subsidiary of the Company

PPL Sundance – PPL Sundance Energy, LLC

PRP – potentially responsible parties under the Superfund Act

PSA – power supply adjuster

PWEC Dedicated Assets – the following Pinnacle West Energy power plants, each of which is dedicated to serving APS’ customers: Redhawk Units 1 and 2, West Phoenix Units 4 and 5 and Saguaro Unit 3

PX – California Power Exchange

RFP – request for proposals

RTO – regional transmission organization

Rules – ACC retail electric competition rules

Salt River Project – Salt River Project Agricultural Improvement and Power District

SCE – Southern California Edison Company

SEC – United States Securities and Exchange Commission

SFAS – Statement of Financial Accounting Standards

SIP – State Implementation Plan

SNWA – Southern Nevada Water Authority

Spark Spread – Excess of market power price over market gas price at a specific location

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SPE – special-purpose entity

Standard & Poor’s – Standard & Poor’s Corporation

SunCor – SunCor Development Company, a subsidiary of the Company

Sundance Plant – PPL Sundance’s 450-megawatt generating facility located approximately 55 miles southeast of Phoenix, Arizona

Superfund – Comprehensive Environmental Response, Compensation and Liability Act

T&D – transmission and distribution

Track A Order – ACC order dated September 10, 2002 regarding generation asset transfers and related issues

Track B Order – ACC order dated March 14, 2003 regarding competitive solicitation requirements for power purchases by Arizona’s investor-owned electric utilities

Trading – energy-related activities entered into with the objective of generating profits on changes in market prices

2004 Settlement Agreement – an agreement proposing terms under which APS’ general rate case would be settled

VIE – variable interest entity

WestConnect – WestConnect RTO, LLC, a proposed RTO to be formed by owners of electric transmission lines in the southwestern United States

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INTRODUCTION

Filing Format

     This Annual Report on Form 10-K is a combined report being filed by two separate registrants: Pinnacle West and APS. The information required with respect to each company is set forth within the applicable items.

     The Management’s Discussion and Analysis of Financial Condition and Results of Operations included under Item 7 of this report is divided into the following two sections:

•   Pinnacle West Consolidated—This section describes the financial condition and results of operations of Pinnacle West and its subsidiaries on a consolidated basis. It includes discussions of Pinnacle West’s regulated utility and non-utility operations. A substantial part of Pinnacle West’s revenues and earnings are derived from its regulated utility, APS.

•   APS—This section includes a detailed description of the results of operations and contractual obligations of APS.

     Item 8 of this report includes Consolidated Financial Statements of Pinnacle West and Financial Statements of APS. Item 8 also includes Notes to Pinnacle West’s Consolidated Financial Statements, the majority of which also relate to APS, and Supplemental Notes to APS’ Financial Statements.

PART I

ITEM 1. BUSINESS

OVERVIEW

General

     Pinnacle West was incorporated in 1985 under the laws of the State of Arizona and owns all of the outstanding equity securities of APS, its major subsidiary. APS is a vertically-integrated electric utility that provides either retail or wholesale electric service to most of the state of Arizona, with the major exceptions of about one-half of the Phoenix metropolitan area, the Tucson metropolitan area and Mohave County in northwestern Arizona. Through its marketing and trading division, APS also generates, sells and delivers electricity to wholesale customers in the western United States.

     Pinnacle West’s other significant subsidiaries are Pinnacle West Energy, which owns and operates unregulated generating plants; APS Energy Services, which provides competitive energy services and products in the western United States; and SunCor, which is engaged in real estate development activities. Each of these subsidiaries is discussed in greater detail below. See “Business of Pinnacle West Energy Corporation,” “Business of APS Energy Services Company, Inc.” and “Business of SunCor Development Company” in this Item 1.

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Business Segments

     Pinnacle West has three principal business segments (determined by products, services and the regulatory environment):

•   the regulated electricity segment (70% of operating revenues in 2004), which consists of traditional regulated retail and wholesale electricity businesses (primarily electric service to Native Load customers) and related activities, and includes electricity generation, transmission and distribution;

•   the marketing and trading segment (16% of operating revenues in 2004), which consists of competitive energy business activities, including wholesale marketing and trading and APS Energy Services’ commodity-related energy services; and

•   the real estate segment (12% of operating revenues in 2004), which consists of SunCor’s real estate development and investment activities.

     See Note 17 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8 for financial information about the business segments.

APS General Rate Case

     APS’ general rate case pending before the ACC is the key issue affecting Pinnacle West’s and APS’ outlook. As discussed in greater detail in Note 3 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8, on August 18, 2004, a substantial majority of the parties to the rate case, including APS, the ACC staff, the Arizona Residential Utility Consumer Office, other customer and advocacy groups, and merchant power plant intervenors entered into the 2004 Settlement Agreement, which proposes terms under which the rate case would be settled.

     On February 28, 2005, the administrative law judge issued a recommended order, proposing ACC approval of the 2004 Settlement Agreement with two changes related to the PSA. On March 14, 2005, the parties to the 2004 Settlement Agreement jointly filed suggested changes to the recommended order addressing, among other things, the recommended order’s proposed treatment of the PSA. The ACC has scheduled open meetings on March 25 and March 28, 2005 to consider the recommended order and suggested changes. APS cannot predict the outcome of this matter.

Employees

     At December 31, 2004, Pinnacle West employed about 7,200 people, including the employees of its subsidiaries. Of these employees, about 6,100 were employees of APS, including employees at jointly-owned generating facilities for which APS serves as the generating facility manager. About 1,100 people were employed by Pinnacle West and its other subsidiaries. Pinnacle West’s principal executive offices are located at 400 North Fifth Street, Phoenix, Arizona 85004 (telephone 602-250-1000).

Available Information

     Pinnacle West makes available free of charge on or through its internet site, (www.pinnaclewest.com) the following filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC: its Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q, its Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.

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     Pinnacle West also has a Corporate Governance webpage. You can access Pinnacle West’s Corporate Governance webpage through its internet site, www.pinnaclewest.com, by clicking on the “About Us” link to the heading “Corporate Commitments.” Pinnacle West posts the following on its Corporate Governance webpage:

•   Corporate Governance Guidelines;

•   Board Committee Summary;

•   Charters for Pinnacle West’s Audit Committee, Corporate Governance Committee, Finance and Operating Committee and Human Resources Committee;

•   Code of Ethics for Financial Professionals; and

•   Ethics Policy and Standards of Business Practices.

     Pinnacle West will post any amendments to the Code of Ethics and Ethics Policy and Standards of Business Practices, and any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange, on its internet site. The information on Pinnacle West’s internet site is not incorporated by reference into this report.

     You can request a copy of these documents by contacting Pinnacle West at the following address: Pinnacle West Capital Corporation, Office of the Secretary, Station 9068, P.O. Box 53999, Phoenix, Arizona 85072-3999 (telephone 602-250-3252) .

Forward-Looking Statements

     This document contains forward-looking statements based on current expectations, and neither Pinnacle West nor APS assumes any obligation to update these statements or make any further statements on any of these issues, except as required by applicable law. These forward-looking statements are often identified by words such as “estimate,” “predict,” “hope,” “may,” “believe,” “anticipate,” “plan,” “expect,” “require,” “intend,” “assume” and similar words. Because actual results may differ materially from expectations, we caution readers not to place undue reliance on these statements. A number of factors could cause future results to differ materially from historical results, or from results or outcomes currently expected or sought by Pinnacle West or APS. In addition to the “Risk Factors” described in Exhibits 99.31 and 99.32 to this report, these factors include, but are not limited to:

•   state and federal regulatory and legislative decisions and actions, including the outcome of the rate case APS filed with the ACC on June 27, 2003 and the wholesale electric price mitigation plan adopted by the FERC;

•   the outcome of regulatory, legislative and judicial proceedings relating to the restructuring;

•   the ongoing restructuring of the electric industry, including the introduction of retail electric competition in Arizona and decisions impacting wholesale competition;

•   market prices for electricity and natural gas;

•   power plant performance and outages, including transmission outages and constraints;

•   weather variations affecting local and regional customer energy usage;

•   customer growth and energy usage;

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•   regional economic and market conditions, including the results of litigation and other proceedings resulting from the California energy situation, volatile purchased power and fuel costs and the completion of generation and transmission construction in the region, which could affect customer growth and the cost of power supplies;

•   the cost of debt and equity capital and access to capital markets;

•   the uncertainty that current credit ratings will remain in effect for any given period of time;

•   our ability to compete successfully outside traditional regulated markets (including the wholesale market);

•   the performance of our marketing and trading activities due to volatile market liquidity and any deteriorating counterparty credit and the use of derivative contracts in our business (including the interpretation of the subjective and complex accounting rules related to these contracts);

•   changes in accounting principles generally accepted in the United States of America and the interpretation of those principles;

•   the performance of the stock market and the changing interest rate environment, which affect the amount of required contributions to Pinnacle West’s pension plan and APS’ nuclear decommissioning trust funds, as well as the reported costs of providing pension and other postretirement benefits;

•   technological developments in the electric industry;

•   the strength of the real estate market in SunCor’s market areas, which include Arizona, Idaho, New Mexico and Utah; and

•   other uncertainties, all of which are difficult to predict and many of which are beyond the control of Pinnacle West and APS.

REGULATION AND COMPETITION

Retail

     The ACC regulates APS’ retail electric rates and its issuance of securities. The ACC must also approve any transfer of APS’ property used to provide retail electric service and approve or receive prior notification of certain transactions between Pinnacle West, APS and their respective affiliates. See Note 3 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8 for a discussion of the status of electric industry restructuring in Arizona.

     The electric utility industry has undergone significant regulatory change in the last few years regarding competition in the sale of electricity and related services. However, many states, including Arizona, have reexamined retail electric competition.

     As of January 1, 2001, all of APS’ retail customers were eligible to choose alternate energy suppliers. However, there are currently no active retail competitors offering unbundled energy or other utility services to APS’ customers. As a result, APS cannot predict when, and the extent to which, additional competitors will re-enter APS’ service territory. Also, regulatory developments and legal challenges to the Rules have raised considerable uncertainty about the status and pace of retail electric competition and of electric restructuring in Arizona. See “Retail Electric Competition Rules” in Note 3 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8 for additional information.

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     APS is subject to varying degrees of competition from other investor-owned utilities in Arizona (such as Tucson Electric Power Company and Southwest Gas Corporation) as well as cooperatives, municipalities, electrical districts and similar types of governmental or non-profit organizations (principally Salt River Project). APS also faces competition from low-cost, hydroelectric power and parties that have access to low-priced preferential, federal power and other governmental subsidies. In addition, some customers, particularly industrial and large commercial customers, may own and operate generation facilities to meet their own energy requirements.

Wholesale

     General

     The FERC regulates rates for wholesale power sales and transmission services. During 2004, approximately 9.4% of APS’ electric operating revenues resulted from such sales and services. In early 2003, Pinnacle West moved its marketing and trading division to APS for all future marketing and trading activities (existing wholesale contracts remained at Pinnacle West) as a result of the ACC’s Track A Order prohibiting the previously required transfer of APS’ generating assets to Pinnacle West Energy (see “Track A Order” in Note 3 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8).

     The marketing and trading division focuses primarily on managing APS’ purchased power and fuel risks in connection with its costs of serving retail customer energy requirements. The division also sells, in the wholesale market, APS and Pinnacle West Energy generation output that is not needed for APS’ Native Load and, in doing so, competes with other utilities, power marketers and independent power producers. Additionally, the marketing and trading division, subject to specified parameters, markets, hedges and trades in electricity, fuels and emissions allowances and credits.

     Market-Based Rate Proceeding

     On August 11, 2004, Pinnacle West, APS, Pinnacle West Energy and APS Energy Services (collectively, the “Pinnacle West Companies”) submitted to the FERC an update to their three-year market-based rate review, pursuant to the FERC’s order implementing a new generation market power analysis. On December 20, 2004, the FERC issued an order approving the Pinnacle West Companies’ market-based rates for control areas other than those of APS, Public Service Company of New Mexico and Tucson Electric Power Company. With respect to these three control areas, the FERC required that the Pinnacle West Companies submit additional data, and on February 18, 2005, the Pinnacle West Companies made such a filing. To the extent the FERC does not permit the Pinnacle West Companies to make sales at market-based rates in these control areas, the Pinnacle West Companies will still be permitted to make sales at cost-based rates in the three control areas. We cannot currently predict the outcome of this proceeding, but we do not believe that having such sales limited to cost-based rates will have a material adverse effect on our financial position, results of operations or liquidity.

     Regional Transmission Organizations

     Federal In a December 1999 order, the FERC established characteristics and functions that must be met by utilities in forming and operating RTOs. The characteristics for an acceptable RTO include independence from market participants, operational control over a region large enough to

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support efficient and nondiscriminatory markets and exclusive authority to maintain short-term reliability. Additionally, in a pending notice of proposed rulemaking, the FERC is considering implementing a standard market design for wholesale markets.

     On October 16, 2001, APS and other owners of electric transmission lines in the southwestern U.S. filed with the FERC a request for a declaratory order confirming that their proposal to form WestConnect RTO, LLC would satisfy the FERC’s requirements for the formation of an RTO. On October 10, 2002, the FERC issued an order finding that the WestConnect proposal, if modified to address specified issues, could meet the FERC’s RTO requirements and provide the basic framework for a standard market design for the southwestern U.S. See Arizona Public Service Co., 101 FERC ¶ 61,033, order on reh’g, 101 FERC ¶ 61,350, order on reh’g, 104 FERC ¶ 61,285 (2003). Since that time, APS has been evaluating a phased approach to RTO implementation in the desert Southwest. APS is currently participating with other entities in the southwestern U.S. in a cost/benefit analysis of implementing the WestConnect RTO, the results of which are expected to be completed in 2005.

     If APS ultimately joins an RTO, APS could incur increased transmission-related costs and receive reduced transmission service revenues; APS may be required to expand its transmission system according to decisions made by the RTO rather than its internal planning process; and APS may experience other impacts on its operations, cash flows or financial position that will not be quantifiable until the final tariffs and other material terms of the RTO are known.

     State The ACC’s retail electric competition Rules require the formation and implementation of an Arizona Independent Scheduling Administrator. The purpose of the AISA is to oversee the application of operating protocols to ensure statewide consistency for transmission access. The AISA is anticipated to be a temporary organization until the implementation of an independent system operator or RTO. APS participated in the creation of the AISA, a not-for-profit entity, and the filing at the FERC for approval of its operating protocols. An ACC proceeding reviewing the AISA is still pending.

BUSINESS OF ARIZONA PUBLIC SERVICE COMPANY

General

     APS was incorporated in 1920 under the laws of the State of Arizona and currently has more than 989,500 customers. APS does not distribute any products. During 2004, no single purchaser or user of energy (other than Pinnacle West) accounted for more than 6.2% of electric revenues. See “Overview – General” and “Regulation and Competition” above for additional background information about APS’ business.

     At December 31, 2004, APS employed approximately 6,100 people, including employees at jointly-owned generating facilities for which APS serves as the generating facility manager. APS’ principal executive offices are located at 400 North Fifth Street, P.O. Box 53999, Phoenix, Arizona 85072-3999 (telephone 602-250-1000).

Purchased Power and Generating Fuel

     See “Properties – Capacity” in Item 2 for information about APS’ and Pinnacle West’s power plants by fuel types.

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     2004 Energy Mix

     Pinnacle West’s consolidated sources of energy during 2004 were: purchased power – 56.9%; coal – 20.8%; nuclear – 13.5%; gas – 8.7%; and other (includes oil, hydro and solar) – 0.1%. In accordance with GAAP, a substantial portion of our purchased power contracts was netted against wholesale sales contracts on the Consolidated Statements of Income. See Note 18 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8.

     APS’ sources of energy during 2004 were: purchased power – 62.9%; coal – 21.4%; nuclear – 13.9%; gas – 1.7%; and other (includes oil, hydro and solar) – 0.1%. In accordance with GAAP, a substantial portion of our purchased power contracts was netted against wholesale sales contracts on the Statements of Income. See Note 18 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8.

     Coal Supply

     Cholla Cholla is a coal-fired power plant located in northeastern Arizona. It is a jointly-owned facility operated by APS. APS purchases most of Cholla’s coal requirements from a coal supplier that mines all of the coal under a long-term lease of coal reserves with the Navajo Nation, the federal government and private landholders. Cholla has sufficient coal under current contracts to ensure a reliable fuel supply through 2007. These contracts include expected requirements for low sulfur coal, which is required for certain limited operating conditions; however, if necessary, low sulfur coal may be purchased on the open market. APS may purchase a portion of Cholla’s coal requirements on the spot market to take advantage of competitive pricing options and to supplement coal required for increased operating capacity. Following expiration of current contracts, APS believes that competitive fuel supply options will exist to ensure the continued operation of Cholla for its useful life, and has evaluated the necessary plant modifications and operational requirements to convert to other fuel sources.

     Four Corners Four Corners is a coal-fired power plant located in the northwestern corner of New Mexico. It is a jointly-owned facility operated by APS. APS purchases all of Four Corners’ coal requirements from a supplier with a long-term lease of coal reserves with the Navajo Nation. The Four Corners coal contract runs through July 2016, with options to extend the contract for five to fifteen additional years beyond the current plant site lease expiration in 2017.

     Navajo Generating Station The Navajo Generating Station is a coal-fired power plant located in northern Arizona. It is a jointly-owned facility operated by Salt River Project. The Navajo Generating Station’s coal requirements are purchased from a supplier with long-term leases from the Navajo Nation and the Hopi Tribe. The Navajo Generating Station is under contract with its coal supplier through 2011, with options to extend through the current plant site lease expiration in 2019. The Navajo Generating Station lease waives certain taxes through the lease expiration in 2019. Items that may impact the fuel price include lease provisions that allow for a renegotiation of the coal royalty in 2007 and 2017 and a fuel contract requirement for a five-year price review in 2007. In addition, the potential closure of the Mohave Generating Station will impact the cost structure for the Black Mesa – Kayenta Mine complex, and may increase costs to the Navajo Generating Station, which is served by the Kayenta Mine.

     See “Legal Proceedings” in Item 3 for information about a lawsuit relating to royalties for coal paid by the participants at the Navajo Generating Station.

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     See “Properties – Capacity” in Item 2 for information about APS’ ownership interests in Cholla, Four Corners and the Navajo Generating Station. See Note 11 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8 for information regarding APS’ coal mine reclamation obligations.

     Natural Gas Supply

     See Note 11 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8 for a discussion of APS’ and Pinnacle West’s natural gas requirements.

     Nuclear Fuel Supply

     Palo Verde Fuel Cycle Palo Verde is a nuclear power plant located about 50 miles west of Phoenix, Arizona. It is a jointly-owned facility operated by APS. The fuel cycle for Palo Verde is comprised of the following stages:

•   mining and milling of uranium ore to produce uranium concentrates;

•   conversion of uranium concentrates to uranium hexafluoride;

•   enrichment of uranium hexafluoride;

•   fabrication of fuel assemblies;

•   utilization of fuel assemblies in reactors; and

•   storage and disposal of spent nuclear fuel.

     The Palo Verde participants have contracted for all of Palo Verde’s requirements for uranium concentrates and conversion services through 2008. The Palo Verde participants have also contracted for all of Palo Verde’s enrichment services through 2010 and fuel assembly fabrication services until at least 2015.

     Spent Nuclear Fuel and Waste Disposal See “Palo Verde Nuclear Generating Station” in Note 11 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8 for a discussion of spent nuclear fuel and waste disposal.

     Purchased Power Agreements

     In addition to its own available generating capacity (see “Properties” in Item 2), APS purchases electricity under various arrangements. One of the most important of these is a long-term contract with Salt River Project. The amount of electricity available to APS is based in large part on customer demand within certain areas now served by APS pursuant to a related territorial agreement. The generating capacity available to APS pursuant to the contract is 350 MW. In 2004, APS received approximately 568,770 MWh of energy under the contract and paid about $54.9 million for capacity availability and energy received. This contract may be canceled by Salt River Project on three years’ notice. By letter dated June 7, 2004, Salt River Project gave notice to APS to reduce capacity by 150 MW effective June 16, 2007. To date, this letter is the only notice Salt River Project has given under the contract. APS may also cancel the contract on five years’ notice, which may be given no earlier than December 31, 2006.

     In September 1990, APS entered into a thirty-year seasonal capacity exchange agreement with PacifiCorp. Under this agreement, APS receives electricity from PacifiCorp during the summer

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peak season (from May 15 to September 15) and APS returns electricity to PacifiCorp during the winter season (from October 15 to February 15). Until 2020, APS and PacifiCorp each has 480 MW of capacity and a related amount of energy available to it under the agreement for its respective seasons. In 2004, APS received approximately 571,392 MWh of energy under the capacity exchange. APS must also make additional offers of energy to PacifiCorp each year through October 31, 2020. Pursuant to this requirement, during 2004, PacifiCorp received offers of 1,095,000 MWh and purchased about 246,275 MWh.

     Consistent with the ACC’s Track B Order, APS issued a request for proposals (“RFP”) in March 2003 and, as a result of that RFP, APS entered into contracts with three parties, including Pinnacle West Energy, to meet a portion of APS’ capacity and energy requirements for the years 2003 through 2006. See “Track B Order” in Note 3 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8 for additional information about the contracts and the Track B Order.

Construction Program

     During the years 2002 through 2004, APS incurred approximately $1.4 billion in capital expenditures. APS’ capital expenditures for the years 2005 through 2007 are expected to be primarily for expanding transmission and distribution capabilities to meet growing customer needs, for upgrading existing utility property and for environmental purposes. APS’ capital expenditures were approximately $484 million in 2004. APS’ capital expenditures, including expenditures for environmental control facilities, for the years 2005 through 2007 have been estimated as follows (dollars in millions):

	Estimate
Major facilities:	2005		2006		2007
Delivery	$	390	$	395	$	440
Generation		352		158		195
Other		30		7		6
Total	$	772	$	560	$	641

     The above amounts exclude capitalized interest costs and include capitalized property taxes and approximately $30 million per year for nuclear fuel. The estimate for 2005 includes about $190 million for APS’ planned acquisition of the Sundance Plant. See “Request for Proposals and Asset Purchase Agreement” in Note 3 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8 for a discussion of the asset purchase agreement between APS and PPL Sundance. APS conducts a continuing review of its construction program.

     See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Needs and Resources by Company” in Item 7 for additional information about APS’ construction programs.

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Environmental Matters

     EPA Environmental Regulation

      Regional Haze Rules On April 22, 1999, the EPA announced final regional haze rules. These regulations require states to submit implementation plans by 2008 to eliminate all man-made emissions causing visibility impairment in certain specified areas, including Class I Areas in the Colorado Plateau, and to consider and potentially apply the best available retrofit technology (“BART”) for major stationary sources.

     The rules allow nine western states and tribes to follow an alternate implementation plan and schedule for the Class I Areas. This alternate implementation plan is known as the Annex Rule. Five western states, including Arizona, have submitted proposed State Implementation Plans to the EPA to implement the Annex Rule.

     On February 18, 2005, the U.S. Court of Appeals for the District of Columbia granted a petition for review of the Annex Rule, filed by the Center for Energy and Economic Development (CEED). Center for Energy and Economic Development v. the EPA, No. 03-1222 (D.C. Cir.). APS, Phelps Dodge Corporation, and Environmental Defense were intervenors in the litigation in support of the EPA and the Annex Rule. Although the Court concluded that the EPA has the authority to promulgate a BART alternative, the Court ruled that the EPA must first conduct a BART analysis of eligible sources to demonstrate that the alternate plan would achieve greater reductions than BART. At this time, the EPA’s response to the CEED decision is uncertain. The Company cannot currently predict the outcome of this matter.

     Mercury On March 15, 2005, the EPA issued the Clean Air Mercury Rule to regulate mercury emissions from coal-fired power plants. This rule establishes performance standards limiting mercury emissions from coal-fired power plants and establishes a two phased market-based trading program. Under the trading program, the EPA has assigned each state a "budget" for reducing coal-fired power plant mercury emissions, and each state must submit to the EPA a plan detailing how it will meet its "budget." In the first phase of the program, beginning in 2010, mercury emissions will be reduced from a total of 48 tons per year to 38 tons. In 2018, mercury emissions will be further reduced to 15 tons. APS is currently evaluating the potential impact of this rule.

     Federal Implementation Plan In September 1999, the EPA proposed a FIP to set air quality standards at certain power plants, including the Navajo Generating Station and Four Corners. The FIP is similar to current Arizona regulation of the Navajo Generating Station and New Mexico regulation of Four Corners, with minor modifications. APS does not currently expect the FIP to have a material adverse effect on its financial position, results of operations or liquidity.

     Superfund Superfund establishes liability for the cleanup of hazardous substances found contaminating the soil, water or air. Those who generated, transported or disposed of hazardous substances at a contaminated site are among those who are PRPs. PRPs may be strictly, and often jointly and severally, liable for clean-up. On September 3, 2003, the EPA advised APS that the EPA

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considers APS to be a PRP in the Motorola 52^nd Street Superfund Site, Operable Unit 3 (OU3) in Phoenix, Arizona. APS has facilities that are within this superfund site. APS and Pinnacle West have agreed with the EPA to perform certain investigative activities of the APS facilities within OU3. Because the investigation has not yet been completed and ultimate remediation requirements are not yet finalized, neither APS nor Pinnacle West can currently estimate the expenditures which may be required.

     Manufactured Gas Plant Sites APS is currently investigating properties, which it now owns or which were previously owned by it or its corporate predecessors, that were at one time sites of, or sites associated with, manufactured gas plants. APS is taking action to voluntarily remediate these sites. APS does not expect these matters to have a material adverse effect on its financial position, results of operations or liquidity.

     Navajo Nation Environmental Issues

     Four Corners and the Navajo Generating Station are located on the Navajo Reservation and are held under easements granted by the federal government as well as leases from the Navajo Nation. APS is the Four Corners operating agent. APS owns all of Four Corners Units 1, 2 and 3, and a 15% interest in Four Corners Units 4 and 5. APS owns a 14% interest in Navajo Generating Station Units 1, 2 and 3.

     In July 1995, the Navajo Nation enacted the Navajo Nation Air Pollution Prevention and Control Act, the Navajo Nation Safe Drinking Water Act and the Navajo Nation Pesticide Act (collectively, the Navajo Acts). The Navajo Acts purport to give the Navajo Nation Environmental Protection Agency authority to promulgate regulations covering air quality, drinking water and pesticide activities, including those activities that occur at Four Corners and the Navajo Generating Station. On October 17, 1995, the Four Corners participants and the Navajo Generating Station participants each filed a lawsuit in the District Court of the Navajo Nation, Window Rock District, challenging the applicability of the Navajo Nation as to Four Corners and Navajo Generating Station. The Court has stayed these proceedings pursuant to a request by the parties, and the parties are seeking to negotiate a settlement. APS cannot currently predict the outcome of this matter.

     In February 1998, the EPA issued regulations identifying those Clean Air Act provisions for which it is appropriate to treat Indian tribes in the same manner as states. The EPA has announced that it has not yet determined whether the Clean Air Act would supersede pre-existing binding agreements between the Navajo Nation and the Four Corners participants and the Navajo Generating Station participants that limit the Navajo Nation’s environmental regulatory authority over the Navajo Generating Station and Four Corners. APS believes that the Clean Air Act does not supersede these pre-existing agreements. The parties have reached tentative agreement on a resolution of the Clean Air Act issues. If such an agreement is executed by the parties and approved by the EPA, APS would dismiss the pending litigation to the extent the claims relate to the Clean Air Act. APS cannot currently predict the outcome of this matter.

     In April 2000, the Navajo Tribal Council approved operating permit regulations under the Navajo Nation Air Pollution Prevention and Control Act. APS believes the regulations fail to recognize that the Navajo Nation did not intend to assert jurisdiction over Four Corners and the Navajo Generating Station. On July 12, 2000, the Four Corners participants and the Navajo Generating Station participants each filed a petition with the Navajo Supreme Court for review of the

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operating permit regulations. Those proceedings have been stayed, pending the settlement negotiations mentioned above. APS cannot currently predict the outcome of this matter.

Water Supply

     Assured supplies of water are important for APS’ and Pinnacle West Energy’s generating plants. At the present time, APS and Pinnacle West Energy have adequate water to meet their needs. However, conflicting claims to limited amounts of water in the southwestern United States have resulted in numerous court actions.

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

     A summons served on APS in early 1986 required all water claimants in the Lower Gila River Watershed in Arizona to assert any claims to water on or before January 20, 1987, in an action pending in Maricopa County, Arizona, Superior Court. (In re The General Adjudication of All Rights to Use Water in the Gila River System and Source, Supreme Court Nos. WC-79-0001 through WC 79-0004 (Consolidated) [WC-1, WC-2, WC-3 and WC-4 (Consolidated)], Maricopa County Nos. W-1, W-2, W-3 and W-4 (Consolidated)). Palo Verde is located within the geographic area subject to the summons. APS’ rights and the rights of the Palo Verde participants to the use of groundwater and effluent at Palo Verde are potentially at issue in this action. As project manager of Palo Verde, APS filed claims that dispute the court’s jurisdiction over the Palo Verde participants’ groundwater rights and their contractual rights to effluent relating to Palo Verde. Alternatively, APS seeks confirmation of such rights. Three of APS’ other power plants and two of Pinnacle West Energy’s power plants are also located within the geographic area subject to the summons. APS’ claims dispute the court’s jurisdiction over its groundwater rights with respect to these plants. Alternatively, APS seeks confirmation of such rights. In November 1999, the Arizona Supreme Court issued a decision confirming that certain groundwater rights may be available to the federal government and Indian tribes. In addition, in September 2000, the Arizona Supreme Court issued a decision affirming the lower court’s criteria for resolving groundwater claims. Litigation on both of these issues will continue in the trial court. No trial date concerning APS’ water rights claims has been set in this matter.

     APS has also filed claims to water in the Little Colorado River Watershed in Arizona in an action pending in the Apache County, Arizona, Superior Court. (In re The General Adjudication of All Rights to Use Water in the Little Colorado River System and Source, Supreme Court No. WC-79-0006 WC-6, Apache County No. 6417). APS’ groundwater resource utilized at Cholla is within the geographic area subject to the adjudication and is therefore potentially at issue in the case. APS’ claims dispute the court’s jurisdiction over its groundwater rights. Alternatively, APS seeks confirmation of such rights. A number of parties are in the process of settlement negotiations with respect to certain claims in this matter. Other claims have been identified as ready for litigation in

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motions filed with the court. No trial date concerning APS’ water rights claims has been set in this matter.

     Although the above matters remain subject to further evaluation, Pinnacle West expects that the described litigation will not have a material adverse impact on its financial position, results of operations or liquidity.

     The Four Corners region, in which Four Corners is located, has been experiencing drought conditions that may affect the water supply for the plants if adequate moisture is not received in the watershed that supplies the area. APS is continuing to work with area stakeholders to implement agreements to minimize the effect, if any, on operations of the plant for 2005 and later years. The effect of the drought cannot be fully assessed at this time, and APS cannot predict the ultimate outcome, if any, of the drought or whether the drought will adversely affect the amount of power available, or the price thereof, from Four Corners.

BUSINESS OF PINNACLE WEST ENERGY CORPORATION

     Pinnacle West Energy was incorporated in 1999 under the laws of the State of Arizona and is engaged principally in the operation of unregulated generating plants. Pinnacle West Energy had approximately 100 employees as of December 31, 2004. Pinnacle West Energy’s principal offices are located at 400 North Fifth Street, Phoenix, Arizona 85004 (telephone 602-250-4145).

     See “Liquidity and Capital Resources” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 for a discussion of Pinnacle West Energy’s capital requirements.

     Pinnacle West Energy owns the PWEC Dedicated Assets as well as an interest in Silverhawk. The PWEC Dedicated Assets were built as a result of what APS believed was a regulatory restriction against APS’ construction of additional plants and based on the requirement in the 1999 Settlement Agreement that APS transfer its generation assets. As discussed under “APS General Rate Case; 2004 Settlement Agreement” in Note 3 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8, as part of the proposed settlement of APS’ general rate case, APS would acquire the PWEC Dedicated Assets from Pinnacle West Energy. Silverhawk, which is Pinnacle West Energy’s only power plant not included in the PWEC Dedicated Assets, is a 570 MW combined cycle power plant located 20 miles north of Las Vegas, Nevada in which Pinnacle West Energy has a 75% ownership interest. See “Properties” in Item 2 for a summary of the generating plants owned by Pinnacle West Energy.

     At December 31, 2004, Pinnacle West Energy had total assets of $1.3 billion, of which $1.0 billion related to the PWEC Dedicated Assets. Pinnacle West Energy had a pretax loss of $47 million in 2004, a net loss of $1 million in 2003 and a net loss of $19 million in 2002. Income taxes related to Pinnacle West Energy were recorded by Pinnacle West in 2004.

BUSINESS OF APS ENERGY SERVICES COMPANY, INC.

     APS Energy Services was incorporated in 1998 under the laws of the State of Arizona and provides competitive commodity-related energy services (such as direct access commodity contracts, energy procurement and energy supply consultation) and energy-related products and services (such as energy master planning, energy use consultation and facility audits, cogeneration analysis and installation and project management) to commercial, industrial and institutional retail customers in

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the western United States. APS Energy Services had approximately 100 employees as of December 31, 2004. APS Energy Services’ principal offices are located at 400 East Van Buren Street, Phoenix, Arizona 85004 (telephone 602-250-5000).

     APS Energy Services had net income of $3 million in 2004, net income of $16 million in 2003, and pretax income of $28 million in 2002. Income taxes related to APS Energy Services were recorded by Pinnacle West prior to 2003. At December 31, 2004, APS Energy Services had total assets of $77 million.

BUSINESS OF SUNCOR DEVELOPMENT COMPANY

     SunCor was incorporated in 1965 under the laws of the State of Arizona and is a developer of residential, commercial and industrial real estate projects in Arizona, Idaho, New Mexico and Utah. The principal executive offices of SunCor are located at 80 East Rio Salado Parkway, Suite 410, Tempe, Arizona 85281 (telephone 480-317-6800). SunCor and its subsidiaries had approximately 800 employees at December 31, 2004.

     At December 31, 2004, SunCor had total assets of about $464 million. SunCor’s assets consist primarily of land with improvements, commercial buildings, golf courses and other real estate investments. SunCor intends to continue its focus on real estate development of master-planned communities, mixed-use residential, commercial, office and industrial projects.

     SunCor projects under development include seven master-planned communities and several commercial projects. The commercial projects and four of the master-planned communities are in Arizona. Other master-planned communities are located near St. George, Utah, Boise, Idaho and Santa Fe, New Mexico.

     SunCor has implemented an accelerated asset sales program for 2003 through 2005. As a result of this program, SunCor expects to have net income of approximately $50 million in 2005. SunCor also expects to make a cash distribution of approximately $80 million to $100 million to the parent in 2005.

     For the past three years, SunCor’s operating revenues were approximately: $360 million in 2004; $362 million in 2003; and $201 million in 2002. SunCor’s net income was approximately $45 million in 2004; $56 million in 2003; and $19 million in 2002. Certain components of SunCor’s real estate sales activities, which are included in the real estate segment, are required to be reported as discontinued operations on Pinnacle West’s Consolidated Statements of Income in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” See Note 22 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8.

     See Note 6 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8 for information regarding SunCor’s long-term debt and “Liquidity and Capital Resources” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 for a discussion of SunCor’s capital requirements.

BUSINESS OF EL DORADO INVESTMENT COMPANY

     El Dorado was incorporated in 1983 under the laws of the State of Arizona. El Dorado owns minority interests in several energy-related investments and Arizona community-based ventures. El

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Dorado’s short-term goal is to prudently realize the value of its existing investments. On a long-term basis, Pinnacle West may use El Dorado, when appropriate, for investments that are strategic to the business of generating, distributing and marketing electricity. El Dorado’s offices are located at 400 North Fifth Street, Phoenix, Arizona 85004 (telephone 602-250-3517).

     El Dorado had pretax income of $40 million in 2004, pretax income of $7 million in 2003, and a pretax loss of $55 million in 2002. Pinnacle West records income taxes related to El Dorado. El Dorado sold its investment in NAC on November 18, 2004, which resulted in a pre-tax gain of $4 million and is classified as discontinued operations in 2004. All related revenue and expenses for NAC have been reclassified to discontinued operations for the years ended December 31, 2003 and 2002 (see Note 22 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8). In addition, the year ended 2004 includes a $35 million gain ($21 million after tax) related to the sale of El Dorado’s limited partnership interest in the Phoenix Suns. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 for additional information. At December 31, 2004, El Dorado had total assets of $23 million.

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ITEM 2. PROPERTIES

Capacity

     APS’ and Pinnacle West Energy’s generating facilities are described below. For APS’ plants, the “net accredited capacities” are reported, consistent with industry practice for regulated utilities. For Pinnacle West Energy, the “permitted capacities” are reported, consistent with industry practice for unregulated plants.

APS – Net Accredited Capacity

     APS’ present generating facilities have net accredited capacities as follows:

	Capacity (kW)
Coal:
Units 1, 2 and 3 at Four Corners		560,000
15% owned Units 4 and 5 at Four Corners		222,000
Units 1, 2 and 3 at Cholla		615,000
14% owned Units 1, 2 and 3 at the Navajo Generating Station		315,000
Subtotal		1,712,000
Gas or Oil:
Two steam units at Ocotillo and two steam units at Saguaro		430,000
Eleven combustion turbine units		493,000
Three combined cycle units		255,000
Subtotal		1,178,000
Nuclear:
29.1% owned or leased Units 1, 2, and 3 at Palo Verde		1,107,000
Hydro and Solar		9,510
Total APS facilities		4,006,510
Pinnacle West Energy – Permitted Capacities
Pinnacle West Energy’s present generating facilities have permitted capacities as follows:
Gas or Oil:
Two combined cycle units at Redhawk, two combined cycle units at West Phoenix and 75% ownership of one combined cycle unit at Silverhawk		2,138,000
One combustion turbine unit at Saguaro		80,000
Total Pinnacle West Energy facilities		2,218,000

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Reserve Margin

     APS’ 2004 peak one-hour demand on its electric system was recorded on August 11, 2004 at 6,402,100 kW, compared to the 2003 peak of 6,332,400 kW recorded on July 14, 2003. Taking into account additional capacity then available to APS under long-term purchase power contracts as well as APS’ and Pinnacle West Energy’s generating capacity, APS’ capability of meeting system demand on August 11, 2004, amounted to 6,388,600 kW, for an installed reserve margin of negative 0.3%. The power actually available to APS from its resources fluctuates from time to time due in part to planned and unplanned plant and transmission outages and technical problems. The available capacity from sources actually operable at the time of the 2004 peak amounted to 3,570,600 kW, for a margin of negative 52.6%. Firm purchases totaling 4,187,000 kW, including short-term seasonal purchases and unit contingent purchases, were in place at the time of the peak, ensuring the ability to meet the load requirement with an actual reserve margin of 6.9 %.

     See “Business of Arizona Public Service Company – Purchased Power and Generating Fuel – Purchased Power Agreements” in Item 1 for information about certain of APS’ long-term power agreements.

Plant Sites Leased from Navajo Nation

     The Navajo Generating Station and Four Corners are located on land held under easements from the federal government and also under leases from the Navajo Nation. These are long-term agreements with options to extend, and APS does not believe that the risks with respect to enforcement of these easements and leases are material. The majority of coal contracted for use in these plants and certain associated transmission lines are also located on Indian reservations. See “Business of Arizona Public Service Company – Purchased Power and Generating Fuel – Coal Supply” in Item 1.

Palo Verde Nuclear Generating Station

     Regulatory

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

     Nuclear Decommissioning Costs

     The NRC rules on financial assurance requirements for the decommissioning of nuclear power plants provide that a licensee may use a trust as the exclusive financial assurance mechanism if the licensee recovers estimated total decommissioning costs through cost-of-service rates or through a “non-bypassable charge.” The “non-bypassable systems benefits” charge is the charge that the ACC has approved for APS’ recovery of certain types of costs, including costs for low income programs, demand side management, consumer education, environmental, renewables, etc. “Non-bypassable” means that if a customer chooses to take energy from an “energy service provider” other than APS, the customer will still have to pay this charge as part of the customer’s APS electric bill.

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     Other mechanisms are prescribed, including prepayment, if the requirements for exclusive reliance on an external sinking fund mechanism are not met. APS currently relies on an external sinking fund mechanism to meet the NRC financial assurance requirements for its interests in Palo Verde Units 1, 2 and 3. The decommissioning costs of Palo Verde Units 1, 2 and 3 are currently included in APS’ ACC jurisdictional rates. The Rules provide that decommissioning costs are recoverable through a non-bypassable “system benefits” charge, which would allow APS to maintain its external sinking fund mechanism. See Note 12 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8 for additional information about APS’ nuclear decommissioning costs.

     Palo Verde Liability and Insurance Matters

     See “Palo Verde Nuclear Generating Station” in Note 11 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8 for a discussion of the insurance maintained by the Palo Verde participants, including APS, for Palo Verde.

Property Not Held in Fee or Subject to Encumbrances

     Jointly-Owned Facilities

     APS shares ownership of some of its generating and transmission facilities with other companies. Pinnacle West Energy shares ownership of its Silverhawk plant. The following table shows APS’ and Pinnacle West Energy’s interests in those jointly-owned facilities recorded on the Consolidated Balance Sheets at December 31, 2004:

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

(a)	PacifiCorp owns Cholla Unit 4 and APS operates the unit for PacifiCorp. The common facilities at Cholla are jointly-owned.
(b)	Weighted average of interests.

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     Palo Verde Leases

     In 1986, APS sold about 42% of its share of Palo Verde Unit 2 and certain common facilities in three separate sale leaseback transactions. APS accounts for these leases as operating leases. The leases, which have terms of 29.5 years, contain options to renew the leases for two additional years and to purchase the property for fair market value at the end of the lease terms. See Notes 9 and 20 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8 for additional information regarding the Palo Verde Unit 2 sale leaseback transactions.

Transmission Access

     APS’ transmission facilities consist of approximately 5,589 pole miles of overhead lines and approximately 37 miles of underground lines, 5,457 miles of which are located within the State of Arizona. APS’ distribution facilities consist of approximately 12,211 pole miles of overhead lines and approximately 13,727 miles of underground lines, all of which are located within the State of Arizona.

Other Information Regarding Our Properties

     See “Business of Arizona Public Service Company – Environmental Matters” and “Water Supply” in Item 1 with respect to matters having a possible impact on the operation of certain of APS’ and Pinnacle West Energy’s power plants.

     See “Business of Arizona Public Service Company – Construction Program” in Item 1 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” in Item 7 for a discussion of APS’ and Pinnacle West Energy’s construction programs.

Information Regarding SunCor’s Properties

     See “Business of SunCor Development Company” in Item 1 for information regarding SunCor’s properties. Substantially all of SunCor’s debt is collateralized by interests in certain real property.

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ITEM 3. LEGAL PROCEEDINGS

     See “Business of Arizona Public Service Company – Environmental Matters” and “– Water Supply” in Item 1 with regard to pending or threatened litigation and other disputes. See Note 3 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8 for a discussion of the Rules, the Track A Order and related litigation.

     See Note 11 of Notes to the Pinnacle West Consolidated Financial Statements in Item 8 with regard to a lawsuit against APS and the other Navajo Generating Station participants and for information relating to the FERC proceedings on California energy market issues.

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

     Not applicable.

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SUPPLEMENTAL ITEM.
EXECUTIVE OFFICERS OF PINNACLE WEST

Pinnacle West’s executive officers are as follows:

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

(1) Member of the Board of Directors.

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

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     Mr. Post was elected Chairman of the Board effective February 2001, and Chief Executive Officer effective February 1999. He has served as an officer of Pinnacle West since 1995 in the following capacities: from August 1999 to February 2001 as President; from February 1997 to February 1999 as President; and from June 1995 to February 1997 as Executive Vice President. Mr. Post is also Chairman of the Board (since February 2001) of APS. He was President of APS from February 1997 until October 1998 and he was Chief Executive Officer from February 1997 until October 2002. Mr. Post is also a director of APS, Pinnacle West Energy and Phelps Dodge Corporation.

     Mr. Davis was elected President effective February 2001 and Chief Operating Officer effective September 2003. Prior to that time he was Chief Operating Officer and Executive Vice President of Pinnacle West (April 2000 – February 2001) and Executive Vice President, Commercial Operations of APS (September 1996 – October 1998). Mr. Davis is also President of APS (since October 1998) and Chief Executive Officer of APS (since October 2002). He is a director of APS and Pinnacle West Energy.

     Mr. Brandt was elected to his present position in September 2003 and was Senior Vice President and Chief Financial Officer (December 2002 – September 2003). Prior to that time, he was Senior Vice President and Chief Financial Officer of Ameren Corporation (diversified energy services company). Mr. Brandt was elected Executive Vice President and Chief Financial Officer of APS in September 2003. He was also Senior Vice President and Chief Financial Officer of APS (January 2003 – September 2003).

     Mr. Flores was elected to his present position in September 2003. Prior to that time, he was Executive Vice President, Corporate Business Services of Pinnacle West (July 1999 – September 2003). He was also Executive Vice President, Corporate Business Services of APS (October 1998 – July 1999).

     Mr. Froggatt was elected to his present position in October 2002. Prior to that time, he was Vice President and Controller of Pinnacle West (August 1999 – October 2002), Controller of Pinnacle West (July 1999 – August 1999) and Controller of APS (July 1997 – July 1999).

     Ms. Gomez was elected to her present position in February 2004. Prior to that time, she was Treasurer (August 1999 – February 2004) and Manager, Treasury Operations of APS (1997 – 1999). She was also elected Treasurer of APS in October 1999 and Vice President of APS in February 2004.

     Mr. Levine was elected Executive Vice President of APS in July 1999 and President and Chief Executive Officer of Pinnacle West Energy in January 2003. Prior to that time, he was Senior Vice President, Nuclear Generation of APS (September 1996 – July 1999).

     Ms. Loftin was elected Vice President and General Counsel in July 1999 and Secretary in October 2002. She was also elected Vice President and General Counsel of APS in July 1999 and Secretary of APS in October 2002.

     Mr. Robinson was elected to his present position in September 2003. Prior to that time, he was Vice President, Finance and Planning of APS (October 2002 – September 2003), Vice President, Regulation and Planning of Pinnacle West (June 2001 – October 2002) and Director, Accounting, Regulation and Planning of Pinnacle West (prior to June 2001).

     Mr. Wheeler was elected to his present position in September 2003. Prior to that time, he was Senior Vice President, Regulation, System Planning and Operations of APS (October 2002 – September 2003) and Senior Vice President, Transmission, Regulation and Planning of Pinnacle West and APS (June 2001 – October 2002). Prior to that time he was a partner with Snell & Wilmer L.L.P.

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PART II

ITEM 5. MARKET FOR REGISTRANTS’ COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     Pinnacle West’s common stock is publicly held and is traded on the New York and Pacific Stock Exchanges. At the close of business on March 14, 2005, Pinnacle West’s common stock was held of record by approximately 34,248 shareholders.

QUARTERLY STOCK PRICES AND DIVIDENDS PAID PER SHARE
STOCK SYMBOL: PNW

							Dividends
							Per
2004	High		Low		Close		Share
1st Quarter	$	40.81	$	36.90	$	39.35	$	0.450
2nd Quarter		41.50		36.30		40.39		0.450
3rd Quarter		42.99		39.63		41.50		0.450
4th Quarter		45.84		41.61		44.41		0.475

							Dividends
							Per
2003	High		Low		Close		Share
1st Quarter	$	37.13	$	28.34	$	33.24	$	0.425
2nd Quarter		39.59		31.35		37.45		0.425
3rd Quarter		38.03		32.87		35.50		0.425
4th Quarter		40.48		34.91		40.02		0.450

     APS’ common stock is wholly-owned by Pinnacle West and is not listed for trading on any stock exchange. As a result, there is no established public trading market for APS’ common stock.

     The chart below sets forth the dividends declared on APS’ common stock for each of the four quarters for 2004 and 2003.

Common Stock Dividends
(Dollars in Thousands)

Quarter	2004		2003
1st Quarter	$	42,500	$	42,500
2nd Quarter		42,500		42,500
3rd Quarter		42,500		42,500
4th Quarter		42,500		42,500

     The sole holder of APS’ common stock, Pinnacle West, is entitled to dividends when and as declared out of funds legally available therefor. As of December 31, 2004, APS did not have any outstanding preferred stock.

     Pinnacle West did not purchase any of its common stock during the fourth quarter of 2004.

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ITEM 6. SELECTED FINANCIAL DATA

PINNACLE WEST CAPITAL CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA

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

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

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SELECTED FINANCIAL DATA
ARIZONA PUBLIC SERVICE COMPANY

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

(a)   Change in accounting standards related to derivatives.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

     The following discussion should be read in conjunction with Pinnacle West’s Consolidated Financial Statements and Arizona Public Service Company’s Financial Statements and the related Notes that appear in Item 8 of this report.

OVERVIEW

     Pinnacle West owns all of the outstanding common stock of APS. APS is a vertically-integrated electric utility that provides either retail or wholesale electric service to most of the state of Arizona, with the major exceptions of about one-half of the Phoenix metropolitan area, the Tucson metropolitan area and Mohave County in northwestern Arizona. Through its marketing and trading division, APS also generates, sells and delivers electricity to wholesale customers in the western United States. APS has historically accounted for a substantial part of our revenues and earnings. Customer growth in APS’ service territory is about three times the national average and remains a fundamental driver of our revenues and earnings.

     Pinnacle West Energy is our unregulated generation subsidiary. We formed Pinnacle West Energy in 1999 as a result of the ACC’s requirement that APS transfer all of its competitive assets and services to an affiliate or to a third party by the end of 2002. We planned to transfer APS’ generation assets to Pinnacle West Energy. Additionally, Pinnacle West Energy constructed several power plants to meet growing energy needs (1790 MW in Arizona and 570 MW in Nevada). In September 2002, the ACC issued the Track A Order, which prohibited APS from transferring its generation assets to Pinnacle West Energy. As a result of the Track A Order, APS, through its general rate case currently pending before the ACC, is seeking to transfer the plants built by Pinnacle West Energy in Arizona to APS to unite the Arizona generation under one common owner, as originally intended. We refer to these plants as the PWEC Dedicated Assets.

     SunCor, our real estate development subsidiary, has been and is expected to be an important source of earnings and cash flow, particularly during the years 2003 through 2005 due to accelerated asset sales activity.

     Our subsidiary, APS Energy Services, provides competitive commodity-related energy services and energy-related products and services to commercial and industrial retail customers in the western United States.

     El Dorado, our investment subsidiary, sold its investment in NAC on November 18, 2004, which resulted in a pretax gain of $4 million and the classification of NAC as discontinued operations in 2004. In addition, the year ended December 31, 2004 includes a $35 million gain ($21 million after tax) related to the sale of El Dorado’s limited partnership interest in the Phoenix Suns.

     We continue to focus on solid operational performance in our electricity generation and delivery activities. In the generation area, 2004 represented the thirteenth consecutive year Palo Verde was the largest power producer in the United States. In the delivery area, we focus on superior reliability and customer satisfaction while expanding our transmission and distribution system to

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meet growth and sustain reliability. We plan to expand long-term resources to meet our retail customers’ growing electricity needs.

     We believe APS’ general rate case pending before the ACC is the key issue affecting our outlook. As discussed in greater detail in Note 3, on August 18, 2004, a substantial majority of the parties to the rate case, including APS, the ACC staff, the Arizona Residential Utility Consumer Office, other customer and advocacy groups, and merchant power plant intervenors entered into the 2004 Settlement Agreement, which proposes terms under which the rate case would be settled. Neither Pinnacle West nor APS is able to predict whether the ACC will approve the 2004 Settlement Agreement as proposed.

     Other factors affecting our past and future financial results include customer growth; purchased power and fuel costs; operations and maintenance expenses, including those relating to plant and transmission outages; weather variations; depreciation and amortization expenses, which are affected by net additions to utility plant and other property and changes in regulatory asset amortization; and the performance of our subsidiaries.

EARNINGS CONTRIBUTIONS BY BUSINESS SEGMENTS

     We have three principal business segments (determined by services and the regulatory environment):

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

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

•   our real estate segment, which consists of SunCor’s real estate development and investment activities.

     The following table summarizes income from continuing operations by segment and net income for the years ended December 31, 2004, 2003 and 2002 (dollars in millions):

	2004		2003		2002
Regulated electricity (a)	$	151	$	170	$	170
Marketing and trading		18		9		58
Real estate		40		45		10
Other (b)		26		2		(1	)
Income from continuing operations		235		226		237
Real estate discontinued operations – net of income taxes (c)		4		10		9
Other discontinued operations – net of income taxes (c)		4		5		(31	)
Cumulative effect of change in accounting – net of income taxes (d)		—		—		(66	)
Net income	$	243	$	241	$	149

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(a)	In 2002, Pinnacle West Energy recorded a charge related to the cancellation of Redhawk Units 3 and 4 of approximately $30 million after income taxes ($49 million pretax).
(b)	The year-ended 2004 includes a $35 million gain ($21 million after-tax) related to the sale of El Dorado’s limited partnership interest in the Phoenix Suns.
(c)	Discontinued operations relate to NAC and real estate. See Note 22.
(d)	Marketing and trading segment change in accounting for trading activities upon adoption of EITF 02-3, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities.” See Note 18.

     See Note 17 for additional financial information regarding our business segments.

PINNACLE WEST CONSOLIDATED – RESULTS OF OPERATIONS

General

      Throughout the following explanations of our results of operations, we refer to “gross margin.” With respect to our regulated electricity segment and our marketing and trading segment, gross margin refers to electric operating revenues less purchased power and fuel costs. “Gross margin” is a “non-GAAP financial measure,” as defined in accordance with SEC rules. “Operating margin” (a GAAP financial measure) plus “other operating expenses,” as disclosed in Note 17, is equal to gross margin. We view gross margin as an important performance measure of the core profitability of our operations. This measure is a key component of our internal financial reporting and is used by our management in analyzing our business segments. We believe that investors benefit from having access to the same financial measures that our management uses. In addition, we have reclassified certain prior period amounts to conform to our current period presentation.

2004 Compared with 2003

     Our consolidated net income for the twelve months ended December 31, 2004 was $243 million compared with $241 million for the prior-year period. The $2 million increase in the period-to-period comparison reflected the following changes in earnings by segment:

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

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•   Marketing and Trading Segment – Net income increased approximately $9 million primarily due to higher forward and realized prices for wholesale electricity partially offset by lower margins in California by APS Energy Services and increased costs related to a new power plant placed in service in mid-2004.

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

•   Other Segment – Net income increased approximately $23 million primarily due to a $21 million after-tax gain related to the sale of El Dorado’s limited partnership interest in the Phoenix Suns.

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     Additional details on the major factors that increased (decreased) income from continuing operations and net income are contained in the following table (dollars in millions).

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

     The increase in net costs (primarily interest expense, depreciation and operations and maintenance expense, net of gross margin contributions) related to new power plants placed in service in mid-2003 and mid-2004 by Pinnacle West Energy totaled approximately $26 million after income taxes in the twelve months ended December 31, 2004 compared with the prior-year period.

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Regulated Electricity Segment Revenues

     Regulated electricity segment revenues were $57 million higher for the twelve months ended December 31, 2004 compared with the prior-year period primarily as a result of:

•   a $101 million increase in retail revenues related to customer growth and higher average usage, excluding weather effects;

•   a $42 million decrease in retail revenues related to milder weather;

•   a $13 million decrease in retail revenues related to a reduction in retail electricity prices; and

•   an $11 million increase due to miscellaneous factors.

Marketing and Trading Segment Revenues

     Marketing and trading segment revenues were $70 million higher for the twelve months ended December 31, 2004 compared with the prior-year period primarily as a result of:

•   a $47 million increase from generation sales other than Native Load primarily due to higher wholesale market prices and higher sales volumes, including sales from the new power plants in service;

•   $28 million in higher mark-to-market gains for future-period deliveries primarily as a result of higher forward prices for wholesale electricity;

•   $20 million of higher energy trading revenues on realized sales of electricity primarily due to higher electricity prices; and

•   a $25 million decrease from lower competitive retail sales volumes in California by APS Energy Services.

Other Revenues

     Other revenues were $15 million higher for the twelve months ended December 31, 2004 compared with the prior-year period primarily due to higher non-commodity revenues at APS Energy Services.

2003 Compared with 2002

     Our consolidated net income for the year ended December 31, 2003 was $241 million compared with $149 million for the prior year. The 2003 net income included $15 million of after-tax income from discontinued operations related to NAC and SunCor. The 2002 net income included a $21 million after-tax loss from discontinued operations related to NAC and SunCor (see Note 22). The 2002 net income also included a $66 million after-tax charge for the cumulative effect of a change in accounting for trading activities due to the adoption of EITF 02-3, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities” (see Note 18). Excluding the discontinued operations and

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the accounting change, the $11 million decrease in the period-to-period comparison reflects the following changes in earnings by segment:

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

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

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

•   Other Segment – Income from continuing operations increased approximately $3 million primarily due to El Dorado Investment losses recognized in 2002.

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     Additional details on the major factors that increased (decreased) income from continuing operations and net income for the year ended December 31, 2003 compared with the prior year are contained in the following table (dollars in millions).

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

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     The increase in operating and interest costs related to new power plants placed in service by Pinnacle West Energy, net of purchased power savings and increased gross margin from generation sales other than Native Load, totaled approximately $30 million after income taxes in the year ended December 31, 2003 compared with the prior-year period.

Regulated Electricity Segment Revenues

     Regulated electricity segment revenues were $88 million higher in the year ended December 31, 2003 compared with the prior year, primarily as a result of:

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

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

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

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

•   a $3 million net increase due to miscellaneous factors.

Marketing and Trading Segment Revenues

     Marketing and trading segment revenues were $105 million higher in the year ended December 31, 2003 compared with the prior year, primarily as a result of:

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

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

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

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

•   $17 million of lower realized wholesale revenues primarily due to lower unit margins on trading activities that are reported on a net basis.

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Real Estate Segment Revenues

     Real estate segment revenues were $161 million higher in the year ended December 31, 2003 compared with the prior year primarily as a result of increased asset, land and home sales related to SunCor’s effort to accelerate asset sales.

LIQUIDITY AND CAPITAL RESOURCES

Capital Needs and Resources – Pinnacle West Consolidated

     Capital Expenditure Requirements

     The following table summarizes the actual capital expenditures for the year ended December 31, 2004 and estimated capital expenditures for the next three years.

CAPITAL EXPENDITURES
(dollars in millions)

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

(a)	As discussed in Note 3 under “APS General Rate Case; 2004 Settlement Agreement,” as part of its general rate case, APS has requested rate base treatment of the PWEC Dedicated Assets. The estimated capital expenditures related to the PWEC Dedicated Assets are reflected in APS for the years 2005, 2006 and 2007.
(b)	The estimate for 2005 includes about $190 million for acquisition of the Sundance Plant. See “Request for Proposals and Asset Purchase Agreement” in Note 3 for a discussion of the asset purchase agreement between APS and PPL Sundance.
(c)	Primarily information systems and facilities projects.
(d)	Consists primarily of capital expenditures for land development and retail and office building construction reflected in “Real estate investments” on the Consolidated Statements of Cash Flows.

     Delivery capital expenditures are comprised of T&D infrastructure additions and upgrades, capital replacements, new customer construction and related information systems and facility costs. Examples of the types of projects included in the forecast include T&D lines and substations, line extensions to new residential and commercial developments and upgrades to customer information systems. Major transmission projects are driven by strong regional customer growth.

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     Generation capital expenditures are comprised of various improvements to APS’ existing fossil and nuclear plants, the acquisition of the Sundance Plant and the replacement of Palo Verde steam generators (see below). Examples of the types of projects included in this category are additions, upgrades and capital replacements of various power plant equipment such as turbines, boilers and environmental equipment. Generation also includes nuclear fuel expenditures of approximately $30 million annually for 2005 to 2007.

     Replacement of the steam generators in Palo Verde Unit 2 was completed during the fall outage of 2003 at a cost to APS of approximately $70 million. The Palo Verde owners have approved the manufacture of two additional sets of steam generators. These generators will be installed in Unit 1 (scheduled completion in the fall of 2005) and Unit 3 (scheduled completion in the fall of 2007). Our portion of steam generator expenditures for Units 1 and 3 is approximately $140 million, which will be spent through 2008. In 2005 through 2007, approximately $95 million of the costs for steam generator replacements at Units 1 and 3 are included in the generation capital expenditures table above and will be funded with internally-generated cash or external financings.

Contractual Obligations

     The following table summarizes Pinnacle West’s consolidated contractual requirements as of December 31, 2004 (dollars in millions):

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

(a)	The long-term debt matures at various dates through 2034 and bears interest principally at fixed rates. Interest on variable-rate long-term debt is determined by using the rates at December 31, 2004.
(b)	The short-term debt matures within 12 months. The weighted-average interest rate used to determine interest payments on the short-term debt was 4.21% at December 31, 2004.

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(c)	Future pension contributions are not determinable for time periods after 2005.
(d)	Our purchase power and fuel commitments include purchases of coal, electricity, natural gas and nuclear fuel (see Note 11).
(e)	These contractual obligations include commitments for capital expenditures and other obligations. Obligations for 2005 include about $190 million for acquisition of the Sundance Plant (see Note 3).

     Off-Balance Sheet Arrangements

     In 1986, APS entered into agreements with three separate VIE lessors in order to sell and lease back interests in Palo Verde Unit 2. The leases are accounted for as operating leases in accordance with GAAP. See Note 9 for further information about the sale leaseback transactions. We are not the primary beneficiary of the Palo Verde VIEs and, accordingly, do not consolidate them.

     APS is exposed to losses under the Palo Verde sale leaseback agreements upon the occurrence of certain events that APS does not consider to be reasonably likely to occur. Under certain circumstances (for example, the NRC issuing specified violation orders with respect to Palo Verde or the occurrence of specified nuclear events), APS would be required to assume the debt associated with the transactions, make specified payments to the equity participants, and take title to the leased Unit 2 interests, which, if appropriate, may be required to be written down in value. If such an event had occurred as of December 31, 2004, APS would have been required to assume approximately $250 million of debt and pay the equity participants approximately $192 million.

     In the first quarter of 2004, we adopted FIN No. 46R, “Consolidation of Variable Interest Entities” for all non-SPE contractual arrangements. SunCor has certain land development arrangements that are required to be consolidated under FIN No. 46R. The assets and non-controlling interests reflected in our Consolidated Balance Sheets related to these arrangements were approximately $34 million at December 31, 2004.

     Guarantees and Letters of Credit

     We and certain of our subsidiaries have issued guarantees and letters of credit in support of our unregulated businesses. We have also obtained surety bonds on behalf of APS Energy Services. We have not recorded any liability on our Consolidated Balance Sheets with respect to these obligations. We generally provide indemnifications related to liabilities arising from or related to certain of our agreements, with limited exceptions depending on the particular agreement. See Note 21 for additional information regarding guarantees and letters of credit.

     Credit Ratings

     The ratings of securities of Pinnacle West and APS as of March 15, 2005 are shown below and are considered to be “investment-grade” ratings. The ratings reflect the respective views of the rating agencies, from which an explanation of the significance of their ratings may be obtained. There is no assurance that these ratings will continue for any given period of time. The ratings may be revised or withdrawn entirely by the rating agencies, if, in their respective judgments, circumstances so warrant. Any downward revision or withdrawal may adversely affect the market price of Pinnacle West’s or APS’ securities and serve to increase those companies’ cost of and access

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to capital. It may also require additional collateral related to certain derivative instruments (see Note 18).

	Moody’s	Standard & Poor’s
Pinnacle West
Senior unsecured	Baa2	BBB-
Commercial paper	P-2	A-2
Outlook	Negative	Negative
APS
Senior unsecured	Baa1	BBB
Secured lease obligation bonds	Baa2	BBB
Commercial paper	P-2	A-2
Outlook	Negative	Negative

     APS no longer has any senior secured debt. See “Capital Needs and Resources – By Company – APS” below for a discussion of the termination of APS’ mortgage and deed of trust.

     Debt Provisions

     Pinnacle West’s and APS’ debt covenants related to their respective bank financing arrangements include a debt-to-total-capitalization ratio and an interest coverage test. Pinnacle West and APS comply with these covenants and each anticipates it will continue to meet these and other significant covenant requirements. These covenants require that the ratio of debt to total capitalization cannot exceed 65% for the Company and for APS. At December 31, 2004, the ratio was approximately 53% for Pinnacle West and 54% for APS. The provisions regarding interest coverage require a minimum cash coverage of two times the interest requirements for each of the Company and APS. Based on 2004 results, the coverages were approximately 4 times for the Company and 4 times for APS. Failure to comply with such covenant levels would result in an event of default which, generally speaking, would require the immediate repayment of the debt subject to the covenants.

     Neither Pinnacle West’s nor APS’ financing agreements contain “ratings triggers” that would result in an acceleration of the required interest and principal payments in the event of a ratings downgrade. However, in the event of a ratings downgrade, Pinnacle West and/or APS may be subject to increased interest costs under certain financing agreements.

     All of Pinnacle West’s bank agreements contain “cross-default” provisions that would result in defaults and the potential acceleration of payment under these loan agreements if Pinnacle West or APS were to default under other agreements. All of APS’ bank agreements contain cross-default provisions that would result in defaults and the potential acceleration of payment under these bank agreements if APS were to default under other agreements. Pinnacle West’s and APS’ credit agreements generally contain provisions under which the lenders could refuse to advance loans in the event of a material adverse change in financial condition or financial prospects, except that Pinnacle West and APS do not have a material adverse change restriction for revolver borrowings equal to outstanding commercial paper amounts.

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     See Note 6 for further discussions.

Capital Needs and Resources — By Company

     Pinnacle West (Parent Company)

     Our primary cash needs are for dividends to our shareholders; interest payments and optional and mandatory repayments of principal on our long-term debt (see the table above for our contractual requirements, including our debt repayment obligations, but excluding optional repayments). On October 20, 2004, our Board of Directors increased the common stock dividend to an indicated annual rate of $1.90 per share from $1.80 per share, effective with the December 1, 2004 dividend payment. The level of our common dividends and future dividend growth will be dependent on a number of factors including, but not limited to, payout ratio trends, free cash flow and financial market conditions.

     Our primary sources of cash are dividends from APS, external financings and cash distributions from our other subsidiaries, primarily SunCor. For the years 2002 through 2004, total dividends from APS were $510 million and total cash distributions from SunCor were $206 million. For the year ended December 31, 2004, dividends from APS were approximately $170 million and distributions from SunCor were approximately $85 million. We expect SunCor to make cash distributions to the parent company of approximately $80 to $100 million in 2005 based on anticipated asset sales activities. As discussed in Note 3 under “ACC Financing Orders,” APS must maintain a common equity ratio of at least 40% and may not pay common dividends if the payment would reduce its common equity below that threshold. As defined in the Financing Order, common equity ratio is common equity divided by common equity plus long-term debt, including current maturities of long-term debt. At December 31, 2004, APS’ common equity ratio as defined was approximately 45%.

     On February 2, 2004, we used proceeds from the $165 million Floating Rate Notes issued on November 12, 2003 and short-term borrowings to pay down the maturing $215 million 4.5% Senior Notes due 2004.

     At December 31, 2004, the parent company’s outstanding long-term debt, including current maturities, was $468 million. In October 2004, we replaced two separate revolving credit facilities (with collective borrowing capacity of $275 million) with a $300 million revolving credit facility that terminates in October 2007. This line of credit is available to support the issuance of up to $250 million in commercial paper or to be used as bank borrowings, including up to $100 million for issuances of letters of credit. At December 31, 2004, we had no commercial paper or short-term borrowings outstanding. We ended 2004 in an invested position.

     Pinnacle West sponsors a qualified pension plan for the employees of Pinnacle West and our subsidiaries. We contribute at least the minimum amount required under IRS regulations, but no more than the maximum tax-deductible amount. The minimum required funding takes into consideration the value of the fund assets and our pension obligation. We contributed $35 million in 2004, $46 million in 2003, $27 million in 2002, $44 million in 2001 and $24 million in 2000. APS and other subsidiaries fund their share of the pension contribution, of which APS represents approximately 92% of the total funding amounts described above. The assets in the plan are comprised of common stocks, bonds and real estate. Future year contribution amounts are dependent

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on fund performance and fund valuation assumptions. The minimum required contribution to be made to our pension plan in 2005 is estimated to be approximately $50 million. The expected contribution to our other postretirement benefit plans in 2005 is estimated to be approximately $40 million.

     APS

     APS’ capital requirements consist primarily of capital expenditures and optional and mandatory redemptions of long-term debt. See “ACC Financing Order” in Note 3 for a discussion of the $500 million financing arrangement between APS and Pinnacle West Energy authorized by the ACC pursuant to the Financing Order.

     APS pays for its capital requirements with cash from operations and, to the extent necessary, external financings. APS has historically paid for its dividends to Pinnacle West with cash from operations. See “Pinnacle West (Parent Company)” above for a discussion of the common equity ratio that APS must maintain in order to pay dividends to Pinnacle West.

     On February 15, 2004, $125 million of APS’ 5.875% notes due 2004 were redeemed at maturity and on March 1, 2004, $80 million of APS’ First Mortgage Bonds, 6.625% Series due 2004 were redeemed at maturity. APS used cash from operations and short-term debt to redeem the maturing debt.

     On March 31, 2004, Navajo County, Arizona Pollution Control Corporation issued $166 million of variable interest rate pollution control bonds, 2004 Series A-E, due 2034. The bonds were issued to refinance $166 million of outstanding pollution control bonds. The refinanced bonds were all $25 million of the Navajo 5.50% bonds due 2028 and $141 million of the Navajo 5.875% bonds due 2028. The Series A-E bonds are payable solely from revenues obtained from APS pursuant to a loan agreement between APS and Navajo County, Arizona Pollution Control Corporation. These bonds are classified as long-term debt on our Consolidated Balance Sheets. See Note 6.

     Also on March 31, 2004, Coconino County, Arizona Pollution Control Corporation issued $13 million of variable interest rate pollution control bonds, 2004 Series A, due 2034. The bonds were issued to refinance $13 million of outstanding pollution control bonds. The refinanced bonds were $13 million of the Coconino 5.875% bonds due 2028. The Series A bonds are payable solely from revenues obtained from APS pursuant to a loan agreement between APS and Coconino County, Arizona Pollution Control Corporation. These bonds are classified as long-term debt on our Consolidated Balance Sheets. See Note 6.

     In May 2004, APS renewed its $250 million revolving credit facility, while increasing its size to $325 million and extending its term to three years. The revolver provides liquidity support for APS’ $250 million commercial paper program, as well as an additional $75 million for other liquidity needs and miscellaneous letters of credit.

     On June 29, 2004, APS issued $300 million of 5.80% senior unsecured notes due June 30, 2014. The proceeds from the sale of the notes were used to redeem $100 million in aggregate principal amount of APS’ 6.25% Notes due January 15, 2005 and a portion of $300 million in aggregate principal amount of APS’ 7.625% Notes due August 1, 2005.

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     On March 1, 2005, Maricopa County, Arizona Pollution Control Corporation issued $164 million of variable interest rate pollution control bonds, 2004 Series A-E, due 2029. The bonds were issued to refinance $164 million of outstanding pollution control bonds. The Series A-E bonds are payable solely from revenues obtained from APS pursuant to a loan agreement between APS and Maricopa County, Arizona Pollution Control Corporation. These bonds are classified as long-term debt on our Consolidated Balance Sheets.

     APS has retired all first mortgage bonds issued by APS under its 1946 mortgage and deed of trust, including the first mortgage bonds securing APS senior notes. On April 30, 2004, APS terminated its mortgage and deed of trust and, as a result, is not able to issue any additional first mortgage bonds under that mortgage.

     APS’ outstanding debt was approximately $2.7 billion at December 31, 2004. APS had committed lines of credit with various banks of $325 million at December 31, 2004 which were available either to support the issuance of commercial paper or to be used for bank borrowings, including issuances of letters of credit. At December 31, 2004, APS had no outstanding commercial paper or bank borrowings. APS ended 2004 in an invested position.

     Although provisions in APS’ articles of incorporation and ACC financing orders establish maximum amounts of preferred stock and debt that APS may issue, APS does not expect any of these provisions to limit its ability to meet its capital requirements.

     Pinnacle West Energy

     Pinnacle West Energy’s capital requirements consist primarily of capital expenditures. In May 2004, SNWA paid Pinnacle West Energy approximately $91 million for a 25% interest in the 570 MW Silverhawk combined cycle plant. See the capital expenditures table above for actual capital expenditures for 2004 and projected capital expenditures for the next three years. Pinnacle West Energy’s sources of cash will be cash infusions from the parent and cash from operations.

     See “ACC Financing Order” in Note 3 for a discussion of the $500 million financing arrangement between APS and Pinnacle West Energy authorized by the ACC pursuant to the Financing Order.

     Other Subsidiaries

     During the past three years, SunCor funded its cash requirements with cash from operations and its own external financings. SunCor’s capital needs consist primarily of capital expenditures for land development and retail and office building construction. See the capital expenditures table above for actual capital expenditures in 2004 and projected capital expenditures for the next three years. SunCor expects to fund its capital requirements with cash from operations and external financings.

     In 2004, SunCor did not issue any long-term debt; and it redeemed, refinanced or repaid $2 million in long-term debt (see Note 6).

     SunCor’s total outstanding debt was approximately $87 million as of December 31, 2004. SunCor’s total short-term debt was $71 million at December 31, 2004, including $35 million of

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short-term borrowings outstanding under a $90 million line of credit. SunCor’s long-term debt, including current maturities, totaled $16 million at December 31, 2004.

     We expect SunCor to make cash distributions to the parent company of approximately $80 to $100 million in 2005 based on anticipated asset sales activities.

     El Dorado funded its cash requirements during the past three years, primarily for NAC in 2002, with cash infused by the parent company and with cash from operations. As described above, during 2004, El Dorado sold its limited partnership interest in the Phoenix Suns and its ownership interest in NAC. El Dorado expects minimal capital requirements over the next three years and intends to focus on prudently realizing the value of its existing investments.

     APS Energy Services’ cash requirements during the past three years were funded with cash infusions from the parent company and with cash from operations.

CRITICAL ACCOUNTING POLICIES

     In preparing the financial statements in accordance with GAAP, management must often make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period. Some of those judgments can be subjective and complex, and actual results could differ from those estimates. We consider the following accounting policies to be our most critical because of the uncertainties, judgments and complexities of the underlying accounting standards and operations involved.

Regulatory Accounting

     Regulatory accounting allows for the actions of regulators, such as the ACC and the FERC, to be reflected in our financial statements. Their actions may cause us to capitalize costs that would otherwise be included as an expense in the current period by unregulated companies. If future recovery of costs ceases to be probable, the assets would be written off as a charge in current period earnings. We had $135 million of regulatory assets on the Consolidated Balance Sheets at December 31, 2004. A component of the 2004 Settlement Agreement, which is subject to ACC approval, would allow APS to acquire the PWEC Dedicated Assets from Pinnacle West Energy, with a net carrying value of approximately $850 million, and rate base the PWEC Dedicated Assets at a rate base value of $700 million. This would result in a mandatory rate base disallowance of approximately $150 million. As a result, for financial reporting purposes, APS would recognize a one-time, after-tax net plant write-off of approximately $90 million in the period when the plant transfer to APS is completed and would reduce annual depreciation expense by approximately $5 million. See Notes 1 and 3 for more information about regulatory assets, APS’ general rate case and the 2004 Settlement Agreement.

Pensions and Other Postretirement Benefit Accounting

     Changes in our actuarial assumptions used in calculating our pension and other postretirement benefit liability and expense can have a significant impact on our earnings and financial position. The most relevant actuarial assumptions are the discount rate used to measure our liability and net periodic cost, the expected long-term rate of return on plan assets used to estimate

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earnings on invested funds over the long-term, and the assumed healthcare cost trend rates. We review these assumptions on an annual basis and adjust them as necessary.

     The following chart reflects the sensitivities that a change in certain actuarial assumptions would have had on the 2004 projected benefit obligation, our 2004 reported pension liability on the Consolidated Balance Sheets and our 2004 reported pension expense, after consideration of amounts capitalized or billed to electric plant participants, on Pinnacle West’s Consolidated Statements of Income (dollars in millions):

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

(a) Each fluctuation assumes that the other assumptions of the calculation are held constant.

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

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

(a) Each fluctuation assumes that the other assumptions of the calculation are held constant.

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(b) This assumes a 1% change in the initial and ultimate health care cost trend rate.

     See Note 8 for further details about our pension and other postretirement benefit plans.

Derivative Accounting

     Derivative accounting requires evaluation of rules that are complex and subject to varying interpretations. Our evaluation of these rules, as they apply to our contracts, will determine whether we use accrual accounting (for contracts designated as normal) or fair value (mark-to-market) accounting. Mark-to-market accounting requires that changes in the fair value are recognized periodically in income unless certain hedge criteria are met. For fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item associated with the hedged risk are recognized in earnings. For cash flow hedges, changes in the fair value of the derivative are recognized in common stock equity (as a component of other comprehensive income (loss)).

     The fair value of our derivative contracts is not always readily determinable. In some cases, we use models and other valuation techniques to determine fair value. The use of these models and valuation techniques sometimes requires subjective and complex judgement. Actual results could differ from the results estimated through application of these methods. Our marketing and trading portfolio consists of structured activities hedged with a portfolio of forward purchases that protects the economic value of the sales transactions. See “Market Risks – Commodity Price Risk” below for quantitative analysis. See Note 1 for discussion on accounting policies and Note 18 for a further discussion on derivative and energy trading accounting.

OTHER ACCOUNTING MATTERS

Accounting for Derivative and Trading Activities

     We adopted EITF 02-3 in the fourth quarter of 2002. We recorded a $66 million after-tax charge in net income as a cumulative effect adjustment for the previously recorded accumulated unrealized mark-to-market on energy trading contracts that did not meet the accounting definition of a derivative. Our energy trading contracts that are derivatives are accounted for at fair value under SFAS No. 133. Contracts that do not meet the definition of a derivative are now accounted for on an accrual basis with the associated revenues and costs recorded at the time the contracted commodities are delivered or received.

     See Notes 1 and 18 for further information on accounting for derivatives.

Variable Interest Entities

     See “Liquidity and Capital Resources – Off-Balance Sheet Arrangements” and Note 20 for a discussion of VIEs.

PINNACLE WEST CONSOLIDATED – FACTORS AFFECTING OUR FINANCIAL OUTLOOK

APS General Rate Case

     We believe APS’ general rate case, including the proposed settlement pending before the ACC is the key issue affecting our outlook. See “APS General Rate Case; 2004 Settlement Agreement” in Note 3 for a detailed discussion of this rate case and proposed settlement.

Factors Affecting Operating Revenues, Purchased Power and Fuel Costs

     General Electric operating revenues are derived from sales of electricity in regulated retail markets in Arizona and from competitive retail and wholesale power markets in the western United States. These revenues are affected by electricity sales volumes related to customer mix, customer growth and average usage per customer as well as electricity prices and variations in weather from

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period to period. Competitive sales of energy and energy-related products and services are made by APS Energy Services in western states that have opened to competition.

     Customer and Sales Growth The customer and sales growth referred to in this paragraph applies to Native Load customers and sales to them. Customer growth in APS’ service territory averaged about 3.4% a year for the three years 2002 through 2004; we currently expect customer growth to average about 3.8% per year from 2005 to 2007. We currently estimate that total retail electricity sales in kilowatt-hours will grow 5.0% on average, from 2005 through 2007, before the effects of weather variations. Customer growth for the year ended December 31, 2004 compared with the prior year was 3.7%.

     Actual sales growth, excluding weather-related variations, may differ from our projections as a result of numerous factors, such as economic conditions, customer growth and usage patterns. Our experience indicates that a reasonable range of variation in our kilowatt-hour sales projection attributable to such economic factors can result in increases or decreases in annual net income of up to $10 million.

     Retail Rate Changes APS has a rate settlement agreement pending before the ACC that includes, among other things, a proposed general rate increase of 4.21% and a power supply adjuster that would provide timely recovery of variations in purchased power and fuel prices. See “APS General Rate Case; 2004 Settlement Agreement” in Note 3. APS expects to file another general rate case in late 2005.

     Weather In forecasting retail sales growth, we assume normal weather patterns based on historical data. Historical extreme weather variations have resulted in annual variations in net income in excess of $20 million. However, our experience indicates that the more typical variations from normal weather can result in increases or decreases in annual net income of up to $10 million.

     Trading In accordance with GAAP, we adopted EITF 02-3, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities,” in the fourth quarter of 2002. As a consequence, we are recording structured trading transactions completed prior to implementation of EITF 02-3 that do not qualify as derivatives for financial accounting purposes on the accrual method, recognizing the revenues and associated purchased power and fuel costs as the respective commodities are delivered. We expect the deliveries under these historical contracts to contribute the following amounts to net income: approximately $12 million each year in 2005 through 2007 and approximately $7 million in 2008.

     Purchased Power and Fuel Costs Purchased power and fuel costs are impacted by our electricity sales volumes, existing contracts for purchased power and generation fuel, our power plant performance, transmission availability or constraints, prevailing market prices, new generating plants being placed in service and our hedging program for managing such costs. See “Natural Gas Supply” in Note 11 for more information on fuel costs. See “APS General Rate Case; 2004 Settlement Agreement” in Note 3 for information regarding a power supply adjuster.

     Wholesale Power Market Conditions The marketing and trading division focuses primarily on managing APS’ purchased power and fuel risks in connection with its costs of serving retail customer demand. We moved this division to APS in early 2003 for future marketing and trading activities (existing wholesale contracts remained at Pinnacle West) as a result of the ACC’s

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Track A Order prohibiting APS’ transfer of generating assets to Pinnacle West Energy. Additionally, the marketing and trading division, subject to specified parameters, markets, hedges and trades in electricity, fuels and emission allowances and credits. Our future earnings will be affected by the strength or weakness of the wholesale power market. The market has suffered a substantial reduction in overall liquidity because there are fewer creditworthy counterparties and because several key participants have exited the market or scaled back their activities.

Other Factors Affecting Financial Results

     Operations and Maintenance Expenses Operations and maintenance expenses are impacted by growth, power plant additions and operations, inflation, outages, higher trending pension and other postretirement benefit costs and other factors.

     Depreciation and Amortization Expenses Depreciation and amortization expenses are impacted by net additions to utility plant and other property, which includes generation construction or acquisition, and changes in regulatory asset amortization. Silverhawk was placed in service in May 2004. APS plans to acquire the Sundance Plant in 2005 and, in accordance with the proposed rate settlement, to issue requests for proposals to acquire additional long-term resources in 2006 and 2007. As part of the 1999 Settlement Agreement, APS amortized certain regulatory assets over a period that ended June 30, 2004. Amortization in the last three years is as follows (dollars in millions):

2002	2003	2004
$115	$86	$18

     Property Taxes Taxes other than income taxes consist primarily of property taxes, which are affected by tax rates and the value of property in-service and under construction. The average property tax rate for APS, which currently owns the majority of our property, was 9.2% of assessed value for 2004 and 9.3% for 2003. We expect property taxes to increase primarily due to our generation construction program, as the plants phase-in to the property tax base, the planned acquisition of the Sundance Plant and our additions to existing facilities.

     Interest Expense Interest expense is affected by the amount of debt outstanding and the interest rates on that debt. The primary factors affecting borrowing levels in the next several years are expected to be our capital requirements and our internally generated cash flow. Capitalized interest offsets a portion of interest expense while capital projects are under construction. We stop accruing capitalized interest on a project when it is placed in commercial operation. As noted above, we placed new power plants in commercial operation in 2001, 2002, 2003 and 2004. Interest expense is also affected by interest rates on variable-rate debt and interest rates on the refinancing of the Company’s future liquidity needs. In addition, see Note 1 for a discussion of AFUDC.

     Retail Competition The regulatory developments and legal challenges to the Rules discussed in Note 3 have raised considerable uncertainty about the status and pace of retail electric competition and of electric restructuring in Arizona. Although some very limited retail competition existed in APS’ service area in 1999 and 2000, there are currently no active retail competitors providing unbundled energy or other utility services to APS’ customers. As a result, we cannot predict when, and the extent to which, additional competitors will re-enter APS’ service territory.

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     Subsidiaries In the case of SunCor, efforts to accelerate asset sales activities in 2004 were successful. A portion of these sales have been, and additional amounts may be required to be, reported as discontinued operations on our Consolidated Statements of Income. SunCor’s net income was $45 million in 2004. See Note 22 for further discussion. We anticipate SunCor’s earnings contributions in 2005 to be approximately $50 million after income taxes.

     El Dorado’s historical results are not indicative of future performance. El Dorado’s income before taxes in 2004 was $40 million. Income taxes were recorded at the parent company. The year ended 2004 includes a $35 million gain ($21 million after tax) related to the sale of El Dorado’s limited partnership interest in the Phoenix Suns. El Dorado sold its investment in NAC on November 18, 2004, which resulted in a pretax gain of $4 million and is classified as discontinued operations in 2004 and prior years. See Note 22 for information regarding the sale of NAC.

     General Our financial results may be affected by a number of broad factors. See “Forward-Looking Statements” for further information on such factors, which may cause our actual future results to differ from those we currently seek or anticipate.

Market Risks

     Our operations include managing market risks related to changes in interest rates, commodity prices and investments held by our nuclear decommissioning trust fund.

     Interest Rate and Equity Risk

     Our major financial market risk exposure is to changing interest rates. Changing interest rates will affect interest paid on variable-rate debt and interest earned by our nuclear decommissioning trust fund (see Note 12). Our policy is to manage interest rates through the use of a combination of fixed-rate and floating-rate debt. On January 29, 2004, we entered into two fixed-for-floating interest rate swap transactions on our $300 million 6.4% senior note. These transactions qualify as fair value hedges under SFAS No 133. See Note 6.

     The tables below present contractual balances of our consolidated long-term and short-term debt at the expected maturity dates as well as the fair value of those instruments on December 31, 2004 and 2003. The interest rates presented in the tables below represent the weighted-average interest rates for the years ended December 31, 2004 and 2003 (dollars in thousands):

						Variable-Rate					Fixed-Rate
	Short-Term Debt					Long-Term Debt					Long-Term Debt
	Interest					Interest					Interest
2004	Rates			Amount		Rates			Amount		Rates			Amount
2005		4.21	%	$	71,030		1.81	%	$	214,967		7.27	%	$	402,198
2006		—			—		6.55	%		2,918		6.45	%		395,314
2007		—			—		4.81	%		302		5.99	%		1,154
2008		—			—		5.22	%		5,294		5.51	%		1,055
2009		—			—		—			—		5.51	%		818
Years thereafter		—			—		1.31	%		516,340		4.79	%		1,669,901
Total				$	71,030				$	739,821				$	2,470,440
Fair value				$	71,030				$	740,271				$	2,574,608

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						Variable-Rate					Fixed-Rate
	Short-Term Debt					Long-Term Debt					Long-Term Debt
	Interest					Interest					Interest
2003	Rates			Amount		Rates			Amount		Rates			Amount
2004		4.26	%	$	86,081		1.57	%	$	280,749		5.33	%	$	424,165
2005		—			—		1.99	%		165,469		7.27	%		403,204
2006		—			—		6.55	%		2,937		6.49	%		391,585
2007		—			—		4.99	%		373		5.54	%		1,256
2008		—			—		5.19	%		5,269		5.55	%		1,098
Years thereafter		—			—		1.84	%		106,520		5.83	%		1,547,775
Total				$	86,081				$	561,317				$	2,769,083
Fair value				$	86,081				$	561,447				$	2,913,085

     The tables below present contractual balances of APS’ long-term debt at the expected maturity dates as well as the fair value of those instruments on December 31, 2004 and 2003. The interest rates presented in the tables below represent the weighted-average interest rates for the years ended December 31, 2004 and 2003 (dollars in thousands):

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

	Variable-Rate					Fixed-Rate
	Long-Term Debt					Long-Term Debt
	Interest					Interest
2003	Rates			Amount		Rates			Amount
2004		1.57	%	$	280,340		6.16	%	$	206,727
2005		—			—		7.27	%		402,259
2006		—			—		6.73	%		85,451
2007		—			—		5.55	%		1,134
2008		—			—		5.55	%		1,098
Years thereafter		1.84	%		106,520		5.83	%		1,547,775
Total				$	386,860				$	2,244,444
Fair value				$	386,906				$	2,365,821

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Commodity Price Risk

     We are exposed to the impact of market fluctuations in the commodity price and transportation costs of electricity, natural gas, coal and emissions allowances. We manage risks associated with these market fluctuations by utilizing various commodity instruments that qualify as derivatives, including exchange-traded futures and options and over-the-counter forwards, options and swaps. Our ERMC, consisting of officers and key management personnel, oversees company-wide energy risk management activities and monitors the results of marketing and trading activities to ensure compliance with our stated energy risk management and trading policies. As part of our risk management program, we use such instruments to hedge purchases and sales of electricity, fuels and emissions allowances and credits. The changes in market value of such contracts have a high correlation to price changes in the hedged commodities. In addition, subject to specified risk parameters monitored by the ERMC, we engage in marketing and trading activities intended to profit from market price movements.

     The mark-to-market value of derivative instruments related to our risk management and trading activities are presented in two categories consistent with our business segments:

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

•   Marketing and Trading – non-trading and trading derivative instruments of our competitive business segment.

     The following tables show the pretax changes in mark-to-market of our non-trading and trading derivative positions in 2004 and 2003 (dollars in millions):

	2004						2003
	Regulated			Marketing and			Regulated			Marketing and
	Electricity			Trading			Electricity			Trading
Mark-to-market of net positions at beginning of year	$	—		$	69		$	(49	)	$	57
Change in mark-to-market gains/(losses) for future period deliveries		11			21			(5	)		(7	)
Changes in cash flow hedges recorded in OCI		43			37			41			44
Ineffective portion of changes in fair value recorded in earnings		(2	)		1			8			—
Mark-to-market losses/(gains) realized during the year		(18	)		(21	)		5			(25	)
Mark-to-market of net positions at end of year	$	34		$	107		$	—		$	69

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     The tables below show the fair value of maturities of our non-trading and trading derivative contracts (dollars in millions) at December 31, 2004 by maturities and by the type of valuation that is performed to calculate the fair values. See Note 1, “Derivative Accounting,” for more discussion of our valuation methods.

Regulated Electricity

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

Marketing and Trading

																			Total
																Years			fair
Source of Fair Value	2005			2006			2007			2008			2009			thereafter			value
Prices actively quoted	$	44		$	—		$	—		$	—		$	—		$	—		$	44
Prices provided by other external sources		1			32			42			24			(1	)		(2	)		96
Prices based on models and other valuation methods		(9	)		(6	)		(13	)		(6	)		—			1			(33	)
Total by maturity	$	36		$	26		$	29		$	18		$	(1	)	$	(1	)	$	107

     The table below shows the impact that hypothetical price movements of 10% would have on the market value of our risk management and trading assets and liabilities included on Pinnacle West’s Consolidated Balance Sheets at December 31, 2004 and 2003 (dollars in millions).

	December 31, 2004						December 31, 2003
	Gain (Loss)						Gain (Loss)
Commodity	Price Up			Price Down			Price Up			Price Down
	10%			10%			10%			10%
Mark-to-market changes reported in earnings (a):
Electricity	$	(4	)	$	4		$	(2	)	$	2
Natural gas		2			(2	)		(1	)		1
Other		1			(1	)		1			—
Mark-to-market changes reported in OCI (b):
Electricity		35			(35	)		36			(36	)
Natural gas		43			(43	)		30			(30	)
Total	$	77		$	(77	)	$	64		$	(63	)

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(a)	These contracts are primarily structured sales activities hedged with a portfolio of forward purchases that protects the economic value of the sales transactions.
(b)	These contracts are hedges of our forecasted purchases of natural gas and electricity. The impact of these hypothetical price movements would substantially offset the impact that these same price movements would have on the physical exposures being hedged.

Credit Risk

     We are exposed to losses in the event of nonperformance or nonpayment by counterparties. We have risk management and trading contracts with many counterparties, including two counterparties for which a worst case exposure represents approximately 35% of Pinnacle West’s $391 million of risk management and trading assets as of December 31, 2004. See Note 1, “Derivative Accounting” for a discussion of our credit valuation adjustment policy. See Note 18 for further discussion of credit risk.

ARIZONA PUBLIC SERVICE COMPANY – RESULTS OF OPERATIONS

General

     Throughout the following explanations of APS’ results of operations, we refer to “gross margin.” Gross margin refers to electric operating revenues less purchased power and fuel costs. “Gross margin” is a “non-GAAP financial measure,” as defined in accordance with SEC rules. Operating income (a GAAP financial measure) plus specified operating expenses (operations and maintenance, depreciation and amortization, operating income taxes and other taxes), as disclosed on the Statements of Income, is equal to gross margin. We view gross margin as an important performance measure of the core profitability of our operations. This measure is a key component of our internal financial reporting and is used by our management in analyzing our business segments. We believe that investors benefit from having access to the same financial measures that our management uses. In addition, we have reclassified certain prior period amounts to conform to our current period presentation.

2004 Compared with 2003

     APS’ net income for the year ended December 31, 2004 was $200 million compared with $181 million for the prior year. The $19 million increase in the period-to-period comparison reflects lower regulatory asset amortization; the benefit of customer growth; decreased purchased power and fuel costs primarily due to lower prices for capacity purchases; increased interest income and lower replacement power costs due to fewer unplanned outages. These positive factors were partially offset by increased operations and maintenance costs related to increased generation, customer service and personnel costs; the effects of weather on retail sales; higher depreciation and amortization related to increased delivery and other assets; lower realized margins on energy trading due to higher wholesale electricity prices; a retail electricity price reduction; lower income tax credits; and higher interest expense primarily due to increased utility plant in service.

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     Additional details on the major factors that increased (decreased) net income for the year ended December 31, 2004 compared with the prior year are contained in the following table (dollars in millions).

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

Regulated Electricity Revenues

     Regulated electricity revenues were $52 million higher in the year ended December 31, 2004 compared with the prior year, primarily as a result of:

•   an $101 million increase in retail revenues related to customer growth and higher average usage, excluding weather effects;

•   a $42 million decrease in retail revenues related to weather;

•   a $13 million decrease in retail revenues related to a reduction in retail electricity prices; and

•   a $6 million increase due to miscellaneous factors.

Marketing and Trading Revenues

     Marketing and trading revenues were $40 million higher in the year ended December 31, 2004 compared with the prior year, primarily as a result of:

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•   a $13 million decrease from generation sales other than Native Load due to substantially lower sales volumes, resulting from lower market spark spreads;

•   $49 million of higher energy trading revenues on realized sales of electricity primarily due to higher electricity prices; and

•   $4 million in higher mark-to-market gains for future-period deliveries primarily as a result of higher forward prices for wholesale electricity.

2003 Compared with 2002

     APS’ net income for the year ended December 31, 2003 was $181 million compared with $199 million for the prior year. The $18 million decrease in the period-to-period comparison reflects higher purchased power and fuel costs resulting from higher prices for hedged gas and purchased power; higher replacement power costs from plant outages due to higher market prices and more unplanned outages (Cholla Unit 3 experienced an unplanned outage from August of 2003 through November of 2003); higher operations and maintenance costs related to increased pension and other benefits; two retail electricity price reductions; and higher depreciation expense related to increased delivery and other assets. These negative factors were partially offset by higher retail sales primarily due to customer growth and favorable weather; lower operating costs primarily related to severance costs recorded in 2002; lower regulatory asset amortization; tax credits and favorable income tax adjustments related to prior years resolved in 2003; higher income related to APS’ return to the AFUDC method of capitalizing construction finance costs; and increased generation sales other than Native Load primarily due to higher sales volumes, partially offset by lower unit margins.

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     Additional details on the major factors that increased (decreased) net income for the year ended December 31, 2003 compared with the prior year are contained in the following table (dollars in millions).

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

Regulated Electricity Revenues

     Regulated electricity revenues were $97 million higher in the year ended December 31, 2003 compared with the prior year, primarily as a result of:

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

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

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

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

•   a $12 million net increase due to miscellaneous factors.

Marketing and Trading Revenues

     Marketing and trading revenues were $71 million higher in the year ended December 31, 2003 compared with the prior year, primarily as a result of:

•   a $66 million increase from generation sales other than Native Load primarily due to higher prices and sales volumes, including sales from new power plants in service;

•   a $5 million net increase due to miscellaneous factors.

LIQUIDITY AND CAPITAL RESOURCES – ARIZONA PUBLIC SERVICE COMPANY

     Contractual Obligations

     The following table summarizes contractual requirements for APS as of December 31, 2004 (dollars in millions):

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

(a)	The long-term debt matures at various dates through 2034 and bears interest principally at fixed rates. Interest on variable-rate long-term debt is determined by the rates at December 31, 2004.
(b)	APS’ purchase power and fuel commitments include purchases of coal, electricity, natural gas, and nuclear fuel (see Note S-5).
(c)	Future pension contributions are not determinable for time periods after 2005.
(d)	These contractual obligations include commitments for capital expenditures and other obligations. Obligations for 2005 include about $190 million for acquisition of the Sundance Plant (see Note 3).

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RISK FACTORS

     Exhibit 99.31 and Exhibit 99.32, which are hereby incorporated by reference, contain a discussion of risk factors affecting Pinnacle West and APS, respectively.

FORWARD-LOOKING STATEMENTS

     This document contains forward-looking statements based on current expectations, and neither Pinnacle West nor APS assumes any obligation to update these statements or make any further statements on any of these issues, except as required by applicable law. These forward-looking statements are often identified by words such as “estimate,” “predict,” “hope,” “may,” “believe,” “anticipate,” “plan,” “expect,” “require,” “intend,” “assume” and similar words. Because actual results may differ materially from expectations, we caution readers not to place undue reliance on these statements. A number of factors could cause future results to differ materially from historical results, or from results or outcomes currently expected or sought by Pinnacle West or APS. In addition to the “Risk Factors” described in Exhibits 99.31 and 99.32 to this report, these factors include, but are not limited to:

•   state and federal regulatory and legislative decisions and actions, including the outcome of the rate case APS filed with the ACC on June 27, 2003 and the wholesale electric price mitigation plan adopted by the FERC;

•   the outcome of regulatory, legislative and judicial proceedings relating to the restructuring;

•   the ongoing restructuring of the electric industry, including the introduction of retail electric competition in Arizona and decisions impacting wholesale competition;

•   market prices for electricity and natural gas;

•   power plant performance and outages, including transmission outages and constraints;

•   weather variations affecting local and regional customer energy usage;

•   customer growth and energy usage;

•   regional economic and market conditions, including the results of litigation and other proceedings resulting from the California energy situation, volatile purchased power and fuel costs and the completion of generation and transmission construction in the region, which could affect customer growth and the cost of power supplies;

•   the cost of debt and equity capital and access to capital markets;

•   the uncertainty that current credit ratings will remain in effect for any given period of time;

•   our ability to compete successfully outside traditional regulated markets (including the wholesale market);

•   the performance of our marketing and trading activities due to volatile market liquidity and any deteriorating counterparty credit and the use of derivative contracts in our business (including the interpretation of the subjective and complex accounting rules related to these contracts);

•   changes in accounting principles generally accepted in the United States of America and the interpretation of those principles;

•   the performance of the stock market and the changing interest rate environment, which affect the amount of required contributions to Pinnacle West’s pension plan

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	and APS’ nuclear decommissioning trust funds, as well as the reported costs of providing pension and other postretirement benefits;
•	technological developments in the electric industry;
•	the strength of the real estate market in SunCor’s market areas, which include Arizona, Idaho, New Mexico and Utah; and
•	other uncertainties, all of which are difficult to predict and many of which are beyond the control of Pinnacle West and APS.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

     See “Pinnacle West Consolidated – Factors Affecting Our Financial Outlook” in Item 7 above for a discussion of quantitative and qualitative disclosures about market risk.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE

	Page
Management’s Report on Internal Control Over Financial Reporting (Pinnacle West Capital Corporation)	64
Report of Independent Registered Public Accounting Firm	65
Pinnacle West Consolidated Statements of Income for 2004, 2003 and 2002	67
Pinnacle West Consolidated Balance Sheets as of December 31, 2004 and 2003	68
Pinnacle West Consolidated Statements of Cash Flows for 2004, 2003 and 2002	70
Pinnacle West Consolidated Statements of Changes in Common Stock Equity for 2004, 2003 and 2002	71
Notes to Pinnacle West’s Consolidated Financial Statements	72
Management’s Report on Internal Control Over Financial Reporting (Arizona Public Service Company)	128
Report of Independent Registered Public Accounting Firm	129
APS Statements of Income for 2004, 2003 and 2002	131
APS Balance Sheets as of December 31, 2004 and 2003	132
APS Statements of Cash Flow for 2004, 2003 and 2002	134
APS Statements of Changes in Common Stock Equity for 2004, 2003 and 2002	135
Supplemental Notes to APS’ Financial Statements	137
Financial Statement Schedule for 2004, 2003 and 2002
Pinnacle West Schedule II – Valuation and Qualifying Accounts for 2004, 2003 and 2002	146
APS Schedule II – Reserve for Uncollectibles for 2004, 2003 and 2002	147

See Note 13 for the selected quarterly financial data required to be presented in this Item.

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MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
(PINNACLE WEST CAPITAL CORPORATION)

     Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13(a)-15(f). Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2004. Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein and relates also to the Company’s consolidated financial statements.

March 15, 2005

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Pinnacle West Capital Corporation
Phoenix, Arizona

We have audited the accompanying consolidated balance sheets of Pinnacle West Capital Corporation and subsidiaries (the “Company”) as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in common stock equity, and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedule listed in the Index at Item 15. We also have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that the Company maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these financial statements and financial statement schedule, an opinion on management’s assessment, and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

65

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also, in our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

As discussed in Note 18 to the consolidated financial statements, in 2002 the Company changed its method for accounting for trading activities in order to comply with the provisions of Emerging Issues Task Force Issue No. 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities.

DELOITTE & TOUCHE LLP
Phoenix, Arizona

March 15, 2005

66

PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(dollars and shares in thousands, except per share amounts)

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

See Notes to Pinnacle West’s Consolidated Financial Statements.

67

PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

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

See Notes to Pinnacle West’s Consolidated Financial Statements.

68

PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

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

See Notes to Pinnacle West’s Consolidated Financial Statements.

69

PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)

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

See Notes to Pinnacle West’s Consolidated Financial Statements.

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PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
(dollars in thousands)

	Year Ended December 31,
	2004			2003			2002
COMMON STOCK (Note 7) Balance at beginning of year	$	1,744,354		$	1,737,258		$	1,536,924
Issuance of common stock		18,291			—			199,238
Other		6,402			7,096			1,096
Balance at end of year		1,769,047			1,744,354			1,737,258
TREASURY STOCK (Note 7)
Balance at beginning of year		(3,273	)		(4,358	)		(5,886	)
Purchase of treasury stock		(2,986	)		—			(5,971	)
Reissuance of treasury stock used for stock compensation, net		5,831			1,085			7,499
Balance at end of year		(428	)		(3,273	)		(4,358	)
RETAINED EARNINGS
Balance at beginning of year		1,127,699			1,044,537			1,032,850
Net income		243,195			240,579			149,408
Common stock dividends		(166,772	)		(157,417	)		(137,721	)
Balance at end of year		1,204,122			1,127,699			1,044,537
ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)
Balance at beginning of year		(39,001	)		(91,284	)		(64,565	)
Minimum pension liability adjustment, net of tax expense (benefit) of ($9,756), $3,700 and ($46,109)		(15,224	)		4,700			(70,298	)
Unrealized gain on derivative instruments, net of tax expense of $31,117, $33,298 and $28,820		48,226			51,089			43,939
Reclassification of realized gain to income, net of tax benefit of ($10,695), ($2,343) and ($237)		(16,546	)		(3,506	)		(360	)
Balance at end of year		(22,545	)		(39,001	)		(91,284	)
TOTAL COMMON STOCK EQUITY	$	2,950,196		$	2,829,779		$	2,686,153
COMPREHENSIVE INCOME (LOSS) Net income	$	243,195		$	240,579		$	149,408
Other comprehensive income (loss)		16,456			52,283			(26,719	)
Comprehensive income	$	259,651		$	292,862		$	122,689

See Notes to Pinnacle West’s Consolidated Financial Statements.

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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. Through its marketing and trading division, APS also generates, sells and delivers electricity to wholesale customers in the western United States. Pinnacle West Energy, which was formed in 1999, is the subsidiary through which we conduct our unregulated generation operations. APS Energy Services was formed in 1998 and provides competitive commodity energy and energy-related products to key customers in competitive markets in the western United States. SunCor is a developer of residential, commercial and industrial real estate projects in Arizona, New Mexico, Idaho and Utah. El Dorado is an investment firm.

Accounting Records and Use of Estimates

     Our accounting records are maintained in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. We have reclassified certain prior year amounts to conform to the current year presentation.

Derivative Accounting

     We are exposed to the impact of market fluctuations in the commodity price and transportation costs of electricity, natural gas, coal and emissions allowances and in interest rates. We manage risks associated with these market fluctuations by utilizing various instruments that qualify as derivatives, including exchange-traded futures and options and over-the-counter forwards, options and swaps. As part of our overall risk management program, we use such instruments to hedge purchases and sales of electricity, fuels, and emissions allowances and credits. In addition, subject to specified risk parameters monitored by the ERMC, we engage in marketing and trading activities intended to profit from market price movements.

     We account for our derivative contracts in accordance with SFAS No. 133, as amended by SFAS No. 149, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 133 requires that entities recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. Changes in the fair value of derivative instruments are either recognized periodically in income or, if certain hedge criteria are met, in common stock equity (as a component of other comprehensive income (loss)). SFAS No. 133 provides a scope exception for contracts that meet the normal purchases and sales criteria specified in the standard.

72

PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Prior to the fourth quarter of 2002, we accounted for our trading activity at fair value, with changes in fair value reported in earnings as required by EITF 98-10, “Accounting for Contracts Involved in Energy Trading and Risk Management Activities.” In the fourth quarter of 2002, we adopted EITF 02-3, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities,” which rescinded EITF 98-10. We recorded a $66 million after-tax charge in net income as a cumulative effect adjustment for the previously recorded accumulated unrealized mark-to-market on energy trading contracts that did not meet the accounting definition of a derivative. Our energy trading contracts that are derivatives are accounted for at fair value under SFAS No. 133, as amended. Energy trading contracts that do not meet the definition of a derivative are now accounted for on an accrual basis with the associated revenues and costs recorded at the time the contracted commodities are delivered or received.

     Under fair value (mark-to-market) accounting, derivative contracts for the purchase or sale of energy commodities are reflected at fair market value, net of valuation adjustments, with resulting unrealized gains and losses recorded as current or long-term assets and liabilities from risk management and trading activities on the Consolidated Balance Sheets.

     We determine fair market value using actively-quoted prices when available. We consider quotes for exchange-traded contracts and over-the-counter quotes obtained from independent brokers to be actively-quoted.

     When actively-quoted prices are not available, we use prices provided by other external sources. This includes quarterly and calendar year quotes from independent brokers, which we convert into monthly prices using historical relationships.

     For options, long-term contracts and other contracts for which price quotes are not available, we use models and other valuation methods. The valuation models we employ utilize spot prices, forward prices, historical market data and other factors to forecast future prices. The primary valuation technique we use to calculate the fair value of contracts where price quotes are not available is based on the extrapolation of forward pricing curves using observable market data for more liquid delivery points in the same region and actual transactions at the more illiquid delivery points. We also value option contracts using a variation of the Black-Scholes option-pricing model.

     For non-exchange traded contracts, we calculate fair market value based on the average of the bid and offer price, and we discount to reflect net present value. We maintain certain valuation adjustments for a number of risks associated with the valuation of future commitments. These include valuation adjustments for liquidity and credit risks based on the financial condition of counterparties. The liquidity valuation adjustment represents the cost that would be incurred if all unmatched positions were closed-out or hedged.

     The credit valuation adjustment represents estimated credit losses on our overall exposure to counterparties, taking into account netting arrangements, expected default experience for the credit rating of the counterparties and the overall diversification of the portfolio. Counterparties in the portfolio consist principally of major energy companies, municipalities, local distribution companies and financial institutions. We maintain credit policies that management believes minimize overall credit risk. Determination of the credit quality of counterparties is based upon a number of factors, including credit ratings, financial condition, project economics and collateral requirements. When

73

PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

applicable, we employ standardized agreements that allow for the netting of positive and negative exposures associated with a single counterparty.

     The use of models and other valuation methods to determine fair market value often requires subjective and complex judgment. Actual results could differ from the results estimated through application of these methods. Our marketing and trading portfolio includes structured activities hedged with a portfolio of forward purchases that protects the economic value of the sales transactions. Our practice is to hedge within timeframes established by the ERMC.

     See Note 18 for additional information about our derivative and energy trading accounting policies.

Regulatory Accounting

     APS is regulated by the ACC and the FERC. The accompanying financial statements reflect the rate-making policies of these commissions. For regulated operations, we prepare our financial statements in accordance with SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation.” SFAS No. 71 requires a cost-based, rate-regulated enterprise to reflect the impact of regulatory decisions in its financial statements. As a result, we capitalize certain costs that would be included as expense in the current period by unregulated companies. Regulatory assets represent incurred costs that have been deferred because they are probable of future recovery in customer rates. Regulatory liabilities generally represent expected future costs that have already been collected from customers.

     Management continually assesses whether our regulatory assets are probable of future recovery by considering factors such as applicable regulatory environment changes and recent rate orders to other regulated entities in the same jurisdiction. This determination reflects the current political and regulatory climate in the state and is subject to change in the future. If future recovery of costs ceases to be probable, the assets would be written off as a charge in current period earnings.

     As part of the 1999 Settlement Agreement, APS amortized certain regulatory assets over a period that ended June 30, 2004. Amortization in the last three years is as follows (dollars in millions):

2002	2003		2004
$115	$	86	$	18

     The detail of regulatory assets is as follows (dollars in millions):

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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(a) See “Reacquired Debt Costs” below.

     The detail of regulatory liabilities is as follows (dollars in millions):

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

(a)	See Note 12 for information on Asset Retirement Obligations.
(b)	See “ACC Financing Orders” in Note 3 for information on the “APS Loan”.

Utility Plant and Depreciation

     Utility plant is the term we use to describe the business property and equipment that supports electric service, consisting primarily of generation, transmission and distribution facilities. We report utility plant at its original cost, which includes:

•   material and labor;

•   contractor costs;

•   capitalized leases;

•   construction overhead costs (where applicable); and

•   capitalized interest or an allowance for funds used during construction.

     We expense the costs of plant outages, major maintenance and routine maintenance as incurred. We charge retired utility plant to accumulated depreciation. Prior to 2003, we charged removal costs, less salvage, to accumulated depreciation. Effective January 1, 2003, we applied the provisions of SFAS No. 143. The standard requires that liabilities associated with the retirement of tangible long-lived assets be recognized at fair value as incurred and capitalized as part of the related tangible long-lived assets. Accretion of the liability due to the passage of time is an operating

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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

expense and the capitalized cost is depreciated over the useful life of the long-lived asset. See Note 12.

     APS records a regulatory liability for the asset retirement obligations related to its regulated assets. This regulatory liability represents the difference between the amount that has been recovered in regulated rates and the amount calculated under SFAS No. 143. APS believes it can recover in regulated rates the transition and ongoing current period costs calculated in accordance with SFAS No. 143.

     We record depreciation on utility plant on a straight-line basis over the remaining useful life of the related assets. The approximate remaining average useful lives of our utility property at December 31, 2004 were as follows:

•   Fossil plant – 23 years;

•   Nuclear plant – 18 years;

•   Other generation – 26 years;

•   Transmission – 36 years;

•   Distribution – 23 years; and

•   Other – 8 years.

     For the years 2002 through 2004, the depreciation rates, as prescribed by our regulators, ranged from a low of 1.51% to a high of 12.5%. The weighted-average rate was 3.36% for 2004, 3.35% for 2003 and 3.35% for 2002. We depreciate non-utility property and equipment over the estimated useful lives of the related assets, ranging from 3 to 55 years.

Investments

     El Dorado accounts for its investments using the equity (if significant influence) and cost (less than 20% ownership) methods. See Note 22 for a discussion of the sale of NAC.

     The Company’s investments have been reviewed in accordance with EITF 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” and no other-than-temporary impairments were identified.

Capitalized Interest

     Capitalized interest represents the cost of debt funds used to finance non-regulated construction projects. Plant construction costs, including capitalized interest, are expensed through depreciation when completed projects are placed into commercial operation. The rate used to calculate capitalized interest was a composite rate of 4.44% for 2004, 4.55% for 2003 and 4.80% for 2002. Capitalized interest ceases to accrue when construction is complete.

Allowance for Funds Used During Construction

     AFUDC represents the approximate net composite interest cost of borrowed funds and a reasonable return on the equity funds used for construction of regulated utility plant. Plant construction costs, including AFUDC, are recovered in authorized rates through depreciation when completed projects are placed into commercial operation.

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     AFUDC was calculated by using a composite rate of 8.42% for 2004 and 8.55% for 2003. APS compounds AFUDC monthly and ceases to accrue AFUDC when construction work is completed and the property is placed in service.

     In 2003, APS returned to the AFUDC method of capitalizing interest and equity costs associated with construction projects in a regulated utility. This is consistent with APS returning to a vertically-integrated utility, as evidenced by APS’ 2003 general rate case filing, which includes the request for rate recognition of generation assets. Prior to 2003, APS capitalized interest in accordance with SFAS No. 34, “Capitalization of Interest Cost.” Although AFUDC both increases the plant balance and results in higher current earnings during the construction period, AFUDC is realized in future revenues through depreciation provisions included in rates. This change increased earnings by $11 million in 2003 as compared to what it would have been under SFAS No. 34.

Electric Revenues

     We derive electric revenues from sales of electricity to our regulated Native Load customers and sales to other parties from our marketing and trading activities. Revenues related to the sale of electricity are generally recorded when service is rendered or electricity is delivered to customers. However, the determination and billing of electricity sales to individual Native Load customers is based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each month, amounts of electricity delivered to customers since the date of the last meter reading and billing and the corresponding unbilled revenue are estimated. We exclude sales taxes on electric revenues from both revenue and taxes other than income taxes.

     Revenues from our Native Load customers and non-derivative instruments are reported on a gross basis on Pinnacle West’s Consolidated Statements of Income. In the electricity business, some contracts to purchase energy are netted against other contracts to sell energy. This is called “book-out” and usually occurs in contracts that have the same terms (quantities and delivery points) and for which power does not flow. We net these book-outs, which reduces both revenues and purchased power and fuel costs.

     All gains and losses (realized and unrealized) on energy trading contracts that qualify as derivatives are included in marketing and trading segment revenues on the Consolidated Statements of Income on a net basis.

Real Estate Revenues

     SunCor recognizes revenue from land, home and qualifying commercial operating assets sales in full, provided (a) the income is determinable, that is, the collectibility of the sales price is reasonably assured or the amount that will not be collectible can be estimated, and (b) the earnings process is virtually complete, that is, SunCor is not obligated to perform significant activities after the sale to earn the income. Unless both conditions exist, recognition of all or part of the income is postponed under the percentage of completion method per SFAS No. 66, “Accounting for Sales of Real Estate.” SunCor recognizes income only after the assets’ title has passed. A single method of recognizing income is applied to all sales transactions within an entire home, land or commercial development project. Commercial property and management revenues are recorded over the term of the lease or period in which services are provided. In addition, see Note 22 – Discontinued Operations.

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Real Estate Investments

     Real estate investments primarily include SunCor’s land, home inventory and investments in joint ventures. Land includes acquisition costs, infrastructure costs, property taxes and capitalized interest directly associated with the acquisition and development of each project. Land under development and land held for future development are stated at accumulated cost, except that, to the extent that such land is believed to be impaired, it is written down to fair value. Land held for sale is stated at the lower of accumulated cost or estimated fair value less costs to sell. Home inventory consists of construction costs, improved lot costs, capitalized interest and property taxes on homes under construction. Home inventory is stated at the lower of accumulated cost or estimated fair value less costs to sell. Investments in joint ventures for which SunCor does not have a controlling financial interest are not consolidated but are accounted for using the equity method of accounting. In 2003, SunCor acquired two joint ventures for $10 million and consolidated $53 million of assets and $43 million of liabilities, which are included on the Consolidated Balance Sheets at December 31, 2003. The $10 million cash investment is included on the other investing line of the Consolidated Statements of Cash Flow at December 31, 2003. In addition, see Note 22 – Discontinued Operations.

Cash and Cash Equivalents

     We consider all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents.

     We have investments in auction rate securities in which interest rates are reset on a short-term basis; however, the underlying contract maturity dates extend beyond three months. We classify the investments in auction rate securities as investments in debt securities on our Consolidated Balance Sheets. We have reclassified cash at December 31, 2003 of $92 million to investment in debt securities. Included in that reclassification is $70 million related to APS. The purchase and sale activities related to these investments have also been reclassified on the Consolidated Statement of Cash Flows.

Nuclear Fuel

     APS charges nuclear fuel to fuel expense by using the unit-of-production method. The unit-of-production method is an amortization method based on actual physical usage. APS divides the cost of the fuel by the estimated number of thermal units it expects to produce with that fuel. APS then multiplies that rate by the number of thermal units produced within the current period. This calculation determines the current period nuclear fuel expense.

     APS also charges nuclear fuel expense for the permanent disposal of spent nuclear fuel. The DOE is responsible for the permanent disposal of spent nuclear fuel, and it charges APS $0.001 per kWh of nuclear generation. See Note 11 for information about spent nuclear fuel disposal and Note 12 for information on nuclear decommissioning costs.

Income Taxes

     Income taxes are provided using the asset and liability approach prescribed by SFAS No. 109, “Accounting for Income Taxes.” We file our federal income tax return on a consolidated basis and we file our state income tax returns on a consolidated or unitary basis. In accordance with our intercompany tax sharing agreement, federal and state income taxes are allocated to each subsidiary

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as though each subsidiary filed a separate income tax return. Any difference between that method and the consolidated (and unitary) income tax liability is attributed to the parent company. See Note 4.

Reacquired Debt Costs

     For reacquired debt costs related to the regulated portion of APS’ business, APS defers those gains and losses incurred upon early retirement and is seeking recovery of the net amount of losses in the APS general rate case (see Note 3).

Stock-Based Compensation

     In 2002, we began applying the fair value method of accounting for stock-based compensation, as provided for in SFAS No. 123, “Accounting for Stock-Based Compensation.” The fair value method of accounting is the preferred method. In accordance with the transition requirements of SFAS No. 123, we applied the fair value method prospectively, beginning with 2002 stock grants. In prior years, we recognized stock compensation expense based on the intrinsic value method allowed in Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees.”

     The following chart compares our net income, stock compensation expense and earnings per share to what those items would have been if we had recorded stock compensation expense based on the fair value method for all stock grants through 2004 (dollars in thousands, except per share amounts):

	2004			2003			2002
Net Income as reported:	$	243,195		$	240,579		$	149,408
Add: Stock compensation expense included in reported net income (net of tax)		4,690			3,514			2,347
Deduct: Total stock compensation expense determined under fair value method (net of tax)		(5,311	)		(5,220	)		(3,742	)
Pro forma net income	$	242,574		$	238,873		$	148,013
Earnings per share – basic:
As reported	$	2.66		$	2.64		$	1.76
Pro forma (fair value method)	$	2.65		$	2.62		$	1.74
Earnings per share – diluted:
As reported	$	2.66		$	2.63		$	1.76
Pro forma (fair value method)	$	2.65		$	2.61		$	1.74

     In order to calculate the fair value of the 2004, 2003 and 2002 stock option grants and the pro forma information above, we calculated the fair value of each fixed stock option in the incentive plans using the Black-Scholes option-pricing model. The fair value was calculated based on the date

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the option was granted. The following weighted-average assumptions were also used in order to calculate the fair value of the stock options:

	2004			2003			2002
Risk-free interest rate		3.15	%		3.35	%		4.17	%
Dividend yield		4.76	%		5.26	%		4.17	%
Volatility		17.04	%		38.03	%		22.59	%
Expected life (months)		60			60			60

     See Note 16 for further discussion about our stock compensation plans.

Intangible Assets

     We have no goodwill recorded and have separately disclosed other intangible assets on Pinnacle West’s Consolidated Balance Sheets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” The intangible assets are amortized over their finite useful lives. Amortization expense was $34 million in 2004, $25 million in 2003, and $21 million in 2002. Estimated amortization expense on existing intangible assets over the next five years is $33 million in 2005, $31 million in 2006, $25 million in 2007, $16 million in 2008, and $1 million in 2009. At December 31, 2004, the weighted average amortization period for intangible assets is 7 years.

2. New Accounting Standards

     In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” The standard establishes accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. SFAS No. 123R is effective as of the beginning of the first interim or annual period that begins after June 15, 2005. We are currently accounting for stock-based compensation using the fair value method and are evaluating the impacts of this new guidance, but we do not believe it will have a material impact on our financial statements.

     See the following Notes for information about new accounting standards and other accounting matters:

•   Note 8 for FSP 106-2 regarding the Medicare Prescription Drug, Improvement and Modernization Act related to retirement plans and other benefits;

•   Note 18 for EITF 02-3 and DIG Issue No. C15 related to accounting for derivatives and energy contracts; and

•   Note 20 for FIN No. 46R related to variable interest entities.

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3. Regulatory Matters

Electric Industry Restructuring

State

     APS General Rate Case; 2004 Settlement Agreement

     On June 27, 2003, APS filed a general rate case with the ACC and requested a $175.1 million, or 9.8%, increase in its annual retail electricity revenues, intended to become effective July 1, 2004. In this rate case, APS updated its cost of service and rate design.

     The general rate case also addresses the implementation of rate adjustment mechanisms that were the subject of ACC hearings in April 2003. The rate adjustment mechanisms, which were authorized as a result of the 1999 Settlement Agreement, would allow APS to recover several types of costs, the most significant of which are power supply costs (fuel and purchased power costs) and costs associated with complying with the Rules.

     On August 18, 2004, a substantial majority of the parties to the rate case, including APS, the ACC staff, the Arizona Residential Utility Consumer Office, other customer groups, and merchant power plant intervenors entered into an agreement that proposes terms under which the rate case would be settled (the “2004 Settlement Agreement”).

     Key financial components of the 2004 Settlement Agreement, which is subject to ACC approval, are as follows:

•   APS would receive an annual retail rate increase of approximately $75.5 million, or 4.21%. The increase would consist of an increase in base rates of approximately 3.77% and an increase of approximately 0.44% for recovery over five years of the past costs of compliance with the ACC’s retail electric competition rules.

•   APS would acquire the PWEC Dedicated Assets from Pinnacle West Energy, with a net carrying value of approximately $850 million, and rate base the PWEC Dedicated Assets at a rate base value of $700 million, which would result in a mandatory rate base disallowance of $150 million. As a result, for financial reporting purposes, APS would recognize a one-time, after-tax net plant write-off of approximately $90 million in the period when the plant transfer to APS is completed and would reduce annual depreciation expense by approximately $5 million.

•   To bridge the time between the effective date of the rate increase and the actual date the PWEC Dedicated Assets transfer, APS and Pinnacle West Energy would enter into a cost-based purchase power agreement (the “Bridge PPA”), which would be based on the value of the PWEC Dedicated Assets described in the previous bullet point. The Bridge PPA would remain in effect until the FERC approves the transfer of the PWEC Dedicated Assets to APS and the transfer is completed.

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

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acquired and rate-based the PWEC Dedicated Assets at the value described above.

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

•   A PSA would provide for the recovery of variations in fuel and purchased power costs, subject to specified parameters and procedures.

•   APS would not restore and recover in rates the $234 million write-off recorded in 1999 as a result of the 1999 Settlement Agreement. As a result, annual amortization expense for financial reporting purposes would be approximately $16 million less than if the $234 million write-off had been restored and amortized over a 15-year period as originally requested.

•   APS would adopt longer service lives than originally requested for certain depreciable assets, which would have the effect of reducing annual depreciation expense for financial reporting purposes by approximately $26 million.

     On February 28, 2005, the administrative law judge in the general rate case issued a recommended order. The recommended order proposes ACC approval of the 2004 Settlement Agreement with two changes related to the PSA. First, the amount of gas costs that APS could recover under the annual PSA would be limited to $500 million per year. Second, although the 2004 Settlement Agreement provides that the PSA would remain in effect for a minimum five-year period, under the recommended order the ACC would be able to eliminate the PSA at any time, if appropriate, if APS files a rate case before the expiration of the five-year period or APS does not comply with the terms of the PSA. If APS exceeds the gas costs that could be recoverable under the PSA or if the ACC eliminates the PSA, APS would retain the right to file a rate case to reset its base rates.

     On March 14, 2005, the parties to the 2004 Settlement Agreement jointly filed suggested changes to the recommended order addressing, among other things, the recommended order’s proposed treatment of the PSA. The ACC has scheduled open meetings on March 25 and March 28, 2005 to consider the recommended order and suggested changes. APS cannot predict the outcome of this matter.

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     ACC Financing Order

     On May 12, 2003, APS issued $500 million of debt pursuant to the Financing Order and made a $500 million loan to Pinnacle West Energy. Pinnacle West Energy distributed the net proceeds of that loan to us to fund the repayment of a portion of the debt we incurred to finance the construction of the PWEC Dedicated Assets.

     The ACC granted the Financing Order subject to various conditions. One of these conditions is that APS must maintain a common equity ratio of at least forty percent and may not pay common dividends if such payment would reduce its common equity ratio below that threshold, unless otherwise waived by the ACC.

     In addition, the Financing Order required the ACC staff to conduct an inquiry into our and our affiliates’ compliance with the retail electric competition and related rules and decisions. On June 13, 2003, APS submitted its report on these matters to the ACC staff. As part of the 2004 Settlement Agreement, this inquiry would be concluded with no further action by the ACC.

     Retail Electric Competition Rules

     The Rules approved by the ACC include the following major provisions:

•   They apply to virtually all Arizona electric utilities regulated by the ACC, including APS.

•   Effective January 1, 2001, retail access became available to all APS retail electricity customers.

•   Electric service providers that get CC&N’s from the ACC can supply only competitive services, including electric generation, but not electric transmission and distribution.

•   Affected utilities must file ACC tariffs that unbundle rates for noncompetitive services.

•   The ACC shall allow a reasonable opportunity for recovery of unmitigated stranded costs.

•   Absent an ACC waiver, prior to January 1, 2001, each affected utility (except certain electric cooperatives) must transfer all competitive electric assets and services to an

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unaffiliated party or parties or to a separate corporate affiliate or affiliates. Under the 1999 Settlement Agreement, APS received a waiver to allow transfer of its competitive electric assets and services to affiliates no later than December 31, 2002. However, as discussed below, in 2002 the ACC reversed its decision, as reflected in the Rules, to require APS to transfer its generation assets.

     Under the 1999 Settlement Agreement, the Rules are to be interpreted and applied, to the greatest extent possible, in a manner consistent with the 1999 Settlement Agreement. If the two cannot be reconciled, APS must seek, and the other parties to the 1999 Settlement Agreement must support, a waiver of the Rules in favor of the 1999 Settlement Agreement.

     On November 27, 2000, a Maricopa County, Arizona, Superior Court judge issued a final judgment holding that the Rules are unconstitutional and unlawful in their entirety due to failure to establish a fair value rate base for competitive electric service providers and because certain of the Rules were not submitted to the Arizona Attorney General for certification. The judgment also invalidates all ACC orders authorizing competitive electric service providers, including APS Energy Services, to operate in Arizona. We do not believe the ruling affected the 1999 Settlement Agreement. The 1999 Settlement Agreement was not at issue in the consolidated cases before the judge. Further, the ACC made findings related to the fair value of APS’ property in the order approving the 1999 Settlement Agreement. The ACC and other parties aligned with the ACC appealed the ruling to the Arizona Court of Appeals, and in January 2004, the Court invalidated some, but not all, of the Rules as either violative of Arizona’s constitutional requirement that the ACC consider the “fair value” of a utility’s property in setting rates or as being beyond the ACC’s constitutional and statutory powers. Other Rules were set aside for failure to submit such regulations to the Arizona Attorney General for approval as required by statute. A request for the Arizona Supreme Court to review the Court of Appeals decision was denied on January 4, 2005.

     Track A Order

     On September 10, 2002, the ACC issued the Track A Order, in which the ACC, among other things:

•   reversed its decision, as reflected in the Rules, to require APS to transfer its generation assets either to an unrelated third party or to a separate corporate affiliate; and

•   unilaterally modified the 1999 Settlement Agreement, which authorized APS’ transfer of its generating assets, and directed APS to cancel its activities to transfer its generation assets to Pinnacle West Energy.

     On November 15, 2002, APS filed appeals of the Track A Order in the Maricopa County, Arizona Superior Court and in the Arizona Court of Appeals. Arizona Public Service Company vs. Arizona Corporation Commission, CV 2002-0222 32. Arizona Public Service Company vs. Arizona Corporation Commission, 1CA CC 02-0002. On December 13, 2002, APS and the ACC staff agreed to principles for resolving certain issues raised by APS in its appeals of the Track A Order. The major provisions of the principles include, among other things, the following:

•   APS and the ACC staff agreed that it would be appropriate for the ACC to consider the following matters in APS’ general rate case, which was filed on June 27, 2003:

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•   the generating assets to be included in APS’ rate base, including the question of whether the PWEC Dedicated Assets should be included in APS’ rate base;

•   the appropriate treatment of the $234 million pretax asset write-off agreed to by APS as part of the 1999 Settlement Agreement; and

•   the appropriate treatment of costs incurred by APS in preparation for the previously anticipated transfer of generation assets to Pinnacle West Energy.

•   As a result of the ACC’s issuance of the Financing Order, APS’ appeals of the Track A Order are limited to the issues described in the preceding bullet points.

     On August 27, 2003, APS, Pinnacle West and Pinnacle West Energy filed a lawsuit asserting damage claims relating to the Track A Order. Arizona Public Service Company et al. v. The State of Arizona ex rel., Superior Court of the State of Arizona, County of Maricopa, No. CV2003-016372.

     Upon the ACC’s issuance of a final, non-appealable order approving the 2004 Settlement Agreement, APS, Pinnacle West, and Pinnacle West Energy will dismiss the litigation described under this “Track A” heading.

     Track B Order

     On March 14, 2003, the ACC issued the Track B Order, which required APS to solicit bids for certain estimated amounts of capacity and energy for periods beginning July 1, 2003. For 2003, APS was required to solicit competitive bids for about 2,500 MW of capacity and about 4,600 gigawatt-hours of energy, or approximately 20% of APS’ total retail energy requirements.

     APS issued requests for proposals in March 2003 and, by May 6, 2003, APS entered into contracts to meet all or a portion of its requirements for the years 2003 through 2006 as follows:

(1)	Pinnacle West Energy agreed to provide 1,700 MW in July through September of 2003 and in June through September of 2004, 2005 and 2006, by means of a unit contingent contract.
(2)	PPL EnergyPlus, LLC agreed to provide 112 MW in July through September of 2003 and 150 MW in June through September of 2004 and 2005, by means of a unit contingent contract.
(3)	Panda Gila River LP agreed to provide 450 MW in October of 2003 and 2004 and May of 2004 and 2005, and 225 MW from November 2003 through April 2004 and from November 2004 through April 2005, by means of firm call options.

     Effective upon final ACC approval of the 2004 Settlement Agreement and the closing of the purchase of the Sundance Plant discussed below, the Track B contracts with Pinnacle West Energy and PPL Energy Plus, LLC will be cancelled.

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     Request for Proposals and Asset Purchase Agreement

     In early December 2003, APS issued a request for proposals (“2003 RFP”) for long-term power supply resources. On June 1, 2004, APS and PPL Sundance, a wholly-owned subsidiary of PPL Corporation, entered into an asset purchase agreement by which APS agreed to purchase the Sundance Plant. The Sundance Plant, which began commercial operation in July 2002, would provide peaking generation support for APS’ system and reduce APS’ growing needs for new generation resources. The purchase price for the Sundance Plant is approximately $190 million.

     On June 1, 2004, APS and PPL Sundance filed a joint application with the ACC with respect to APS’ proposed acquisition of the Sundance Plant. On January 20, 2005, the ACC issued an order confirming APS’ authority to “self-build or buy new generation assets for native load” and stated that APS’ acquisition of the Sundance Plant would be a proper purpose under APS’ existing ACC financing authorizations. APS’ filings with the ACC also had requested that the ACC allow APS to defer for future recovery certain capital and operating costs (net of fuel and purchased power savings) associated with the Sundance Plant acquisition until rate treatment for the Sundance Plant could be considered in APS’ next general rate case. APS’ filings estimated that the deferrals would be approximately $10 million to $15 million before income taxes on an annualized basis. The order issued by the ACC allows APS to record the deferrals for up to 36 months, subject to a number of conditions. However, if APS has a general rate case pending at the end of the 36-month period, the deferral period could extend until the rate case had been decided. The conditions imposed by the order are expected to substantially limit the amount of deferrals that APS will be able to record.

     APS’ acquisition of the Sundance Plant is subject to FERC approval and to customary closing conditions. The transaction is targeted to close in the spring of 2005.

     APS does not expect to enter into any additional transactions as a result of the 2003 RFP.

     Provider of Last Resort Obligation

     Although the Rules allow retail customers to have access to competitive providers of energy and energy services, APS is, under the Rules, the “provider of last resort” for standard-offer, full-service customers under rates that have been approved by the ACC. In the event of shortfalls due to unforeseen increases in load demand or generation or transmission outages, APS may need to purchase additional supplemental power in the wholesale spot market. At various times, prices in the spot wholesale market have significantly exceeded the amount included in APS’ current retail rates. There can be no assurance that APS would be able to fully recover the costs of this power. The proposed settlement of APS’ general rate case, discussed above, would, among other things, allow APS to recover purchased power costs.

     1999 Settlement Agreement

     The following are the major provisions of a settlement agreement entered into in 1999, as approved by the ACC:

•   APS has reduced rates for standard-offer service for customers with loads less than three MW in a series of annual retail electricity price reductions of 1.5% on July 1 for each of the years 1999 to 2003 for a total of 7.5%. Based on the price reductions authorized in the 1999 Settlement Agreement, there were retail price decreases of

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approximately $24 million ($14 million after taxes), effective July 1, 1999; approximately $28 million ($17 million after taxes), effective July 1, 2000; approximately $27 million ($16 million after taxes), effective July 1, 2001; approximately $28 million ($17 million after taxes), effective July 1, 2002; and approximately $29 million ($18 million after taxes), effective July 1, 2003. For customers having loads of three MW or greater, standard-offer rates have been reduced in varying annual increments that total 5% in the years 1999 through 2002.

•   Unbundled rates being charged by APS for competitive direct access service (for example, distribution services) became effective upon approval of the 1999 Settlement Agreement, retroactive to July 1, 1999, and also became subject to annual reductions beginning January 1, 2000, that vary by rate class, through January 1, 2004.

•   There was a moratorium on retail price changes for standard-offer and unbundled competitive direct access services until July 1, 2004.

•   APS is being permitted to defer for later recovery prudent and reasonable costs of complying with the Rules, system benefits costs in excess of the levels included in then-current (1999) rates, and costs associated with the “provider of last resort” and standard-offer obligations for service after July 1, 2004. These costs are to be recovered through an adjustment clause or clauses commencing on July 1, 2004, or when the rate case is decided. See “APS General Rate Case; 2004 Settlement Agreement” above.

•   APS’ distribution system opened for retail access effective September 24, 1999. Customers were eligible for retail access in accordance with the phase-in adopted by the ACC under the Rules (see “Retail Electric Competition Rules” above), including an additional 140 MW being made available to eligible non-residential customers. APS opened its distribution system to retail access for all customers on January 1, 2001.

•   Prior to the 1999 Settlement Agreement, APS was recovering substantially all of its regulatory assets through July 1, 2004, pursuant to a 1996 regulatory agreement. In addition, the 1999 Settlement Agreement stated that APS has demonstrated that its allowable stranded costs, after mitigation and exclusive of regulatory assets, are at least $533 million net present value (in 1999 dollars). The 1999 Settlement Agreement also stated that APS will not be allowed to recover $183 million net present value (in 1999 dollars) ($234 million pretax) of the $533 million. The 1999 Settlement Agreement provided that APS will have the opportunity to recover $350 million net present value (in 1999 dollars) through a competitive transition charge that will remain in effect through December 31, 2004, at which time it will terminate. The costs subject to recovery under the adjustment clause described above will be decreased or increased by any over/under-recovery of the $350 million due to sales volume variances. As part of its general rate case request, APS sought the recovery of amounts written off by APS as a result of the 1999 Settlement Agreement. That claim would be given up under the terms of the 2004 Settlement Agreement (see above).

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•   The 1999 Settlement Agreement required APS to form, or cause to be formed, a separate corporate affiliate or affiliates and transfer to such affiliate(s) its competitive electric assets and services no later than December 31, 2002. The 1999 Settlement Agreement provided that APS would be allowed to defer and later collect, beginning July 1, 2004, 67% of its costs to accomplish the required transfer of generation assets to an affiliate. However, as discussed above under “Track A Order,” in 2002 the ACC unilaterally modified this aspect of the 1999 Settlement Agreement by issuing an order preventing APS from transferring its generation assets. Under the 2004 Settlement Agreement, APS would recover all costs incurred by APS in preparation for the previously anticipated transfer of generation assets to Pinnacle West Energy. See “APS General Rate Case; 2004 Settlement Agreement” above. Such full recovery of divestiture costs would be allowed under the 2004 Settlement Agreement (see above).

     General

     The regulatory developments and legal challenges to the Rules discussed in this Note have raised considerable uncertainty about the status and pace of retail electric competition and of electric restructuring in Arizona. Although some very limited retail competition existed in APS’ service area in 1999 and 2000, there are currently no active retail competitors providing unbundled energy or other utility services to APS’ customers. As a result, we cannot predict when, and the extent to which, additional competitors will re-enter APS’ service territory. As competition in the electric industry continues to evolve, we will continue to evaluate strategies and alternatives that will position us to compete in the new regulatory environment.

Federal

     In July 2002, the FERC adopted a price mitigation plan that constrains the price of electricity in the wholesale spot electricity market in the western United States. The FERC adopted a price cap of $250 per MWh for the period subsequent to October 31, 2002. Sales at prices above the cap must be justified and are subject to potential refund.

     On July 31, 2002, the FERC issued a Notice of Proposed Rulemaking for Standard Market Design for wholesale electric markets. Voluminous comments and reply comments were filed on virtually every aspect of the proposed rule. On April 28, 2003, the FERC Staff issued an additional white paper on the proposed Standard Market Design. The white paper discusses several policy changes to the proposed Standard Market Design, including a greater emphasis on flexibility for regional needs. We cannot currently predict what, if any, impact there may be to the Company if the FERC adopts the proposed rule or any modifications proposed in the comments.

     The FERC has been, though its Office of Marker Oversight and Investigations (OMOI), in the process of auditing a number of electric utilities regarding compliance with its regulations. Such an audit of APS and its affiliates was recently completed, and the FERC has issued an order approving the OMOI audit report and directing certain compliance actions. Arizona Public Service Company, 109 FERC ¶ 61,271 (2004).

     Chief among the FERC’s findings, APS must pay $4 million for its use of unauthorized point-to-point transmission service. Of the $4 million, APS must distribute: (1) $2.75 million to upgrade the West Phoenix-Lincoln Street 230kV transmission line with high capacity composite

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conductors; and (2) $1.25 million as a contribution to established low income energy assistance programs in Arizona. APS must not recover these monies from any existing or future wholesale or retail rate recovery mechanism, nor may it announce the low income payment as a public interest contribution. APS must also take certain corrective actions and make quarterly filings detailing its progress in implementing these actions until all are completed.

     APS believes that the resolution of these matters will not have a material adverse effect on its financial position, results of operations or liquidity.

General

     The regulatory developments and legal challenges to the Rules discussed in this Note have raised considerable uncertainty about the status and pace of retail electric competition and of electric restructuring in Arizona. Although some very limited retail competition existed in APS’ service area in 1999 and 2000, there are currently no active retail competitors providing unbundled energy or other utility services to APS’ customers. As a result, we cannot predict when, and the extent to which, additional competitors will re-enter APS’ service territory. As competition in the electric industry continues to evolve, we will continue to evaluate strategies and alternatives that will position us to compete in the new regulatory environment.

4. Income Taxes

     Certain assets and liabilities are reported differently for income tax purposes than they are for financial statements. The tax effect of these differences is recorded as deferred taxes. We calculate deferred taxes using the current income tax rates.

     APS has recorded a regulatory asset and a regulatory liability related to income taxes on its Balance Sheets in accordance with SFAS No. 71. The regulatory asset is for certain temporary differences, primarily the allowance for equity funds used during construction. The regulatory liability relates to excess deferred taxes resulting primarily from the reduction in federal income tax rates as part of the Tax Reform Act of 1986. APS amortizes this amount as the differences reverse.

      As a result of a change in IRS guidance, we claimed a tax deduction related to an APS tax accounting method change on the 2001 federal consolidated income tax return. The accelerated deduction resulted in a $200 million reduction in the current income tax liability and a corresponding increase in the plant-related deferred tax liability. In 2002, we received an income tax refund of approximately $115 million related to our 2001 federal consolidated income tax return. The 2001 federal consolidated income tax return is currently under examination by the IRS. As part of this ongoing examination, the IRS is reviewing this accounting method change and the resultant deduction. During 2004, the current income tax liability was increased, with a corresponding decrease to plant-related deferred tax liability, to reflect the expected outcome of this audit. We do not expect the ultimate outcome of this examination to have a material adverse impact on our financial position, results of operations or liquidity.

     The income tax liability accounts reflect the tax and interest associated with the most probable resolution of all known and measurable tax exposures.

     In 2004 and 2003, we resolved certain prior-year issues with the taxing authorities and recorded tax benefits associated with tax credits and other reductions to income tax expense.

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     The components of income tax expense are as follows (dollars in thousands):

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

     The following chart compares pretax income from continuing operations at the 35% federal income tax rate to income tax expense (dollars in thousands):

	Year Ended December 31,
	2004			2003			2002
Federal income tax expense at 35% statutory rate	$	127,426		$	114,897		$	136,048
Increases (reductions) in tax expense resulting from:
State income tax net of federal income tax benefit		13,705			11,522			18,114
Credits and favorable adjustments related to prior years resolved in current year		(6,138	)		(17,944	)		—
Medicare Subsidy Part-D (see Note 8)		(1,778	)		—			—
Allowance for equity funds used during construction (see Note 1)		(1,547	)		(4,984	)		—
Other		(2,811	)		(1,018	)		(2,017	)
Income tax expense	$	128,857		$	102,473		$	152,145

     The following table sets forth the net deferred income tax liability recognized on the Consolidated Balance Sheets (dollars in thousands):

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	December 31,
	2004			2003
Current liability	$	(9,057	)	$	(631	)
Long term liability		(1,227,553	)		(1,338,527	)
Accumulated deferred income taxes – net	$	(1,236,610	)	$	(1,339,158	)

     The components of the net deferred income tax liability were as follows (dollars in thousands):

	December 31,
	2004			2003
DEFERRED TAX ASSETS
Regulatory liabilities:
Asset Retirement Obligation	$	182,086		$	169,322
Federal excess deferred income taxes		16,341			18,936
Other		8,282			8,302
Pension liability		91,973			73,844
Risk management and trading activities		91,021			59,293
Deferred gain on Palo Verde Unit 2 sale leaseback		19,816			21,656
Other		70,849			64,770
Total deferred tax assets		480,368			416,123
DEFERRED TAX LIABILITIES
Plant-related		(1,516,174	)		(1,614,887	)
Risk management and trading activities		(146,037	)		(84,124	)
Regulatory assets		(54,767	)		(56,270	)
Total deferred tax liabilities		(1,716,978	)		(1,755,281	)
Accumulated deferred income taxes – net	$	(1,236,610	)	$	(1,339,158	)

5. Lines of Credit and Short-Term Borrowings

     APS had committed lines of credit with various banks of $325 million at December 31, 2004 and $250 million at December 31, 2003, which were available either to support the issuance of up to $250 million in commercial paper or to be used for bank borrowings, including issuance of letters of credit. The current line matures in May 2007. The commitment fees at December 31, 2004 and 2003 for these lines of credit were 0.15% and 0.175% per annum. APS had no bank borrowings outstanding under these lines of credit at December 31, 2004 and 2003. APS had approximately $4.8 million letters of credit issued under the line at December 31, 2004.

     APS had no commercial paper borrowings outstanding at December 31, 2004 and 2003. By Arizona statute, APS’ short-term borrowings cannot exceed 7% of its total capitalization unless approved by the ACC.

     Pinnacle West had committed lines of credit of $300 million at December 31, 2004 and $275 million at December 31, 2003, which were available either to support the issuance of up to $250

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million in commercial paper or to be used for bank borrowings, including issuance of letters of credit. The current lines mature in October 2007. Pinnacle West had no outstanding borrowings at December 31, 2004 and December 31, 2003. Pinnacle West had approximately $13 million of letters of credit issued under the line at December 31, 2004 and approximately $15 million of letters of credit issued under the line at December 31, 2003. The commitment fees were 0.175% in 2004 and ranged from 0.125% to 0.175% in 2003. Pinnacle West had no commercial paper borrowings outstanding at December 31, 2004 and 2003. All APS and Pinnacle West bank lines of credit and commercial paper agreements are unsecured.

     SunCor had revolving lines of credit totaling $90 million at December 31, 2004 and $120 million at December 31, 2003. The commitment fees were 0.125% in 2004 and 2003. SunCor had $35 million outstanding at December 31, 2004 and $50 million outstanding at December 31, 2003. The weighted-average interest rate was 4.50% at December 31, 2004 and 2003. Interest for 2004 and 2003 was based on LIBOR plus 2% or prime plus 0.5%. The balance is included in short-term debt on the Consolidated Balance Sheets. SunCor had other short-term loans in the amount of $36 million at December 31, 2004 and December 31, 2003. These loans are made up of multiple notes primarily with variable interest rates based on LIBOR plus 2.5% at December 31, 2004 and 2003.

6. Long-Term Debt

     APS has retired all first mortgage bonds issued under its 1946 mortgage and deed of trust, including the first mortgage bonds securing APS senior notes. On April 30, 2004, APS terminated its mortgage and deed of trust and, as a result, is not able to issue any additional first mortgage bonds under that mortgage. SunCor’s short and long-term debt is collateralized by interests in certain real property and Pinnacle West’s debt is unsecured. The following table presents the components of long-term debt on the Consolidated Balance Sheets outstanding at December 31, 2004 and 2003 (dollars in thousands):

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					December 31,
	Maturity	Interest
	Dates (a)	Rates			2004			2003
APS
First mortgage bonds (b)	2004		6.625	%	$	—		$	80,000
First mortgage bonds (c)	2028		5.50	%		—			25,000
First mortgage bonds (d)	2028		5.875	%		—			154,000
Unamortized discount and premium						(7,968	)		(8,631	)
Pollution control bonds (e)	2024-2034		(f	)		565,860			386,860
Pollution control bonds with senior notes	2029		5.05	%		90,000			90,000
Unsecured notes (g)	2004		5.875	%		—			125,000
Unsecured notes	2005		6.25	%		100,000			100,000
Unsecured notes	2005		7.625	%		300,000			300,000
Unsecured notes	2011		6.375	%		400,000			400,000
Unsecured notes	2012		6.50	%		375,000			375,000
Unsecured notes	2033		5.625	%		200,000			200,000
Unsecured notes	2015		4.650	%		300,000			300,000
Unsecured notes (h)	2014		5.80	%		300,000			—
Secured note	2014		6.00	%		1,900			—
Senior notes (i)	2006		6.75	%		83,695			83,695
Capitalized lease obligations	2006-2012		(j	)		9,854			11,749
Subtotal						2,718,341			2,622,673
SUNCOR
Notes payable	2006-2008		(k	)		15,467			17,125
Capitalized lease obligations	2005-2007		8.91	%		507			728
Subtotal						15,974			17,853
PINNACLE WEST
Senior notes (l)	2006		6.40	%		302,589			515,000
Unamortized discount and premium						(143	)		(270	)
Floating rate senior notes	2005		(m	)		165,000			165,000
Capitalized lease obligations	2005-2007		5.45	%		389			1,243
Subtotal						467,835			680,973
Total long-term debt (n)						3,202,150			3,321,499
Less current maturities (n)						617,165			704,914
TOTAL LONG-TERM DEBT LESS CURRENT MATURITIES					$	2,584,985		$	2,616,585

(a)	This schedule does not reflect the timing of redemptions that may occur prior to maturity.
(b)	On March 1, 2004, APS redeemed at maturity $80 million of its First Mortgage Bonds, 6.625% Series due 2004.
(c)	On March 31, 2004, APS redeemed $25 million of its First Mortgage Bonds, 5.5% Series due 2028.
(d)	On March 31, 2004, APS redeemed $154 million of its First Mortgage Bonds, 5.875% Series due 2028.
(e)	On March 31, 2004, Navajo County, Arizona Pollution Control Corporation issued $166 million of variable interest rate pollution control bonds, 2004 Series A-E, due 2034. The bonds were issued to refinance $166 million of outstanding pollution control bonds. The refinanced bonds were all $25 million of the Navajo 5.50% bonds due 2028 (see (c) above) and $141 million of the Navajo 5.875% bonds due 2028 (see (d) above). The Series A-E

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	bonds are payable solely from revenues obtained from APS pursuant to a loan agreement between APS and Navajo County, Arizona Pollution Control Corporation. Also on March 31, 2004, Coconino County, Arizona Pollution Control Corporation issued $13 million of variable interest rate pollution control bonds, 2004 Series A, due 2034. The bonds were issued to refinance $13 million of outstanding pollution control bonds. The refinanced bonds were $13 million of the Coconino 5.875% bonds due 2028 (see (d) above). The Series A bonds are payable solely from revenues obtained from APS pursuant to a loan agreement between APS and Coconino County, Arizona Pollution Control Corporation.
(f)	The weighted-average rate was 1.89% at December 31, 2004 and 1.51% at December 31, 2003. Changes in short-term interest rates would affect the costs associated with this debt.
(g)	On February 15, 2004, APS redeemed at maturity $125 million of its 5.875% Notes due 2004.
(h)	On June 29, 2004, APS issued $300 million of 5.80% senior unsecured notes due June 30, 2014. The proceeds from the sale of the notes were used to redeem $100 million in aggregate principal amount of APS’ 6.25% Notes due January 15, 2005 and a portion of $300 million in aggregate principal amount of APS’ 7.625% Notes due August 1, 2005.
(i)	Through April 30, 2004, APS had outstanding $84 million of first mortgage bonds (senior note mortgage bonds) issued to the senior note trustee as collateral for the senior notes, as well as the $90 million issue due in 2029. The senior note mortgage bonds had the same interest rate, interest payment dates, maturity and redemption provisions as the senior notes. As long as the senior note mortgage bonds secured the senior notes, the senior notes effectively ranked equally with the first mortgage bonds. On April 30, 2004, when APS repaid all of its first mortgage bonds, other than those that secure senior notes, the senior note mortgage bonds were released from the senior note indenture, resulting in their no longer securing the senior notes and ceasing to be outstanding.
(j)	The weighted average rate was 5.78% at December 31, 2004 and 5.55% at December 31, 2003 . Capital leases are included in property, plant and equipment on the Consolidated Balance Sheets for both December 31, 2004 and December 31, 2003.
(k)	Multiple notes with variable interest rates based on the lenders’ prime plus 0.25%, lenders’ prime plus 1.75% and LIBOR plus 2.50%. There are also two notes at fixed rates of 8.00% and 10.00%.
(l)	On January 29, 2004, we entered into a fixed-for-floating interest rate swap transaction on the $300 million 6.40% senior note. The transaction qualifies as a fair value hedge under SFAS No. 133.
(m)	The weighted average rate was 2.06% at December 31, 2004 and 1.98% at December 31, 2003.
(n)	$281 million of pollution control bonds at December 31, 2003 have been reclassified from long-term to current maturities. The bond holders had the ability to put these bonds to APS in the short-term on the interest rate reset date. Without a demonstrated intent to finance on a long-term basis (by use of credit agreements that extend for more than one year, etc.), GAAP requires the classification of the obligations as current maturities.

     Pinnacle West’s and APS’ debt covenants related to their respective bank financing arrangements include a debt-to-total-capitalization ratio and an interest coverage test. Pinnacle West and APS comply with these covenants and each anticipates it will continue to meet those and other significant covenant requirements. These covenants require that the ratio of debt to total capitalization cannot exceed 65% for the Company and for APS. At December 31, 2004, the ratio was approximately 53% for Pinnacle West and 54% for APS. The provisions regarding interest

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coverage require a minimum cash coverage of two times the interest requirements for each of the Company and APS. Based on 2004 results, the coverages were approximately 4 times for the Company and 4 times for APS. Failure to comply with such covenant levels would result in an event of default which, generally speaking, would require the immediate repayment of the debt subject to the covenants.

     Neither Pinnacle West’s nor APS’ financing agreements contain “ratings triggers” that would result in an acceleration of the required interest and principal payments in the event of a ratings downgrade. However, in the event of a ratings downgrade, Pinnacle West and/or APS may be subject to increased interest costs under certain financing agreements.

     All of Pinnacle West’s bank agreements contain “cross-default” provisions that would result in defaults and the potential acceleration of payment under these loan agreements if Pinnacle West or APS were to default under other agreements. All of APS’ bank agreements contain cross-default provisions that would result in defaults and the potential acceleration of payment under these bank agreements if APS were to default under other agreements. Pinnacle West’s and APS’ credit agreements generally contain provisions under which the lenders could refuse to advance loans in the event of a material adverse change in our financial condition or financial prospects, except that Pinnacle West and APS do not have a material adverse change restriction for revolver borrowings equal to outstanding commercial paper amounts.

     The following is a list of principal payments due on Pinnacle West’s total long-term debt and capitalized lease requirements:

•   $618 million in 2005;

•   $398 million in 2006;

•   $174 million in 2007;

•   $7 million in 2008;

•   $1 million in 2009; and

•   $2,012 million, thereafter.

7. Common Stock and Treasury Stock

     Our common stock and treasury stock activity during each of the three years 2004, 2003 and 2002 is as follows (dollars in thousands):

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	Common Stock				Treasury Stock
	Shares		Amount		Shares			Amount
Balance at December 31, 2001		84,824,947	$	1,536,924		(101,307	)	$	(5,886	)
Common stock issuance		6,555,000		199,238		—			—
Purchase of treasury stock		—		—		(150,500	)		(5,971	)
Reissuance of treasury stock for stock compensation (net)		—		—		126,977			7,499
Other		—		1,096		—			—
Balance at December 31, 2002		91,379,947		1,737,258		(124,830	)		(4,358	)
Reissuance of treasury stock for stock compensation (net)		—		—		32,815			1,085
Other		—		7,096		—			—
Balance at December 31, 2003		91,379,947		1,744,354		(92,015	)		(3,273	)
Common stock issuance		422,914		18,291		—			—
Purchase of treasury stock		—		—		(80,000	)		(2,986	)
Reissuance of treasury stock for stock compensation (net)		—		—		162,493			5,831
Other		—		6,402		—			—
Balance at December 31, 2004		91,802,861	$	1,769,047		(9,522	)	$	(428	)

8. Retirement Plans and Other Benefits

     Pinnacle West sponsors a qualified defined benefit and account balance pension plan and a non-qualified supplemental excess benefit retirement plan for the employees of Pinnacle West and our subsidiaries. Effective January 1, 2003, Pinnacle West sponsored a new account balance plan for all new employees in place of the defined benefit plan and, as of April 1, 2003, the plan was offered as an alternative to the defined benefit plan for all existing employees. A defined benefit plan specifies the amount of benefits a plan participant is to receive using information about the participant. The pension plan covers nearly all of our employees. The supplemental excess benefit retirement plan covers officers of the Company and highly compensated employees designated for participation by the Board of Directors. Our employees do not contribute to the plans. Generally, we calculate the benefits based on age, years of service and pay.

     Pinnacle West also sponsors other postretirement benefits for the employees of Pinnacle West and our subsidiaries. We provide medical and life insurance benefits to retired employees. Employees must retire to become eligible for these retirement benefits, which are based on years of service and age. For the medical insurance plans, retirees make contributions to cover a portion of the plan costs. For the life insurance plan, retirees do not make contributions. We retain the right to change or eliminate these benefits.

     Pinnacle West uses a December 31 measurement date for its pension and other postretirement benefit plans.

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PINNACLE WEST CAPITAL CORPORATION
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     On December 8, 2003, the President signed the “Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the Act). One feature of the Act is a government subsidy of prescription drug cost. The FASB issued FSP 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” to address the accounting for the effects of the Act. During the third quarter of 2004, we retroactively adopted the provisions of FSP 106-2, resulting in the remeasurement of our postretirement benefit plans’ accumulated postretirement benefit obligation as of December 31, 2003. The impact of the subsidy is a decrease in the accumulated projected benefit obligation of approximately $65 million and a decrease of approximately $11 million in the net periodic postretirement benefit cost for 2004. The 2004 after-tax reduction to expense is approximately $5 million, excluding amounts capitalized as construction overhead or billed to electric plant participants.

     The following table provides details of the plans’ benefit costs. Also included is the portion of these costs charged to expense, including administrative costs and excluding amounts capitalized as overhead construction or billed to electric plant participants (dollars in thousands):

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

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     The following table sets forth the plans’ changes in the benefit obligations for the plan years 2004 and 2003 (dollars in thousands):

	Pension						Other Benefits
	2004			2003			2004			2003
Benefit obligation at January 1	$	1,307,628		$	1,069,577		$	540,181		$	409,874
Service cost		41,207			37,662			17,557			15,858
Interest cost		81,873			76,951			29,488			30,163
Benefit payments		(45,195	)		(43,869	)		(14,332	)		(15,749	)
Actuarial losses/(gains)		68,731			171,420			(36,681	)		106,475
Plan amendments		—			(4,113	)		—			(6,440	)
Benefit obligation at December 31	$	1,454,244		$	1,307,628		$	536,213		$	540,181

     The following table sets forth the qualified pension plan and other benefit plan changes in the fair value of plan assets for the years 2004 and 2003 (dollars in thousands):

	Pension						Other Benefits
	2004			2003			2004			2003
Fair value of plan assets at January 1	$	887,311		$	720,807		$	294,051		$	223,474
Actual return on plan assets		102,829			162,571			32,433			46,071
Employer contributions		35,000			46,000			32,600			39,852
Benefit payments		(42,858	)		(42,067	)		(7,000	)		(15,346	)
Fair value of plan assets at December 31	$	982,282		$	887,311		$	352,084		$	294,051

     The following table shows a reconciliation of the funded status of the plans to the amounts recognized on the Consolidated Balance Sheets as of December 31, 2004 and 2003 (dollars in thousands):

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

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     The following sets forth the details related to benefits included on the Consolidated Balance Sheets at December 31, 2004 and 2003 (dollars in thousands):

	Pension						Other Benefits
	2004			2003			2004			2003
Accrued benefit cost	$	(85,621	)	$	(61,800	)	$	(3,241	)	$	(3,022	)
Additional minimum liability		(148,824	)		(126,241	)		—			—
Total liability		(234,445	)		(188,041	)		(3,241	)		(3,022	)
Intangible asset		14,234			16,634			—			—
Accumulated other comprehensive loss (pretax)		134,590			109,607			—			—
Net amount recognized	$	(85,621	)	$	(61,800	)	$	(3,241	)	$	(3,022	)

     The following table sets forth the other comprehensive income arising from the change in additional minimum liability for the years ended December 31, 2004 and 2003 (dollars in thousands):

	2004			2003
Decrease (increase) in minimum liability included in other comprehensive income – net of tax:
Pinnacle West consolidated	$	(15,225	)	$	4,700
APS share	$	(13,930	)	$	4,329

     The following table sets forth the projected benefit obligation and the accumulated benefit obligation for pension plans in excess of plan assets for the plan years 2004 and 2003 (dollars in thousands):

	2004		2003
Projected benefit obligation	$	1,454,244	$	1,307,628
Accumulated benefit obligation	$	1,216,727	$	1,075,352
Less fair value of plan assets		982,282		887,311
Pinnacle West pension liability	$	234,445	$	188,041
APS share of pension liability	$	203,668	$	160,639

     Below are the weighted-average assumptions for both the pension and other benefits used to determine each respective benefit obligation and net periodic benefit cost:

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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

							Benefit Costs
	Benefit Obligations						For the Years Ended
	As of December 31,						December 31,
	2004			2003			2004			2003
Discount rate-pension		5.84	%		6.10	%		6.10	%		6.75	%
Discount rate-other benefits		5.92	%		6.10	%		6.10	%		6.75	%
Rate of compensation increase		4.00	%		4.00	%		4.00	%		4.00	%
Expected long-term return on plan assets		N/A			N/A			9.00	%		9.00	%
Initial health care cost trend rate		8.00	%		8.00	%		8.00	%		8.00	%
Ultimate health care cost trend rate		5.00	%		5.00	%		5.00	%		5.00	%
Year ultimate health care trend rate is reached		2009			2008			2008			2007

     In selecting the pretax expected long-term rate of return on plan assets we consider past performance and economic forecasts for the types of investments held by the plan. For the year 2005 we are assuming a 9% rate of return on plan assets. As recent history has demonstrated, markets may decline and increase dramatically. However, we believe the long-term rate of return on plan assets of 9% is reasonable given our asset allocation in relation to historical and expected future performance.

     Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1% change in the assumed initial and ultimate health care cost trend rates would have the following effects (dollars in millions):

	1% Increase		1% Decrease
Effect on other postretirement benefits expense, after consideration of amounts capitalized or billed to electric plant participants	$	6		($5	)
Effect on service and interest cost components of net periodic other postretirement benefit costs	$	10		($8	)
Effect on the accumulated other postretirement benefit obligation	$	96		($76	)

Plan Assets

     Pinnacle West’s qualified pension plan asset allocation at December 31, 2004 and 2003 is as follows:

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	Percentage of Plan Assets
	at December 31,						Target Asset Allocation
Asset Category:	2004			2003
Equity securities		60	%		65	%		60	%
Fixed Income		27			23			30	%
Other		13			12			10	%
Total		100	%		100	%

     The Board of Directors has established an investment policy for the pension plan assets and has delegated oversight of the plan assets to an Investment Management Committee. The investment policy sets forth the objective of providing for future pension benefits by maximizing return consistent with acceptable levels of risk. The primary investment strategies are diversification of assets, stated asset allocation targets and ranges, prohibition of investments in Pinnacle West securities, and external management of plan assets.

     Pinnacle West’s other postretirement benefit plans’ asset allocation at December 31, 2004 and 2003, is as follows:

	Percentage of Plan Assets
	at December 31,						Target Asset Allocation
Asset Category:	2004			2003
Equity securities		71	%		71	%		70	%
Fixed Income		23			25			27	%
Other		6			4			3	%
Total		100	%		100	%

     The Investment Management Committee, described above, has also been delegated oversight of the plan assets for the postretirement benefit plans. The investment policy for other postretirement benefit plans assets is similar to that of the pension plan assets described above.

Contributions

     The minimum required contribution to be made to our pension plan in 2005 is estimated to be approximately $50 million. The contribution to be made to other postretirement benefit plans in 2005 is estimated to be approximately $40 million. APS’ share is approximately 92% of both plans.

Estimated Future Benefit Payments

     Benefit payments, which reflect estimated future employee service, for the next five years and the succeeding five years thereafter are estimated to be as follows (dollars in thousands):

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	Pension		Other Benefits (a)
2005	$	47,365	$	15,595
2006		50,848		15,470
2007		54,381		16,947
2008		59,021		18,404
2009		64,858		20,095
Years 2010-2014		443,578		139,329

(a)   The expected future other benefit payments take into account the Medicare Part D subsidy.

Employee Savings Plan Benefits

     Pinnacle West sponsors a defined contribution savings plan for eligible employees of Pinnacle West and subsidiaries. In 2004 APS represented 91% of the total cost of this plan. In a defined contribution savings plan, the benefits a participant receives result from regular contributions participants make to their own individual account. Under this plan, the Company matches a percentage of the participants’ contributions in the form of Pinnacle West stock. After a five year vesting period, participants have an option to transfer the Company matching contributions out of the Pinnacle West Stock Fund to other investment funds within the plan. At December 31, 2004, approximately 22% of total plan assets were in Pinnacle West stock. Pinnacle West recorded expenses for this plan of approximately $5 million for each of the years 2004, 2003 and 2002. APS recorded expenses for this plan of approximately $5 million in 2004, $5 million in 2003 and $4 million in 2002.

9. Leases

     In 1986, APS sold about 42% of its share of Palo Verde Unit 2 and certain common facilities in three separate sale leaseback transactions. APS accounts for these leases as operating leases. The gain resulting from the transaction of approximately $140 million was deferred and is being amortized to operations and maintenance expense over 29.5 years, the original term of the leases. There are options to renew the leases for two additional years and to purchase the property for fair market value at the end of the lease terms. Rent expense is calculated on a straight-line basis. See Note 20 for a discussion of VIEs, including the SPEs involved in the Palo Verde sale leaseback transactions.

     In addition, we lease certain land, buildings, equipment, vehicles and miscellaneous other items through operating rental agreements with varying terms, provisions and expiration dates.

     Total lease expense recognized in the Consolidated Statements of Income was $69 million in 2004, $67 million in 2003 and $67 million in 2002.

     The amounts to be paid for the Palo Verde Unit 2 leases are approximately $49 million per year for the years 2005 to 2015.

     Estimated future minimum lease payments for Pinnacle West’s operating leases are approximately as follows (dollars in millions):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year
2005	$	73
2006		70
2007		69
2008		67
2009		65
Thereafter		368
Total future lease commitments	$	712

10. Jointly-Owned Facilities

     APS shares ownership of some of its generating and transmission facilities with other companies. Pinnacle West Energy shares ownership of its Silverhawk Plant. Our share of operating and maintaining these facilities is included in the Consolidated Statements of Income in operations and maintenance expense. The following table shows APS’ and Pinnacle West Energy’s interests in those jointly-owned facilities recorded on the Consolidated Balance Sheets at December 31, 2004 (dollars in thousands):

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

(a)	PacifiCorp owns Cholla Unit 4 and APS operates the unit for PacifiCorp. The common facilities at Cholla are jointly-owned.
(b)	Weighted average of interests.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. Commitments and Contingencies

Palo Verde Nuclear Generating Station

     Spent Nuclear Fuel and Waste Disposal

     Nuclear power plant operators are required to enter into spent fuel disposal contracts with the DOE, and the DOE is required to accept and dispose of all spent nuclear fuel and other high-level radioactive wastes generated by domestic power reactors. Although the Nuclear Waste Act required the DOE to develop a permanent repository for the storage and disposal of spent nuclear fuel by 1998, the DOE has announced that the repository cannot be completed before 2010 and it does not intend to begin accepting spent nuclear fuel prior to that date. In November 1997, the United States Court of Appeals for the District of Columbia Circuit (D.C. Circuit) issued a decision preventing the DOE from excusing its own delay, but refused to order the DOE to begin accepting spent nuclear fuel. Based on this decision and the DOE’s delay, a number of utilities, including APS (on behalf of itself and the other Palo Verde owners), filed damages actions against the DOE in the Court of Federal Claims. Arizona Public Service Company v. United States of America, United States Court of Federal Claims, 03-2832C.

     In February 2002, the Secretary of Energy recommended to President Bush that the Yucca Mountain, Nevada site be developed as a permanent repository for spent nuclear fuel. The President transmitted this recommendation to Congress and the State of Nevada vetoed the President’s recommendation. Congress approved the Yucca Mountain site, overriding the Nevada veto. The State of Nevada has filed several lawsuits relating to the Yucca Mountain site. We cannot currently predict what further steps will be taken in this area.

     APS has existing fuel storage pools at Palo Verde and is operating a new facility for on-site dry storage of spent nuclear fuel. With the existing storage pools and the addition of the new facility, APS believes spent nuclear fuel storage or disposal methods will be available for use by Palo Verde to allow its continued operation through the term of the operating license for each Palo Verde unit.

     Although some low-level waste has been stored on-site in a low-level waste facility, APS is currently shipping low-level waste to off-site facilities. APS currently believes interim low-level waste storage methods are or will be available for use by Palo Verde to allow its continued operation and to safely store low-level waste until a permanent disposal facility is available.

     APS currently estimates it will incur $115 million (in 2004 dollars) over the life of Palo Verde for its share of the costs related to the on-site interim storage of spent nuclear fuel. As of December 31, 2004, APS had spent $11 million for on-site interim spent nuclear fuel storage. APS has recorded a regulatory asset of $11 million and is currently seeking recovery of these costs through future rates (see “APS General Rate Case; 2004 Settlement Agreement” in Note 3).

     APS believes that scientific and financial aspects of the issues of spent nuclear fuel and low-level waste storage and disposal can be resolved satisfactorily. However, APS acknowledges that their ultimate resolution in a timely fashion will require political resolve and action on national and regional scales which APS is less able to predict. APS expects to vigorously protect and pursue its rights related to this matter.

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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Nuclear Insurance

     The Palo Verde participants have insurance for public liability resulting from nuclear energy hazards to the full limit of liability under federal law. This potential liability is covered by primary liability insurance provided by commercial insurance carriers in the amount of $300 million and the balance by an industry-wide retrospective assessment program. If losses at any nuclear power plant covered by the programs exceed the accumulated funds, APS could be assessed retrospective premium adjustments. The maximum assessment per reactor under the program for each nuclear incident is approximately $101 million, subject to an annual limit of $10 million per incident. Based on APS’ interest in the three Palo Verde units, APS’ maximum potential assessment per incident for all three units is approximately $88 million, with an annual payment limitation of approximately $9 million.

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

     Purchased Power and Fuel Commitments

     APS and Pinnacle West are parties to various purchased power and fuel contracts with terms expiring from 2005 through 2025 that include required purchase provisions. We estimate the contract requirements to be approximately $187 million in 2005; $90 million in 2006; $81 million in 2007; $66 million in 2008; $68 million in 2009 and $363 million thereafter. However, these amounts may vary significantly pursuant to certain provisions in such contracts that permit us to decrease required purchases under certain circumstances.

     Of the various purchased power and fuel contracts mentioned above some of those contracts have take-or-pay provisions. The contracts APS has for the supply of its coal supply have take-or-pay provisions. The current take-or-pay coal contracts have terms that expire in 2016.

     The following table summarizes the estimated take-or-pay commitments for the existing terms (dollars in millions):

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

(a) Total take-or-pay commitments are approximately $542 million. The total net present value of these commitments is approximately $389 million.

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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Coal Mine Reclamation Obligations

     APS must reimburse certain coal providers for amounts incurred for coal mine reclamation. APS’ coal mine reclamation obligation was $61 million at December 31, 2004 and $60 million at December 31, 2003 and is included in deferred credits-other on the Consolidated Balance Sheets.

California Energy Market Issues and Refunds in the Pacific Northwest

     FERC In July 2001, the FERC ordered an expedited fact-finding hearing to calculate refunds for spot market transactions in California during a specified time frame. APS was a seller and a purchaser in the California markets at issue, and to the extent that refunds are ordered, APS should be a recipient as well as a payor of such amounts. The FERC is still considering the evidence and refund amounts have not yet been finalized. APS does not anticipate material changes in its exposure and still believes, subject to the finalization of the revised proxy prices, that it will be entitled to a net refund.

     On March 19, 2002, the State of California filed a complaint with the FERC alleging that wholesale sellers of power and energy, including the Company, failed to properly file rate information at the FERC in connection with sales to California from 2000 to the present under market-based rates. State of California v. British Columbia Power Exchange et al., Docket No. EL02-71-000. The complaint requests the FERC to require the wholesale sellers to refund any rates that are “found to exceed just and reasonable levels.” This complaint was dismissed by the FERC and the State of California appealed the matter to the Ninth Circuit Court of Appeals. In an order issued September 9, 2004, the Ninth Circuit upheld the FERC’s authority to permit market-based rates, but rejected the FERC’s claim that it was without authority to consider retroactive refunds when a utility has not strictly adhered to the quarterly reporting requirements of the market-based rate system. On September 9, 2004, the Ninth Circuit remanded the case to the FERC for further proceedings. State of California ex rel. Bill Lockyer, Attorney General v. FERC, No. 02-73093. Several of the intervenors in this appeal filed a petition for rehearing of this decision on October 25, 2004. The outcome of the further proceedings cannot be predicted at this time.

     The FERC also ordered an evidentiary proceeding to discuss and evaluate possible refunds for the Pacific Northwest. The FERC affirmed the ALJ’s conclusion that the prices in the Pacific Northwest were not unreasonable or unjust and refunds should not be ordered in this proceeding. This decision has now been appealed to the Court of Appeals (Ninth Circuit). Although the FERC ruling in the Pacific Northwest matter is being appealed and the FERC has not yet calculated the specific refund amounts due in California, we do not expect that the resolution of these issues, as to the amounts alleged in the proceedings, will have a material adverse impact on our financial position, results of operations or liquidity.

     On March 26, 2003, FERC made public a Final Report on Price Manipulation in Western Markets, prepared by its staff and covering spot markets in the West in 2000 and 2001. The report stated that a significant number of entities who participated in the California markets during the 2000-2001 time period, including APS, may potentially have been involved in arbitrage transactions that allegedly violated certain provisions of the ISO tariff. After reviewing the matter, along with the data supplied by APS, the FERC staff moved to dismiss the claims against APS and to dismiss the proceeding. The motion to dismiss was granted by the FERC on January 22, 2004. Certain parties have sought rehearing of this order, and that request is pending.

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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     California Civil Energy Market Litigation The State of California and others have filed various claims, which have now been consolidated, against several power suppliers to California alleging antitrust violations. Wholesale Electricity Antitrust Cases I and II, Superior Court in and for the County of San Diego, Proceedings Nos. 4204-00005 and 4204-00006. Two of the suppliers who were named as defendants in those matters, Reliant Energy Services, Inc. (and other Reliant entities) and Duke Energy and Trading, LLP (and other Duke entities), filed cross-claims against various other participants in the PX and California independent system operator markets, including APS, attempting to expand those matters to such other participants. APS has not yet filed a responsive pleading in the matter, but APS believes the claims by Reliant and Duke as they relate to APS are without merit.

     APS was also named in a lawsuit regarding wholesale contracts in California, which, after moving to state court, has been removed to the federal court for a second time. James Millar, et al. v. Allegheny Energy Supply, et al., San Francisco Superior Court, Case No. 407867, U.S. District Court (Northern District) C-04-0519 SBA. The First Amended Complaint alleges basically that the contracts entered into were the result of an unfair and unreasonable market, in violation of California unfair competition laws. The PX has filed a lawsuit against the State of California regarding the seizure of forward contracts and the State has filed a cross complaint against APS and numerous other PX participants. Cal PX v. The State of California, Superior Court in and for the County of Sacramento, JCCP No. 4203. Various motions continue to be filed, and we currently believe these claims will have no material adverse impact on our financial position, results of operations or liquidity.

Construction Program

     Consolidated capital expenditures in 2005 are estimated to be (dollars in millions):

APS	$	772
Pinnacle West Energy		7
SunCor		114
Other		8
Total	$	901

Natural Gas Supply

     Pursuant to the terms of a comprehensive settlement entered into in 1996 with El Paso Natural Gas Company, the rates charged for natural gas transportation are subject to a rate moratorium through December 31, 2005.

     On July 9, 2003 the FERC issued an order that altered the capacity rights of parties to the 1996 settlement but maintained the cost responsibility provisions agreed to by parties to that settlement. The D.C. Court of Appeals recently upheld the FERC’s authority to alter the capacity rights of parties to the settlement. With respect to the FERC’s authority to maintain the cost responsibility provisions of the settlement, a party has sought appellate review and is seeking to reallocate the costs responsibility associated with the changed contractual obligations in a way that would be less favorable to APS and Pinnacle West Energy than under the FERC’s July 9, 2003 order. Should this party prevail on this point, APS and Pinnacle West Energy’s annual capacity cost could be increased by approximately $3 million per year, from September 2003 through December 2005.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     El Paso is required under the terms of the 1996 settlement to file a new rate case by July 1, 2005, with new rates to become effective on January 1, 2006. APS cannot currently assess the financial impact that El Paso’s filing could have on rates.

Navajo Nation Litigation

     In June 1999, the Navajo Nation served Salt River Project with a lawsuit naming Salt River Project, several Peabody Coal Company entities (collectively, “Peabody”), Southern California Edison Company and other defendants, and citing various claims in connection with the renegotiations of the coal royalty and lease agreements under which Peabody mines coal for the Navajo Generating Station and the Mohave Generating Station. The Navajo Nation v. Peabody Holding Company, Inc., et al., United States District Court for the District of Columbia, CA-99-0469-EGS (the “D.C. Lawsuit”). APS is a 14% owner of the Navajo Generating Station, which Salt River Project operates. The D.C. Lawsuit alleges, among other things, that the defendants obtained a favorable coal royalty rate by improperly influencing the outcome of a federal administrative process under which the royalty rate was to be adjusted. The suit seeks $600 million in damages, treble damages, punitive damages of not less than $1 billion, and the ejection of defendants “from all possessory interests and Navajo Tribal lands arising out of the [primary coal lease]”. In July 2001, the court dismissed all claims against Salt River Project.

     In January, 2005, Peabody served APS with a lawsuit naming APS and the other Navajo Generating Station participants and seeking, among other things, a declaration that the participants “are obligated to reimburse Peabody for any royalty, tax, or other obligation arising out of the D.C. Lawsuit”. Peabody Western Coal Company v. Salt River Project Agricultural Improvement and Power District, et al., Circuit Court for the City of St. Louis, Division No. 1, Cause No. 042-08561. Based on APS’ ownership interest in the Navajo Generating Station, APS could be liable for up to 14% of any such obligation. Because the litigation is in preliminary stages, APS cannot currently predict the outcome of this matter.

Litigation

     We are party to various other claims, legal actions and complaints arising in the ordinary course of business, including but not limited to environmental matters related to the Clean Air Act, Navajo Nation issues and EPA and ADEQ issues. In our opinion, the ultimate resolution of these matters will not have a material adverse effect on our financial position, results of operations or liquidity.

12. Asset Retirement Obligations

     APS has asset retirement obligations for its Palo Verde nuclear facilities and certain other generation, transmission and distribution assets. The Palo Verde asset retirement obligation primarily relates to final plant decommissioning. This obligation is based on the NRC’s requirements for disposal of radiated property or plant and agreements APS reached with the ACC for final decommissioning of the plant. The non-nuclear generation asset retirement obligations primarily relate to requirements for removing portions of those plants at the end of the plant life or lease term. Some of APS’ transmission and distribution assets have asset retirement obligations because they are subject to right of way and easement agreements that require final removal. These agreements have a history of uninterrupted renewal that APS expects to continue. As a result, APS cannot reasonably estimate the fair value of the asset retirement obligation related to such distribution and transmission assets. The asset retirement obligations associated with our non-regulated assets are immaterial.

     To fund the costs APS expects to incur to decommission Palo Verde, APS established external decommissioning trusts in accordance with NRC regulations. APS invests the trust funds in fixed income and domestic equity securities and classifies them as available for sale. The following table shows the cost and fair value of APS’ nuclear decommissioning trust fund assets which are on the Consolidated Balance Sheets at December 31, 2004 and December 31, 2003 (dollars in millions):

	December 31,		December 31,
	2004		2003
Trust fund assets – at cost
Fixed income securities	$	134	$	124
Domestic stock		83		74
Total	$	217	$	198
Trust fund assets – at fair value
Fixed income securities	$	150	$	140
Domestic stock		118		101
Total	$	268	$	241

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The following schedule shows the change in our asset retirement obligations during the years ended December 31, 2004 and 2003 (dollars in millions):

	2004			2003
At beginning of year	$	234		$	219
Changes attributable to:
Liabilities incurred		—			—
Liabilities settled		(1	)		—
Accretion expense		17			15
Estimated cash flow revisions		2			—
At end of year	$	252		$	234

     In accordance with SFAS No. 71, APS accrues for removal costs for its regulated assets, even if there is no legal obligation for removal. At December 31, 2004, regulatory liabilities shown on Pinnacle West’s Consolidated Balance Sheets included approximately $462 million of estimated future removal costs that are not considered legal obligations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. Selected Quarterly Financial Data (Unaudited)

     The following note presents quarterly financial information for 2004 and 2003. We are disclosing originally reported amounts and revised amounts in the first and second quarters of 2004 due to the adoption of FSP 106-2, which was implemented on June 30, 2004 (see Note 8) and in each period for the reclassification of NAC as discontinued operations (see Note 22).

     Consolidated quarterly financial information for 2004 and 2003 is as follows (dollars in thousands, except per share amounts):

	2004 Quarter Ended										2004
	March 31,			June 30,			September 30,		December 31,		Total
As originally reported:
Operating Revenues	$	574,369		$	722,686		$	886,779	$	734,718	$	2,918,552
Operations and Maintenance		138,656			140,245			160,765		159,431		599,097
Operating Income		83,371			121,160			210,836		90,745		506,112
Income Taxes		15,627			44,027			58,900		11,283		129,837
Income From Continuing Operations		29,768			71,057			103,886		29,318		234,029
Net Income (a)		30,156			71,370			105,400		33,729		240,655
NAC Reclassifications (see Note 22):
Operating Revenues		(8,024	)		(10,803	)		—		—		(18,827	)
Operating Income		(443	)		(1,950	)		—		—		(2,393	)
Income Taxes		(159	)		(821	)		—		—		(980	)
Income From Continuing Operations		(247	)		(1,104	)		—		—		(1,351	)
Medicare Subsidy Adoption (See Note 8):
Operations and Maintenance		(1,270	)		(1,270	)		—		—		(2,540	)
Operating Income		1,270			1,270			—		—		2,540
Income from Continuing Operations		1,270			1,270			—		—		2,540
Net Income		1,270			1,270			—		—		2,540
After NAC Reclassifications and Medicare Subsidy Adoption:
Operating Revenues		566,345			711,883			886,779		734,718		2,899,725
Operations and Maintenance		137,386			138,975			160,765		159,431		596,557
Operating Income		84,198			120,480			210,836		90,745		506,259
Income Taxes		15,468			43,206			58,900		11,283		128,857
Income From Continuing Operations		30,791			71,223			103,886		29,318		235,218
Net Income (a) (b)		31,426			72,640			105,400		33,729		243,195

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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	2003 Quarter Ended												2003
	March 31,			June 30,			September 30,			December 31,			Total
As originally reported:
Operating Revenues	$	552,643		$	683,302		$	847,703		$	734,204		$	2,817,852
Operating Income		69,255			132,482			198,850			81,466			482,053
Income Taxes		12,754			35,248			50,528			7,030			105,560
Income From Continuing Operations		20,153			54,889			109,538			45,996			230,576
Net Income (a)		25,298			56,142			110,048			49,091			240,579
NAC reclassifications (see Note 22):
Operating Revenues		(11,382	)		(19,637	)		(16,701	)		(10,638	)		(58,358	)
Operating Income		(3,675	)		(1,347	)		(1,489	)		(1,600	)		(8,111	)
Income Taxes		(1,402	)		(507	)		(567	)		(611	)		(3,087	)
Income From Continuing Operations		(2,167	)		(783	)		(878	)		(945	)		(4,773	)
Reclassified:
Operating Revenues		541,261			663,665			831,002			723,566			2,759,494
Operating Income		65,580			131,135			197,361			79,866			473,942
Income Taxes		11,352			34,741			49,961			6,419			102,473
Income From Continuing Operations		17,986			54,106			108,660			45,051			225,803
Net Income (a) (b)		25,298			56,142			110,048			49,091			240,579

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

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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Earnings per share:

	2004 Quarter Ended
	March 31,		June 30,		September 30,		December 31,
As originally reported – Basic earnings per share (a):
Income From Continuing Operations	$	0.33	$	0.78	$	1.14	$	0.32
Net Income		0.33		0.78		1.15		0.37
After NAC reclassification and Medicare subsidy adoption – Basic earnings per share (a):
Income from Continuing Operations		0.34		0.78		1.14		0.32
Net Income		0.34		0.80		1.15		0.37
As originally reported – Diluted earnings per share (a):
Income From Continuing Operations		0.33		0.78		1.14		0.32
Net Income		0.33		0.78		1.15		0.37
After NAC reclassification and Medicare subsidy adoption – Diluted earnings per share (a):
Income From Continued Operations		0.34		0.78		1.14		0.32
Net Income		0.34		0.79		1.15		0.37

	2003 Quarter Ended
	March 31,		June 30,		September 30,		December 31,
As originally reported – Basic earnings per share (b):
Income From Continuing Operations	$	0.22	$	0.60	$	1.20	$	0.50
Net Income		0.28		0.62		1.21		0.54
Reclassified – Basic earnings per share (b):
Income from Continuing Operations		0.20		0.59		1.19		0.49
Net Income		0.28		0.62		1.21		0.54
As originally reported – Diluted earnings per share (b):
Income From Continuing Operations		0.22		0.60		1.20		0.50
Net Income		0.28		0.61		1.20		0.54
Reclassified – Diluted earnings per share (b):
Income From Continued Operations		0.20		0.59		1.19		0.49
Net Income		0.28		0.61		1.20		0.54

(a)

The difference between originally reported and revised basic and diluted earnings per share related to the sale of NAC (see Note 22) and the adoption of the Medicare subsidy, which changed reported amounts for the first and second quarter of 2004 (See Note 8). The earnings per share impact from the sale of NAC or the adoption of the Medicare subsidy did not change earnings per share by more than $0.02 in any given quarter in 2004.

(b)

The difference between originally reported and reclassified basic and diluted earnings per share for income from continuing operations related to the sale of NAC (see Note 22). The earnings per share impact from the sale of NAC did not change earnings per share by more than $0.02 in any given quarter in 2003.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14. Fair Value of Financial Instruments

     We believe that the carrying amounts of our cash equivalents are reasonable estimates of their fair values at December 31, 2004 and 2003 due to their short maturities.

     We hold investments in debt securities for purposes other than trading. We believe that the carrying amounts of these investments represent reasonable estimates of their fair values at December 31, 2004 and 2003 due to the short-term reset of interest rates.

     We also hold investments in fixed income and domestic equity securities for purposes other than trading. The December 31, 2004 and 2003 fair values of such investments, which we determine by using quoted market prices, approximate their carrying amount. For further information, see disclosure of cost and fair value of APS’ nuclear decommissioning trust fund assets in Note 12.

     On December 31, 2004, the carrying value of our long-term debt (excluding capitalized lease obligations) was $3.19 billion, with an estimated fair value of $3.30 billion. The carrying value of our long-term debt (excluding capitalized lease obligations) was $3.31 billion on December 31, 2003, with an estimated fair value of $3.46 billion. The fair value estimates are based on quoted market prices of the same or similar issues.

15. Earnings Per Share

     The following table presents earnings per weighted average common share outstanding for the years ended December 31, 2004, 2003 and 2002:

	2004		2003		2002
Basic earnings per share:
Income from continuing operations	$	2.57	$	2.47	$	2.79
Income (loss) from discontinued operations		0.09		0.17		(0.26	)
Cumulative effect of change in accounting		—		—		(0.77	)
Earnings per share – basic	$	2.66	$	2.64	$	1.76
Diluted earnings per share:
Income from continuing operations	$	2.57	$	2.47	$	2.78
Income (loss) from discontinued operations		0.09		0.16		(0.25	)
Cumulative effect of change in accounting		—		—		(0.77	)
Earnings per share – diluted	$	2.66	$	2.63	$	1.76

     Dilutive stock options increased average common shares outstanding by approximately 135,000 shares in 2004, 140,000 shares in 2003 and 61,000 shares in 2002. Total average common shares outstanding for the purposes of calculating diluted earnings per share were 91,532,473 shares in 2004, 91,405,134 shares in 2003 and 84,963,921 shares in 2002.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Options to purchase 1,058,616 shares of common stock were outstanding at December 31, 2004 but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares. Options to purchase shares of common stock that were not included in the computation of diluted earnings per share were 2,291,646 at December 31, 2003 and 1,629,958 at December 31, 2002.

16. Stock-Based Compensation

     Pinnacle West offers stock-based compensation plans for officers and key employees of the Company and our subsidiaries.

     In May 2002, shareholders approved the 2002 Long-Term Incentive Plan (2002 plan), which allows Pinnacle West to grant performance shares, stock ownership incentive awards and non-qualified and performance-accelerated stock options to key employees. The Company has reserved 6 million shares of common stock for issuance under the 2002 plan. No more than 1.8 million shares may be issued in relation to performance share awards and stock ownership incentive awards. The plan also provides for the granting of new non-qualified stock options at a price per share not less than the fair market value of the common stock at the time of grant. The stock options vest over three years, unless certain performance criteria are met, which can accelerate the vesting period. The term of the option cannot be longer than 10 years and the option cannot be repriced during its term.

     The 1994 plan includes outstanding options but no new options will be granted under the plan. Options vested one-third of the grant per year beginning one year after the date the option is granted and expire ten years from the date of the grant. The 1994 plan also provided for the granting of any combination of shares of restricted stock, stock appreciation rights or dividend equivalents.

     In the third quarter of 2002, we began applying the fair value method of accounting for stock-based compensation, as provided for in SFAS No. 123. The fair value method of accounting is the preferred method. In accordance with the transition requirements of SFAS No. 123, we applied the fair value method prospectively, beginning with 2002 stock grants. In prior years, we recognized stock compensation expense based on the intrinsic value method allowed in APB No. 25.

     In addition, see Note 2 for discussion of a new standard on share based payments (SFAS No. 123R).

     Total stock-based compensation cost, including restricted stock, performance shares, stock options, and stock ownership incentives was $8 million in 2004, $6 million in 2003 and $5 million in 2002 for Pinnacle West, and $6 million in 2004, $3 million in 2003 and $3 million in 2002 for APS.

     The following table is a summary of the status of outstanding stock options under our equity incentive plans as of December 31, 2004, 2003 and 2002 and changes during the years ending on those dates:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

				2004					2003					2002
				Weighted					Weighted					Weighted
				Average					Average					Average
	2004			Exercise		2003			Exercise		2002			Exercise
	Shares			Price		Shares			Price		Shares			Price
Outstanding at beginning of year		2,698,246		$	38.56		2,185,129		$	39.96		1,832,725		$	39.52
Granted		37,580			37.85		621,875			32.29		603,900			38.37
Exercised		(372,205	)		34.02		(62,366	)		26.09		(163,381	)		28.25
Forfeited		(87,498	)		42.31		(46,392	)		37.61		(88,115	)		41.54
Outstanding at end of year		2,276,123			39.14		2,698,246			38.56		2,185,129			39.96
Options exercisable at year-end		1,859,340			40.59		1,787,622			40.35		1,155,357			39.66
Weighted average fair value of options granted during the year				$	3.53				$	7.37				$	6.16

     The following table summarizes information about our stock options at December 31, 2004:

					Weighted
			Weighted		Average				Weighted
			Average		Remaining				Average
Exercise	Options		Exercise		Contract		Options		Exercise
Prices Per Share	Outstanding		Price		Life (Years)		Exercisable		Price
$23.39 – 28.07		4,750	$	27.44		0.5		4,750	$	27.44
28.07 – 32.75		515,344		32.24		7.8		129,706		32.10
32.75 – 37.42		138,863		34.72		4.4		138,863		34.72
37.42 – 42.10		693,482		38.83		5.9		662,337		38.87
42.10 – 46.78		923,684		43.95		5.4		923,684		43.95
		2,276,123						1,859,340

     The following table is a summary of the amount and weighted-average grant date fair value of stock compensation awards granted, other than options, during the years ended December 31, 2004, 2003 and 2002:

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(b) Performance shares priced at the closing market price on the grant date.

(c) Shares are based on estimated ownership of Pinnacle West common stock.

17. Business Segments

     We have three principal business segments (determined by products, services and the regulatory environment):

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

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

•   our real estate segment, which consists of SunCor’s real estate development and investment activities.

     In 2004, our other segment includes a $35 million gain ($21 million after-tax) related to the sale of El Dorado’s limited partnership interest in the Phoenix Suns. The other segment also includes activity related to APS Energy Services’ non-commodity trading activities, as well as the parent company and other subsidiaries.

     Financial data for the years ended December 31, 2004, 2003 and 2002 by business segments is provided as follows (dollars in millions):

	Business Segments for the Year Ended December 31, 2004
			Marketing
	Regulated		and
	Electricity		Trading			Real Estate			Other			Total
Operating revenues	$	2,035	$	462		$	360		$	43		$	2,900
Purchased power and fuel costs		568		382			—			—			950
Other operating expenses		685		34			290			34			1,043
Operating margin		782		46			70			9			907
Depreciation and amortization		384		11			6			—			401
Interest expense		169		8			2			—			179
Other expense/(income)		4		(2	)		(5	)		(34	)		(37	)
Pretax margin		225		29			67			43			364
Income taxes		74		11			27			17			129
Income from continuing operations		151		18			40			26			235
Income from discontinued operations – net of income taxes of $5 (see Note 22)		—		—			4			4			8
Net income	$	151	$	18		$	44		$	30		$	243
Total assets	$	8,674	$	746		$	454		$	23		$	9,897
Capital expenditures	$	483	$	34		$	81		$	—		$	598

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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Business Segments for the Year Ended December 31, 2003
				Marketing
	Regulated			and
	Electricity			Trading		Real Estate			Other		Total
Operating revenues	$	1,978		$	392	$	362		$	27	$	2,759
Purchased power and fuel costs		517			345		—			—		862
Other operating expenses		625			34		306			23		988
Operating margin		836			13		56			4		909
Depreciation and amortization		428			1		6			—		435
Interest expense		172			—		2			1		175
Other expense/(income)		(4	)		—		(25	)		—		(29	)
Pretax margin		240			12		73			3		328
Income taxes		70			3		28			1		102
Income from continuing operations		170			9		45			2		226
Income from discontinued operations – net of income taxes of $10 (see Note 22)		—			—		10			5		15
Net income	$	170		$	9	$	55		$	7	$	241
Total assets	$	8,373		$	680	$	439		$	27	$	9,519
Capital expenditures	$	686		$	9	$	72		$	—	$	767

	Business Segments for the Year Ended December 31, 2002
			Marketing
	Regulated		and
	Electricity		Trading			Real Estate			Other			Total
Operating revenues	$	1,890	$	287		$	201		$	27		$	2,405
Purchased power and fuel costs		377		155			—			—			532
Other operating expenses		659		34			185			22			900
Operating margin		854		98			16			5			973
Depreciation and amortization		416		2			4			—			422
Interest expense		141		—			2			—			143
Other expense/(income)		19		—			(7	)		7			19
Pretax margin		278		96			17			(2	)		389
Income taxes		108		38			7			(1	)		152
Income (loss) from continuing operations		170		58			10			(1	)		237
Income (loss) from discontinued operations – net of income taxes of $14 (see Note 22)		—		—			9			(31	)		(22	)
Cumulative effect of change in accounting for trading activities – net of income taxes of $43		—		(66	)		—			—			(66	)
Net income (loss)	$	170	$	(8	)	$	19		$	(32	)	$	149
Capital expenditures	$	893	$	19		$	72		$	—		$	984

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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

18. Derivative and Energy Trading Accounting

     We are exposed to the impact of market fluctuations in the commodity price and transportation costs of electricity, natural gas, coal, emissions allowances and in interest rates. We manage risks associated with these market fluctuations by utilizing various instruments that qualify as derivatives, including exchange-traded futures and options and over-the-counter forwards, options and swaps. As part of our overall risk management program, we use such instruments to hedge our exposure to changes in interest rates and to hedge purchases and sales of electricity, fuels, and emissions allowances and credits. As of December 31, 2004, we hedged exposures to the price variability of the commodities for a maximum of eight years. The changes in market value of such contracts have a high correlation to price changes in the hedged transactions. In addition, subject to specified risk parameters monitored by the ERMC, we engage in marketing and trading activities intended to profit from market price movements.

     We recognize all derivatives, except those which receive a scope exception, as either assets or liabilities on the balance sheet and measure those instruments at fair value in accordance with SFAS No. 133, as amended by SFAS No. 149. Derivative commodity contracts for the physical delivery of purchase and sale quantities transacted in the normal course of business receive the normal purchase and sales exception and are accounted for under the accrual method of accounting. Changes in the fair value of derivative instruments are recognized periodically in income unless certain hedge criteria are met. For cash flow hedges, changes in the fair value of the derivative are recognized in common stock equity (as a component of other comprehensive income (loss)). For fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item associated with the hedged risk are recognized in earnings. We use cash flow hedges to limit our exposure to cash flow variability on forecasted transactions. We use fair value hedges to limit our exposure to changes in fair value of an asset or liability.

     We assess hedge effectiveness both at inception and on a continuing basis. Hedge effectiveness is related to the degree to which the derivative contract and the hedged item are correlated. It is measured based on the relative changes in fair value between the derivative contract and the hedged item over time. We exclude the time value of certain options from our assessment of hedge effectiveness. Any change in the fair value resulting from ineffectiveness, or the amount by which the derivative contract and the hedged commodity are not directly correlated, is recognized immediately in net income.

     Both non-trading and trading derivatives that do not receive a scope exception are classified as assets and liabilities from risk management and trading activities on the Consolidated Balance Sheets. Certain of our non-trading derivatives qualify for cash flow hedge accounting treatment. Non-trading derivatives, or any portion thereof that are not effective hedges, are adjusted to fair value through income. Gains and losses related to non-trading derivatives that qualify as cash flow hedges of expected transactions are recognized in revenue or purchased power and fuel expense as an offset to the related item being hedged when the underlying hedged physical transaction impacts earnings. If it becomes probable that a forecasted transaction will not occur, we discontinue the use of hedge accounting and recognize in income the unrealized gains and losses that were previously recorded in other comprehensive income (loss). In the event a non-trading derivative is terminated or settled, the unrealized gains and losses remain in other comprehensive income (loss), and are recognized in income when the underlying transaction impacts earnings.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     All gains and losses (realized and unrealized) on trading contracts that qualify as derivatives are included in marketing and trading segment revenues on the Consolidated Statements of Income on a net basis. Trading contracts that do not meet the definition of a derivative are accounted for on an accrual basis with the associated revenues and costs recorded at the time the contracted commodities are delivered or received.

     In the electricity business, some contracts to purchase energy are netted against other contracts to sell energy. This is called “book-out” and usually occurs in contracts that have the same terms (quantities and delivery points) and for which power does not flow. We net these book-outs, which reduces both revenues and purchased power and fuel costs in our Consolidated Statement of Income, but this does not impact our financial condition, net income or cash flows.

     In November 2003, the FASB revised its derivative guidance in DIG Issue No. C15, “Normal Purchases and Normal Sales Exception for Option-Type Contracts and Forward Contracts in Electricity.” Effective January 1, 2004, the new guidance changed the criteria for the normal purchases and sales scope exception for electricity contracts. The implementation of this guidance did not have a material impact on our consolidated financial statements.

     During 2002, the EITF discussed EITF 02-3 and reached a consensus on certain issues. EITF 02-3 rescinded EITF 98-10 and was effective October 25, 2002 for any new contracts, and on January 1, 2003 for existing contracts, with early adoption permitted. We adopted the EITF 02-3 guidance for all contracts in the fourth quarter of 2002. We recorded a $66 million after-tax charge in net income as a cumulative effect adjustment for the previously recorded accumulated unrealized mark-to-market on energy trading contracts that did not meet the accounting definition of a derivative.

Cash Flow Hedges

     The changes in the fair value of our hedged positions included in the Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002 are comprised of the following (dollars in thousands):

	2004			2003		2002
Gains/(losses) on the ineffective portion of derivatives qualifying for hedge accounting	$	(1,568	)	$	8,237	$	9,763
Gains/(losses) from the change in options’ time value excluded from measurement of effectiveness		185			181		(2,484	)
Gains from the discontinuance of cash flow hedges		1,137			—		386

     During the twelve months ending December 31, 2005, we estimate that a net gain of $44 million before income taxes will be reclassified from accumulated other comprehensive loss as an offset to the effect on earnings of market price changes for the related hedged transactions.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Our assets and liabilities from risk management and trading activities are presented in two categories, consistent with our business segments:

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

•   Marketing and Trading – both non-trading and trading derivative instruments of our competitive business segment.

     The following table summarizes our assets and liabilities from risk management and trading activities at December 31, 2004 and 2003 (dollars in thousands):

December 31, 2004

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

December 31, 2003

	Current				Current			Other			Net Asset/
	Assets		Investments		Liabilities			Liabilities			(Liability)
Regulated electricity:
Mark-to-market	$	44,079	$	5,900	$	(47,268	)	$	(3,028	)	$	(317	)
Options		—		12,101		—			—			12,101
Marketing and trading:
Mark-to-market		53,551		116,363		(37,023	)		(63,398	)		69,493
Emission allowances – at cost		—		4,582		(8,464	)		(16,304	)		(20,186	)
Total	$	97,630	$	138,946	$	(92,755	)	$	(82,730	)	$	61,091

     Cash or other assets may be required to serve as collateral against our open positions on certain energy-related contracts. Collateral provided to counterparties is $1 million at December 31, 2004 and $1 million at December 31, 2003, and is included in other current assets on the Consolidated Balance Sheet. Collateral provided to us by counterparties is $18 million at

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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004 and $12 million at December 31, 2003, and is included in other current liabilities on the Consolidated Balance Sheet.

Fair Value Hedges

     On January 29, 2004, we entered into two fixed-for-floating interest rate swap transactions on our $300 million 6.4% Senior Notes. The purpose of these hedges is to protect against significant fluctuations in the fair value of our debt. Our interest rate swaps are considered to be fully effective with any resulting gains or losses on the derivative offset by a similar loss or gain amount on the underlying fair value of debt. The fair value of the interest rate swaps was $2.6 million at December 31, 2004 and is included in investments and other assets with the corresponding offset in long-term debt less current maturities on the Consolidated Balance Sheets.

Credit Risk

     We are exposed to losses in the event of nonperformance or nonpayment by counterparties. We have risk management and trading contracts with many counterparties, including two counterparties for which a worst case exposure represents approximately 35% of Pinnacle West’s $391 million of risk management and trading assets as of December 31, 2004. Our risk management process assesses and monitors the financial exposure of these and all other counterparties. Despite the fact that the great majority of trading counterparties are rated as investment grade by the credit rating agencies, including the counterparties noted above, there is still a possibility that one or more of these companies could default, resulting in a material impact on consolidated earnings for a given period. Counterparties in the portfolio consist principally of major energy companies, municipalities, local distribution companies and financial institutions. We maintain credit policies that we believe minimize overall credit risk to within acceptable limits. Determination of the credit quality of our counterparties is based upon a number of factors, including credit ratings and our evaluation of their financial condition. In many contracts, we employ collateral requirements and standardized agreements that allow for the netting of positive and negative exposures associated with a single counterparty. Valuation adjustments are established representing our estimated credit losses on our overall exposure to counterparties. See Note 1 “Derivative” for a discussion of our credit valuation adjustment policy.

19. Other Income and Other Expense

     The following table provides detail of other income and other expense for the years ended December 31, 2004, 2003 and 2002 (dollars in thousands):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Year Ended December 31,
	2004			2003			2002
Other income:
Investment gains (a)	$	38,256		$	3,649		$	—
Interest income		7,470			4,412			4,332
SunCor non-operating income (b)		4,458			24,740			7,355
Asset sales		3,026			618			568
Miscellaneous		779			2,144			2,655
Total other income	$	53,989		$	35,563		$	14,910
Other expense:
Non-operating costs (c)	$	(15,524	)	$	(14,959	)	$	(12,958	)
Asset sales		(1,382	)		(1,522	)		(6,472	)
Investment losses (d)		—			—			(10,439	)
Miscellaneous		(4,604	)		(4,093	)		(3,786	)
Total other expense	$	(21,510	)	$	(20,574	)	$	(33,655	)

(a)	Primarily related to the gain on the sale of El Dorado’s limited partnership interest in the Phoenix Suns in the second quarter of 2004 for $35 million ($21 million after tax).
(b)	Primarily related to the sale at SunCor of a land interest and profit participation agreement in the fourth quarter of 2003 for $18 million. In 2002, SunCor received $2.5 million for the profit participation.
(c)	As defined by the FERC, includes below-the-line non-operating utility costs (primarily community relations).
(d)	Primarily related to El Dorado’s investment losses in NAC prior to consolidation in the third quarter of 2002.

20. Variable Interest Entities

     In 1986, APS entered into agreements with three separate VIE lessors in order to sell and lease back interests in Palo Verde Unit 2. The leases are accounted for as operating leases in accordance with GAAP. See Note 9 for further information about the sale leaseback transactions. We are not the primary beneficiary of the Palo Verde VIEs and, accordingly, do not consolidate them.

     APS is exposed to losses under the Palo Verde sale leaseback agreements upon the occurrence of certain events that APS does not consider to be reasonably likely to occur. Under certain circumstances (for example, the NRC issuing specified violation orders with respect to Palo Verde or the occurrence of specified nuclear events), APS would be required to assume the debt associated with the transactions, make specified payments to the equity participants, and take title to the leased Unit 2 interests, which, if appropriate, may be required to be written down in value. If such an event had occurred as of December 31, 2004, APS would have been required to assume approximately $250 million of debt and pay the equity participants approximately $192 million.

     In the first quarter of 2004, we adopted FIN No. 46R, “Consolidation of Variable Interest Entities” for all non-SPE contractual arrangements. SunCor has certain land development arrangements that are required to be consolidated under FIN No. 46R. The assets and non-controlling

122

PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

interests reflected in our Consolidated Balance Sheets related to these arrangements were approximately $34 million at December 31, 2004.

21. Guarantees

     We have issued parental guarantees and letters of credit and obtained surety bonds on behalf of our unregulated subsidiaries. Our parental guarantees related to Pinnacle West Energy consist of equipment and performance guarantees related to our generation construction program, and long-term service agreement guarantees for new power plants. Our credit support instruments enable APS Energy Services to offer commodity energy and energy-related products. Non-performance or payment under the original contract by our unregulated subsidiaries would require us to perform under the guarantee or surety bond. No liability is currently recorded on the Consolidated Balance Sheets related to Pinnacle West’s guarantees on behalf of its subsidiaries. Our guarantees have no recourse or collateral provisions to allow us to recover amounts paid under the guarantee. The amounts and approximate terms of our guarantees and surety bonds for each subsidiary at December 31, 2004 are as follows (dollars in millions):

	Guarantees				Surety Bonds
			Term				Term
	Amount		(in years)		Amount		(in years)
Parental:
Pinnacle West Energy	$	25		1	$	—		—
APS Energy Services		46		1		51		1
Total	$	71			$	51

     At December 31, 2004, we had entered into approximately $39 million of letters of credit which support various transmission and construction agreements. These letters of credit expire in 2005 and 2006. We intend to provide from either existing or new facilities for the extension, renewal or substitution of the letters of credit to the extent required. At December 31, 2004, Pinnacle West has approximately $3 million of letters of credit related to workers’ compensation expiring in 2006.

     APS has entered into various agreements that require letters of credit for financial assurance purposes. At December 31, 2004, approximately $200 million of letters of credit were outstanding to support existing pollution control bonds of approximately $200 million. The letters of credit are available to fund the payment of principal and interest of such debt obligations. In July 2004, $150 million of these letters of credit were renewed for a three-year term and expire in 2007. The remainder expire in 2005. APS has also entered into approximately $102 million of letters of credit to support certain equity lessors in the Palo Verde sale leaseback transactions (see Note 9 for further details on the Palo Verde sale leaseback transactions). These letters of credit expire in 2005. Additionally, APS has approximately $5 million of letters of credit related to counterparty collateral requirements expiring in 2006. APS intends to provide from either existing or new facilities for the extension, renewal or substitution of the letters of credit to the extent required.

     We provide indemnifications relating to liabilities arising from or related to certain of our agreements. APS has provided indemnifications to the equity participants and other parties in the Palo Verde sale leaseback transactions with respect to certain tax matters. Generally, a maximum obligation is not explicitly stated in the indemnification and therefore, the overall maximum amount of the obligation under such indemnifications cannot be reasonably estimated. Based on historical

123

PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

experience and evaluation of the specific indemnities, we do not believe that any material loss related to such indemnifications is likely.

22. Discontinued Operations

     The following table provides a summary of SunCor and NAC income (loss) from discontinued operations (after income taxes) for the years ended December 31, 2004, 2003 and 2002 (dollars in millions):

	2004		2003		2002
SunCor	$	4	$	10	$	9
NAC		4		5		(31	)
Total income (loss) from discontinued operations	$	8	$	15	$	(22	)

SunCor

     Certain components of SunCor’s real estate sales activities, which are included in the real estate segment, are required to be reported as discontinued operations on Pinnacle West’s Consolidated Statements of Income in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Among other guidance, SFAS No. 144 prescribes accounting for discontinued operations and defines certain activities as discontinued operations.

     In the second quarter of 2002, SunCor sold a retail center, but maintained a continuing involvement through a management contract. In the first quarter of 2003, this management contract was canceled. As a result, the after-tax gain of $6 million ($10 million pre-tax) recorded in operations in 2002 related to this property was reclassified as discontinued operations on our Consolidated Statements of Income. The income from discontinued operations in the year ended December 31, 2002 primarily reflects this sale.

     In 2003, SunCor sold its water utility company, which resulted in an after-tax gain of $8 million ($14 million pretax). The amounts of the gain on the sale and operating income of the water utility company in 2003 and 2002 are classified as discontinued operations on Pinnacle West’s Consolidated Statements of Income.

     In the fourth quarter of 2003, SunCor sold a retail center, which resulted in an after-tax gain of $2 million ($3 million pretax). The gain on the sale and the operating income related to this property in 2003 are classified as discontinued operations on Pinnacle West’s Consolidated Statements of Income. There were no prior-year operations related to this retail center.

     In 2004, SunCor sold commercial property, which resulted in an after-tax gain of $1 million ($2 million pretax). The gain on the sale and the operating income related to this property in 2004 are classified as discontinued operations on Pinnacle West’s Consolidated Statements of Income. There were no prior-year operations related to this property.

     The following table provides SunCor’s revenue and income before income taxes (including the gains on disposals as noted above) related to properties classified as discontinued operations on

124

PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Pinnacle West’s Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002 (dollars in millions):

	2004		2003		2002
Revenue	$	11	$	71	$	35
Income before taxes		6		17		15

NAC

     In July 2004, we entered into an agreement to sell our investment in NAC. The transaction closed on November 18, 2004 and resulted in a pre-tax gain of $4 million, which is classified as discontinued operations in 2004. El Dorado began consolidating the operations of NAC in the third quarter of 2002. All related revenues and expenses for NAC have been reclassified to discontinued operations for the years ended December 31, 2003 and 2002 on Pinnacle West’s Consolidated Statements of Income.

     The following table provides the revenue and income before taxes (including the gain on disposal as noted above) for El Dorado’s investment in NAC that was classified as discontinued operations for the years ended December 31, 2004, 2003 and 2002 (dollars in millions):

	2004		2003		2002
Revenue	$	31	$	58	$	35
Income (loss) before taxes		7		8		(50	)

Percentage-of-Completion – NAC

     Certain NAC contract revenues are accounted for under the percentage-of-completion method. Revenues are recognized based upon total costs incurred to date compared to total costs expected to be incurred for each contract. Revisions in contract revenue and cost estimates are reflected in the accounting period when known. Provisions are made for the full amounts of anticipated losses in the periods in which they are first determined. Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income, and are recognized in the period in which revisions are determined. Profit incentives are included in revenues when their realization is reasonably assured.

     Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. General and administrative costs are charged to expense as incurred.

125

Assets and Liabilities Related to Discontinued Operations

     Due to the sale of NAC, all NAC assets and liabilities have been reclassified to assets and liabilities related to discontinued operations on the Consolidated Balance Sheets at December 31, 2003 and are provided in the following table (dollars in thousands):

Cash	$	5,867
Customer and other receivables		11,066
Net property, plant and equipment		5,404
Other		728
Assets related to discontinued operations	$	23,065
Accounts payable	$	10,406
Long-term debt less current maturities		800
Other		5,221
Liabilities related to discontinued operations	$	16,427

126

MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
(ARIZONA PUBLIC SERVICE COMPANY)

     Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13(a)-15(f). Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2004. Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein and relates also to the Company’s financial statements.

March 15, 2005

127

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Arizona Public Service Company
Phoenix, Arizona

     We have audited the accompanying balance sheets of Arizona Public Service Company (the “Company”) as of December 31, 2004 and 2003, and the related statements of income, changes in common stock equity, and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedule listed in the Index at Item 15. We also have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that the Company maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these financial statements and financial statement schedule, an opinion on management’s assessment, and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

     A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

128

     Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

     In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also, in our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

DELOITTE & TOUCHE LLP
Phoenix, Arizona

March 15, 2005

129

ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF INCOME
(dollars in thousands)

	Year Ended December 31,
	2004			2003			2002
Electric Operating Revenues:
Regulated electricity	$	2,051,602		$	1,999,390		$	1,902,112
Marketing and trading		145,519			105,541			34,054
Total		2,197,121			2,104,931			1,936,166
Operating Expenses:
Regulated electricity purchased power and fuel		612,300			606,251			438,141
Marketing and trading purchased power and fuel		150,954			97,180			32,662
Operations and maintenance		540,277			513,604			495,845
Depreciation and amortization		336,648			389,240			399,640
Income taxes (Notes 4 and S-2)		113,696			91,646			132,953
Other taxes		114,265			108,852			107,925
Total		1,868,140			1,806,773			1,607,166
Operating Income		328,981			298,158			329,000
Other Income (Deductions):
Income taxes (Notes 4 and S-2)		(6,334	)		4,792			6,148
Allowance for equity funds used during construction		4,885			14,240			—
Other income (Note S-9)		30,593			20,277			5,149
Other expense (Note S-9)		(13,816	)		(12,962	)		(19,338	)
Total		15,328			26,347			(8,041	)
Interest Deductions:
Interest on long-term debt		140,556			142,706			128,462
Interest on short-term borrowings		6,427			4,904			5,416
Debt discount, premium and expense		4,854			3,337			2,888
Capitalized interest		(7,155	)		(7,379	)		(15,150	)
Total		144,682			143,568			121,616
Net Income	$	199,627		$	180,937		$	199,343

See Notes to Pinnacle West’s Consolidated Financial Statements and Supplemental Notes to Arizona Public Service Company’s Financial Statements.

130

ARIZONA PUBLIC SERVICE COMPANY
BALANCE SHEETS
(dollars in thousands)

	December 31,
	2004			2003
ASSETS
Utility Plant (Notes 1, 6, 9 and 10) Electric plant in service and held for future use	$	9,120,407		$	8,826,033
Less accumulated depreciation and amortization		3,266,181			3,089,645
Total		5,854,226			5,736,388
Construction work in progress		249,243			187,478
Intangible assets, net of accumulated amortization of $154,843 and $120,895		103,701			94,181
Nuclear fuel, net of accumulated amortization of $59,020 and $58,053		51,188			52,011
Utility plant – net		6,258,358			6,070,058
Investments and Other Assets
Note receivable from Pinnacle West Energy (Notes 1, 3 and S-10)		498,489			497,865
Decommissioning trust accounts (Note 12)		267,700			240,645
Assets from risk management and trading activities – long-term (Note S-8)		20,123			18,001
Other assets		61,364			64,119
Total investments and other assets		847,676			820,630
Current Assets:
Cash and cash equivalents		49,575			42,152
Investment in debt securities		181,175			69,850
Accounts receivable:
Service customers		214,487			190,884
Other (Note 1)		63,131			67,540
Allowance for doubtful accounts		(3,444	)		(3,743	)
Accrued utility revenues		76,154			71,501
Materials and supplies (at average cost)		83,893			80,682
Fossil fuel (at average cost)		20,506			28,360
Assets from risk management and trading activities (Note S-8)		70,430			52,448
Other		10,187			6,969
Total current assets		766,094			606,643
Deferred Debits:
Regulatory assets (Notes 1, 3 and S-2)		135,051			132,349
Unamortized debt issue costs		21,832			19,797
Other		69,541			73,056
Total deferred debits		226,424			225,202
Total Assets	$	8,098,552		$	7,722,533

See Notes to Pinnacle West’s Consolidated Financial Statements and Supplemental Notes to Arizona Public Service Company’s Financial Statements.

131

ARIZONA PUBLIC SERVICE COMPANY
BALANCE SHEETS
(dollars in thousands)

	December 31,
	2004			2003
LIABILITIES AND EQUITY
Capitalization:
Common stock	$	178,162		$	178,162
Additional paid-in capital		1,246,804			1,246,804
Retained earnings		860,196			830,569
Accumulated other comprehensive income (loss):
Minimum pension liability adjustment		(71,087	)		(57,158	)
Derivative instruments		18,327			5,253
Common stock equity		2,232,402			2,203,630
Long-term debt less current maturities (Notes 6 and S-3)		2,267,094			2,135,606
Total capitalization		4,499,496			4,339,236
Current Liabilities:
Current maturities of long-term debt (Notes 6 and S-3)		451,247			487,067
Accounts payable		215,076			131,383
Accrued taxes		292,521			90,474
Accrued interest		33,332			42,702
Customer deposits		51,804			45,481
Deferred income taxes (Notes 4 and S-2)		9,057			631
Liabilities from risk management and trading activities (Note S-8)		34,292			58,138
Other		91,441			60,008
Total current liabilities		1,178,770			915,884
Deferred Credits and Other:
Deferred income taxes (Notes 4 and S-2)		1,108,571			1,257,671
Regulatory liabilities (Notes 1, 3, 4, and S-2)		506,646			468,694
Liability for asset retirements and removals (Note 12)		251,612			234,440
Pension liability (Note 8)		203,668			160,639
Unamortized gain — sale of utility plant (Note 9)		50,333			54,909
Customer advances for construction		59,185			52,783
Liabilities from risk management and trading activities (Note S-8)		13,124			4,502
Other		227,147			233,775
Total deferred credits and other		2,420,286			2,467,413
Commitments and Contingencies (Notes 3, 11, 12 and S-10)
Total Liabilities and Equity	$	8,098,552		$	7,722,533

See Notes to Pinnacle West’s Consolidated Financial Statements and Supplemental Notes to Arizona Public Service Company’s Financial Statements.

132

ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF CASH FLOWS
(dollars in thousands)

	Year Ended December 31,
	2004			2003			2002
Cash Flows from Operating Activities:
Net income	$	199,627		$	180,937		$	199,343
Items not requiring cash:
Depreciation and amortization		336,648			389,240			399,640
Nuclear fuel amortization		30,446			28,757			31,185
Allowance for equity funds used during construction		(4,885	)		(14,240	)		—
Deferred income taxes		(140,855	)		(1,087	)		206,767
Change in derivative mark-to-market valuations		(15,807	)		2,339			2,957
Changes in certain current assets and liabilities:
Accounts receivable		(19,493	)		83,692			(102,450	)
Accrued utility revenues		(4,653	)		1,414			3,216
Materials, supplies and fossil fuel		4,643			(872	)		68
Other current assets		(2,529	)		976			2,227
Accounts payable		88,937			17,961			15,372
Accrued taxes		202,047			7,917			(25,038	)
Accrued interest		(9,370	)		94			1,565
Other current liabilities		37,756			13,804			44,224
Increase in regulatory assets		(2,702	)		(20,971	)		(11,029	)
Change in risk management trading – assets		(6,845	)		12,551			(22,570	)
Change in risk management trading – liabilities		8,879			—			—
Change in customer advances		6,402			7,270			(23,780	)
Change in pension liability		22,361			17,395			7,016
Change in other long-term assets		(27,994	)		(5,349	)		(24,502	)
Change in other long-term liabilities		15,525			55,296			301
Net cash flow provided by operating activities		718,138			777,124			704,512
Cash Flows from Investing Activities:
Capital expenditures		(513,677	)		(426,260	)		(490,156	)
Capitalized interest		(7,155	)		(7,379	)		(15,150	)
Purchases of investment securities		(871,810	)		(855,660	)		—
Proceeds from sale of investment securities		760,485			785,810			—
Loan to Pinnacle West Energy		—			(497,865	)		—
Other		(805	)		(8,296	)		44,918
Net cash flow used for investing activities		(632,962	)		(1,009,650	)		(460,388	)
Cash Flows from Financing Activities:
Issuance of long-term debt		478,140			491,654			459,926
Short-term borrowings		—			—			(171,162	)
Dividends paid on common stock		(170,000	)		(170,000	)		(170,000	)
Repayment and reacquisition of long-term debt		(385,893	)		(89,525	)		(337,160	)
Net cash flow provided by (used for) financing activities		(77,753	)		232,129			(218,396	)
Net increase/(decrease) in cash and cash equivalents		7,423			(397	)		25,728
Cash and cash equivalents at beginning of year		42,152			42,549			16,821
Cash and cash equivalents at end of year	$	49,575		$	42,152		$	42,549
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes paid/(refunded)	$	68,074		$	74,523		$	(54,283	)
Interest, net of amounts capitalized	$	149,148		$	140,010		$	117,081

See Notes to Pinnacle West’s Consolidated Financial Statements and Supplemental Notes to Arizona Public Service Company’s Financial Statements.

133

ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
(dollars in thousands)

	Years Ended December 31,
	2004			2003			2002
COMMON STOCK	$	178,162		$	178,162		$	178,162
ADDITIONAL PAID-IN CAPITAL		1,246,804			1,246,804			1,246,804
RETAINED EARNINGS
Balance at beginning of year		830,569			819,632			790,289
Net income		199,627			180,937			199,343
Common stock dividends		(170,000	)		(170,000	)		(170,000	)
Balance at end of year		860,196			830,569			819,632
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of year		(51,905	)		(85,286	)		(64,565	)
Minimum pension liability adjustment, net of tax expense (benefit) of ($8,936), $3,105 and ($39,696)		(13,929	)		4,329			(60,521	)
Unrealized gain on derivative instruments, net of tax expense of $16,824, $15,824 and $25,426		25,892			24,135			38,764
Reclassification of realized (gain)/loss to income, net of tax expense (benefit) of ($8,344), $3,207 and $679		(12,818	)		4,917			1,036
Balance at end of year		(52,760	)		(51,905	)		(85,286	)
TOTAL COMMON STOCK EQUITY	$	2,232,402		$	2,203,630		$	2,159,312
COMPREHENSIVE INCOME
Net income	$	199,627		$	180,937		$	199,343
Other comprehensive income (loss)		(855	)		33,381			(20,721	)
Total comprehensive income	$	198,772		$	214,318		$	178,622

See Notes to Pinnacle West’s Consolidated Financial Statements and Supplemental Notes to Arizona Public Service Company’s Financial Statements.

134

     Certain notes to Arizona Public Service Company’s financial statements are combined with the notes to Pinnacle West Capital Corporation’s consolidated financial statements. Listed below are the consolidated notes to Pinnacle West Capital Corporation’s consolidated financial statements, the majority of which also relate to Arizona Public Service Company’s financial statements. In addition, listed below are the supplemental notes which are required disclosures for Arizona Public Service Company and should be read in conjunction with Pinnacle West Capital Corporation’s Consolidated Notes.

	Consolidated	APS’ Supplemental
	Footnote Reference	Footnote Reference
Summary of Significant Accounting Policies	Note 1	Note S-1
New Accounting Standards	Note 2	—
Regulatory Matters	Note 3	—
Income Taxes	Note 4	Note S-2
Lines of Credit and Short-Term Borrowings	Note 5	—
Long-Term Debt	Note 6	Note S-3
Common Stock and Treasury Stock	Note 7	—
Retirement Plans and Other Benefits	Note 8	—
Leases	Note 9	Note S-4
Jointly-Owned Facilities	Note 10	—
Commitments and Contingencies	Note 11	Note S-5
Asset Retirement Obligations	Note 12	—
Selected Quarterly Financial Data (Unaudited)	Note 13	Note S-6
Fair Value of Financial Instruments	Note 14	Note S-7
Earnings Per Share	Note 15	—
Stock-Based Compensation	Note 16	—
Business Segments	Note 17	—
Derivative and Energy Trading Activities	Note 18	Note S-8
Other Income and Other Expense	Note 19	Note S-9
Variable Interest Entities	Note 20	—
Guarantees	Note 21	—
Discontinued Operations	Note 22	—
Related Party Transactions	—	Note S-10

135

ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE FINANCIAL STATEMENTS

S-1. Summary of Significant Accounting Polices

Stock-Based Compensation

     Pinnacle West offers stock-based compensation plans for officers and key employees of APS. In 2002, APS began applying the fair value method of accounting for stock-based compensation, as provided for in SFAS No. 123, “Accounting for Stock-Based Compensation.” The fair value method of accounting is the preferred method. In accordance with the transition requirements of SFAS No. 123, APS applied the fair value method prospectively, beginning with 2002 stock grants. In prior years, APS recognized stock compensation expense based on the intrinsic value method allowed in Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees.”

     The following chart compares APS’ net income and stock compensation expense to what those items would have been if APS had recorded stock compensation expense based on the fair value method for all stock grants through 2004 (dollars in thousands):

	2004			2003			2002
Net income, as reported	$	199,627		$	180,937		$	199,343
Add: Stock compensation expense included in reported net income (net of tax)		3,353			2,035			1,493
Deduct: Total stock compensation expense determined under fair value method (net of tax)		(3,713	)		(3,024	)		(2,455	)
Pro forma net income	$	199,267		$	179,948		$	198,381

S-2. Income Taxes

     APS is included in our consolidated tax return. However, when we allocate income taxes to APS, we do so based on APS’ taxable income or loss alone.

     As a result of a change in IRS guidance, we claimed a tax deduction related to an APS tax accounting method change on the 2001 federal consolidated income tax return. The accelerated deduction resulted in a $200 million reduction in the current income tax liability and a corresponding increase in the plant-related deferred tax liability. In 2002, we received an income tax refund of approximately $115 million related to our 2001 federal consolidated income tax return. The 2001 federal consolidated income tax return is currently under examination by the IRS. As part of this ongoing examination, the IRS is reviewing this accounting method change and the resultant deduction. During 2004, the current income tax liability was increased, with a corresponding decrease to plant-related deferred tax liability, to reflect the expected outcome of this audit. We do not expect the ultimate outcome of this examination to have a material adverse impact on our financial position, results of operations or liquidity.

     The income tax liability accounts reflect the tax and interest associated with the most probable resolution of all known and measurable tax exposures.

136

ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE FINANCIAL STATEMENTS

     The components of APS’ income tax expense are as follows (dollars in thousands):

	Year Ended December 31,
	2004			2003			2002
Current:
Federal	$	207,306		$	75,087		$	(61,962	)
State		53,579			12,854			(18,000	)
Total current		260,885			87,941			(79,962	)
Deferred		(140,855	)		(1,087	)		206,767
Total income tax expense	$	120,030		$	86,854		$	126,805

     On the APS Statements of Income, federal and state income taxes are allocated between operating income and other income.

     The following chart compares APS’ pretax income at the 35% federal income tax rate to income tax expense (dollars in thousands):

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

     The following table sets forth the net deferred income tax liability recognized on the APS Balance Sheets (dollars in thousands):

	December 31,
	2004			2003
Current liability	$	(9,057	)	$	(631	)
Long term liability		(1,108,571	)		(1,257,671	)
Accumulated deferred income taxes – net	$	(1,117,628	)	$	(1,258,302	)

     The components of the net deferred income tax liability were as follows (dollars in thousands):

137

ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE FINANCIAL STATEMENTS

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

S-3. Long-Term Debt Payments

     The following is a list of principal payments due on APS’ total long-term debt and capitalized lease requirements:

•   $452 million in 2005;

•   $86 million in 2006;

•   $174 million in 2007;

•   $1 million in 2008;

•   $1 million in 2009; and

•   $2,012 million, thereafter.

S-4. Leases

     Total lease expense recognized in the APS Statements of Income was $57 million in 2004, $66 million in 2003 and $57 million in 2002.

     Estimated future minimum lease payments for APS’ operating leases are approximately as follows (dollars in millions):

138

\

ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE FINANCIAL STATEMENTS

Year
2005	$	65
2006		64
2007		63
2008		61
2009		61
Thereafter		352
Total future lease commitments	$	666

S-5. Commitments and Contingencies

Purchased Power and Fuel Commitments

     APS is party to various purchased power and fuel contracts with terms expiring from 2005 through 2025 that include required purchase provisions. APS estimates the contract requirements to be approximately $245 million in 2005; $125 million in 2006; $81 million in 2007; $66 million in 2008; $68 million in 2009 and $363 million thereafter. Included in these contract requirements is approximately $57 million in 2005 and $36 million in 2006 for related party purchases (see Note 3). However, these amounts may vary significantly pursuant to certain provisions in such contracts that permit us to decrease required purchases under certain circumstances.

139

ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE FINANCIAL STATEMENTS

S-6. Selected Quarterly Financial Data (Unaudited)

     The following note presents quarterly financial information for 2004 and 2003. APS is disclosing originally reported amounts and revised amounts in the first and second quarters of 2004 due to the adoption of FSP 106-2 (see Note 8). Quarterly financial information for 2004 and 2003 is as follows (dollars in thousands):

	2004 Quarter Ended,
	March 31,			June 30,			September 30,		December 31,		Total
As originally reported:
Operating Revenues	$	441,102		$	569,658		$	700,512	$	485,849	$	2,197,121
Operations and Maintenance		126,988			127,947			143,338		144,156		542,429
Operating Income		65,974			82,528			129,682		48,645		326,829
Net Income		33,353			53,858			95,192		15,072		197,475
Medicare Subsidy Adoption (see Note 8):
Operations and Maintenance		(1,076	)		(1,076	)		—		—		(2,152	)
Operating Income		1,076			1,076			—		—		2,152
Net Income		1,076			1,076			—		—		2,152
After Medicare Subsidy Adoption:
Operating Revenues		441,102			569,658			700,512		485,849		2,197,121
Operations and Maintenance		125,912			126,871			143,338		144,156		540,277
Operating Income		67,050			83,604			129,682		48,645		328,981
Net Income		34,429			54,934			95,192		15,072		199,627

	2003 Quarter Ended,
	March 31,		June 30,		September 30,		December 31,		Total
As originally reported:
Operating Revenues	$	431,937	$	533,322	$	682,616	$	457,056	$	2,104,931
Operating Income		46,830		76,258		120,415		54,655		298,158
Net Income		15,933		43,175		100,356		21,473		180,937

S-7. Fair Value of Financial Instruments

     APS believes that the carrying amounts of its cash equivalents are reasonable estimates of their fair values at December 31, 2004 and 2003 due to their short maturities.

     We hold investments in debt securities for purposes other than trading. We believe that the carrying amounts of these investments represent reasonable estimates of their fair values at December 31, 2004 and 2003 due to the short-term reset of interest rates.

     APS holds investments in fixed income and domestic equity securities for purposes other than trading. The December 31, 2004 and 2003 fair values of such investments, which APS determines by using quoted market prices, approximate their carrying amount. For further information, see disclosure of cost and fair value of APS’ nuclear decommissioning trust fund assets in Note 12.

     On December 31, 2004, the carrying value of APS’ long-term debt (excluding capitalized lease obligations) was $2.71 billion, with an estimated fair value of $2.81 billion. The carrying value of APS’ long-term debt (excluding capital lease obligations) was $2.61 billion on December 31,

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ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE FINANCIAL STATEMENTS

2003, with an estimated fair value of $2.74 billion. The fair value estimates are based on quoted market prices of the same or similar issues.

S-8. Derivative and Energy Trading Accounting

     APS is exposed to the impact of market fluctuations in the commodity price and transportation costs of electricity, natural gas, coal and emissions allowances. As part of its overall risk management program, APS uses various commodity instruments that qualify as derivatives to hedge purchases and sales of electricity, fuels and emissions allowances and credits. As of December 31, 2004, APS hedged exposures to these risks for a maximum of three years.

Cash Flow Hedges

     The changes in the fair value of APS’ hedged positions included in the APS Statements of Income for the years ended December 31, 2004, 2003 and 2002 are comprised of the following (dollars in thousands):

	2004			2003		2002
Gains/(losses) on the ineffective portion of derivatives qualifying for hedge accounting	$	(1,570	)	$	7,033	$	9,091
Gains/(losses) from the change in options time value excluded from measurement of effectiveness		185			181		(609	)
Gains/(losses) from the discontinuance of cash flow hedges		575			—		(9,206	)

     During the twelve months ending December 31, 2005, APS estimates that a net gain of $23 million before income taxes will be reclassified from accumulated other comprehensive loss as an offset to the effect on earnings of market price changes for the related hedged transactions.

     APS’ assets and liabilities from risk management and trading activities are presented in two categories:

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

•   Marketing and Trading – both non-trading and trading derivative instruments.

     The following table summarizes APS’ assets and liabilities from risk management and trading activities at December 31, 2004 and 2003 (dollars in thousands):

141

ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE FINANCIAL STATEMENTS

December 31, 2004

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

December 31, 2003

	Current				Current			Other			Net Asset/
	Assets		Investments		Liabilities			Liabilities			(Liability)
Regulated Electricity:
Mark-to-Market	$	44,079	$	5,900	$	(47,268	)	$	(3,028	)	$	(317	)
Options		—		12,101		—			—			12,101
Marketing & Trading:
Mark-to-Market		8,369		—		(10,870	)		(1,474	)		(3,975	)
Total	$	52,448	$	18,001	$	(58,138	)	$	(4,502	)	$	7,809

     Cash or other assets may be required to serve as collateral against APS’ open positions on certain energy-related contracts. No collateral was provided to counterparties at December 31, 2004 or at December 31, 2003. Collateral provided to us by counterparties is $6 million at December 31, 2004 and $12 million at December 31, 2003, and is included in other current liabilities on the Balance Sheet.

S-9. Other Income and Other Expense

     The following table provides detail of APS’ other income and other expense for the years ended December 31, 2004, 2003 and 2002 (dollars in thousands):

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ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE FINANCIAL STATEMENTS

	Year Ended December 31,
	2004			2003			2002
Other income:
Interest income	$	22,354		$	15,660		$	3,455
Miscellaneous		2,021			1,892			1,126
Investment gains – net		3,192			2,107			—
Asset sales		3,026			618			568
Total other income	$	30,593		$	20,277		$	5,149
Other expense:
Non-operating costs (a)	$	(8,923	)	$	(9,361	)	$	(9,952	)
Asset sales		(1,212	)		(1,522	)		(6,472	)
Miscellaneous		(3,681	)		(2,079	)		(1,783	)
Equity losses – net		—			—			(1,131	)
Total other expense	$	(13,816	)	$	(12,962	)	$	(19,338	)

(a) As defined by the FERC, includes below-the-line non-operating utility costs (primarily community relations).

S-10. Related Party Transactions

     From time to time, APS enters into transactions with Pinnacle West or Pinnacle West’s subsidiaries. The following table summarizes the amounts included in the APS Statements of Income and Balance Sheets related to transactions with affiliated companies (dollars in millions):

143

ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE FINANCIAL STATEMENTS

	Year Ended December 31,
	2004		2003		2002
Electric operating revenues:
Pinnacle West – marketing and trading	$	13	$	12	$	85
Pinnacle West Energy		3		9		—
Total	$	16	$	21	$	85
Purchased power and fuel costs:
Pinnacle West – marketing and trading	$	—	$	—	$	135
Pinnacle West Energy		75		70		—
Total	$	75	$	70	$	135
Other:
Pinnacle West Energy:
Lease expense	$	—	$	10	$	—
Interest income	$	19	$	12	$	—
Capital expenditures:
Pinnacle West — marketing and trading	$	11	$	—	$	—
Pinnacle West		22		—		—
Total	$	33	$	—	$	—

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

(a)   This net intercompany receivable primarily consists of the $500 million of debt APS issued to Pinnacle West Energy pursuant to the Financing Order (see “ACC Financing Order” in Note 3).

     Electric revenues include sales of electricity to affiliated companies at contract prices. Purchased power includes purchases of electricity from affiliated companies at contract prices. The Company purchases electricity from and sells electricity to APS Energy Services; however, these transactions are settled net and reported net in accordance with EITF 03-11, “Reporting Realized Gains and Losses on Derivative Instruments That Are Subject to FASB Statement No. 133 and Not ‘Held for Trading Purposes’ As Defined in Issue No. 2-3.” See Note 18 for more information related to EITF 03-11. Intercompany receivables primarily include the amounts related to the loan APS made to Pinnacle West Energy and intercompany sales of electricity. Intercompany payables primarily include amounts related to the intercompany purchases of electricity. Intercompany receivables and payables are generally settled on a current basis in cash.

144

PINNACLE WEST CAPITAL CORPORATION
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
(dollars in thousands)

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

(a)	Represents pro-rata allocations for sale of land.
(b)	Contract losses related to NAC (see Note 22 – Discontinued Operations – NAC).

145

ARIZONA PUBLIC SERVICE COMPANY
SCHEDULE II – RESERVE FOR UNCOLLECTIBLES
(dollars in thousands)

Column A	Column B		Column C				Column D		Column E
			Additions
	Balance at		Charged to		Charged				Balance
	beginning		cost and		to other				at end of
Description	of period		expenses		accounts		Deductions		period
Reserve for uncollectibles:
2004	$	3,743	$	2,446	$	—	$	2,745	$	3,444
2003		1,341		5,716		—		3,314		3,743
2002		3,349		2,680		—		4,688		1,341

146

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE

     None.

ITEM 9A. CONTROLS AND PROCEDURES

     (a) Disclosure Controls and Procedures

     The term “disclosure controls and procedures” means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to a company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

     Pinnacle West’s management, with the participation of Pinnacle West’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of Pinnacle West’s disclosure controls and procedures as of December 31, 2004. Based on that evaluation, Pinnacle West’s Chief Executive Officer and Chief Financial Officer have concluded that, as of that date, Pinnacle West’s disclosure controls and procedures were effective.

     APS’ management, with the participation of APS’ Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of APS’ disclosure controls and procedures as of December 31, 2004. Based on that evaluation, APS’ Chief Executive Officer and Chief Financial Officer have concluded that, as of that date, APS’ disclosure controls and procedures were effective.

     (b) Management’s Annual Reports on Internal Control Over Financial Reporting

     Reference is made to “Management’s Report on Internal Control Over Financial Reporting (Pinnacle West Capital Corporation)” on page 64 of this report and “Management’s Report on Internal Control Over Financial Reporting (Arizona Public Service Company)” on page 128 of this report.

     (c) Attestation Reports of the Registered Public Accounting Firm

     Reference is made to “Report of Independent Registered Public Accounting Firm” on page 65 of this report and “Report of Independent Registered Public Accounting Firm” on page 129 of this report on the internal control over financial reporting of Pinnacle West and APS, respectively.

     (d) Changes In Internal Control Over Financial Reporting

     The term “internal control over financial reporting” (defined in SEC Rule 13a-15(f)) refers to the process of a company that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

147

     No change in Pinnacle West’s or APS’ internal control over financial reporting occurred during the fiscal quarter ended December 31, 2004 that materially affected, or is reasonably likely to materially affect, Pinnacle West’s or APS’ internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

     None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE
OFFICERS OF PINNACLE WEST

     Reference is hereby made to “Information About Our Board and Its Committees and Our Corporate Governance,” “Election of Directors” and to “Section 16(a) Beneficial Ownership Reporting Compliance” in the Pinnacle West Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 18, 2005 (the “2005 Proxy Statement”) and to the Supplemental Item – “Executive Officers of Pinnacle West” in Part I of this report.

     Pinnacle West has adopted a Code of Ethics for Financial Professionals that applies to professional employees in the areas of finance, accounting, internal audit, energy risk management, marketing and trading financial control, tax, investor relations, and treasury and also includes Pinnacle West’s Chief Executive Officer, Chief Financial Officer, Controller, Treasurer, and officers holding substantially equivalent positions at Pinnacle West’s subsidiaries. The Code of Ethics for Financial Professionals is posted on Pinnacle West’s website at www.pinnaclewest.com. Pinnacle West intends to satisfy the requirements under Item 5.05 of Form 8-K regarding disclosure of amendments to, or waivers from, provisions of the Code of Ethics for Financial Professionals by posting such information on Pinnacle West’s website.

ITEM 11. EXECUTIVE COMPENSATION

     Reference is hereby made to “Information About Our Board and Its Committees and Our Corporate Governance – How are Directors compensated?”; “Performance Graph”; and “Executive Compensation” in the 2005 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS

Security Ownership of Certain Beneficial Owners and Management

     Reference is hereby made to “How Many Shares of Pinnacle West Stock are Owned by Management and Large Shareholders?” in the 2005 Proxy Statement.

Securities Authorized For Issuance Under Equity Compensation Plans

     The following table sets forth information as of December 31, 2004 with respect to our compensation plans and individual compensation arrangements under which our equity securities were authorized for issuance.

148

Equity Compensation Plan Information

					Number of securities
	Number of				remaining available for
	securities to be		Weighted-average		future issuance under
	issued upon exercise		exercise price of		equity compensation
	of outstanding		outstanding		plans (excluding
	options, warrants		options, warrants		securities reflected in
Plan category	and rights		and rights		column (a))
	(a)		(b)		(c)
Equity compensation plans approved by security holders		2,276,123	$	39.14		4,393,196
Equity compensation plans not approved by security holders		—	$	—		154,100
Total		2,276,123	$	39.14		4,547,296

Equity Compensation Plans Approved By Security Holders

     The Company has four equity compensation plans that were approved by its shareholders: the Pinnacle West Capital Corporation Stock Option and Incentive Plan, under which no new options may be granted; the Pinnacle West Capital Corporation Directors Stock Option Plan, under which no new options may be granted; the Pinnacle West Capital Corporation 1994 Long-Term Incentive Plan, under which no stock awards may be granted; and the Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan. See Note 16 for additional information regarding these plans.

Equity Compensation Plans Not Approved By Security Holders

     The Company has one equity compensation plan, the Pinnacle West Capital Corporation 2000 Director Equity Plan (the “2000 Plan”), for which the approval of shareholders was not required.

     Number of Shares Subject to the 2000 Plan. The total number of shares of the Company’s common stock granted under the 2000 Plan may not exceed 200,000. In the case of a significant corporate event, such as a reorganization, merger or consolidation, the 2000 Plan provides for adjustment of the above limit, the number of shares to be awarded automatically to eligible non-employee directors and the number of shares of the Company’s common stock non-employee directors are required to own to receive an annual grant of common stock under the 2000 Plan.

     Eligibility for Participation. Only non-employee directors may participate in the 2000 Plan. A non-employee director is an individual who is a director of the Company but who is not also an employee of the Company or any of its subsidiaries.

     Terms of Awards. The 2000 Plan provides for: (1) annual grants of common stock to eligible non-employee directors, (2) discretionary grants of common stock to eligible non-employee directors and (3) grants of nonqualified stock options to eligible non-employee directors.

149

     Annual Grants of Stock

     Each individual who is a non-employee director as of July 1 of a calendar year, and who meets requirements of ownership of the Company’s common stock set forth below, will receive 900 shares of the Company’s common stock for such calendar year. In the first calendar year in which a non-employee director is eligible to participate in the 2000 Plan, he or she must own at least 900 shares of the Company’s common stock as of December 31 of the same calendar year to receive a grant of 900 shares of the Company’s common stock. If the non-employee director owns 900 shares of common stock as of June 30, he or she will receive a grant of 900 shares of common stock as of July 1 of the same calendar year. If the non-employee director does not own 900 shares of the Company’s common stock as of June 30, but acquires the necessary shares on or before December 31 of the same year, he or she will receive a grant of 900 shares of common stock within a reasonable time after the Company verifies that the requisite number of shares has been acquired. In each subsequent year, the number of shares of the Company’s common stock the non-employee director must own to receive a grant of 900 shares of common stock will increase by 900 shares, until reaching a maximum of 4,500 shares. In each of the subsequent years, the non-employee director must own the requisite number of shares of the Company’s common stock as of June 30 of the relevant calendar year.

     Discretionary Grants of Stock

     The Human Resources Committee of the Board of Directors administers the 2000 Plan and may grant shares of the Company’s common stock to non-employee directors in its discretion. No discretionary grants of common stock have been made under the 2000 Plan.

     Grants of Non-qualified Stock Options

     The Committee can grant non-qualified stock options under the 2000 Plan. The terms and the conditions of the option grant, including the exercise price per share, which may not be less than fair market value on the date of grant, will be set by the Committee in a written award agreement. The Committee will determine the time or times at which any such options may be exercised in whole or in part. The Committee will also determine the performance or other conditions, if any, that must be satisfied before all or part of an option may be exercised. Any such options granted to a participant will expire on the tenth anniversary date of the date of grant, unless the option is earlier terminated, forfeited or surrendered pursuant to a provision of the 2000 Plan or the applicable award agreement. Notwithstanding the foregoing, if a participant ceases to be a Company director for any reason, including death or disability, any such options held by that participant will expire on the second anniversary of the date on which the participant ceased to be a Company director, unless otherwise provided in the applicable award agreement. Unless the Committee provides otherwise, no such options may be sold, transferred, pledged, assigned or otherwise alienated, other than by will, the laws of descent and distribution, or under any other circumstances allowed by the Committee. No options have been granted under the 2000 Plan.

150

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Reference is hereby made to “How Many Shares of Pinnacle West Stock are Owned by Management and Large Shareholders?”; “Executive Compensation – Human Resources Committee Interlocks and Insider Participation” and “What are the Company’s Executive Benefit Plans – Employment and Severance Agreements” in the 2005 Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT
FEES AND SERVICES

Pinnacle West

     Reference is hereby made to “Audit Matters – What fees were paid to APS’ independent accountants in 2004 and 2003?” and “– What are the Audit Committee’s pre-approval policies?” in the 2005 Proxy Statement.

APS

     The following fees were paid to our independent public accountants, Deloitte & Touche LLP, for the last two fiscal years:

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

(1)	The aggregate fees billed for services rendered for the audit of annual financial statements and for review of financial statements included in Forms 10-Q.
(2)	The aggregate fees billed for assurance and services that are reasonably related to the performance of the audit or review of the financial statements that are not included in Audit Fees reported above, which primarily consist of fees for Sarbanes-Oxley Section 404 readiness.
(3)	The aggregate fees billed primarily for investment tax credit services, tax compliance and tax planning.
(4)	The aggregate fees billed for services rendered for all services in 2003, other than the audit services described above, which for 2003 consisted of continuing professional education fees.

     Pinnacle West’s Audit Committee pre-approves each audit service and non-audit service to be provided by APS’ independent public accountants. The Audit Committee has delegated to the Chairman of the Audit Committee the authority to pre-approve audit and non-audit services to be performed by the independent public accountants if the services are not expected to cost more than $50,000. The Chairman must report any pre-approval decisions to the Audit Committee at its next scheduled meeting. All of the services performed by Deloitte & Touche LLP for APS were pre-approved by the Audit Committee.

151

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Financial Statements and Financial Statement Schedules

     See the Index to Financial Statements and Financial Statement Schedule in Part II, Item 8.

Exhibits Filed

     The documents listed below are being filed or have previously been filed on behalf of Pinnacle West or APS and are incorporated herein by reference from the documents indicated and made a part hereof. Exhibits not identified as previously filed are filed herewith.

Exhibit				Date
No.	Registrant(s)	Description	Previously Filed as Exhibit : a	Effective
3.1	Pinnacle West	Articles of Incorporation, restated as of July 29, 1988	19.1 to Pinnacle West’s September 1988 Form 10-Q Report, File No. 1-8962	11-14-88
3.2	Pinnacle West	Pinnacle West Capital Corporation Bylaws, amended as of June 23, 2004	3.1 to Pinnacle West’s June 30, 2004 Form 10-Q Report, File No. 1-8962	8-9-04
3.3	APS	Articles of Incorporation, restated as of May 25, 1988	4.2 to APS’ Form S-3 Registration Nos. 33-33910 and 33-55248 by means of September 24, 1993 Form 8-K Report, File No. 1-4473	9-29-93
3.4	APS	Arizona Public Service Company Bylaws, amended as of June 23, 2004	3.1 to APS’ June 30, 2004 Form 10-Q Report, File No. 1-4473	8-9-04
4.12	Pinnacle West APS	Agreement, dated March 21, 1994, relating to the filing of instruments defining the rights of holders of APS long-term debt not in excess of 10% of APS’ total assets	4.1 to APS’ 1993 Form 10-K Report, File No. 1-4473	3-30-94

152

Exhibit				Date
No.	Registrant(s)	Description	Previously Filed as Exhibit: a	Effective
4.13	Pinnacle West APS	Indenture dated as of January 1, 1995 among APS and The Bank of New York, as Trustee	4.6 to APS’ Registration Statement Nos. 33-61228 and 33-55473 by means of January 1, 1995 Form 8-K Report, File No. 1-4473	1-11-95
4.14	Pinnacle West APS	First Supplemental Indenture dated as of January 1, 1995	4.4 to APS’ Registration Statement Nos. 33-61228 and 33-55473 by means of January 1, 1995 Form 8-K Report, File No. 1-4473	1-11-95
4.15	Pinnacle West APS	Indenture dated as of November 15, 1996 among APS and The Bank of New York, as Trustee	4.5 to APS’ Registration Statements Nos. 33-61228, 33-55473, 33-64455 and 333- 15379 by means of November 19, 1996 Form 8-K Report, File No. 1-4473	11-22-96
4.16	Pinnacle West APS	First Supplemental Indenture	4.6 to APS’ Registration Statements Nos. 33-61228, 33-55473, 33-64455 and 333-15379 by means of November 19, 1996 Form 8-K Report, File No. 1-4473	11-22-96
4.17	Pinnacle West APS	Second Supplemental Indenture	4.10 to APS’ Registration Statement Nos. 33-55473, 33-64455 and 333-15379 by means of April 7, 1997 Form 8-K Report, File No. 1-4473	4-9-97
4.18	Pinnacle West APS	Third Supplemental Indenture	10.2 to Pinnacle West’s March 2003 Form 10-Q Report, File No. 1-8962	5-15-03
4.19	Pinnacle West	Indenture dated as of December 1, 2000 between the Company and The Bank of New York, as Trustee, relating to Senior Debt Securities	4.1 to Pinnacle West’s Registration Statement No. 333-53150, File No. 1-8962	1-25-01

153

Exhibit				Date
No.	Registrant(s)	Description	Previously Filed as Exhibit: a	Effective
4.20	Pinnacle West	First Supplemental Indenture dated as of March 15, 2001	4.2 to Pinnacle West’s Registration Statement No. 333-52476, File No. 1-8962	3-26-01
4.21	Pinnacle West	Second Supplemental Indenture dated as of November 1, 2003	4.20 to Pinnacle West’s Registration Statement No. 333-101457 by means of November 6, 2003 Form 8-K Report, File No. 1-8962	11-12-03
4.22	Pinnacle West	Indenture dated as of December 1, 2000 between the Company and The Bank of New York, as Trustee, relating to subordinated Debt Securities	4.2 to Pinnacle West’s Registration Statement No. 333-53150, File No. 1-8962	1-25-01
4.23	Pinnacle West	Specimen Certificate of Pinnacle West Capital Corporation Common Stock, no par value	4.2 to Pinnacle West’s 1988 Form 10-K Report, File No. 1-8962	3-31-89
4.24	Pinnacle West	Agreement, dated March 29, 1988, relating to the filing of instruments defining the rights of holders of long-term debt not in excess of 10% of the Company’s total assets	4.1 to Pinnacle West’s 1987 Form 10-K Report, File No. 1-8962	3-30-88
4.25	Pinnacle West APS	Indenture dated as of January 15, 1998 among APS and The Chase Manhattan Bank, as Trustee	4.10 to APS’ Registration Statement Nos. 333-15379 and 333-27551 by means of January 13, 1998 Form 8-K Report, File No. 1-4473	1-16-98
4.26	Pinnacle West APS	First Supplemental Indenture dated as of January 15, 1998	4.3 to APS’ Registration Statement Nos. 333-15379 and 333-27551 by means of January 13, 1998 Form 8-K Report, File No. 1-4473	1-16-98

154

Exhibit				Date
No.	Registrant(s)	Description	Previously Filed as Exhibit: a	Effective
4.27	Pinnacle West APS	Second Supplemental Indenture dated as of February 15, 1999	4.3 to APS’ Registration Statement Nos. 333-27551 and 333-58445 by means of February 18, 1999 Form 8-K Report, File No. 1-4473	2-22-99
4.28	Pinnacle West APS	Third Supplemental Indenture dated as of November 1, 1999	4.5 to APS’ Registration Statement Nos. 333-58445 by means of November 2, 1999 Form 8-K Report, File No. 1-4473	11-5-99
4.29	Pinnacle West APS	Fourth Supplemental Indenture dated as of August 1, 2000	4.1 to APS’ Registration Statement No. 333-58445 and 333-94277 by means of August 2, 2000 Form 8-K Report, File No. 1-4473	8-4-00
4.30	Pinnacle West APS	Fifth Supplemental Indenture dated as of October 1, 2001	4.1 to APS’ September 2001 Form 10-Q, File No. 1-4473	11-6-01
4.31	Pinnacle West APS	Sixth Supplemental Indenture dated as of March 1, 2002	4.1 to APS’ Registration Statement Nos. 333-63994 and 333-83398 by means of February 26, 2002 Form 8-K Report, File No. 1-4473	2-28-02
4.32	Pinnacle West APS	Seventh Supplemental Indenture dated as of May 1, 2003	4.1 to APS’ Registration Statement No. 333-90824 by means of May 7, 2003 Form 8-K Report, File No. 1-8962	5-9-03
4.33	Pinnacle West APS	Eighth Supplemental Indenture dated as of June 15, 2004	4.1 to APS’ Registration Statement No. 333-106772 by means of June 24, 2004 Form 8-K Report, File No. 1-4473	6-28-04

155

Exhibit				Date
No.	Registrant(s)	Description	Previously Filed as Exhibit: a	Effective
4.34	Pinnacle West	Amended and Restated Rights Agreement, dated as of March 26, 1999, between Pinnacle West Capital Corporation and BankBoston, N.A., as Rights Agent, including (i) as Exhibit A thereto the form of Amended Certificate of Designation of Series A Participating Preferred Stock of Pinnacle West Capital Corporation, (ii) as Exhibit B thereto the form of Rights Certificate and (iii) as Exhibit C thereto the Summary of Right to Purchase Preferred Shares	4.1 to Pinnacle West’s March 22, 1999 Form 8-K Report, File No. 1-8962	4-19-99
4.35	Pinnacle West	Amendment to Rights Agreement, effective as of January 1, 2002	4.1 to Pinnacle West’s March 2002 Form 10-Q Report, File No. 1-8962	5-15-02
4.36	Pinnacle West	Second Amended and Restated Investor’s Advantage Plan	4.4 to Pinnacle West’s June 23, 2004 Form 8-K Report, File No. 1-8962	8-9-04
10.1b	Pinnacle West APS	2005 Officer and CEO Variable Incentive Plan
10.2	Pinnacle West APS	Amendment No. 4 to the Decommissioning Trust Agreement (PVNGS Unit 1), dated as of December 19, 2003	10.3 to Pinnacle West’s 2003 Form 10-K Report, File No. 1-8962	3-15-04
10.3	Pinnacle West APS	Amendment No. 7 to the Decommissioning Trust Agreement (PVNGS Unit 2), dated as of December 19, 2003	10.4 to Pinnacle West’s 2003 Form 10-K Report, File No. 1-8962	3-15-04

156

Exhibit				Date
No.	Registrant(s)	Description	Previously Filed as Exhibit: a	Effective
10.4	Pinnacle West APS	Amendment No. 4 to the Decommissioning Trust Agreement (PVNGS Unit 3), dated as of December 19, 2003	10.5 to Pinnacle West’s 2003 Form 10-K Report, File No. 1-8962	3-15-04
10.5	Pinnacle West APS	Fourth Amendment to the Pinnacle West Capital Corporation, Arizona Public Service Company, SunCor Development Company and El Dorado Investment Company Deferred Compensation Plan	10.6 to Pinnacle West’s 2003 Form 10-K Report, File No. 1-8962	3-15-04
10.6	Pinnacle West APS	Pinnacle West Capital Corporation Supplement Excess Benefit Retirement Plan, amended and restated as of January 1, 2003	10.7 to Pinnacle West’s 2003 Form 10-K Report, File No. 1-8962	3-15-04
10.7	Pinnacle West APS	Two separate Decommissioning Trust Agreements (relating to PVNGS Units 1 and 3, respectively), each dated July 1, 1991, between APS and Mellon Bank, N.A., as Decommissioning Trustee	10.2 to APS’ September 1991 Form 10-Q Report, File No. 1-4473	11-14-91
10.8	Pinnacle West APS	Amendment No. 1 to Decommissioning Trust Agreement (PVNGS Unit 1), dated as of December 1, 1994	10.1 to APS’ 1994 Form 10- K Report, File No. 1-4473	3-30-95

157

Exhibit				Date
No.	Registrant(s)	Description	Previously Filed as Exhibit: a	Effective
10.9	Pinnacle West APS	Amendment No. 1 to Decommissioning Trust Agreement (PVNGS Unit 3), dated as of December 1, 1994	10.2 to APS’ 1994 Form 10-K Report, File No. 1-4473	3-30-95
10.10	Pinnacle West APS	Amendment No. 2 to APS Decommissioning Trust Agreement (PVNGS Unit 1) dated as of July 1, 1991	10.4 to APS’ 1996 Form 10-K Report , File No. 1-4473	3-28-97
10.11	Pinnacle West APS	Amendment No. 2 to APS Decommissioning Trust Agreement (PVNGS Unit 3) dated as of July 1, 1991	10.6 to APS’ 1996 Form 10-K Report, File No. 1-4473	3-28-97
10.12	Pinnacle West APS	Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2) dated as of January 31, 1992, among APS, Mellon Bank, N.A., as Decommissioning Trustee, and State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee under two separate Trust Agreements, each with a separate Equity Participant, and as Lessor under two separate Facility Leases, each relating to an undivided interest in PVNGS Unit 2	10.1 to Pinnacle West’s 1991 Form 10-K Report, File No. 1-8962	3-26-92

158

Exhibit				Date
No.	Registrant(s)	Description	Previously Filed as Exhibit: a	Effective
10.13	Pinnacle West APS	First Amendment to Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2), dated as of November 1, 1992	10.2 to APS’ 1992 Form 10-K Report, File No. 1-4473	3-30-93
10.14	Pinnacle West APS	Amendment No. 2 to Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2), dated as of November 1, 1994	10.3 to APS’ 1994 Form 10-K Report, File No. 1-4473	3-30-95
10.15	Pinnacle West APS	Amendment No. 3 to Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2), dated as of January 31, 1992	10.1 to APS’ June 1996 Form 10-Q Report, File No. 1-4473	8-9-96
10.16	Pinnacle West APS	Amendment No. 4 to Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2) dated as of January 31, 1992	APS 10.5 to APS’ 1996 Form 10-K Report, File No. 1-4473	3-28-97
10.17	Pinnacle West APS	Amendment No. 5 to the Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2), dated as of June 30, 2000	10.1 to Pinnacle West’s March 2002 Form 10-Q Report, File No. 1-8962	5-15-02
10.18	Pinnacle West APS	Amendment No. 3 to the Decommissioning Trust Agreement (PVNGS Unit 1), dated as of March 18, 2002	10.2 to Pinnacle West’s March 2002 Form 10-Q Report, File No. 1-8962	5-15-02

159

Exhibit				Date
No.	Registrant(s)	Description	Previously Filed as Exhibit: a	Effective
10.19	Pinnacle West APS	Amendment No. 6 to the Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2), dated as of March 18, 2002	10.3 to Pinnacle West’s March 2002 Form 10-Q Report, File No. 1-8962	5-15-02
10.20	Pinnacle West APS	Amendment No. 3 to the Decommissioning Trust Agreement (PVNGS Unit 3), dated as of March 18, 2002	10.4 to Pinnacle West’s March 2002 Form 10-Q Report, File No. 1-8962	5-15-02
10.21	Pinnacle West APS	Asset Purchase and Power Exchange Agreement dated September 21, 1990 between APS and PacifiCorp, as amended as of October 11, 1990 and as of July 18, 1991	10.1 to APS’ June 1991 Form 10-Q Report, File No. 1-4473	8-8-91
10.22	Pinnacle West APS	Long-Term Power Transaction Agreement dated September 21, 1990 between APS and PacifiCorp, as amended as of October 11, 1990, and as of July 8, 1991	10.2 to APS’ June 1991 Form 10-Q Report, File No. 1-4473	8-8-91
10.23	Pinnacle West APS	Amendment No. 1 dated April 5, 1995 to the Long-Term Power Transaction Agreement and Asset Purchase and Power Exchange Agreement between PacifiCorp and APS	10.3 to APS’ 1995 Form 10-K Report, File No. 1-4473	3-29-96
10.24	Pinnacle West APS	Restated Transmission Agreement between PacifiCorp and APS dated April 5, 1995	10.4 to APS’ 1995 Form 10-K Report, File No. 1-4473	3-29-96

160

Exhibit				Date
No.	Registrant(s)	Description	Previously Filed as Exhibit: a	Effective
10.25	Pinnacle West APS	Contract among PacifiCorp, APS and United States Department of Energy Western Area Power Administration, Salt Lake Area Integrated Projects for Firm Transmission Service dated May 5, 1995	10.5 to APS’ 1995 Form 10-K Report, File No. 1-4473	3-29-96
10.26	Pinnacle West APS	Reciprocal Transmission Service Agreement between APS and PacifiCorp dated as of March 2, 1994	10.6 to APS’ 1995 Form 10-K Report, File No. 1-4473	3-29-96
10.27	Pinnacle West APS	Contract, dated July 21, 1984, with DOE providing for the disposal of nuclear fuel and/or high -level radioactive waste, ANPP	10.31 to Pinnacle West’s Form S-14 Registration Statement, File No. 2-96386	3-13-85
10.28	Pinnacle West APS	Indenture of Lease with Navajo Tribe of Indians, Four Corners Plant	5.01 to APS’ Form S-7 Registration Statement, File No. 2-59644	9-1-77
10.29	Pinnacle West APS	Supplemental and Additional Indenture of Lease, including amendments and supplements to original lease with Navajo Tribe of Indians, Four Corners Plant	5.02 to APS’ Form S-7 Registration Statement, File No. 2-59644	9-1-77
10.30	Pinnacle West APS	Amendment and Supplement No. 1 to Supplemental and Additional Indenture of Lease Four Corners, dated April 25, 1985	10.36 to Pinnacle West’s Registration Statement on Form 8-B Report, File No. 1-8962	7-25-85

161

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

162

Exhibit				Date
No.	Registrant(s)	Description	Previously Filed as Exhibit: a	Effective
10.38	Pinnacle West APS	Water Service Contract Assignment with the United States Department of Interior, Bureau of Reclamation, Navajo Plant	5(l) to APS’ Form S-7 Registration Statement, File No. 2-394442	3-16-71
10.39	Pinnacle West APS	Arizona Nuclear Power Project Participation Agreement, dated August 23, 1973, among APS Salt River Project Agricultural Improvement and Power District, Southern California Edison Company, Public Service Company of New Mexico, El Paso Electric Company, Southern California Public Power Authority, and Department of Water and Power of the City of Los Angeles, and amendments 1-12 thereto	10. 1 to APS’ 1988 Form 10-K Report, File No. 1-4473	3-8-89

163

Exhibit				Date
No.	Registrant(s)	Description	Previously Filed as Exhibit: a	Effective
10.40	Pinnacle West APS	Amendment No. 13, dated as of April 22, 1991, to Arizona Nuclear Power Project Participation Agreement, dated August 23, 1973, among APS, Salt River Project Agricultural Improvement and Power District, Southern California Edison Company, Public Service Company of New Mexico, El Paso Electric Company, Southern California Public Power Authority, and Department of Water and Power of the City of Los Angeles	10.1 to APS’ March 1991 Form 10-Q Report, File No. 1-4473	5-15-91
10.41	Pinnacle West APS	Amendment No. 14 to Arizona Nuclear Power Project Participation Agreement, dated August 23, 1973, among APS, Salt River Project Agricultural Improvement and Power District, Southern California Edison Company, Public Service Company of New Mexico, El Paso Electric Company, Southern California Public Power Authority, and Department of Water and Power of the City of Los Angeles	99.1 to Pinnacle West’s June 2000 Form 10-Q Report, File No. 1-8962	8-14-00

164

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

165

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

166

Exhibit				Date
No.	Registrant(s)	Description	Previously Filed as Exhibit: a	Effective
10.50b	Pinnacle West APS	First Amendment to the Pinnacle West Capital Corporation Supplemental Excess Benefit Retirement Plan	10.7 to Pinnacle West’s 2001 Form 10-K Report, File No. 1-8962	3-27-02
10.51b	Pinnacle West APS	Second Amendment to the Pinnacle West Capital Corporation Supplemental Excess Benefit Retirement Plan	10.8 to Pinnacle West’s 2001 Form 10-K Report, File No. 1-8962	3-27-02
10.52b	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
10.53b	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
10.54b	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
10.55b	Pinnacle West APS	Second Amendment to the Arizona Public Service Company Deferred Compensation Plan, effective as of January 1, 1993	10.2 to APS’ 1993 Form 10-K Report, File No. 1-4473	3-30-94

167

Exhibit				Date
No.	Registrant(s)	Description	Previously Filed as Exhibit: a	Effective
10.56b	Pinnacle West APS	Third Amendment to the Arizona Public Service Company Directors’ Deferred Compensation Plan, effective as of May 1, 1993	10.1 to APS’ September 1994 Form 10-Q Report, File No. 1-4473	11-10-94
10.57b	Pinnacle West APS	Fourth Amendment dated December 28, 1999 to the Arizona Public Service Company Directors Deferred Compensation Plan	10.8 to Pinnacle West’s 1999 Form 10-K Report, File No. 1-8962	3-30-00
10.58b	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
10.59b	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
10.60b	Pinnacle West APS	Fourth Amendment to the Arizona Public Service Company Deferred Compensation Plan effective as of May 1, 1993	10.2 to APS’ September 1994 Form 10-Q Report, File No. 1-4473	11-10-94

168

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

169

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

170

Exhibit				Date
No.	Registrant(s)	Description	Previously Filed as Exhibit: a	Effective
10.72b	Pinnacle West APS	Letter Agreement dated August 16, 1996 between APS and William L. Stewart	10.8 to APS’ 1996 Form 10-K Report, File No. 1-4473	3-28-97
10.73b	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
10.74b	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
10.75b	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
10.76b	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
10.77b	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
10.78b	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
10.79b	Pinnacle West APS	Employment Agreement, effective as of October 1, 2002, between APS and James M. Levine	10.1 to Pinnacle West’s November 2002 Form 10-Q Report, File No. 1-8962	11-14-02
10.79.1b	Pinnacle West APS	Amendment to Agreement between APS and James M. Levine	10.2 to Pinnacle West’s September 2004 Form 10-Q Report, File No. 1-8962	11-8-04

171

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

172

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

173

Exhibit				Date
No.	Registrant(s)	Description	Previously Filed as Exhibit: a	Effective
10.94	Pinnacle West APS	Addendum to Memorandum of Agreement between APS and Salt River Project dated as of May 19, 1998	10.2 to APS’ May 19, 1998 Form 8-K Report, File No. 1-4473	6-26-98
10.95bd	Pinnacle West APS	Performance Share Agreement under the Pinnacle West Capital Corporation 2002 Long- Term Incentive Plan
10.96bd	Pinnacle West APS	Performance Share Agreement under the Pinnacle West Capital Corporation 2002 Long- Term Incentive Plan
10.97bd	Pinnacle West APS	Performance Share Agreement under the Pinnacle West Capital Corporation 2002 Long- Term Incentive Plan
10.98bd	Pinnacle West APS	Performance Accelerated Stock Option Agreement under Pinnacle West Capital Corporation 2002 Long- Term Incentive Plan
10.99bd	Pinnacle West APS	Stock Ownership Incentive Agreement under Pinnacle West Capital Corporation 2002 Long- Term Incentive Plan
10.100	Pinnacle West APS	Amended and Restated Reimbursement Agreement among APS, the Banks party thereto, and JPMorgan Chase Bank, as Administrative Agent and Issuing Bank, dated as of July 22, 2002

174

Exhibit				Date
No.	Registrant(s)	Description	Previously Filed as Exhibit: a	Effective
10.101	APS	Three-Year Credit Agreement dated as of May 21, 2004 between APS as Borrower, and the banks, financial institutions and other institutional lenders and initial issuing banks listed on the signature pages thereof
10.102	Pinnacle West APS	Agreement between Pinnacle West Energy Corporation and Arizona Public Service Company for Transportation and Treatment of Effluent by and between Pinnacle West Energy Corporation and APS dated as of the 10th day of April, 2001
10.103	Pinnacle West APS	Agreement for the Transfer and Use of Wastewater and Effluent by and between APS, SRP and PWE dated June 1, 2001
10.104	Pinnacle West APS	Agreement for the Sale and Purchase of Wastewater Effluent dated November 13, 2000, by and between the City of Tolleson, Arizona, APS and SRP
10.105	Pinnacle West APS	Operating Agreement for the Co-Ownership of Wastewater Effluent dated November 16, 2000 by and between APS and SRP

175

Exhibit				Date
No.	Registrant(s)	Description	Previously Filed as Exhibit: a	Effective
10.106	Pinnacle West APS	Asset Purchase Agreement by and between PPL Sundance Energy, LLC, as Seller, and APS, as Purchaser, dated as of June 1, 2004	10.1 to Pinnacle West’s June 2004 Form 10-Q Report, File No. 1-8962	8-9-04
10.106.1	Pinnacle West APS	Amendment to Asset Purchase Agreement	99.1 to Pinnacle West’s November 18, 2004 Form 8-K Report, File No. 1-8962	12-20-04
10.107	Pinnacle West APS	Credit Agreement dated as of October 19, 2004 among Pinnacle West, other lenders, and JPMorgan Chase Bank, as Administrative Agent	10.1 to Pinnacle West’s September 2004 Form 10-Q Report, File No. 1-8962	11-8-04
10.108b	Pinnacle West APS	Pinnacle West Capital Capital Corporation Supplemental Excess Benefit Retirement Plan, amended and restated as of January 1, 2003	10.7 to Pinnacle West’s 2003 Form 10-K Report, File No. 1-8962	3-15-04
10.109b	Pinnacle West APS	Pinnacle West Capital Corporation and Arizona Public Service Company Directors’ Retirement Plan, as amended and restated on June 21, 2000	99.2 to Pinnacle West’s Registration Statement on Form S-8 No. 333-40796, File No. 1-8962	7-3-00
10.110	Pinnacle West APS	Agreement for the Sale and Purchase of Wastewater Effluent with City of Tolleson and Salt River Agricultural Improvement and Power District, dated June 12, 1981, including Amendment No. 1 dated as of November 12, 1981 and Amendment No. 2 dated as of June 4, 1986	10.4 to APS’ 1991 Form 10-K Report, File 1-4473	3-19-92
12.1	Pinnacle West	Ratio of Earnings to Fixed Charges
12.2	APS	Ratio of Earnings to Fixed Charges
21.1	Pinnacle West	Subsidiaries of Pinnacle West
23.1	Pinnacle West	Consent of Deloitte & Touche LLP
23.2	APS	Consent of Deloitte & Touche LLP
31.1	Pinnacle West	Certificate of William J. Post, Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended

176

Exhibit				Date
No.	Registrant(s)	Description	Previously Filed as Exhibit: a	Effective
31.2	Pinnacle West	Certificate of Donald E. Brandt, Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
31.3	APS	Certificate of Jack E. Davis, Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
31.4	APS	Certificate of Donald E. Brandt, Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
32.1	Pinnacle West	Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1850, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	APS	Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1850, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

177

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
99.3c	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

178

Exhibit				Date
No.	Registrant(s)	Description	Previously Filed as Exhibit: a	Effective
99.4c	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
99.5c	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

179

Exhibit				Date
No.	Registrant(s)	Description	Previously Filed as Exhibit: a	Effective
99.6c	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
99.7c	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

180

Exhibit				Date
No.	Registrant(s)	Description	Previously Filed as Exhibit: a	Effective
99.8c	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
99.9c	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
99.10c	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

181

Exhibit				Date
No.	Registrant(s)	Description	Previously Filed as Exhibit: a	Effective
99.11c	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

182

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

183

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

184

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
99.20c	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

185

Exhibit				Date
No.	Registrant(s)	Description	Previously Filed as Exhibit: a	Effective
99.21	Pinnacle West APS	Extension Letter, dated as of August 13, 1987, from the signatories of the Participation Agreement to Chemical Bank	28.20 to APS’ Form S-3 Registration Statement No. 33-9480 by means of a November 6, 1986 Form 8-K Report, File No. 1-4473	8-10-87
99.22	Pinnacle West APS	Rate Reduction Agreement dated December 4, 1995 between APS and the ACC Staff	10.1 to APS’ December 4, 1995 Form 8-K Report, File No. 1-4473	12-14-95
99.23	Pinnacle West APS	ACC Order dated April 24, 1996	10.1 to APS’ March 1996 Form 10-Q Report, File No. 1-4473	5-14-96
99.24	Pinnacle West APS	Arizona Corporation Commission Order, Decision No. 59943, dated December 26, 1996, including the Rules regarding the introduction of retail competition in Arizona	99.1 to APS’ 1996 Form 10-K Report, File No. 1-4473	3-28-97
99.25	Pinnacle West APS	Arizona Corporation Commission Order, Decision No. 61973, dated October 6, 1999, approving APS’ Settlement Agreement	10.1 to APS’ September 1999 10-Q Report, File No. 1-4473	11-15-99
99.26	Pinnacle West APS	Addendum to Settlement Agreement	10.1 to Pinnacle West’s September 2000 Form 10-Q Report, File No. 1-8962	11-14-00
99.27	Pinnacle West APS	Arizona Corporation Commission Order, Decision No. 61969, dated September 29, 1999, including the Retail Electric Competition Rules	10.2 to APS’ September 1999 Form 10-Q Report, File No. 1-4473	11-15-99

186

Exhibit				Date
No.	Registrant(s)	Description	Previously Filed as Exhibit: 9a	Effective
99.28	Pinnacle West APS	Track ‘A’ Appeals Issues – Principles for Resolution	99.1 to Pinnacle West’s November 15, 2002 Form 8-K, File No. 1-8962	12-16-02
99.29	Pinnacle West APS	ACC Opinion and Order dated September 10, 2002, Decision No. 65154 (Track A Order)	99.1 to Pinnacle West’s September 10, 2002 Form 8-K Report, File No. 1-8962	9-17-02
99.30	Pinnacle West APS	ACC Decision No. 65796 dated April 4, 2003 (Financing Order)	99.3 to Pinnacle West’s March 2003 Form 10-Q Report, File No. 1-8962	5-15-03
99.31	Pinnacle West	Risk Factors
99.32	APS	Risk Factors
99.33	Pinnacle West APS	Proposed Settlement of Docket E-01345A-03-0437, APS Request for Rate Adjustment, dated August 18, 2004	99.1 to Pinnacle West’s August 18, 2004 Form 8-K Report, File No. 1-8962	8-18-04
99.34	Pinnacle West APS	Retail Electric Competition Rules	10.1 to APS’ June 1998 Form 10-Q Report, File No. 1-4473	8-14-98
99.35	Pinnacle West APS	Arizona Public Service Company Application filed with the Arizona Corporation Commission on September 16, 2002	99.2 to Pinnacle West’s September 10, 2002 Form 8-K Report, File No. 1-8962	9-17-02

     ^a Reports filed under File No. 1-4473 and 1-8962 were filed in the office of the Securities and Exchange Commission located in Washington, D.C.

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

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

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

187

SIGNATURES

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

	PINNACLE WEST CAPITAL CORPORATION (Registrant)
Date: March 16, 2005	/s/ William J. Post
	(William J. Post, Chairman of the
	Board of Directors and Chief Executive Officer)

Power of Attorney

     We, the undersigned directors and executive officers of Pinnacle West Capital Corporation, hereby severally appoint Donald E. Brandt, Barbara M. Gomez and Nancy C. Loftin, and each of them, our true and lawful attorneys with full power to them and each of them to sign for us, and in our names in the capacities indicated below, any and all amendments to this Annual Report on Form 10-K filed with the Securities and Exchange Commission.

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

Signature	Title	Date
/s/ William J. Post (William J. Post, Chairman of the Board of Directors and Chief Executive Officer)	Principal Executive Officer and Director	March 16, 2005
/s/ Jack E. Davis (Jack E. Davis, President and Chief Operating Officer)	Director	March 16, 2005
/s/ Donald E. Brandt (Donald E. Brandt, Executive Vice President and Chief Financial Officer)	Principal Accounting Officer and Principal Financial Officer	March 16, 2005

188

Signature	Title	Date
/s/ Edward N. Basha, Jr. (Edward N. Basha, Jr.)	Director	March 16, 2005
/s/ Michael L. Gallagher (Michael L. Gallagher)	Director	March 16, 2005
/s/ Pamela Grant (Pamela Grant)	Director	March 16, 2005
/s/ Roy A. Herberger, Jr. (Roy A. Herberger, Jr.)	Director	March 16, 2005
/s/ Martha O. Hesse (Martha O. Hesse)	Director	March 16, 2005
/s/ William S. Jamieson, Jr. (William S. Jamieson, Jr.)	Director	March 16, 2005
/s/ Humberto S. Lopez (Humberto S. Lopez)	Director	March 16, 2005
/s/ Kathryn L. Munro (Kathryn L. Munro)	Director	March 16, 2005
/s/ Bruce J. Nordstrom (Bruce J. Nordstrom)	Director	March 16, 2005
/s/ William L. Stewart (William L. Stewart)	Director	March 16, 2005

189

SIGNATURES

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

	ARIZONA PUBLIC SERVICE COMPANY (Registrant)
Date: March 16, 2005	/s/ Jack E. Davis
	(Jack E. Davis, President and Chief
	Executive Officer)

Power of Attorney

     We, the undersigned directors and executive officers of Arizona Public Service Company, hereby severally appoint Donald E. Brandt, Barbara M. Gomez and Nancy C. Loftin, and each of them, our true and lawful attorneys with full power to them and each of them to sign for us, and in our names in the capacities indicated below, any and all amendments to this Annual Report on Form 10-K filed with the Securities and Exchange Commission.

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

Signature	Title	Date
/s/ William J. Post (William J. Post, Chairman of the Board of Directors )	Director	March 16, 2005
/s/ Jack E. Davis (Jack E. Davis, President and Chief Executive Officer)	Principal Executive Officer and Director	March 16, 2005
/s/ Donald E. Brandt (Donald E. Brandt, Executive Vice President, and Chief Financial Officer)	Principal Financial Officer	March 16, 2005
/s/ Chris N. Froggatt (Chris N. Froggatt, Vice President and Controller)	Principal Accounting Officer	March 16, 2005

190

Signature	Title	Date
/s/ Edward N. Basha, Jr. (Edward N. Basha, Jr.)	Director	March 16, 2005
/s/ Michael L. Gallagher (Michael L. Gallagher)	Director	March 16, 2005
/s/ Pamela Grant (Pamela Grant)	Director	March 16, 2005
/s/ Roy A. Herberger, Jr. (Roy A. Herberger, Jr.)	Director	March 16, 2005
/s/ Martha O. Hesse (Martha O. Hesse)	Director	March 16, 2005
/s/ William S. Jamieson, Jr. (William S. Jamieson, Jr.)	Director	March 16, 2005
/s/ Humberto S. Lopez (Humberto S. Lopez)	Director	March 16, 2005
/s/ Kathryn L. Munro (Kathryn L. Munro)	Director	March 16, 2005
/s/ Bruce J. Nordstrom (Bruce J. Nordstrom)	Director	March 16, 2005
/s/ William L. Stewart (William L. Stewart)	Director	March 16, 2005

191

Exhibit Index

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

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

EX-10.1

                                                                    EXHIBIT 10.1

2005 OFFICER AND CEO VARIABLE INCENTIVE PLANS

      On December 14, 2004, the Human Resources Committee (the "Committee") of
the Pinnacle West Capital Corporation (the "Company") Board of Directors
approved the Chairman and CEO Variable Incentive Plan (the "CEO Incentive
Plan"). The Company's Chairman of the Board and CEO, William J. Post, is
eligible to receive an incentive award under the CEO Incentive Plan. Incentive
award funding under the CEO Incentive Plan is triggered by the attainment of
specified 2005 Company earnings. The amount of the award to Mr. Post is in the
sole discretion of the Committee. Accordingly, the Committee may consider
factors other than 2005 Company earnings to measure Mr. Post's performance.

      On December 15, 2004, the Company's Board of Directors, acting on the
recommendation of the Committee, approved the 2005 Officer Variable Incentive
Plan (the "Officer Incentive Plan"). Each of the Company's officers, as well as
the officers of Arizona Public Service Company ("APS") (currently 19 officers),
are eligible to participate in the Officer Incentive Plan, including the
following four most highly-compensated current executive officers (excluding the
CEO) named in the Company's proxy statement relating to its May 19, 2004 annual
meeting: Jack E. Davis, President and Chief Operating Officer of the Company;
Donald E. Brandt, Executive Vice President and Chief Financial Officer of the
Company; James M. Levine, Executive Vice President, Generation of APS; and
Steven M. Wheeler, Executive Vice President, Customer Service and Regulation of
APS (the "Named Executive Officers").

      The Officer Incentive Plan is composed of two components, one of which is
based on the Company's 2005 earnings and the other on the achievement of
specified business unit results. Once a specified earnings threshold is met, the
achievement of the level of earnings and business unit results generally
determines what award, if any, the officer receives. However, the amount of the
award, if any, to each officer under the Officer Incentive Plan is in the sole
discretion of the Committee. Accordingly, the Committee may consider factors
other than Company earnings and the achievement of business unit results to
measure performance, including input from the CEO about each officer's 2005
achievements.

      Subject to the foregoing, award opportunities (expressed as a percentage
of the officer's base salary) for the Chairman and CEO and the Named Executive
Officers will be based on the following performance measures (weighted according
to the indicated percentages):






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

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

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

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

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


      Award opportunities for other executive vice presidents and senior vice
presidents are up to 100% of base salary (up to 50% based on Company earnings
and up to 50% based on the achievement of business unit results). Award
opportunities for other officers are up to 70% of base salary (up to 35% based
on Company earnings and up to 35% based on the achievement of business unit
results).

EX-10.79.2

                                                                 EXHIBIT 10.79.2

                          SECOND AMENDMENT TO AGREEMENT

      THIS SECOND AMENDMENT is made and entered into by and between Arizona
Public Service Company ("APS") and James M. Levine ("Employee").

                                   WITNESSETH:

      WHEREAS, APS and Employee entered into an Employment Agreement dated
October 11, 2002 as amended by that certain Amendment to Agreement effective as
of October 11, 2002 (collectively, the "Agreement");

      WHEREAS, the parties desire to amend the provisions of the Agreement
relating to incentive pay and the issuance of equity incentives to Employee;

      NOW, THEREFORE, effective as of January 1, 2005, the Agreement is amended
as follows:

      1. Section 4(a) is deleted in its entirety and the following new Section
4(a) is inserted in lieu thereof:

            (a) Incentive Pay. Employee will be allowed to participate in any
annual officer incentive plan and to receive incentive payments thereunder based
on Employee's position and the attainment of specified objectives (e.g.,
earnings, business unit, and individual objectives), all in accordance with the
terms of any such plan.

      2. Section 4(b) is deleted in its entirety and the following new Section
4(b) is inserted in lieu thereof:

            (b) Equity Incentives. Employer agrees to request the Human
Resources Committee (the "Committee") to grant Employee equity incentive awards
under the 2002 Long-Term Incentive Plan (the "2002 Plan") in the same form as,
and in an amount equivalent to 65% - 85% of, each of the annual base grants
awarded to a member of the Office of the President (the "President") under the
2002 Plan. Any special awards granted to the President shall not be deemed
subject to this provision.

      3. Section 4(c) is deleted in its entirety and the following new Section
4(c) is inserted in lieu thereof:

            (c) In addition to (b) above, Employer agrees to request the
Committee to grant Employee 2000 performance shares each year under the 2002
Plan, all in accordance with the terms of the 2002 Plan and as otherwise agreed
upon by the parties.



      4. Except as otherwise set forth herein, the terms and conditions in the
Agreement remain in full force and effect.

                                           Arizona Public Service Company

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

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

EX-10.95

                                                                   Exhibit 10.95

                           PERFORMANCE SHARE AGREEMENT
                                    UNDER THE
                     PINNACLE WEST CAPITAL CORPORATION 2002
                            LONG-TERM INCENTIVE PLAN

      THIS AWARD AGREEMENT is made and entered into as of __________ __, 20___
(the "Date of Grant"), by and between Pinnacle West Capital Corporation (the
"Company"), and ______________ ("Employee").

                                   BACKGROUND

      A.    The Board of Directors of the Company (the "Board of Directors") has
            adopted, and the Company's shareholders have approved, the Pinnacle
            West Capital Corporation 2002 Long-Term Incentive Plan (the "Plan"),
            pursuant to which performance share incentive awards may be granted
            to employees of the Company and its subsidiaries and certain other
            individuals.

      B.    The Company desires to grant to Employee a performance share award
            under the terms of the Plan as described herein.

      C.    Pursuant to the Plan, the Company and Employee agree as follows:

                                    AGREEMENT

            1.    GRANT OF AWARDS. The Company grants to Employee a performance
                  share award of _________ performance shares, subject to the
                  terms, conditions, and adjustments set forth in this Award
                  Agreement.

            2.    AWARD SUBJECT TO PLAN. This award is granted under, and is
                  expressly subject to, all of the terms and provisions of the
                  Plan, which terms are incorporated herein by reference, and
                  this Award Agreement. The committee referred to in Section 4
                  of the Plan (the "Committee") has been appointed by the Board
                  of Directors, and designated by it, as the Committee to make
                  awards.

            3.    PERFORMANCE PERIOD. The performance period for the award of
                  _____ performance shares (the "Award") is the period beginning
                  __________ __, 20___ and ending __________ __, 20___ (the
                  "Performance Period").

            4.    PAYMENT.

                  (a)   PERFORMANCE SHARES PAYABLE IN CAPITAL STOCK. Subject to
                        early termination of this Award Agreement pursuant to
                        Section 5 below, if Employee remains employed by the



                        Company or any of its subsidiaries throughout the
                        Performance Period, promptly following the Performance
                        Period, but not later than __________ __, 20___ (the
                        "Payment Date"), the Company will deliver to Employee
                        one (1) share of Capital Stock for each then-outstanding
                        performance share granted to Employee under the Award
                        made pursuant to this Award Agreement.

                  (b)   DIVIDEND EQUIVALENTS. No dividend equivalents are
                        granted pursuant to this Award.

            5.    TERMINATION OF AWARD. This Award Agreement will terminate and
                  be of no further force or effect on the date that Employee is
                  no longer actively employed by the Company or any of its
                  subsidiaries for any reason, including death, disability or
                  retirement. Employee will, however, be entitled to receive any
                  of the Capital Stock payable under Section 4 of this Award
                  Agreement if Employee's employment terminates after the
                  Performance Period but before Employee's receipt of the
                  Capital Stock.

            6.    TAX WITHHOLDING. Employee must pay, or make arrangements
                  acceptable to the Company for the payment of, any and all
                  federal, state, and local income and payroll tax withholding
                  that in the opinion of the Company is required by law. Unless
                  Employee satisfies any such tax withholding obligation by
                  paying the amount in cash or by check, the Company will
                  withhold shares of Capital Stock having a Fair Market Value on
                  the date of withholding sufficient to cover the withholding
                  obligation.

            7.    NON-TRANSFERABILITY. Neither this award nor any rights under
                  this Award Agreement may be assigned, transferred, or in any
                  manner encumbered except by will or the laws of descent and
                  distribution, and any attempted assignment, transfer,
                  mortgage, pledge or encumbrance, except as herein authorized,
                  will be void and of no effect.

            8.    DEFINITIONS: COPY OF PLAN AND PLAN PROSPECTUS. To the extent
                  not specifically defined in this Award Agreement, all
                  capitalized terms used in this Award Agreement will have the
                  same meanings ascribed to them in the Plan. By signing this
                  Award Agreement, Employee acknowledges receipt of a copy of
                  the Plan and the related Plan Prospectus.

            9.    CHOICE OF LAW. This Agreement will be governed by the laws of
                  the State of Arizona, excluding any conflicts or choice of law
                  rule or principle that might otherwise refer construction or
                  interpretation of this Agreement to another jurisdiction.

                                       2


      An authorized representative of the Company has signed this Award
Agreement, and Employee has signed this Award Agreement to evidence Employee's
acceptance of the award on the terms specified in this Award Agreement, all as
of the Date of Grant.

                                       PINNACLE WEST CAPITAL CORPORATION

                                       By: _____________________________________

                                       Its: ____________________________________

                                       _________________________________________
                                       Employee

                                       3

EX-10.96

                                                                   Exhibit 10.96

                           PERFORMANCE SHARE AGREEMENT
                                    UNDER THE
                     PINNACLE WEST CAPITAL CORPORATION 2002
                            LONG-TERM INCENTIVE PLAN

      THIS AWARD AGREEMENT is made and entered into as of __________ __, 20___
(the "Date of Grant"), by and between Pinnacle West Capital Corporation (the
"Company"), and ______________ ("Employee").

                                   BACKGROUND

      A.    The Board of Directors of the Company (the "Board of Directors") has
            adopted, and the Company's shareholders have approved, the Pinnacle
            West Capital Corporation 2002 Long-Term Incentive Plan (the "Plan"),
            pursuant to which performance share incentive awards may be granted
            to employees of the Company and its subsidiaries and certain other
            individuals.

      B.    The Company desires to grant to Employee a performance share award
            under the terms of the Plan as described herein.

      C.    Pursuant to the Plan, the Company and Employee agree as follows:

                                    AGREEMENT

            1.    GRANT OF AWARDS. The Company grants to Employee a performance
                  share award of _____ performance shares, subject to the terms,
                  conditions, and adjustments set forth in this Award Agreement.

            2.    AWARD SUBJECT TO PLAN. This award is granted under, and is
                  expressly subject to, all of the terms and provisions of the
                  Plan, which terms are incorporated herein by reference, and
                  this Award Agreement. The committee referred to in Section 4
                  of the Plan (the "Committee") has been appointed by the Board
                  of Directors, and designated by it, as the Committee to make
                  awards.

            3.    PERFORMANCE PERIOD. The performance period for the award of
                  _____ performance shares (the "Award") is the ____ (__) year
                  period beginning __________ __, 20___ and ending __________
                  __, 20___ (the "Performance Period").

            4.    PAYMENT.

                  (a)   PERFORMANCE SHARES PAYABLE IN CAPITAL STOCK. Subject to
                        early termination of this Award Agreement pursuant to
                        Section 5 below, if Employee remains employed by the



                        Company or any of its subsidiaries throughout the
                        Performance Period, promptly following the Performance
                        Period but not later than __________ __, 20___ (the
                        "Payment Date"), the Company will deliver to Employee
                        one (1) share of Capital Stock for each then-outstanding
                        performance share granted to Employee under the Award
                        made pursuant to this Award Agreement.

                  (b)   RETIREMENT, DEATH, OR DISABILITY. In the case of
                        Employee's Retirement (as defined herein), death or
                        Disability (as defined herein), Employee shall be deemed
                        to have been employed by the Company through the end of
                        the 2005 Performance Period.

                        (i)   "Retirement" means a termination of employment
                              which constitutes an "Early Retirement" or a
                              "Normal Retirement" under the Pinnacle West
                              Capital Corporation Retirement Plan.

                        (ii)  "Disability" means a period of disability during
                              which Employee qualifies for benefits under
                              Employee's employer's long-term disability plan,
                              or, if Employee does not participate in such a
                              plan, a period of disability during which Employee
                              would have qualified for benefits under such a
                              plan, as determined by the Committee, had Employee
                              been a participant in such a plan. The Committee
                              may require such medical or other evidence, as it
                              deems necessary to judge the nature of Employee's
                              condition.

                  (c)   DIVIDEND EQUIVALENTS. At the time of the Company's
                        delivery of its Capital Stock to Employee pursuant to
                        Section 4(a) above, the Company will also deliver to
                        Employee a cash payment equal to the amount of dividends
                        that Employee would have received if Employee had
                        directly owned the Capital Stock received by Employee
                        for the Award from the Date of Grant through the Payment
                        Date, plus interest on such amount at the rate of _____
                        percent per annum, compounded quarterly.

            5.    TERMINATION OF AWARD. This Award Agreement will terminate and
                  be of no further force or effect on the date that Employee is
                  no longer actively employed by the Company or any of its
                  subsidiaries, except as set forth in Section 4 above. Employee
                  will, however, be entitled to receive any of the Capital Stock
                  and dividend equivalents payable under Section 4 of this Award
                  Agreement if Employee's

                                       2


                  employment terminates after the Performance Period but before
                  Employee's receipt of the Capital Stock and dividend
                  equivalents.

                  6.    TAX WITHHOLDING. Employee must pay, or make arrangements
                        acceptable to the Company for the payment of, any and
                        all federal, state, and local income and payroll tax
                        withholding that in the opinion of the Company is
                        required by law. Unless Employee satisfies any such tax
                        withholding obligation by paying the amount in cash or
                        by check, the Company will withhold shares of Capital
                        Stock having a Fair Market Value on the date of
                        withholding sufficient to cover the withholding
                        obligation.

                  7.    NON-TRANSFERABILITY. Neither this award nor any rights
                        under this Award Agreement may be assigned, transferred,
                        or in any manner encumbered except by will or the laws
                        of descent and distribution, and any attempted
                        assignment, transfer, mortgage, pledge or encumbrance,
                        except as herein authorized, will be void and of no
                        effect.

                  8.    DEFINITIONS: COPY OF PLAN AND PLAN PROSPECTUS. To the
                        extent not specifically defined in this Award Agreement,
                        all capitalized terms used in this Award Agreement will
                        have the same meanings ascribed to them in the Plan. By
                        signing this Award Agreement, Employee acknowledges
                        receipt of a copy of the Plan and the related Plan
                        Prospectus.

                  9.    CHOICE OF LAW. This Agreement will be governed by the
                        laws of the State of Arizona, excluding any conflicts or
                        choice of law rule or principle that might otherwise
                        refer construction or interpretation of this Agreement
                        to another jurisdiction.

      An authorized representative of the Company has signed this Award
Agreement, and Employee has signed this Award Agreement to evidence Employee's
acceptance of the award on the terms specified in this Award Agreement, all as
of the Date of Grant.

                                   PINNACLE WEST CAPITAL CORPORATION

                                   By: _________________________________________

                                   Its: ________________________________________

                                   _____________________________________________
                                   Employee

                                      3

EX-10.97

                                                                  EXHIBIT 10.97

                           PERFORMANCE SHARE AGREEMENT

                                    UNDER THE
                     PINNACLE WEST CAPITAL CORPORATION 2002
                            LONG-TERM INCENTIVE PLAN

         THIS AWARD AGREEMENT is made and entered into as of ___________, 200__
(the "Date of Grant"), by and between Pinnacle West Capital Corporation (the
"Company"), and (Name) ("Employee").

                                   BACKGROUND

      A.    The Board of Directors of the Company (the "Board of Directors") has
            adopted, and the Company's shareholders have approved, the Pinnacle
            West Capital Corporation 2002 Long-Term Incentive Plan (the "Plan"),
            pursuant to which performance share incentive awards may be granted
            to employees of the Company and its subsidiaries and certain other
            individuals.

      B.    The Company desires to grant to Employee a performance share award
            under the terms of the Plan.

      C.    Pursuant to the Plan, the Company and Employee agree as follows:

                                    AGREEMENT

            1.    GRANT OF AWARD. Pursuant to action of the Committee (as
                  defined herein) which was taken on the Date of Grant, the
                  Company grants to Employee (Shares) performance shares
                  ("Performance Shares"), subject to the terms, conditions, and
                  adjustments set forth in this Award Agreement. The Performance
                  Shares granted under this Section 1 are referred to in this
                  Award Agreement as the "Base Grant."

            2.    AWARD SUBJECT TO PLAN. This award is granted under and is
                  expressly subject to, all of the terms and provisions of the
                  Plan, which terms are incorporated herein by reference, and
                  this Award Agreement. The Committee described in Section 4 of
                  the Plan (the "Committee") has been appointed by the Board of
                  Directors, and designated by it, as the Committee to make
                  awards.

            3.    PERFORMANCE PERIOD. The performance period for this award
                  begins _________ __, 20___, and ends _____________ __,

                  20___ (the "Performance Period").

            4.    PAYMENT.

                  (a)   PERFORMANCE SHARES PAYABLE IN COMMON STOCK. Subject to
                        early termination of this Award Agreement pursuant to
                        Section 7 below, as soon as practicable following the
                        end of the Performance Period and the determination of
                        the Company's Earnings Per Share Growth Rate (as defined
                        herein) as compared to the Earnings Per Share Growth
                        Rate of the S&P Electric Utilities Index over such
                        Performance Period but in no event later than December
                        31, 20___, the Company will deliver to Employee one (1)
                        share of the Company's Common Stock for each
                        then-outstanding Performance Share under this Award
                        Agreement. If the Employee terminates employment after
                        the end of the Performance



Page 2
Performance Share Agreement

                        Period but before distribution of any shares pursuant to
                        this Award Agreement, the distribution of the shares
                        will not be made until six (6) months following the
                        Employee's termination of employment if required by
                        Section 409A of the Code.

                  (b)   DIVIDEND EQUIVALENTS. At the time of the Company's
                        delivery of Common Stock to Employee pursuant to
                        Subsection 4(a) above, the Company will also deliver to
                        Employee a cash payment equal to the amount of dividends
                        that Employee would have received if Employee had
                        directly owned all of such Common Stock during the
                        Performance Period, plus interest on such amount at the
                        rate of _____ percent, compounded quarterly.

                  (c)   MAXIMUM AWARD. Employee may not receive more than
                        120,000 shares of Common Stock under this Award
                        Agreement.

            5.    PERFORMANCE CRITERIA AND ADJUSTMENTS.

                  ADJUSTMENT OF BASE GRANT. The Base Grant will increase or
                  decrease based upon the Company's "Earnings Per Share Growth
                  Rate" as compared to the Earnings Per Share Growth Rate of the
                  S&P Electric Utilities Index during the Performance Period, as
                  follows:



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


                        If intermediate percentiles are achieved, the number of
                  Performance Shares awarded will be prorated (partial shares
                  will be rounded down to the nearest whole share when
                  applicable). For example, if the Company's Earnings Per Share
                  Growth Rate during the Performance Period places the Company's
                  performance in the ___th percentile, then the number of
                  Performance Shares would be increased to ______ multiplied by
                  the Base Grant. In no event will Employee be entitled to
                  receive a number of Performance Shares greater than ___ times
                  the Base Grant, even if the Company's Earnings Per Share
                  Growth Rate during the Performance Period places the Company's
                  performance higher than the ____th percentile. Attachment A
                  provides a generic example of the operation of an award
                  granted under this Award Agreement.

            6.    EARNINGS PER SHARE GROWTH RATE. "Earnings Per Share Growth
                  Rate" for the Performance Period is the compounded
                  annual-growth rate (CAGR) of a company's earnings per share
                  from continuing operations, on a fully diluted basis, during
                  the Performance Period[; provided, however, that for purposes
                  of calculating the Company's Earnings Per Share Growth Rate,
                  SunCor Development Company's earnings from discontinued
                  operations will be considered earnings from continuing
                  operations for each fiscal year during the Performance
                  Period.] Only those companies which were in the S&P Electric



Page 3
Performance Share Agreement

                  Utility Index at both the beginning and the ending of the
                  Performance Period will be considered. The Earnings Per Share
                  Growth Rate of the companies in the S&P Electric Utilities
                  Index will be determined using the S&P Compustat system. If
                  the S&P Compustat system is no longer in use, the Committee
                  shall replace it with the most comparable third party data
                  system then in use. If the S&P Electric Utilities Index is
                  discontinued, the S&P comparable replacement index for the
                  sector will be used for computing Earnings Per Share Growth
                  Rate. If S&P no longer computes an index for the electric
                  utility sector, the Committee shall select the most comparable
                  index then in use for the sector comparison. In addition, if
                  the sector comparison is no longer representative of the
                  Company's industry or business, the Committee shall replace
                  the index with the most representative index then in use. Once
                  the CAGR of the Company and all relevant companies in the S&P
                  Electric Utility Index have been determined, the member
                  companies will be ranked from greatest to least CAGR.
                  Percentiles will be calculated based on a company's relative
                  ranking. For example, company 1 out of 26 companies is given a
                  percentile of 96.2% (1.0 - 1/26). Percentiles will be carried
                  out to one (1) decimal place. If the Company is not in the S&P
                  Electric Utility Index, then its percentile will be
                  interpolated between the companies listed in the relative
                  ranking. These calculations will be verified by the Company's
                  internal auditors.

            7.    TERMINATION OF AWARD. This Award Agreement will terminate and
                  be of no further force or effect on the date that Employee is
                  no longer actively employed by the Company or any of its
                  subsidiaries, whether due to voluntary or involuntary
                  termination, death, retirement, disability, or otherwise.
                  Subject to Section 4, Employee will, however, be entitled to
                  receive any Common Stock and dividend equivalents payable
                  under Section 4 of this Award Agreement if Employee's
                  employment terminates after the Performance Period but before
                  Employee's receipt of such Common Stock and dividend
                  equivalents. For avoidance of doubt, no acceleration of
                  Performance Shares or the Performance Period will occur on a
                  change of control of the Company.

            8.    TAX WITHHOLDING. Employee must pay, or make arrangements
                  acceptable to the Company for the payment of any and all
                  federal, state, and local income and payroll tax withholding
                  that in the opinion of the Company is required by law. Unless
                  Employee satisfies any such tax withholding obligation by
                  paying the amount in cash or by check, the Company will
                  withhold shares of Common Stock having a Fair Market Value on
                  the date of withholding sufficient to cover the withholding
                  obligation.

            9.    NON-TRANSFERABILITY. Neither this award nor any rights under
                  this Award Agreement may be assigned, transferred, or in any
                  manner encumbered except by will or the laws of descent and
                  distribution, and any attempted assignment, transfer,
                  mortgage, pledge or encumbrance except as herein authorized,
                  will be void and of no effect.

            10.   DEFINITIONS: COPY OF PLAN AND PLAN PROSPECTUS. To the extent
                  not specifically defined in this Award Agreement, all
                  capitalized terms used in this Award Agreement will have the
                  same meanings ascribed to them in the Plan. By signing this
                  Award Agreement, Employee acknowledges receipt of a copy of
                  the Plan and the related Plan Prospectus.

            11.   CHOICE OF LAW. This Agreement will be governed by the laws of
                  the State of Arizona, excluding any conflicts or choice of law
                  rule or principle that might otherwise refer construction or
                  interpretation of this Agreement to another jurisdiction.



Page 4
Performance Share Agreement

      An authorized representative of the Company has signed this Award
Agreement, and Employee has signed this Award Agreement to evidence Employee's
acceptance of the award on the terms specified in this Award Agreement, all as
of the Date of Grant.

                                   PINNACLE WEST CAPITAL CORPORATION

                                   By: _________________________________________

                                   Its: Vice President and Treasurer

                                   _____________________________________________
                                   Employee



Page 5
Performance Share Agreement

                                  ATTACHMENT A

                                 GENERIC EXAMPLE
                            (PERFORMANCE SHARE AWARD)

ASSUMPTIONS:

      -     Employee is granted 500 Performance Shares, which constitutes
            Employee's "Base Grant".

      -     During the Performance Period, the Company's Earnings Per Share
            Growth Rate is in the 88.3 percentile compared to the S&P Electric
            Utilities Index.

CALCULATION OF EMPLOYEE'S COMMON STOCK PAYMENT:

- -     Based on the Company's achievement of the 88.3 Percentile during the
      Performance Period, in April of the fiscal year immediately following the
      end of the Performance Period, Employee will receive ____ shares of Common
      Stock, calculated as follows:

      -     ___ shares of Common Stock as a result of the Company's Earnings Per
            Share Growth Rate meeting at least the ___th Percentile (____ X Base
            Grant) plus

      -     ___ shares of Common Stock as a result of the Company's Earnings Per
            Share Growth Rate achieving ________ of the Percentile increase
            between the ___th and ___th Percentiles (________ X _______ shares,
            with the ___ shares representing the Common Stock opportunity
            between the ___th and ___th Percentiles). (Note: __________ X
            _________ shares = ______ shares and must be rounded down to ____
            shares.)

EX-10.98

                                                                   EXHIBIT 10.98

                 PERFORMANCE ACCELERATED STOCK OPTION AGREEMENT

                                      UNDER
                     PINNACLE WEST CAPITAL CORPORATION 2002
                            LONG-TERM INCENTIVE PLAN

      THIS AWARD AGREEMENT is made and entered into as of _________ __, 20___
(the "Date of Grant"), by and between Pinnacle West Capital Corporation (the
"Company"), and (Name) ("Employee").

                                   BACKGROUND

      A.    The Board of Directors of the Company (the "Board of Directors") has
            adopted, and the Company's shareholders have approved, the Pinnacle
            West Capital Corporation 2002 Long-Term Incentive Plan (the "Plan"),
            pursuant to which options to purchase shares of the common stock of
            the Company may be granted to employees of the Company and its
            subsidiaries and to certain other individuals.

      B.    The Company desires to grant to Employee the option to purchase
            certain shares of its stock under the terms of the Plan.

      C.    Pursuant to the Plan, the Company and Employee agree as follows:

                                    AGREEMENT

            1.    GRANT OF OPTION. Pursuant to action of the Committee (as
                  defined herein), which was taken on the Date of Grant, the
                  Company grants to Employee the option (the "Option") to
                  purchase all or any part of (Shares) shares of the Company's
                  Common Stock. This Option is not intended as, nor will it be
                  treated as, an "incentive stock option" under Section 422 of
                  the Code.

            2.    GRANT SUBJECT TO PLAN. This Option is granted under and is
                  expressly subject to, all the terms and provisions of the
                  Plan, which terms are incorporated herein by reference, and
                  this Award Agreement. The Committee referred to in Section 4
                  of the Plan (the "Committee") has been appointed by the Board
                  of Directors, and designated by it, as the Committee to make
                  grants of options.

            3.    PURCHASE PRICE. The price at which Employee will be entitled
                  to purchase the Common Stock covered by the Option is
                  $_________ per share.

            4.    VESTING OF OPTION. The Option will vest and become exercisable
                  as follows:

                  (a)   On or after the first anniversary of the Date of Grant,
                        or _________ ___, 20___, Employee may purchase up to
                        one-third (1/3) of the total number of shares of Common
                        Stock subject to this Option.

                  (b)   On or after the second anniversary of the Date of Grant,
                        or _________ ___, 20___, Employee may purchase up to an
                        additional one-third (1/3) of the total number of shares
                        of Common Stock subject to this Option; provided,
                        however, that if the Company has achieved the "First
                        Year Target" (as defined in Section 5(a) below),
                        Employee may purchase the shares of Common Stock
                        described in this Section 4(b) on or after the date
                        which is eighteen months after the Date of Grant, or
                        _________ ___, 20___.



Page 2
Performance Accelerated Stock Option

                  (c)   On or after the third anniversary of the Date of Grant,
                        or _________ ___, 20___, Employee may purchase up to an
                        additional one-third (1/3) of the total number of shares
                        of Common Stock subject to this Option; provided,
                        however, that:

                        (i)   If the Company has achieved the First Year Target
                              OR the "Second Year Target" (as defined in Section
                              5(b) below), Employee may purchase the shares of
                              Common Stock described in this Section 4(c) on or
                              after the date which is thirty months after the
                              Date of Grant, or _________ ___, 20___; and

                        (ii)  If the Company has achieved the First Year Target
                              AND the Second Year Target, Employee may purchase
                              the shares of Common Stock described in this
                              Section 4(c) on or after the second anniversary of
                              the Date of Grant, or _________ ___, 20___.

                  (d)   Notwithstanding the foregoing, if Employee has entered
                        into a KEESA with the Company, Employee may purchase
                        100% of the number of shares subject to this Option at
                        any time during the three (3) month period beginning on
                        Employee's Termination Date, as defined in the KEESA, in
                        the event the Employee's termination is described in
                        Section 11 of the KEESA.

                  (e)   If any Option vesting date is not a business day on
                        which the New York Stock Exchange ("NYSE") is open, such
                        vesting date will be deemed to be the next succeeding
                        business day on which the NYSE is open. In no event will
                        this Option be re-priced, or deemed to be re-priced, as
                        a result of any acceleration of vesting periods, as
                        described in this Section 4.

                  (f)   Attachment A provides generic examples of the operation
                        of a performance accelerated stock option.

            5.    TARGETS.

                  (a)   FIRST YEAR TARGET. For purposes of this Award Agreement,
                        the Company will have achieved the "First Year Target"
                        if its "Earnings Per Share Growth" (as defined in
                        Section 5(c)) equals or exceeds the Earnings Per Share
                        Growth of the S&P Electric Utilities Index for the
                        fiscal year which includes the Date of Grant, or 20___.

                  (b)   SECOND YEAR TARGET. For purposes of this Award
                        Agreement, the Company will have achieved the "Second
                        Year Target" if its Earnings Per Share Growth equals or
                        exceeds the Earnings Per Share Growth of the S&P
                        Electric Utilities Index for the fiscal year immediately
                        following the fiscal year which includes the Date of
                        Grant, or 20___.

                  (c)   EARNINGS PER SHARE GROWTH.

                        (i)   "Earnings Per Share Growth" for a given fiscal
                              year is the percentage increase, if any, of the
                              Company's earnings per share from continuing
                              operations, on a fully-diluted basis, as of the
                              end of the relevant fiscal year, over the earnings
                              per share from continuing operations, on a
                              fully-diluted basis, as of the end of the
                              immediately preceding fiscal year.



Page 3
Performance Accelerated Stock Option

                        (ii)  The "Earnings Per Share Growth of the S&P Electric
                              Utilities Index" for a given Fiscal Year is the
                              percentage increase, if any, of the S&P Electric
                              Utilities Index earnings per share, as of the end
                              of the relevant fiscal year, over the earnings per
                              share as of the end of the immediately preceding
                              fiscal year. The Earnings Per Share Growth of the
                              S&P Electric Utilities Index will be determined
                              using the S&P Compustat system. The S&P Electric
                              Utilities Index earnings per share is a weighted
                              average number provided in the S&P Compustat
                              system. If the S&P Compustat system is no longer
                              in use, the Committee will replace it with the
                              most comparable third party data system then in
                              use. If the S&P Electric Utilities Index is
                              discontinued, the S&P comparable replacement index
                              for the sector will be used for computing Earnings
                              Per Share Growth of the S&P Electric Utilities
                              Index. If S&P no longer computes an index for the
                              electric utility sector, the Committee shall
                              select the most comparable index then in use for
                              the sector comparison. In addition, if the sector
                              comparison is no longer representative of the
                              Company's industry or business, the Committee
                              shall replace the index with the most
                              representative index then in use.

                        (iii) All results will be verified by the Company's
                              independent auditors using generally accepted
                              accounting principles, consistently applied.

            6.    TERM OF OPTION. This Option will be in full force and effect
                  for a period of ten (10) years from the Date of Grant, through
                  and including the close of business of the Company on
                  _________ ___, 20___; however, this Option will terminate
                  earlier upon the occurrence of the events described in this
                  Section 6, with no continuation of vesting.

                  (a)   TERMINATION-GENERAL. Any vested Option will terminate
                        and be of no further force and effect ninety (90) days
                        after the date that Employee is no longer actively
                        employed by the Company or any of its subsidiaries (the
                        "Termination Date") unless:

                        (i)   The Termination Date results from Employee's
                              Retirement, in which case this Option will
                              terminate at the time described in Section 6(b)
                              below;

                        (ii)  The Termination Date results from Employee's
                              Disability, in which case this Option will
                              terminate at the time described in Section 6(c)
                              below; or

                        (iii) The Termination Date results from Employee's
                              death, in which case this Option will terminate at
                              the time described in Section 6(d) below.

                  (b)   RETIREMENT OF EMPLOYEE. If the Termination Date results
                        from Employee's "Retirement" (as hereinafter defined),
                        any vested Option will terminate fifteen (15) months
                        after the Termination Date. Any options that have not
                        vested will expire upon Retirement. If Employee's
                        Retirement occurs on or after Employee's 60th birthday,
                        this Option will also become fully vested, to the extent
                        not already fully vested.



Page 4
Performance Accelerated Stock Option

                  (c)   DISABILITY OF EMPLOYEE. If the Termination Date results
                        from Employee's "Disability" (as hereinafter defined),
                        any vested Option will terminate fifteen (15) months
                        after the Termination Date. If the Termination Date
                        results from Employee's Disability, and Employee dies
                        within one (1) year of the Termination Date, this Option
                        may be exercised, to the extent that Employee was
                        entitled to exercise it at the date of Employee's death,
                        by a legatee or legatees of Employee under Employee's
                        last will, or by Employee's personal representatives or
                        distributees (or by a transferee under Section 9), at
                        any time within a period of fifteen (15) months after
                        Employee's date of death.

                  (d)   DEATH OF EMPLOYEE. If the Termination Date results from
                        Employee's death, any vested Option may be exercised, to
                        the extent that Employee was entitled to exercise it at
                        the date of Employee's death, by a legatee or legatees
                        of Employee under Employee's last will, or by Employee's
                        personal representatives or distributees (or by a
                        transferee under Section 9), at any time within a period
                        of fifteen (15) months after the Termination Date. If
                        Employee dies within ninety (90) days of Employee's
                        Termination Date, this Option may be exercised, to the
                        extent that Employee was entitled to exercise it at the
                        date of Employee's death, by a legatee or legatees of
                        Employee under Employee's last will, or by Employee's
                        personal representatives or distributees (or by a
                        transferee under Section 9), at any time within a period
                        of fifteen (15) months after Employee's date of death.

                  (e)   Notwithstanding the foregoing, (i) except as otherwise
                        provided in Section 6(b) above, this Option will cease
                        vesting as of the Termination Date and (ii) in no event
                        may this Option be exercised after the tenth (10th)
                        anniversary of the Date of Grant.

            7.    OPTION EXERCISE.

                  (a)   NOTICE TO COMPANY OF OPTION EXERCISE. Employee may
                        exercise this Option, in whole or in part, by providing
                        written notice to the Company, accompanied by payment of
                        the Option purchase price, as set forth below.

                  (b)   PAYMENT OF OPTION PURCHASE PRICE. The price at which
                        shares of Common Stock may be purchased under this
                        Option will be paid in full in cash at the time of
                        exercise or, if permitted by the Committee, by means of
                        tendering Common Stock or surrendering another Award (as
                        defined in the Plan), or any combination thereof, on
                        such terms and conditions as the Committee deems
                        appropriate. In addition, Employee may effect a
                        "cashless exercise" of this Option in which all or a
                        portion of the shares subject to this Option are sold
                        through a broker and a portion of the proceeds to cover
                        the exercise price is paid to the Company.

            8.    TAX WITHHOLDING. Employee must pay, or make arrangements
                  acceptable to the Company for the payment of, any and all
                  federal, state, and local income and payroll tax withholding
                  that in the opinion of the Company is required by law. Unless
                  Employee satisfies any such tax withholding obligation by
                  paying the amount in cash or by check, the Company will
                  withhold shares of Common Stock having a Fair Market Value on
                  the date of withholding sufficient to cover the withholding
                  obligation.


Page 5
Performance Accelerated Stock Option

            9.    NON-TRANSFERABILITY. Neither this Option nor any rights under
                  this Award Agreement may be assigned, transferred or in any
                  manner encumbered except by will or the laws of descent and
                  distribution, and any attempted assignment, transfer,
                  mortgage, pledge or encumbrance, except as herein authorized,
                  will be void and of no effect. This Option may be exercised
                  during Employee's lifetime only by Employee. Notwithstanding
                  the foregoing, this Option may be transferred by gift or
                  otherwise to a member of Employee's immediate family and/or
                  trusts whose beneficiaries are members of Employee's immediate
                  family, or to such other persons or entities as may be
                  approved by the Committee.

            10.   DEFINITIONS: COPY OF PLAN AND PLAN PROSPECTUS. For the
                  purposes of this Award Agreement, the following terms shall
                  have the following meanings:

                  (a)   "Disability" shall mean a period of disability during
                        which Employee qualifies for benefits under employer's
                        long-term disability plan, or, if Employee does not
                        participate in such a plan, a period of disability
                        during which Employee would have qualified for benefits
                        under such a plan, as determined by the Committee, had
                        Employee been a participant in such a plan. The
                        Committee may require such medical or other evidence, as
                        it deems necessary to judge the nature of Employee's
                        condition.

                  (b)   "KEESA" means the Key Executive Employment and Severance
                        Agreement, as the same may be amended from time to time.

                  (c)   "Retirement" means a termination of employment under
                        which Employee is immediately eligible to receive
                        payments under the Company's qualified pension plan.

                        To the extent not specifically defined in this Award
                        Agreement, all capitalized terms used in this Award
                        Agreement will have the same meanings ascribed to them
                        in the Plan. By signing this Award Agreement, Employee
                        acknowledges receipt of a copy of the Plan and the
                        related Plan Prospectus.

            11.   CHOICE OF LAW. This Award Agreement will be governed by the
                  laws of the State of Arizona, excluding any conflicts or
                  choice of law rule or principle that might otherwise refer
                  construction or interpretation of this Agreement to another
                  jurisdiction.

      An authorized representative of the Company has signed this Award
Agreement, and Employee has signed this Award Agreement to evidence Employee's
acceptance of the Option on the terms specified in this Award Agreement, all as
of the Date of Grant.

                                   PINNACLE WEST CAPITAL CORPORATION

                                   By: _________________________________________

                                   Its: Vice President and Treasurer

                                   _____________________________________________
                                   Employee



                                  ATTACHMENT A

                                 GENERIC EXAMPLE
                     (PERFORMANCE ACCELERATED STOCK OPTION)

ASSUMPTION:

On _________ ___, 20___, Employee is granted an Option to purchase 750 shares of
Common Stock. Unless accelerated, the option will vest in 1/3 increments over 3
separate 12-month periods:

      -     250 shares will vest on _________ ___, 20___;

      -     250 shares will vest on _________ ___, 20___; and

      -     250 shares will vest on _________ ___, 20___.

SCENARIO #1:

      -     The Company's Earnings Per Share Growth for fiscal year 20___ is
            greater than the Earnings Per Share Growth of the S&P Electric
            Utilities Index for fiscal year 20___. (The First Year Target is
            met.)

      -     The Company's Earnings Per Share Growth for fiscal year 20___ is
            greater than the Earnings Per Share Growth of the S&P Electric
            Utilities Index for fiscal year 20___. (The Second Year Target is
            met.)

      Vesting of Options under Scenario # 1:

      -     1/3 of the Option (250 shares) vests on _________ ___, 20___.

      -     Based on the achievement of the First Year Target, the remaining
            Options vest on _________ ___, 20___ and _________ ___, 20___ (the
            achievement of the First Year Target accelerates the standard
            vesting period by 6 months).

      -     Based on the achievement of the Second Year Target, the remaining
            Options vest on _________ ___, 20___ (the achievement of the Second
            Year Target accelerates the vesting period by another 6 months).

SCENARIO #2:

      -     The Company's Earnings Per Share Growth for fiscal year 20___ is
            greater than the Earnings Per Share Growth of the S&P Electric
            Utilities Index for fiscal year 20___. (The First Year Target is
            met.)

      -     The Company's Earnings Per Share Growth for Fiscal Year 20___ is
            less than the Earnings Per Share Growth of the S&P Electric
            Utilities Index for fiscal year 20___. (The Second Year Target is
            not met.)

      Vesting of Options Under Scenario #2:

      -     1/3 of the Option (250 shares) vests on _________ ___, 20___.



Page 7
Performance Accelerated Stock Option

      -     Based on the achievement of the First Year Target, the remaining
            Options vest on _________ ___, 20___ and _________ ___, 20___ (the
            achievement of the First Year Target accelerates the standard
            vesting period by 6 months.)

      -     Based on the failure to achieve the Second Year Target, the
            remaining Options vest on _________ ___, 20___ (the failure to
            achieve the Second Year Target results in the remaining standard
            vesting period for the final 250 shares.)

SCENARIO #3:

      -     The Company's Earnings Per Share Growth for fiscal year 20___ is
            less than the Earnings Per Share Growth of the S&P Electric
            Utilities Index for fiscal year 20___. (The First Year Target is not
            met.)

      -     The Company's Earnings Per Share Growth for fiscal year 20___ is
            greater than the Earnings Per Share Growth of the S&P Electric
            Utilities Index for fiscal year 20___. (The Second Year Target is
            met.)

      Vesting of Options Under Scenario #3:

      -     1/3 of the Option (250 shares) vests on _________ ___, 20___.

      -     Based on the failure to achieve the First Year Target, the remaining
            Options vests on _________ ___, 20___ and _________ ___, 20___ (the
            failure to achieve the First Year Target results in a standard
            vesting period).

      -     Based on the achievement of the Second Year Target, the remaining
            Options (the final 250 shares) vest on _________ ___, 20___ (the
            achievement of the Second Year Target accelerates the standard
            vesting period and _________ ___, 20___ vesting date by 6 months).

W:/Performance Accelerated Stock Option

EX-10.99

                                                                   Exhibit 10.99

                       STOCK OWNERSHIP INCENTIVE AGREEMENT

                                      UNDER
                        PINNACLE WEST CAPITAL CORPORATION
                          2002 LONG-TERM INCENTIVE PLAN

      THIS AWARD AGREEMENT is made and entered into as of _________ ___, 20___
(the "Date of Grant"), by and between Pinnacle West Capital Corporation (the
"Company"), and (FirstName) ("Employee").

                                   BACKGROUND

      A.    The Board of Directors of the Company (the "Board of Directors") has
            adopted, and the Company's shareholders have approved, the Pinnacle
            West Capital Corporation 2002 Long-Term Incentive Plan (the "Plan"),
            pursuant to which stock ownership incentive awards may be granted to
            employees of the Company and its subsidiaries and to certain other
            individuals.

      B.    The Company desires to grant to Employee a stock ownership incentive
            award under the terms of the Plan.

      C.    Pursuant to the Plan, the Company and Employee agree as follows:

                                    AGREEMENT

            1.    DEFINITIONS. For purposes of this Award Agreement, the
                  following terms have the meanings specified in this Section 1:

                  (a)   "AWARD PERIOD" means the period beginning _________ ___,
                        20___ and ending _________ ___, 20___.

                  (b)   "AVERAGE NUMBER OF SHARES OWNED" means (i) the sum of
                        the number of shares of Common Stock (as defined herein)
                        owned by Employee at the _____________ during the Award
                        Period divided by (ii) __________ (___), rounded down to
                        the next whole share.

                  (c)   "AVERAGE SHARE PRICE" means the average _____________
                        price of the Common Stock on the New York Stock Exchange
                        during the Award Period.

                  (d)   "BASE SALARY" means the base salary earned by Employee
                        during the Award Period.

                  (e)   "COMMON STOCK" means the common stock of the Company.

                  (f)   "OWNERSHIP LEVEL" means the Stock Ownership Value (as
                        defined herein) divided by Employee's Base Salary,
                        expressed as a ratio, carried out to two decimal places
                        and rounded down.

                  (g)   "STOCK OWNERSHIP VALUE" means the Average Number of
                        Shares Owned multiplied by the Average Share Price.

            2.    GRANT OF AWARD. Pursuant to action of the Committee (as
                  defined herein), which was taken on the Date of Grant, the
                  Company grants to Employee the stock ownership incentive award
                  described in this Award Agreement.



Page 2
Stock Ownership Incentive

            3.    AWARD SUBJECT TO PLAN. This award is granted under and is
                  expressly subject to, all the terms and provisions of the
                  Plan, which terms are incorporated herein by reference, and
                  this Award Agreement. The Committee referred to in Section 4
                  of the Plan ("Committee") has been appointed by the Board of
                  Directors, and designated by it, as the Committee to make
                  awards.

            4.    STOCK OWNERSHIP INCENTIVE AWARD.

                  (a)   GENERAL. Upon satisfaction of the "Threshold Performance
                        Goal" described in Section 4(b) below and the Ownership
                        Level described in Section 4(c) below, the Company will
                        deliver to Employee, as soon as practicable after the
                        end of the Award Period, but no later than _________
                        ___, 20___, a number of shares of Common Stock equal to
                        _____ percent (__%) of Employee's Average Number of
                        Shares Owned, subject to the limitation described in
                        Subsection 4(d) below. Partial shares will be rounded
                        down to the nearest whole share, when applicable.
                        Attachment A provides a generic example of the operation
                        of a Stock Ownership Incentive Award.

                  (b)   THRESHOLD PERFORMANCE GOAL. For purposes of this Award
                        Agreement, the threshold performance goal for the Award
                        Period will have been met if, during the Award Period,
                        the Company's earnings from continuing operations[,
                        excluding the effects of the rate case settlement, plus
                        SunCor Development Company's earnings from discontinued
                        operations] are at least $______ million.

                  (c)   OWNERSHIP LEVEL. For purposes of this Agreement, the
                        Common Stock ownership requirement will have been met if
                        Employee's Ownership Level is at least ___ [insert
                        number].

                  (d)   MAXIMUM AWARD. If Employee's Ownership Level exceeds
                        _______ (__), the number of shares of Common Stock
                        awarded to Employee will be ____ percent (__%) of the
                        number of shares represented by an Ownership Level of
                        _________ (__) or _______________ shares maximum.

            5.    EVIDENCE OF OWNERSHIP.

                  (a)   SHARES HELD IN COMPANY PLANS. Employee is not required
                        to provide ownership evidence of shares of Common Stock
                        owned by Employee and held in any Company-sponsored
                        stock-based plan, such as the Pinnacle West Capital
                        Corporation Investors Advantage Plan or the Pinnacle
                        West Capital Corporation Savings Plan.

                  (b)   SHARES HELD OUTSIDE COMPANY PLANS. Shares of Common
                        Stock owned by Employee outside of Company-sponsored
                        stock-based plans (for example, shares held in a
                        brokerage account) will be included in Employee's
                        Average Number of Shares Owned only if Employee provides
                        the Company with written evidence of such ownership (for
                        example, a copy of a brokerage account statement).
                        Employee must provide the Company with evidence of such
                        ownership no later than thirty (30) days following the
                        end of the Award Period.

            6.    TERMINATION OF AWARD. This Award Agreement will terminate and
                  be of no further force or effect as of the date during the
                  Award Period that Employee is no



Page 3
Stock Ownership Incentive

                  longer employed by the Company or any of its subsidiaries,
                  unless the termination of active employment is due to
                  Employee's death or Disability (as defined herein). In the
                  case of Employee's death or Disability, Employee will be
                  deemed to have been employed by the Company through the end of
                  the Award Period. No adjustment will be made to Employee's
                  "Base Salary" calculation as a result of Employee's death or
                  Disability (e.g., the base salary earned by Employee to the
                  date of Employee's death or Disability will not be annualized
                  over the Award Period). For avoidance of doubt, no
                  acceleration of the Award Period will occur as a result of a
                  change of control of the Company.

                  "Disability" shall mean a period of disability during which
                  Employee qualifies for benefits under employer's long-term
                  disability plan, or, if Employee does not participate in such
                  a plan, a period of disability during which Employee would
                  have qualified for benefits under such a plan, as determined
                  by the Committee, had Employee been a participant in such a
                  plan. The Committee may require such medical or other
                  evidence, as it deems necessary to judge the nature of
                  Employee's condition.

            7.    TAX WITHHOLDING. Employee must pay, or make arrangements
                  acceptable to the Company for the payment of, any and all
                  federal, state, and local income and payroll tax withholding
                  that in the opinion of the Company is required by law. Unless
                  Employee satisfies any such tax withholding obligation by
                  paying the amount in cash or by check , the Company will
                  withhold shares of Common Stock having a Fair Market Value on
                  the date of withholding sufficient to cover the withholding
                  obligation.

            8.    NON-TRANSFERABILITY. Neither this award nor any rights under
                  this Award Agreement may be assigned, transferred or in any
                  manner encumbered except by will or the laws of descent and
                  distribution, and any attempted assignment, transfer,
                  mortgage, pledge or encumbrance except as herein authorized,
                  will be void and of no effect.

            9.    DEFINITIONS; COPY OF PLAN AND PLAN PROSPECTUS. To the extent
                  not specifically defined in this Award Agreement, all
                  capitalized terms used in this Award Agreement will have the
                  same meanings ascribed to them in the Plan. By signing this
                  Award Agreement, Employee acknowledges receipt of a copy of
                  the Plan and the related Plan Prospectus.

            10.   CHOICE OF LAW. This Award Agreement will be governed by the
                  laws of the State of Arizona excluding any conflicts or choice
                  of law rule or principle that might otherwise refer
                  construction or interpretation of this Agreement to another
                  jurisdiction.

      An authorized representative of the Company has signed this Award
Agreement, and Employee has signed this Award Agreement to evidence Employee's
acceptance of the award on the terms specified in this Award Agreement, all as
of the Date of Grant.

                                   PINNACLE WEST CAPITAL CORPORATION

                                   By: _________________________________________
                                   Its: Vice President and Treasurer

                                   _____________________________________________
                                   Employee

W:/Stock Ownership Incentive

Page 4
Stock Ownership Incentive

                                  ATTACHMENT A

                                 GENERIC EXAMPLE
                        (STOCK OWNERSHIP INCENTIVE AWARD)

ASSUMPTIONS:

      -     Earnings threshold is met.

      -     Employee's Base Salary is $100,000.

      -     Employee's Ownership Level must be at least two (2) (Employee's
            Ownership Level is based on Employee's title) and cannot exceed five
            (5).

      -     Grant of shares at four percent (4%) of Employee's Average Number of
            Shares Owned.

      -     Employee owns 5,800 shares of Common Stock at the end of each month
            during 20___, resulting in the Average Number of Shares Owned
            equaling 5,800.

      -     The Average Share Price for 20___ is $35.00 per share.

      -     Employee's Stock Ownership Value is $203,000 (5,800 shares X $35.00
            per share)

      -     Employee's Ownership Level is $203,000 / $100,000, or 2.03.

      -     Employee meets the required Ownership Level of at least 2.

DELIVERY OF COMMON STOCK TO EMPLOYEE:

      -     Employee would receive 232 shares of Common Stock (4% of 5,800
            shares, rounded down, which represents Employee's Average Number of
            Shares Owned)

APPLICATION OF THE MAXIMUM:

      -     Same assumptions, except Average Number of Shares Owned equals
            15,000.

      -     Employee's Stock Ownership Value is $525,000 (15,000 shares X $35.00
            per share)

      -     Employee's Ownership Level is 525,000 / 100,000, or 5.25.

      -     Shares are not awarded for Ownership Levels above 5, so five times
            Base Salary is $500,000 Stock Ownership Value, resulting in 14,285
            shares ($500,000 / $35 per share). The 4% award would be based on
            14,285 shares; as a result, Employee would receive 571 shares.

W:/Stock Ownership Incentive

EX-10.100

                                                                  Exhibit 10.100

                              AMENDED AND RESTATED

                             REIMBURSEMENT AGREEMENT

                                      among

                         ARIZONA PUBLIC SERVICE COMPANY

                             THE BANKS PARTY HERETO

                                       and

                              JPMORGAN CHASE BANK,
                    as Administrative Agent and Issuing Bank

                            dated as of July 22, 2002



TABLE OF CONTENTS



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

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


             THE TABLE OF CONTENTS IS NOT A PART OF THIS AGREEMENT.



                  AMENDED AND RESTATED REIMBURSEMENT AGREEMENT

      AMENDED AND RESTATED REIMBURSEMENT AGREEMENT among ARIZONA PUBLIC SERVICE
COMPANY, JPMORGAN CHASE BANK (successor to Morgan Guaranty Trust Company of New
York) ("MGT")), as Administrative Agent and as Issuing Bank, and the BANKS
listed on the signature pages hereto, as amended and restated as of July 22,
2002. (Unless otherwise indicated, all capitalized terms used herein have the
meanings referred to or set forth in Section 1(a).)

      WHEREAS, the Company has entered into a Participation Agreement dated as
of August 1, 1986 (as amended and in effect on July 11, 2002, the "PARTICIPATION
AGREEMENT") among the Company, State Street Bank and Trust Company (as successor
to The First National Bank of Boston), for itself and as Owner Trustee (together
with its successors in such capacity, the "OWNER TRUSTEE"), JPMorgan Chase Bank
(formerly known as The Chase Manhattan Bank, as successor to Chemical Bank), for
itself and as Indenture Trustee (together with its successors in such capacity,
the "INDENTURE TRUSTEE"), PVNGS Funding Corp., Inc., PVNGS II Funding Corp.,
Inc. and Emerson Finance Co., as Equity Participant (together with its
successors and assigns, the "EQUITY PARTICIPANT"), relating to the acquisition
of an undivided interest in Unit 2 of the Palo Verde Nuclear Generating Station
through a trust for the benefit of the Equity Participant which interest has
been leased to the Company pursuant to a lease dated as of August 1, 1986
between the Owner Trustee and the Company (as amended and in effect on July 11,
2002, the "FACILITY LEASE");

      WHEREAS, pursuant to Section 10(b)(3)(ix) of the Participation Agreement,
the Company has agreed to maintain at all times during the Basic Lease Term (as
defined in the Participation Agreement) an irrevocable letter of credit for the
benefit of the Equity Participant;

      WHEREAS, in order to comply with the requirements of Section 10(b)(3)(ix)
of the Participation Agreement, the Company entered into a Reimbursement
Agreement dated as of August 1, 1986 (as amended and restated thereafter from
time to time prior to August 15, 1997, further amended and restated as of August
15, 1997 and in effect immediately prior to July 22, 2002, the "EXISTING
REIMBURSEMENT AGREEMENT") between the Company and MGT, pursuant to which MGT
issued to the Equity Participant its irrevocable transferable letter of credit
(such letter of credit, as amended and restated and in effect from time to time
before July 22, 2002, as further amended and restated as of July 22, 2002, and
as the same may be amended in accordance with this Agreement and in effect from
time to time thereafter, and any successor Letter of Credit as provided in such
Letter of Credit, being referred to herein as the "LETTER OF CREDIT"), to secure
the payment of Rent (as defined in the Participation Agreement) by the Company
under the Facility Lease to the extent of the amount available to be drawn from
time to time under the Letter of Credit;



      WHEREAS, the Letter of Credit will expire on August 15, 2002, if not
extended; and

      WHEREAS, the Company has requested that the Banks become parties hereto,
that the term of the Letter of Credit be extended for three years, and that
certain provisions of the Existing Reimbursement Agreement be amended, and the
Banks are willing to comply with such requests on the terms and conditions set
forth below;

      NOW, THEREFORE, in consideration of the premises and in order to induce
the Banks to enter into this Agreement, agree to the extension of the term of
the Letter of Credit and amend certain provisions of the Existing Reimbursement
Agreement, the parties hereto agree that, upon satisfaction of the conditions
set forth in Section 3(b) below and subject to Section 3(c) below, the Existing
Reimbursement Agreement will, without any further action by the parties hereto,
be amended and restated to read in full as follows:

      SECTION 1. Definitions; Accounting Terms. (a) Definitions. Capitalized
terms used herein and not otherwise defined herein have the respective meanings
assigned thereto in Appendix A to the Facility Lease. The following terms as
used herein have the following respective meanings:

      "ACC" means the Arizona Corporation Commission or any successor thereto.

      "ADMINISTRATIVE AGENT" means JPMorgan Chase Bank, in its capacity as
administrative agent for the Banks hereunder, and its successors in such
capacity.

      "ADMINISTRATIVE QUESTIONNAIRE" means, with respect to each Bank, an
administrative questionnaire in the form prepared by the Administrative Agent
and submitted to the Administrative Agent (with a copy to the Company) duly
completed by such Bank.

      "AFFILIATE" means, as to any Person, any other Person that, directly or
indirectly, controls, is controlled by or is under common control with such
Person or is a director or officer of such Person.

      "AGREEMENT" means, when used with reference to this Agreement, this
Reimbursement Agreement as originally executed as of August 1, 1986, as amended
or amended and restated from time to time before July 22, 2002, as amended and
restated as of July 22, 2002, and as the same may be amended in accordance with
its terms from time to time thereafter.

      "AMENDED AND RESTATED LETTER OF CREDIT" means the Amended and Restated
Letter of Credit dated as of July 22, 2002, amending and restating the Letter of
Credit.

                                       2


      "AMENDMENT AND RESTATEMENT" means the Amendment and Restatement dated as
of July 22, 2002, amending and restating the Existing Reimbursement Agreement.

      "APPLICABLE BOOKING OFFICE" means, as to each Bank, its office, branch or
affiliate located at its address set forth in its Administrative Questionnaire
(or identified in its Administrative Questionnaire as its Applicable Booking
Office) or such other office, branch or affiliate of such Bank as it may
hereafter designate as its Applicable Booking Office by notice to the Company
and the Administrative Agent.

      "ASSET TRANSFER" means the transfer by the Company to PWEC of all or any
part of the Company's generating assets, except the Nuclear Transfer, in one or
a series of transactions, which may occur on or prior to the Nuclear Transfer
and which may involve one or more intermediate transfers to one or more
wholly-owned subsidiaries of the Company formed to effect the transfer(s).

      "ASSIGNEE" has the meaning set forth in Section 15(a).

      "AUTHORIZED OFFICER" means the chairman of the board, chief executive
officer, president, chief operating officer, treasurer, controller, any vice
president or any assistant treasurer of the Company.

      "BANK" means (i) each bank or financial institution listed on the
signature pages hereof, each Assignee that becomes a Bank pursuant to Section
15(a), and their respective successors, and (ii) the Issuing Bank with respect
to its Participation.

      "BASE RATE" means, for any day, a rate per annum equal to the higher of
(i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal
Funds Rate for such day.

      "BUSINESS DAY" means any day except a Saturday, Sunday or other day on
which commercial banks in New York, New York, Chicago, Illinois or the State of
California or, for purposes of Sections 2(a), 2(g) and 9(i) only, Phoenix,
Arizona, are authorized by law to close.

      "CAPITAL LEASE OBLIGATIONS" means as to any Person, the obligations of
such Person to pay rent or other amounts under a lease of (or other agreement
conveying the right to use) real and/or personal property, which obligations are
required to be classified and accounted for as a capital lease on the balance
sheet of such Person under generally accepted accounting principles and, for the
purposes of this Agreement, the amount of such obligations shall be the
capitalized amount thereof, determined in accordance with generally accepted
accounting principles.

      "CODE" means the Internal Revenue Code of 1986, as amended, or any
successor statute.

                                       3


      "COMPANY" means Arizona Public Service Company, an Arizona corporation,
and its successors and permitted assigns.

      "COMPANY INDENTURE" means that certain Mortgage and Deed of Trust, dated
as of July 1, 1946 from Central Arizona Light and Power Company (now the
Company) to The Bank of New York, successor by assignment to Bank of America
National Trust and Savings Association, successor to Security-First National
Bank of Los Angeles, as trustee, or any supplemental indenture thereto, as the
same shall have been, or may be, amended and supplemented from time to time.

      "CONFIDENTIAL INFORMATION" means information that the Company furnishes to
any other party hereto in a writing designated as confidential, or that such
party obtains pursuant to its rights under Section 7(e), but does not include
any such information that (a) is or becomes generally available to the public
other than as a result of a breach by such party of its obligations hereunder,
(b) was available to such party on a nonconfidential basis prior to its
disclosure to such party by the Company or any of its Affiliates or (c) is or
becomes available to such party from a source other than the Company that is
not, to the knowledge of such party, acting in violation of a confidentiality
agreement with the Company.

      "CONSOLIDATED CAPITALIZATION" has the meaning set forth in Section 8(e).

      "CONSOLIDATED CASH COVERAGE RATIO" means, with respect to the Company and
its Consolidated Subsidiaries, for each twelve-month period ending on the last
day of each fiscal quarter (determined as of the last day of such fiscal
quarter), the ratio of:

      (a) an amount equal to:

            (i) consolidated net income of the Company and its Consolidated
Subsidiaries for such period, plus

            (ii) all material non-recurring items which decreased said net
income for such period, minus

            (iii) all material non-recurring items which increased said net
income for such period, plus

            (iv) income taxes deducted in determining said net income for such
period, plus

            (v) total "Interest Charges", as defined in clause (b) below, of the
Company and its Consolidated Subsidiaries for such period, plus

                                       4


            (vi) depreciation and amortization, and nuclear fuel amortization
      for such period, minus

            (vii) allowance for equity and borrowed funds used during
      construction for such period, minus

            (viii) deferrals as described in Financial Accounting Standards
      Board Statement No. 71 for such period, plus or minus

            (ix) other significant noncash items for such period as may be
      specified under Financial Accounting Standards Board Statements or other
      accounting guidelines, to

      (b) without duplication of any item, an amount equal to the sum (such
amount being the "INTEREST CHARGES") of:

            (i) interest on long-term debt for such period as reported in the
      consolidated income statement for such period, plus

            (ii) interest on short-term debt for such period as reported in the
      consolidated income statement for such period, plus

            (iii) imputed interest on the Sale Leaseback Obligation Bonds for
      such period, such amount being equal to the product of (A) the principal
      amount of Sale Leaseback Obligation Bonds outstanding during such period
      and (B) the rate of interest applicable to such Sale Leaseback Obligation
      Bonds during such period, plus

            (iv) all rental payments in respect of operating leases (excluding
      any portion of such rental payments attributable to operating expenses and
      excluding any payments in respect of Sale Leaseback Obligation Bonds) with
      respect to which the payment obligations of the Company or a Consolidated
      Subsidiary of the Company have a present value of at least $25,000,000.

      "CONSOLIDATED INDEBTEDNESS" has the meaning set forth in Section 8(e).

      "CONSOLIDATED NET WORTH" has the meaning set forth in Section 8(e).

      "CONSOLIDATED SUBSIDIARY" means at any date any Subsidiary or other entity
the accounts of which would be consolidated with those of the Company in its
consolidated financial statements if such statements were prepared as of such
date.

      "DATE OF EARLY TERMINATION" has the meaning set forth in the Letter of
Credit.

                                       5


      "ELIGIBLE INSTITUTION" means (i) a commercial bank or a savings and loan
association having a net worth in excess of $250,000,000 (or the equivalent in
any other currency), (ii) a Bank or an affiliate of a Bank or (ii) any other
Person which the Company designates as an Eligible Institution with the consent
of the Administrative Agent.

      "EQUITY PARTICIPANT" has the meaning set forth in the first recital
hereto.

      "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the regulations promulgated and rulings issued
thereunder.

      "ERISA AFFILIATE" means any corporation or trade or business which is a
member of the same controlled group of corporations (within the meaning of
Section 414(b) of the Code) as the Company or is under common control (within
the meaning of Section 414(c) of the Code) with the Company.

      "EXISTING LETTER OF CREDIT" means the Letter of Credit, as amended and in
effect immediately prior to July 22, 2002.

      "EXISTING REIMBURSEMENT AGREEMENT" has the meaning set forth in the third
recital hereto.

      "FACILITY LEASE" has the meaning set forth in the first recital hereto.

      "FEDERAL FUNDS RATE" means, for any day, the rate per annum (rounded
upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Business Day next
succeeding such day, provided that (i) if such day is not a Business Day, the
Federal Funds Rate for such day shall be such rate on such transactions on the
next preceding Business Day as so published on the next succeeding Business Day,
and (ii) if no such rate is so published on such next succeeding Business Day,
the Federal Funds Rate for such day shall be the average rate quoted to JPMorgan
Chase Bank on such day as determined by the Administrative Agent.

      "FEE LETTER" means the Fee Letter dated as of May 21, 2002, from the
Issuing Bank to the Company and accepted and agreed to by the Company on May 21,
2002.

      "FINANCIAL INFORMATION" means (i) the annual report of the Company on Form
10-K for the year ended December 31, 2001, as filed with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended,
(ii) the Company's quarterly report on Form 10-Q for the fiscal quarter of the
Company ended March 31, 2002, as so filed, and (iii) the Company's current
reports on Form 8-K dated

                                       6


December 14, 2001, February 8, 2002, February 26, 2002, April 19, 2002, April
26, 2002, May 22, 2002, June 5, 2002, and July 11, 2002, as so filed.

      "GUARANTEE" means as to any Person, any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Indebtedness
of any other Person or in any manner providing for the payment of any
Indebtedness of any other Person or otherwise protecting the holder of such
Indebtedness against loss (whether by virtue of partnership arrangements,
agreements to keep well, to purchase assets, goods, securities or services, or
to take-or-pay or otherwise), provided that the term "Guarantee" shall not
include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.

      "INDEBTEDNESS" means as to any Person at any date (without duplication):
(a) indebtedness created, issued, incurred or assumed by such Person for
borrowed money or evidenced by bonds, debentures, notes or similar instruments;
(b) all obligations of such Person to pay the deferred purchase price of
property or services, excluding, however, trade accounts payable (other than for
borrowed money) arising in, and accrued expenses incurred in, the ordinary
course of business of such Person so long as such trade accounts payable are
paid within 180 days of the date incurred; (c) all Indebtedness secured by a
lien on any asset of such Person, to the extent such Indebtedness has been
assumed by, or is a recourse obligation of, such Person; (d) all Guarantees by
such Person; (e) all Capital Lease Obligations of such Person; and (f) the
amount of all reimbursement obligations of such Person (whether contingent or
otherwise) in respect of letters of credit, bankers' acceptances, surety or
other bonds and similar instruments in support of Indebtedness.

      "INDENTURE TRUSTEE" has the meaning set forth in the first recital hereto.

      "ISSUING BANK" means JPMorgan Chase Bank and its successors in their
capacity as issuer of the Letter of Credit.

      "LETTER OF CREDIT" has the meaning set forth in the third recital hereto.

      "LETTER OF CREDIT COMMISSION RATE" means a rate per annum determined in
accordance with Schedule I hereto.

      "LIEN" means any lien, security interest or other charge or encumbrance of
any kind, including, without limitation, the lien or retained security title of
a conditional vendor and any easement, right of way or other encumbrance on
title to real property.

      "MATERIAL SUBSIDIARY" means, at any time, a Subsidiary of the Company
which as of such time meets the definition of a "significant subsidiary"
included as of July 22, 2002 in Regulation S-X of the Securities and Exchange
Commission or whose assets at such time exceed 10% of the assets of the Company
and the Subsidiaries (on a consolidated basis).

                                       7


      "MAXIMUM CREDIT AMOUNT" means, at any date, the Maximum Credit Amount, as
defined in the Letter of Credit.

      "MAXIMUM DRAWING AMOUNT" means, at any date, the Maximum Drawing Amount,
as defined in the Letter of Credit.

      "MULTIEMPLOYER PLAN" means a plan defined as such in Section 3(37) of
ERISA to which contributions have been made by the Company or any ERISA
Affiliate within any of the preceding five plan years and which is covered by
Title IV of ERISA.

         "1986 ORDER" means Decision No. 55120, dated July 24, 1986, of the ACC.

      "NUCLEAR TRANSFER" means the transfer by the Company to PWEC of all or a
portion of the Company's interests in PVNGS, in one or a series of transactions,
including the assignment by the Company and assumption by PWEC of the Company's
rights and obligations under the Facility Lease, Participation Agreement, and
other Transaction Documents and Financing Documents, and which may involve one
or more intermediate transfers to one or more wholly-owned subsidiaries of the
Company formed to effect the transfer(s). The Nuclear Transfer will require the
consent of the Equity Participant and the Owner Trustee, among others.

      "OTHER TAXES" has the meaning set forth in Section 2(e).

      "OWNER TRUSTEE" has the meaning set forth in the first recital hereto.

      "PARENT" means, as to any Bank, any Person controlling such Bank.

      "PARTICIPANT" has the meaning set forth in Section 15(b).

      "PARTICIPATION" means a participating interest of a Bank in the credit
represented by the Letter of Credit including, without limitation, the interest
therein retained by the Issuing Bank after giving effect to all participating
interests therein granted by it pursuant to Section 14(a), but prior to giving
effect to any interest therein granted to any Participant pursuant to Section
15(b).

      "PARTICIPATION AGREEMENT" has the meaning set forth in the first recital
hereto.

      "PARTICIPATION AMOUNT" means, with respect to any Bank, the amount set
forth in Schedule II hereto opposite the name of such Bank therein, as such
amount may be changed by reason of an assignment by or to such Bank in
accordance with Section 15(a). Such amount shall be reduced from time to time by
such Bank's ratable share of each reduction of the Maximum Credit Amount.

      "PARTICIPATION PERCENTAGE" means, with respect to any Bank at any time,
the percentage equivalent of a fraction (i) the numerator of which is the
Participation Amount

                                       8


of such Bank at such time and (ii) the denominator of which is the Maximum
Credit Amount at such time.

      "PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.

      "PERMITTED LIEN" of the Company or any Material Subsidiary means any of
the following:

            (i) Liens for taxes, assessments or other governmental charges or
      levies not at the time delinquent or thereafter payable without penalty or
      being contested in good faith by appropriate proceedings and for which
      adequate reserves in accordance with generally accepted accounting
      principles shall have been made;

            (ii) Liens of carriers, warehousemen, mechanics, materialmen and
      landlords incurred in the ordinary course of business, including, without
      limitation, landlord's liens arising under Arizona law under leases
      entered into by the Company in the 1986 sale and leaseback transactions
      with respect to Unit 2, including without limitation the Facility Lease,
      and securing the payment of rent under such leases, to the extent such
      leases are properly treated as operating leases, in each case, for sums
      not overdue or being contested in good faith by appropriate proceedings
      and for which adequate reserves in accordance with generally accepted
      accounting principles shall have been made;

            (iii) Liens incurred in the ordinary course of business in
      connection with worker's compensation, unemployment insurance or other
      forms of governmental insurance or benefits or other similar statutory
      obligations;

            (iv) Liens to secure obligations on surety or appeal bonds;

            (v) rights of setoff and banker's Liens with respect to funds on
      deposit in a financial institution in the ordinary course of business;

            (vi) easements, restrictions and other minor defects of title that
      are not, in the aggregate, material to the use of such property;

            (vii) Liens securing claims against any Person other than the
      Company or any Subsidiary of the Company neither assumed nor guaranteed by
      the Company or any Subsidiary of the Company nor on which the Company or
      any Subsidiary of the Company customarily pays interest, existing upon
      real estate or rights in or relating to real estate acquired by the
      Company or any Subsidiary of the Company for substation, transmission
      line, transportation line, distribution line or right of way purposes;

                                       9


            (viii) rights reserved to or vested in any municipality or public
      authority by the terms of any right, power, franchise, grant, license or
      permit or by any provision of law, to terminate such right, power,
      franchise, grant, license or permit, or to purchase or recapture or to
      designate a purchaser of any of the property of the Company;

            (ix) rights reserved to or vested in others to take or receive any
      part of the power pursuant to firm power commitment contracts, purchased
      power contracts and similar agreements, gas, oil or other minerals or
      timber generated, developed, manufactured or produced by, or grown on, or
      acquired with, any property of the Company;

            (x) rights reserved to or vested in any municipality or public
      authority to control or regulate any property of the Company, or to use
      such property in a manner that does not materially impair the use of such
      property for the purposes for which it is held by the Company;

            (xi) security interests granted in favor of the Unit 2 sale
      leaseback transaction lessors in the Company's Decommissioning Trust
      Agreement (PVNGS Unit 2) dated as of January 31, 1992 (such agreement, as
      amended or otherwise modified from time to time, being the "UNIT 2 TRUST
      AGREEMENT") to secure the Company's obligations in respect of the
      decommissioning of Unit 2 or related facilities;

            (xii) Liens that may exist with respect to the Unit 2 Trust
      Agreement (other than as described in clause (xi) above), or with respect
      to either of the Company's Decommissioning Trust Agreement (PVNGS Unit 1)
      or Decommissioning Trust Agreement (PVNGS Unit 3), each dated as of July
      1, 1991, as amended or otherwise modified from time to time, relating to
      the Company's obligation to set aside funds for the decommissioning and
      retirement from service of such Units;

            (xiii) pledges of pollution control bonds and related rights to
      secure the Company's reimbursement obligations in respect of letters of
      credit supporting pollution control bond transactions, provided that such
      pollution control bonds are not secured by any other assets of the Company
      or any Material Subsidiary;

            (xiv) Liens established on specified bank accounts of the Company to
      secure the Company's reimbursement obligations in respect of letters of
      credit supporting commercial paper issued by the Company and similar
      arrangements for collateral security with respect to refinancings or
      replacements of the same; and

                                       10


            (xv) any Liens securing a claim (other than in respect of
      Indebtedness) in an amount less than $10,000,000;

provided, however, that no Lien in favor of the PBGC shall, in any event, be a
Permitted Lien.

      "PERSON" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.

      "PLAN" means an employee benefit plan within the meaning of Section 3(3)
of ERISA established or maintained by the Company or any ERISA Affiliate which
is covered by Title IV of ERISA, other than a Multiemployer Plan.

      "PRIME RATE" means the rate of interest publicly announced by JPMorgan
Chase Bank in New York City from time to time as its Prime Rate.

      "PVNGS" means the Palo Verde Nuclear Generating Station.

      "PWCC" means Pinnacle West Capital Corporation, an Arizona corporation and
its successors.

      "PWEC" means Pinnacle West Energy Corporation, an Arizona corporation and
a subsidiary of PWCC, and its successors.

      "REIMBURSEMENT DEFAULT" means any event or condition which constitutes a
Reimbursement Event of Default or which with the giving of notice or the lapse
of time or both would, unless cured or waived, become a Reimbursement Event of
Default.

      "REIMBURSEMENT EVENT OF DEFAULT" has the meaning set forth in Section 9.

      "REQUIRED BANKS" means, at any time, Banks with Participation Percentages
aggregating more than 50% at such time.

      "RESTATEMENT EFFECTIVE DATE" has the meaning set forth in Section 3(b).

      "SALE LEASEBACK OBLIGATION BONDS" means PVNGS II Funding Corp. Inc.'s (i)
7.39% Secured Lease Obligation Bonds, Series 1993, due 2005; (ii) 8.00% Secured
Lease Obligation Bonds, Series 1993, due 2015; (iii) any other bonds issued by
the Company in connection with a sale/leaseback transaction; and (iv) any
refinancing or refunding of the obligations specified in clauses (i) through
(iii) above.

      "STATED TERMINATION DATE" means July 22, 2005 or such later date to which
such Stated Termination Date shall have been extended pursuant to Section 17.

                                       11


      "SUBSEQUENT ORDER" means any decision, order or ruling of the ACC issued
after July 22, 2002 that amends, supersedes or otherwise modifies the 1986 Order
or any successor decision, order or ruling.

      "SUBSIDIARY" of any Person means any corporation of which more than 50% of
the issued and outstanding capital stock having ordinary voting power to elect a
majority of the Board of Directors of such corporation (irrespective of whether
at the time capital stock of any other class or classes of such corporation
shall or might have voting power upon the occurrence of any contingency) is at
the time directly or indirectly owned or controlled by such Person, such Person
and one or more of its other Subsidiaries, or one or more of such Person's other
Subsidiaries.

      "TAXES" has the meaning set forth in Section 2(e).

      "TERMINATING PARTICIPATION AGREEMENTS" means (i) the Participation
Agreement between Mellon Bank, N.A. and Morgan Guaranty Trust Company of New
York, dated as of August 15, 1997, (ii) the Participation Agreement between
Union Bank of California, N.A. and Morgan Guaranty Trust Company of New York,
dated as of August 15, 1997, (iii) the Participation Agreement between Barclays
Bank PLC and Morgan Guaranty Trust Company of New York, dated as of August 15,
1997, and (iv) the Participation Agreement between Toronto Dominion (Texas),
Inc. and Morgan Guaranty Trust Company of New York, dated as of August 15, 1997,
as amended by the Assignment and Assumption Agreement dated as of August 31,
1999 between Toronto Dominion (Texas), Inc. and Bank Hapoalim B.M. and consented
to by Morgan Guaranty Trust Company of New York and the Company, in each case
relating to the sale and purchase of Participations (as defined in the Existing
Reimbursement Agreement) in the drawings under the Existing Letter of Credit.

      "TERMINATION DATE" means the earliest of (i) the date on which the Issuing
Bank pays a drawing under the Letter of Credit for the lesser of the Maximum
Drawing Amount and the Maximum Credit Amount, (ii) if a drawing is not requested
by the Equity Participant after a notice of termination is given under the
Letter of Credit, the Date of Early Termination, (iii) if a drawing is requested
by the Equity Participant after a notice of termination is given under the
Letter of Credit, the date on which the Issuing Bank pays such drawing, (iv) the
date on which the Company delivers a certificate to the Issuing Bank certifying
that the Company has paid the amounts due under Section 9(c) of the Facility
Lease (so long as the Equity Participant shall have acknowledged such payment by
its express confirmation thereof in, and its countersignature to, such
certificate), (v) the date on which the Company delivers a certificate to the
Issuing Bank certifying that the Company has paid the amounts due under Section
9(d) of the Facility Lease (so long as the Equity Participant shall have
acknowledged such payment by its express confirmation thereof in, and its
countersignature to, such certificate), (vi) the latest of (x) the Stated
Termination Date, (y) if a draft and certificate all in strict conformity with
the terms and conditions of the Letter of Credit are presented on the

                                       12


Stated Termination Date at such time and at such office as specified in the
fifth paragraph of the Letter of Credit, the date on which the Issuing Bank is
required to honor the draft in accordance with the provisions of such paragraph
pursuant to such presentation, and (z) if a corrected draft and certificate all
in strict conformity with the terms and conditions of the Letter of Credit are
presented on the date specified in, and in accordance with, the provisions of
the sixth paragraph of the Letter of Credit, the date on which the Issuing Bank
is required to honor the draft in accordance with the provisions of such
paragraph pursuant to such presentation, and (vii) the date on which the Company
delivers a certificate to the Issuing Bank certifying that this Agreement has
been terminated pursuant to Section 16(b) (so long as such certificate shall
have been countersigned by the Equity Participant).

      "TOTAL ASSETS" means the aggregate of all assets properly appearing on the
most recent balance sheet of the Company and its Consolidated Subsidiaries
furnished pursuant to Section 6(f) or Section 7(g).

      "UNITED STATES" means the United States of America, including the States
and the District of Columbia, but excluding its territories and possessions.

      "WHOLLY-OWNED SUBSIDIARY" of any Person means any corporation of which all
shares of the issued and outstanding capital stock (other than any director's
qualifying shares) having ordinary voting power to elect a majority of the Board
of Directors of such corporation (irrespective of whether at the time capital
stock of any other class or classes of such corporation shall or might have
voting power upon the occurrence of any contingency) is at the time directly or
indirectly owned or controlled by such Person, such Person and one or more of
its other Subsidiaries, or one or more of such Person's other Subsidiaries.

      (b) Accounting Terms. All accounting terms not specifically defined herein
shall be construed in accordance with generally accepted accounting principles
consistent with those applied in the preparation of the financial statements
referred to in the first sentence of Section 6(f).

      SECTION 2. Reimbursement. (a) The Company agrees to pay to the
Administrative Agent for the account of the Issuing Bank (i) not later than 2:00
p.m., New York City time, on the fifth Business Day after the Issuing Bank shall
have paid any draft under the Letter of Credit a sum equal to the amount so paid
under the Letter of Credit, (ii) interest on each amount paid by the Issuing
Bank under the Letter of Credit from and including the date such amount is paid
by the Issuing Bank under the Letter of Credit until but excluding the earlier
of (x) the date the Issuing Bank shall have received from the Company the
amounts due under clause (i) above and this clause (ii) and (y) the fifth
Business Day after the Issuing Bank shall have paid the relevant draft, payable
on demand, at a rate per annum equal to the Base Rate, and (iii) interest on any
amount not paid by the Company when due under clauses (i) and (ii) above from
and including the

                                       13


fifth Business Day after the relevant draft is paid by the Issuing Bank under
the Letter of Credit until such overdue amount is paid in full, payable on
demand, at a rate per annum equal to 2% per annum above the Base Rate; provided
that such interest rate shall in no event be higher (with respect to each amount
due and payable hereunder, from the date such amount is due and payable until
the date such amount is paid in full) than the maximum rate permitted by
applicable law.

      (b) The Company agrees to pay to the Administrative Agent for the account
of the Banks ratably in proportion to their Participation Percentages a letter
of credit commission computed at the Letter of Credit Commission Rate on the
Maximum Credit Amount of the Letter of Credit from and including the Restatement
Effective Date to, but excluding, the Termination Date, payable quarterly in
arrears on each January 22, April 22, July 22 and October 22 until the
Termination Date, and on the Termination Date.

      (c) The Company agrees to pay to the Administrative Agent for the account
of the Issuing Bank a fronting fee at the rate per annum heretofore mutually
agreed by the Company and the Issuing Bank pursuant to the Fee Letter, on the
Maximum Credit Amount of the Letter of Credit from and including the Restatement
Effective Date to, but excluding, the Termination Date, payable quarterly in
arrears on each January 22, April 22, July 22 and October 22 until the
Termination Date, and on the Termination Date.

      (d) (i) If after July 22, 2002 the adoption of any applicable law, rule or
regulation, or any change therein, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by any Bank with any request or directive (whether or not having the force of
law) of any such authority, central bank or comparable agency shall impose,
modify or deem applicable any reserve, special deposit or similar requirement
(including, without limitation, any such requirement imposed by the Board of
Governors of the Federal Reserve System) against letters of credit issued by or
assets held by, deposits with or for the account of, or credit extended by, any
Bank or shall impose on any Bank any other condition regarding this Agreement or
the Letter of Credit or its Participation therein, and the result of any of the
foregoing is to increase the cost to such Bank of the issuance or maintenance of
the Letter of Credit or its Participation therein, or to reduce the amount of
any sum received or receivable by such Bank under this Agreement with respect
thereto, by an amount deemed by such Bank to be material, then within 15 days
after demand by such Bank (with a copy to the Administrative Agent), the Company
shall pay to the Administrative Agent for the account of such Bank such
additional amount or amounts as will compensate such Bank for such increased
cost or reduction.

      (ii) If any Bank shall have determined that, after July 22, 2002, the
adoption of any applicable law, rule or regulation regarding capital adequacy,
or any change in any such law, rule or regulation, or any change in the
interpretation or administration thereof by any governmental authority, central
bank or comparable agency charged with the

                                       14


interpretation or administration thereof, or any request or directive regarding
capital adequacy (whether or not having the force of law) of any such authority,
central bank or comparable agency, has or would have the effect of reducing the
rate of return on capital of such Bank (or its Parent) as a consequence of such
Bank's obligations hereunder to a level below that which such Bank (or its
Parent) could have achieved but for such adoption, change, request or directive
(taking into consideration its policies with respect to capital adequacy) by an
amount deemed by such Bank to be material, then from time to time, within 15
days after demand by such Bank (with a copy to the Administrative Agent), the
Company shall pay to such Bank such additional amount or amounts as will
compensate such Bank (or its Parent) for such reduction.

      (iii) Each Bank will notify the Company and the Administrative Agent of
any event of which it has knowledge, occurring after July 22, 2002 which will
entitle such Bank to compensation pursuant to clause (i) or (ii) of this Section
2(d) as promptly as practicable, but in any event within 90 days after such Bank
obtains knowledge thereof; provided that, if such Bank fails to give such notice
within 90 days after it obtains knowledge of such an event, such Bank shall,
with respect to compensation payable in respect of any costs resulting from such
event, only be entitled to payment for costs incurred on and after the date that
such Bank does give such notice. A certificate of any Bank claiming compensation
under this Section 2(d) and setting forth the additional amount or amounts to be
paid to it hereunder shall be conclusive in the absence of demonstrable error.
In determining such amount, such Bank may use any reasonable averaging and
attribution methods.

      (e) (i) For the purposes of this Section 2(e), the following terms have
the following meanings:

      "TAXES" means any and all present or future taxes, duties, levies,
imposts, deductions, charges or withholdings with respect to any payment by the
Company pursuant to this Agreement, and all liabilities with respect thereto,
excluding (i) in the case of each Bank and the Administrative Agent, taxes
imposed on its net income, and franchise or similar taxes imposed on it, by a
jurisdiction under the laws of which such Bank or the Administrative Agent (as
the case may be) is organized or in which its principal executive office is
located or, in the case of each Bank, in which its Applicable Booking Office is
located and (ii) in the case of each Bank, any United States withholding tax
imposed with respect to any payment by the Company pursuant to this Agreement,
but only up to the rate (if any) at which United States withholding tax would
apply to such payments to such Bank at the time such Bank first becomes a party
to this Agreement.

      "OTHER TAXES" means any present or future stamp or documentary taxes and
any other excise or property taxes, or similar charges or levies, which arise
from any payment made pursuant to this Agreement or from the execution or
delivery of, or otherwise with respect to, this Agreement or the Letter of
Credit.

                                       15


      (ii) Any and all payments by the Company to or for the account of any Bank
or the Administrative Agent hereunder shall be made without deduction for any
Taxes or Other Taxes; provided that, if the Company shall be required by law to
deduct any Taxes or Other Taxes from any such payments, (A) the sum payable
shall be increased as necessary so that after making all required deductions for
any Taxes or Other Taxes (including deductions applicable to additional sums
payable under this Section) such Bank or the Administrative Agent (as the case
may be) receives an amount equal to the sum it would have received had no such
deductions been made, (B) the Company shall make such deductions, (C) the
Company shall pay the full amount deducted to the relevant taxation authority or
other authority in accordance with applicable law and (D) the Company shall
furnish to the Administrative Agent the original or a certified copy of a
receipt evidencing payment thereof.

      (iii) The Company agrees to indemnify each Bank and the Administrative
Agent for the full amount of Taxes or Other Taxes (including, without
limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on
amounts payable under this Section) paid by such Bank or the Administrative
Agent (as the case may be) and any liability (including penalties, interest and
expenses) arising therefrom or with respect thereto. This indemnification shall
be paid within 30 days after such Bank or the Administrative Agent (as the case
may be) makes demand therefor. Such demand shall be made as promptly as
practicable, but in any event within 90 days after such Bank obtains actual
knowledge of such event; provided, however, that if any Bank fails to make such
demand within 90 days after such Bank obtains knowledge of such event, such Bank
shall, with respect to compensation payable in respect of such event, not be
entitled to compensation in respect of the costs and losses incurred between the
90th day after such Bank obtains actual knowledge of such event and the date
such Bank makes such demand.

      (iv) Each Bank organized under the laws of a jurisdiction outside the
United States shall provide the Company and the Administrative Agent with
Internal Revenue Service Form W-8BEN, W-8ECI, or other type of W-8, as
appropriate, or any successor form prescribed by the Internal Revenue Service:
(i) on or prior to the date of its execution and delivery of this Agreement in
the case of each Bank listed on the signature pages hereof and on or prior to
the date on which it becomes a Bank in the case of each other Bank, (ii) before
the end of each third calendar year thereafter, and (iii) at any time that a
change of circumstances occurs that makes any information on the form so
provided incorrect, certifying that such Bank is entitled to benefits under an
income tax treaty to which the United States is a party which exempts such Bank
from United States withholding tax or reduces the rate of withholding tax on
payments under this Agreement or certifying that the income receivable pursuant
to this Agreement is effectively connected with the conduct of a trade or
business in the United States. Further, each such Bank that is not an exempt
recipient listed in Section 6049(b)(4) of the Code shall provide the Company and
the Administrative Agent with Internal Revenue Service Form W-8 or

                                       16


W-9, as appropriate, or other successor form prescribed by the Internal Revenue
Service, certifying that it is exempt from United States back-up withholding.

      (v) For any period with respect to which a Bank has failed to provide the
Company or the Administrative Agent with the appropriate forms pursuant to
Section 2(e)(iv) (unless such failure is due to a change in treaty, law or
regulation occurring subsequent to the date on which such form originally was
required to be provided), such Bank shall not be entitled to indemnification
under Section 2(e)(ii) or (iii) with respect to Taxes imposed by the United
States; provided that if a Bank, which is otherwise exempt from or subject to a
reduced rate of withholding tax, becomes subject to Taxes because of its failure
to deliver a form required hereunder, the Company shall take such steps as such
Bank shall reasonably request to assist such Bank to recover such Taxes.

      (vi) If the Company is required to pay additional amounts to or for the
account of any Bank pursuant to this Section, then such Bank will change the
jurisdiction of its Applicable Booking Office if, in the judgment of such Bank,
such change (A) will eliminate or reduce any such additional payment which may
thereafter accrue and (B) is not otherwise disadvantageous to such Bank.

      (f) If the payments claimed by any such Bank pursuant to Section 2(d) or
Section 2(e) are substantially in excess, as reasonably determined by the
Company, relative to the amount of such Bank's Participation, of the payments
claimed by the other Banks pursuant to such Sections, the Company shall have the
right, with the assistance of the Administrative Agent, to seek one or more
mutually satisfactory substitute Eligible Institutions to assume all of the
rights and obligations of such Bank in respect of its Participation pursuant to
an assignment and assumption agreement in form and substance satisfactory to the
Administrative Agent; provided that the aggregate amount of the Participation so
assigned to each such Eligible Institution (together with any Participation then
held by such Eligible Institution) shall not be less than $10,000,000.

      (g) The Company shall make each payment hereunder to the Administrative
Agent at 270 Park Avenue, New York, New York 10017, not later than 2:00 p.m.
(New York City time) on the date when due in lawful money of the United States
of America and in Federal or other funds immediately available in New York City.
Whenever any payment under this Section 2 shall be due on a day which is not a
Business Day, the date for payment thereof shall be extended to the next
succeeding day that is a Business Day. If the date for any payment of principal
is extended by operation of law or otherwise, interest thereon shall be payable
for such extended time.

      (h) Computations of the letter of credit commission, the fee referred to
in Section 2(c), and interest based on the Prime Rate shall be made by the
Administrative Agent on the basis of a year of 365 or 366 days, as the case may
be, for the actual number of days (including the first day but excluding the
last day) elapsed. Computations of all other interest hereunder shall be made by
the Administrative Agent on the basis of a year

                                       17


of 360 days for the actual number of days (including the first day but excluding
the last day) elapsed.

      SECTION 3. Amendment and Restatement of Letter of Credit; Conditions to
Effectiveness; Transitional Provisions. (a) On the terms and conditions herein
set forth, the Issuing Bank agrees to execute and deliver to the Equity
Participant on the Restatement Effective Date, or, if all of the conditions
precedent to the effectiveness of this Amendment and Restatement shall not have
been satisfied by 3:00 p.m., New York City time, on the Restatement Effective
Date, on the next succeeding Business Day, an Amended and Restated Letter of
Credit, substantially in the form of Exhibit A hereto, amending and restating
the Existing Letter of Credit.

      (b) This Amendment and Restatement shall become effective on the date (the
"RESTATEMENT EFFECTIVE DATE") on which all of the following conditions shall
have been satisfied (or waived in accordance with Section 10):

            (i) receipt by the Administrative Agent of a counterpart of this
      Amendment and Restatement signed by each party hereto;

            (ii) receipt by the Administrative Agent of fees payable by the
      Company on or before the Restatement Effective Date in such amounts and
      for the accounts of such parties as heretofore mutually agreed pursuant to
      the Fee Letter;

            (iii) receipt by the Administrative Agent of evidence to its
      satisfaction that the Existing Letter of Credit has been (or will
      substantially simultaneously with the effectiveness hereof be) terminated
      without a drawing thereunder, and that all amounts payable by the Company
      under the Existing Reimbursement Agreement have been paid;

            (iv) receipt by the Administrative Agent of an opinion of Snell &
      Wilmer, special counsel for the Company, dated the Restatement Effective
      Date, substantially in the form of Exhibit B hereto, and covering such
      additional matters relating to the transactions contemplated hereby as the
      Banks may reasonably request;

            (v) receipt by the Administrative Agent of an opinion of Davis Polk
      & Wardwell, special counsel for the Administrative Agent, dated the
      Restatement Effective Date, substantially in the form of Exhibit C hereto,
      and covering such additional matters relating to the transactions
      contemplated hereby as the Administrative Agent may reasonably request;

            (vi) receipt by the Administrative Agent of copies, certified by the
      Secretary, an Associate Secretary or an Assistant Secretary of the
      Company, of the resolutions of the Board of Directors of the Company
      authorizing the execution,

                                       18


      delivery and performance of this Amendment and Restatement and the
      transactions contemplated hereby;

            (vii) receipt by the Administrative Agent of a certificate of the
      Secretary, an Associate Secretary or an Assistant Secretary of the
      Company, dated the Restatement Effective Date, certifying the names and
      true signatures of the officers of the Company authorized to sign this
      Amendment and Restatement;

            (viii) receipt by the Administrative Agent of evidence to its
      satisfaction that each of the Terminating Participation Agreements has
      been terminated, and that no amounts payable thereunder by any party
      thereto are outstanding;

            (ix) receipt by the Administrative Agent of a certificate, dated the
      Restatement Effective Date, signed by the chief financial officer, vice
      president, finance, or treasurer of the Company to the effect that (x) (A)
      no Default or Event of Default; (B) no Reimbursement Default (as defined
      in the Existing Reimbursement Agreement) and (C) no Reimbursement Default
      (as defined in this Amendment and Restatement) shall have occurred and be
      continuing on the Restatement Effective Date or would result from the
      amendment and restatement of the Letter of Credit pursuant to subsection
      (a) of this Section 3; and (y) that the representations and warranties of
      the Company set forth in Section 6 of this Amendment and Restatement shall
      be true and correct on and as of the Restatement Effective Date as though
      made on and as of such date;

            (x) receipt by the Administrative Agent of certified copies of all
      approvals, authorizations, orders or consents of, or notices to or
      registrations with, any governmental body or agency, if any, required for
      the Company to enter into this Amendment and Restatement;

            (xi) receipt by the Administrative Agent of such other approvals,
      opinions or documents as the Administrative Agent may reasonably request;
      and

            (xii) receipt by the Administrative Agent of all documents the
      Administrative Agent may reasonably request relating to the existence of
      the Company, the corporate authority for and the validity of this
      Amendment and Restatement and any other matters relevant hereto;

provided that all documents (or copies thereof) to be delivered to the
Administrative Agent on or before the Restatement Effective Date shall be
provided to each Bank and shall be in form and substance satisfactory to the
Required Banks. Each Bank which is a party to a Terminating Participation
Agreement agrees with the Issuing Bank that, subject to the payment of all
amounts accrued and unpaid thereunder to (but not including) the Restatement
Effective Date payable by any party thereto, the Terminating Participation

                                       19


Agreement to which it is a party shall terminate automatically on the
Restatement Effective Date without further action by any party thereto.

      (c) Promptly after this Amendment and Restatement becomes effective, the
Administrative Agent shall give notice thereof and of the Restatement Effective
Date to each party hereto. Immediately upon the effectiveness of this Amendment
and Restatement, the Issuing Bank will be obligated to extend the Letter of
Credit as provided in subsection (a) of this Section 3 and each party hereto
will be bound by the provisions of this subsection (c). The rights and
obligations of the parties hereto on and after the Restatement Effective Date
shall be governed by the provisions of this Amendment and Restatement and as the
same may be further amended and in effect from time to time thereafter. The
rights and obligations of the parties hereto with respect to the period prior to
the Restatement Effective Date will continue to be governed by the provisions of
this Agreement as in effect prior to the Restatement Effective Date.

      SECTION 4. Adjustment of Maximum Drawing Amount; Terms of Drawing. The
Maximum Drawing Amount shall be modified as specified in the third paragraph of
the Letter of Credit and drawings under the Letter of Credit shall be subject to
the other terms and conditions set forth in the Letter of Credit.

      SECTION 5. Obligations Absolute. The payment obligations of the Company
under this Agreement shall be absolute, unconditional and irrevocable, and shall
be performed strictly in accordance with the terms of this Agreement under all
circumstances whatsoever, including, without limitation, the following
circumstances:

            (i) any lack of validity or enforceability of the Letter of Credit
      or any of the Transaction Documents or Financing Documents;

            (ii) any amendment or waiver of or any consent to departure from all
      or any of the Transaction Documents or Financing Documents;

            (iii) the existence of any claim, set-off, defense or other rights
      which the Company may have at any time against the Equity Participant, the
      Owner Trustee or any transferee of the Letter of Credit (or any persons or
      entities for whom any of the foregoing may be acting), the Administrative
      Agent, any Bank, any Participant or any other person or entity, whether in
      connection with this Agreement, the Transaction Documents or Financing
      Documents, the transactions contemplated hereby or thereby or any
      unrelated transaction; provided that nothing herein shall prevent the
      assertion of such claim by separate suit or compulsory counterclaim;

            (iv) any statement or any other document presented under the Letter
      of Credit proving to be forged, fraudulent, invalid or insufficient in any
      respect or any statement therein being untrue or inaccurate in any respect
      whatsoever;

                                       20


            (v) payment by the Issuing Bank under the Letter of Credit against
      presentation of a draft or certificate which does not comply with the
      terms of the Letter of Credit; or

            (vi) any other circumstance or happening whatsoever, whether or not
      similar to any of the foregoing.

      SECTION 6. Representations and Warranties of the Company. The Company
represents and warrants as follows:

      (a) Corporate Existence. Each of the Company and each Material Subsidiary:
(i) is a corporation duly organized and validly existing under the laws of the
jurisdiction of its incorporation; (ii) has all requisite corporate power
necessary to own its assets and carry on its business as presently conducted;
(iii) has all governmental licenses, authorizations, consents and approvals
necessary to own its assets and carry on its business as presently conducted,
unless the failure to have any such license, authorization consent or approval
would not have a material adverse effect on the financial condition or financial
prospects of the Company and its Consolidated Subsidiaries, taken as a whole,
except as disclosed in the Financial Information or by written notice delivered
to the Banks more than 5 Business Days prior to the execution and delivery of
this Amendment and Restatement; and (iv) is qualified to do business in all
jurisdictions in which the nature of the business conducted by it makes such
qualification necessary and where failure so to qualify would have a material
adverse effect on the financial condition or financial prospects of the Company
and its Consolidated Subsidiaries, taken as a whole. All of the issued and
outstanding common stock of the Company is owned by PWCC.

      (b) Noncontravention, Etc. The execution, delivery, and performance by the
Company of this Agreement are within the Company's corporate powers, have been
duly authorized by all necessary corporate action, and do not (i) contravene the
Company's charter or by-laws or (ii) contravene any Applicable Law or any
contractual restriction (including, but not limited to, the Company Indenture)
binding on or affecting the Company. The execution, delivery, and performance by
the Company of this Agreement do not cause the creation or imposition of any
Lien upon the assets of the Company or any Material Subsidiary, except as it may
be necessary for the Company to grant a Lien to the Administrative Agent for the
benefit of the Banks pursuant to Section 8(c).

      (c) Approvals. No authorization or approval or other action by, and no
notice to or filing or registration with, any governmental authority or
regulatory body is required for the due execution, delivery and performance by
the Company of this Agreement, except for (v) the 1986 Order which has been duly
issued by the ACC and is in full force and effect in the form originally issued,
(w) such other Governmental Actions as have been duly obtained, given or
accomplished, (x) the filing with the ACC of a copy of this Agreement within
five days of the execution hereof, in accordance with the 1986 Order

                                       21


and (y) as may be required under Applicable Law not now in effect. The
execution, delivery, and performance by the Company of this Agreement do not
require the consent or approval of the Equity Participant or the Owner Trustee
(except as specified in this Agreement) or PWCC or any trustee or holder of any
indebtedness or other obligation of the Company, other than such consents and
approvals as have been duly obtained, given or accomplished. No Governmental
Action by any Federal, Arizona or New York Governmental Authority relating to
the Securities Act, the Securities Exchange Act, the Trust Indenture Act, the
Federal Power Act, the Atomic Energy Act, the Nuclear Waste Act, the Holding
Company Act, the Arizona Public Utility Act, energy or nuclear matters, public
utilities, the environment, health and safety or Unit 2 is or will be required
in connection with the participation by the Administrative Agent, any Bank or
any Participant in the consummation of the transactions contemplated by this
Agreement, except such Governmental Actions (A) as have been, duly obtained,
given or accomplished or (B) as may be required by Applicable Law not now in
effect.

      (d) Binding Agreement. This Agreement is a legal, valid and binding
obligation of the Company enforceable against the Company in accordance with its
terms, subject, however, to the application by a court of general principles of
equity and to the effect of any applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally.

      (e) Litigation. There is no pending or (to the knowledge of the Company)
threatened action or proceeding affecting the Company or any of its Subsidiaries
before any court, governmental agency or arbitrator, that, if adversely
determined, could have a material adverse effect on the financial condition or
financial prospects of the Company and its Consolidated Subsidiaries, taken as a
whole, except as disclosed in the Financial Information or by written notice
delivered to the Banks more than 5 Business Days prior to the execution and
delivery of this Amendment and Restatement.

      (f) Financial Statements. The balance sheet of the Company and its
Consolidated Subsidiaries as of December 31, 2001 and the related statements of
income and cash flows of the Company and its Consolidated Subsidiaries for the
fiscal year then ended, copies of which have been furnished to the Banks, fairly
present the financial condition of the Company and its Consolidated Subsidiaries
as of such date and the results of operations and cash flows of the Company and
its Consolidated Subsidiaries for such fiscal year, all in accordance with
generally accepted accounting principles consistently applied (except as
disclosed therein). The balance sheet of the Company and its Consolidated
Subsidiaries as of March 31, 2002 and the related statements of income and cash
flows of the Company and its Consolidated Subsidiaries for the quarter then
ended, copies of which have been furnished to the Banks, fairly present the
financial condition of the Company and its Consolidated Subsidiaries as of such
date and the results of operations and cash flows of the Company and its
Consolidated Subsidiaries for the quarter then ended, all in accordance with
generally accepted accounting principles consistently applied (except as
disclosed therein and subject to normal year-end audit

                                       22


adjustments). Since March 31, 2002, there has been no material adverse change in
the financial condition or financial prospects of the Company and its
Consolidated Subsidiaries, taken as a whole.

      (g) ERISA. The Company and the ERISA Affiliates have fulfilled their
respective obligations under the minimum funding standards of ERISA and the Code
with respect to each Plan and are in compliance in all material respects with
the presently applicable provisions of ERISA and the Code, and have not incurred
any liability to the PBGC or any Plan or Multiemployer Plan, other than
liability to the PBGC for premiums prior to the due date for such premiums and
liability to any Plan maintained by the Company or an ERISA Affiliate or to any
Multiemployer Plan for contributions prior to the due date for such
contributions which shall be paid in accordance with the provisions of the
minimum funding standards of ERISA and the Code.

      (h) Taxes. The Company and its Subsidiaries have filed all United States
Federal income tax returns and all other material tax returns which are required
to be filed by them and have paid all taxes due pursuant to such returns or
pursuant to any assessment received by the Company or any of its Subsidiaries,
except to the extent that (i) such taxes are being contested in good faith and
by appropriate proceedings and appropriate reserves for the payment thereof have
been maintained by the Company and its Subsidiaries in accordance with generally
accepted accounting principles or (ii) the failure to make such filings or such
payments is not likely to have a material adverse effect on the financial
condition or the financial prospects of the Company and its Consolidated
Subsidiaries, taken as a whole. The charges, accruals and reserves on the books
of the Company and its Material Subsidiaries as set forth in the most recent
financial statements of the Company delivered to the Banks pursuant to Section
6(f) or Section 7(g)(i) or Section 7(g)(ii) hereof in respect of taxes and other
governmental charges are, in the opinion of the Company, adequate.

      (i) Environmental. The operations and properties of the Company and its
Subsidiaries comply in all material respects with all environmental laws, the
noncompliance with which would have a material adverse effect on the financial
condition or financial prospects of the Company and its Consolidated
Subsidiaries taken as a whole, except as disclosed in the Financial Information
or by written notice delivered to the Banks more than 5 Business Days prior to
the execution and delivery of this Amendment and Restatement.

      (j) Investment Company. The Company is not an "investment company", or a
company "controlled" by an "investment company", within the meaning of the
Investment Company Act of 1940, as amended.

      (k) No Material Misstatements or Omissions. The Financial Information did
not, and any documents filed with the Securities and Exchange Commission and
delivered to the Banks pursuant to Section 7(g)(i) or Section 7(g)(ii) after
December 31,

                                       23


2001 will not, as of the date furnished, contain any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements made therein, in the light of the circumstances under which they were
or shall be made, not misleading.

      (l) No Amendments. Except as provided to the Banks prior to the
Restatement Effective Date, there has been no amendment or waiver of, or consent
with respect to, the payment obligations of the Company under any Transaction
Document or Financing Document since March 17, 1993.

      SECTION 7. Affirmative Covenants. So long as a drawing is available under
the Letter of Credit or the Company shall have any obligation to pay any amount
hereunder to or for the account of the Administrative Agent or any Bank, the
Company will, unless the Required Banks shall otherwise consent in writing:

      (a) Preservation of Corporate Existence, Business, Etc. (i) Preserve and
maintain its corporate existence and all rights and privileges (other than
"franchises" as described in Arizona Revised Statutes, Section 40-283 or any
successor provision) reasonably necessary in the normal conduct of its business,
unless the failure to maintain such rights and privileges would not have a
material adverse effect on the financial condition or financial prospects of the
Company and its Consolidated Subsidiaries taken as a whole, and use its best
efforts to preserve and maintain such franchises reasonably necessary in the
normal conduct of its business, except that (A) the Company from time to time
may make minor extensions of its lines, plants, services or systems prior to the
time a related franchise, certificate of convenience and necessity, license or
permit is procured, (B) from time to time communities served by the Company may
become incorporated and considerable time may elapse before such a franchise is
procured, (C) certain such franchises may have expired prior to the
renegotiation thereof, (D) certain minor defects and exceptions may exist which,
individually and in the aggregate, are not material and (E) certain franchises,
certificates, licenses and permits may not be specific as to their geographical
scope.

      (ii) Continue to conduct the same general type of business conducted on
July 22, 2002.

      (iii) Notwithstanding paragraphs (i) and (ii) above, the Company may
effect the Asset Transfer, whether or not the Nuclear Transfer occurs, and the
Nuclear Transfer.

      (b) Compliance with Laws, Etc. (i) Comply, and cause each Material
Subsidiary to comply, in all material respects with all applicable laws, rules,
regulations and orders of governmental or regulatory authorities if the failure
to comply would have a material adverse effect on the financial condition or
financial prospects of the Company and its Consolidated Subsidiaries, taken as a
whole.

                                       24


            (ii) Comply at all times with the 1986 Order and any Subsequent
      Order, unless the failure to so comply could not affect the validity or
      enforceability of the indebtedness of the Company pursuant to this
      Agreement.

      (c) Payment of Taxes and Claims. Pay and discharge, and cause each of its
Subsidiaries to pay and discharge, before the same shall become delinquent, all
taxes, assessments and governmental charges or levies imposed on it or its
property; provided that neither the Company nor any of its Subsidiaries shall be
required to pay or discharge any such tax, assessment, charge or levy (i) that
is being contested in good faith and by proper proceedings and as to which
adequate reserves are being maintained in accordance with generally accepted
accounting principles or (ii) if the failure to pay such tax, assessment, charge
or levy is not likely to have a material adverse effect on the financial
condition or financial prospects of the Company and its Consolidated
Subsidiaries, taken as a whole.

      (d) Maintenance of Insurance. Maintain, and cause each Material Subsidiary
to maintain, insurance, either with responsible and reputable insurance
companies or associations, or through its own program of self-insurance, in such
amounts and covering such risks as is usually carried by companies engaged in
similar businesses and owning similar properties in the same general areas in
which the Company or such Material Subsidiary operates.

      (e) Visitation Rights. Permit, and cause each of its Subsidiaries to
permit, at any reasonable time and from time to time, any Bank or any of its
agents or representatives to examine and make copies of and abstracts from the
records and books of account of, and visit the properties of, the Company and
any of its Subsidiaries, and to discuss the affairs, finances and accounts of
the Company and any of its Subsidiaries with any of their respective officers or
directors; provided that the Company and its Subsidiaries reserve the right to
restrict access to any of its properties in accordance with reasonably adopted
procedures relating to safety and security; and provided further that the costs
and expenses incurred by any Bank or its agents or representatives in connection
with any such examinations, copies, abstracts, visits or discussions shall be,
upon the occurrence and during the continuation of a Reimbursement Default, for
the account of the Company and, in all other circumstances, for the account of
such Bank.

      (f) Maintenance of Property. Keep, and cause each Material Subsidiary to
keep, all property useful and necessary in its business in good working order
and condition (ordinary wear and tear excepted), it being understood that this
covenant relates only to the working order and condition of such properties and
shall not be construed as a covenant not to dispose of properties.

      (g) Reporting Requirements. Furnish to each of the Banks:

                                       25


            (i) as soon as available and in any event within 60 days after the
      end of each of the first three fiscal quarters of each fiscal year of the
      Company, (A) for each such fiscal quarter of the Company, statements of
      income and cash flows of the Company and its Consolidated Subsidiaries for
      such fiscal quarter and the related balance sheet of the Company and its
      Consolidated Subsidiaries as at the end of such fiscal quarter, setting
      forth in each case in comparative form the corresponding figures for the
      corresponding fiscal quarter in the preceding fiscal year and (B) for the
      period commencing at the end of the previous fiscal year and ending with
      the end of such fiscal quarter, statements of income and cash flows of the
      Company and its Consolidated Subsidiaries for such period setting forth in
      each case in comparative form the corresponding figures for the
      corresponding period in the preceding fiscal year; provided that so long
      as the Company remains subject to the reporting requirements of the
      Securities Exchange Act of 1934, as amended, the Company may provide, in
      satisfaction of the requirements of this first sentence of this Section
      7(g)(i), its report on Form 10-Q for such fiscal quarter. Each set of
      financial statements provided under this Section 7(g)(i) shall be
      accompanied by a certificate of an Authorized Officer, which certificate
      shall state that said financial statements fairly present the financial
      condition and results of operations and cash flows of the Company and its
      Consolidated Subsidiaries in accordance with generally accepted accounting
      principles, consistently applied (except as disclosed therein), as at the
      end of, and for, such period (subject to normal year-end audit
      adjustments);

            (ii) as soon as available and in any event within 120 days after the
      end of each fiscal year of the Company, statements of income, retained
      earnings and cash flows of the Company and its Consolidated Subsidiaries
      for such year and the related balance sheets of the Company and its
      Consolidated Subsidiaries as at the end of such year, setting forth in
      each case in comparative form the corresponding figures for the preceding
      fiscal year; provided that, so long as the Company remains subject to the
      reporting requirements of the Securities Exchange Act of 1934, as amended,
      the Company may provide, in satisfaction of the requirements of this first
      sentence of this Section 7(g)(ii), its report on Form 10-K for such fiscal
      year. Each set of financial statements provided pursuant to this Section
      7(g)(ii) shall be accompanied by an opinion thereon of independent
      certified public accountants of recognized national standing, which
      opinion shall state that said financial statements fairly present the
      financial condition and results of operations and cash flows of the
      Company and its Consolidated Subsidiaries as at the end of, and for, such
      fiscal year, in accordance with generally accepted accounting principles
      consistently applied (except as disclosed therein);

            (iii) as soon as possible and in any event within ten days after an
      Authorized Officer knows of the occurrence of any Reimbursement Default
      continuing on the date of such statement, a statement of an Authorized
      Officer

                                       26


      setting forth details of such Reimbursement Default and the action which
      the Company has taken and proposes to take with respect thereto;

            (iv) as soon as possible, and in any event within ten days after an
      Authorized Officer knows that any of the events or conditions specified
      below with respect to any Plan or Multiemployer Plan have occurred or
      exist, a statement signed by an Authorized Officer setting forth details
      respecting such event or condition and the action, if any, which the
      Company or its ERISA Affiliate proposes to take with respect thereto (and
      a copy of any report or notice required to be filed with or given to the
      PBGC by the Company or an ERISA Affiliate with respect to such event or
      condition):

                  (A) any reportable event, as defined in Section 4043 of ERISA
            and the regulations issued thereunder, with respect to a Plan, as to
            which the PBGC has not by regulation or other ruling or notice of
            general applicability waived the requirement of Section 4043(a) of
            ERISA that it be notified within 30 days of the occurrence of such
            event; provided that a failure to meet the minimum funding standard
            of Section 412 of the Code or Section 302 of ERISA shall be a
            reportable event regardless of the issuance of any waivers in
            accordance with Section 412(d) of the Code;

                  (B) the filing under Section 4041(c) of ERISA of a notice of
            intent to terminate any Plan in a distress termination or the
            termination of any Plan in a distress termination;

                  (C) the institution by the PBGC of proceedings under Section
            4042 of ERISA for the termination of, or the appointment of a
            trustee to administer, any Plan, or the receipt by the Company or
            any ERISA Affiliate of a notice from a Multiemployer Plan that such
            action has been taken by the PBGC with respect to such Multiemployer
            Plan:

                  (D) the complete or partial withdrawal by the Company or any
            ERISA Affiliate under Part 1 of Subtitle E of Title IV of ERISA from
            a Multiemployer Plan, or the receipt by the Company or any ERISA
            Affiliate of notice from a Multiemployer Plan that it is in
            reorganization or insolvency pursuant to Section 4241 or 4245 of
            ERISA or that it intends to terminate or has terminated under
            Section 4041A of ERISA; and

                  (E) the institution of a proceeding by a fiduciary of any
            Multiemployer Plan against the Company or any ERISA Affiliate to
            enforce Section 515 of ERISA, which proceeding is not dismissed
            within 45 days;

                                       27


            (v) promptly after (A) any amendment or modification of the 1986
      Order or (B) the promulgation, amendment or modification of any Subsequent
      Order by the ACC, a copy thereof;

            (vi) promptly after the sending or filing thereof, copies of all
      reports which the Company sends to its security holders as a group, and
      copies of all reports and registration statements which the Company or any
      of its Subsidiaries files with the Securities and Exchange Commission or
      any national securities exchange;

            (vii) as soon as practicable and in any event within 30 days after
      the execution thereof, a copy of each amendment, waiver or consent
      relating to the payment obligations of the Company under any Transaction
      Document or Financing Document; and

            (viii) such other information respecting the condition or
      operations, financial or otherwise, of the Company or any of its
      Subsidiaries as the Administrative Agent at the request of any Bank may
      from time to time reasonably request.

The Company will furnish to the Banks, at the time it furnishes each set of
financial statements pursuant to Section 7(g)(i) or 7(g)(ii) above, a
certificate of an Authorized Officer (x) to the effect that no Reimbursement
Default has occurred and is continuing (or, if any Reimbursement Default has
occurred and is continuing, describing the same in reasonable detail and
describing the action that the Company has taken and proposes to take with
respect thereto) and (y) setting forth in reasonable detail the computations
necessary to determine whether the Company is in compliance with Sections 7(h)
and 8(e) as of the end of the relevant fiscal quarter or fiscal year.

      (h) Consolidated Cash Coverage Ratio. Maintain for each twelve-month
period ending on the last day of each fiscal quarter (determined as of the last
day of such fiscal quarter) a Consolidated Cash Coverage Ratio of no less than
2.0:1.0.

      (i) Filing with ACC. File a copy of this Amendment and Restatement, as
executed by each of the parties hereto, with the ACC within five days of the
execution hereof.

      SECTION 8. Negative Covenants. So long as a drawing is available under the
Letter of Credit or the Company shall have any obligation to pay any amount
hereunder to or for the account of the Administrative Agent or any Bank, the
Company will not, without the written consent of the Required Banks:

      (a) Sale of Assets. Permit the Company nor any Material Subsidiary to, in
one or a series of transactions after December 31, 2001, sell, lease, transfer
or otherwise

                                       28


dispose of assets to any Person other than the Company or any Subsidiary of the
Company (excluding individual dispositions occurring in the ordinary course of
business which involve assets with a book value not exceeding $5,000,000 and
excluding the Asset Transfer and the Nuclear Transfer) if, immediately after
giving effect to such transaction, the aggregate book value of the assets
disposed of in all such transactions after December 31, 2001, other than
excluded transactions, would equal or exceed 30% of the total of all assets
properly appearing on the December 31, 2001 balance sheet of the Company and its
Consolidated Subsidiaries included in its annual report on Form 10-K for the
year ended December 31, 2001.

      (b) Mergers, Etc. Merge or consolidate with or into any Person, or permit
any Material Subsidiary to do so, except that:

            (i) any Material Subsidiary may merge with any Wholly-Owned
      Subsidiary of the Company;

            (ii) any Material Subsidiary may merge into the Company; and

            (iii) the Company may merge with, and any Material Subsidiary may
      merge with, any other Person;

provided that, in each case, immediately after giving effect to such proposed
transaction, no Reimbursement Default would exist; and provided further that, in
the case of any such merger to which the Company is a party, the Company is the
surviving corporation and in the case of any such merger to which any Material
Subsidiary and any other Person are the parties (other than any such merger to
effect the Asset Transfer or the Nuclear Transfer), such Material Subsidiary is
the surviving corporation.

      (c) Negative Pledge. Permit the aggregate amount of all claims secured by
Liens (other than Permitted Liens) upon or with respect to any of its assets or
the assets of any of its Material Subsidiaries, whether now owned or hereafter
acquired, to exceed 55% of Total Assets, unless the Company shall simultaneously
(i) grant to the Administrative Agent, for the benefit of the Banks, Liens on
its assets as collateral for its obligations under this Agreement in a form and
on terms satisfactory to the Administrative Agent and the Required Banks in
their sole and absolute discretion and (ii) obtain the consent of the Equity
Participant thereto.

      (d) Assignment of Transaction Documents or Financing Documents. Enter into
any assignment of the Company's obligations under any of the Transaction
Documents or Financing Documents, except pursuant to the Nuclear Transfer.

      (e) Indebtedness. Permit Consolidated Indebtedness to exceed 65% of
Consolidated Capitalization at any time.

                                       29


      "CONSOLIDATED CAPITALIZATION" means, at any date, the sum as of such date
of Consolidated Indebtedness and Consolidated Net Worth.

      "CONSOLIDATED INDEBTEDNESS" means, at any date, the Indebtedness of the
Company and its Consolidated Subsidiaries determined on a consolidated basis as
of such date.

      "CONSOLIDATED NET WORTH" means, at any date, the sum as of such date of
(a) the par value (or value stated on the books of the Company) of all classes
of capital stock of the Company and its Subsidiaries, excluding the Company's
capital stock owned by the Company and/or its Subsidiaries, plus (or minus in
the case of a surplus deficit) (b) the amount of the consolidated surplus,
whether capital or earned, of the Company, determined in accordance with
generally accepted accounting principles as of the end of the most recent
calendar month (excluding (x) cumulative charges of up to $300 million to
consolidated surplus resulting from, or in anticipation of, discontinuation of
Financial Accounting Standards Board Statement No. 71, accounting for all or
part of the business and (y) the effect on the Company's accumulated other
comprehensive income/loss of the ongoing application of Financial Accounting
Standards Board Statement No. 133).

      SECTION 9. Reimbursement Events of Default. If any of the following events
("REIMBURSEMENT EVENTS OF DEFAULT") shall occur and be continuing:

            (i) The Company shall fail to pay when due any amount payable under
      Section 2(a) or fail to pay any other amount payable under Section 2
      within five Business Days after the same becomes due and payable; or

            (ii) The Company shall fail to perform or observe (A) any term,
      covenant or agreement contained in Section 7(a)(ii), 7(g)(iv), 7(h), 8(a),
      8(b), 8(c) or 8(e), or (B) any term, covenant or agreement contained in
      this Agreement (other than those covered by clause (i) above or subclause
      (A) of this clause (ii) or Section 7(e) or Section 19) on its part to be
      performed or observed if the failure to perform or observe such term,
      covenant or agreement shall remain unremedied for 30 days after written
      notice thereof shall have been given to the Company by the Administrative
      Agent; or

            (iii) Any representation or warranty made by the Company herein or
      by the Company (or any of its officers) in any certificate delivered in
      connection with this Agreement shall prove to have been false or
      misleading in any material respect when made; or

            (iv) Any material provision of this Agreement shall at any time for
      any reason cease to be valid and binding upon the Company, or shall be
      declared to be null and void, or the validity or enforceability thereof
      shall be contested by the

                                       30


      Company or any governmental agency or authority, or the Company shall deny
      that it has any or further liability or obligation under this Agreement;
      or

            (v) The Company shall fail to pay any principal of or premium or
      interest on any Indebtedness which is outstanding in a principal amount of
      at least $5,000,000 (but excluding Indebtedness owing hereunder) of the
      Company, when the same becomes due and payable (whether by scheduled
      maturity, required prepayment, acceleration, demand or otherwise), and
      such failure shall continue after the applicable grace period, if any,
      specified in the agreement or instrument relating to such Indebtedness; or
      the Company shall fail to perform or comply with any other term or
      covenant in any agreement or instrument relating to any such Indebtedness
      and such failure shall continue after the applicable grace period, if any,
      specified in such agreement or instrument, if the effect of such failure
      is to accelerate, or to permit the acceleration of, the maturity of such
      Indebtedness; or

            (vi) The Company shall fail to pay any principal of or premium or
      interest in respect of any operating lease in respect of which the payment
      obligations of the Company have a present value of at least $25,000,000,
      when the same becomes due and payable (whether by scheduled maturity,
      required prepayment, acceleration, demand or otherwise), and such failure
      shall continue after the applicable grace period, if any, specified in
      such operating lease, if the effect of such failure is to terminate, or to
      permit the termination of, such operating lease; or

            (vii) The Company shall generally not pay its debts as such debts
      become due, or shall admit in writing its inability to pay its debts
      generally, or shall make a general assignment for the benefit of
      creditors; or any proceeding shall be instituted by or against the Company
      seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation,
      winding up, reorganization, arrangement, adjustment, protection, relief,
      or composition of it or its debts under any law relating to bankruptcy,
      insolvency or reorganization or relief of debtors, or seeking the entry of
      an order for relief or the appointment of a receiver, trustee, custodian
      or other similar official for it or for any substantial part of its
      property and, in the case of any such proceeding instituted against it
      (but not instituted by it), either such proceeding shall remain
      undismissed or unstayed for a period of 60 days, or any of the actions
      sought in such proceeding (including, without limitation, the entry of an
      order for relief against, or the appointment of a receiver, trustee,
      custodian or other similar official for, it or for any substantial part of
      its property) shall occur; or the Company shall take any corporate action
      to authorize any of the actions set forth above in this clause (vii) or

            (viii) Any Material Subsidiary shall generally not pay its debts as
      such debts become due, or shall admit in writing its inability to pay its
      debts generally,

                                       31


      or shall make a general assignment for the benefit of creditors; or any
      proceeding shall be instituted by or against any Material Subsidiary
      seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation,
      winding up, reorganization, arrangement, adjustment, protection, relief,
      or composition of it or its debts under any law relating to bankruptcy,
      insolvency or reorganization or relief of debtors, or seeking the entry of
      an order for relief or the appointment of a receiver, trustee, custodian
      or other similar official for it or for any substantial part of its
      property and, in the case of any such proceeding instituted against it
      (but not instituted by it), either such proceeding shall remain
      undismissed or unstayed for a period of 60 days, or any of the actions
      sought in such proceeding (including, without limitation, the entry of an
      order for relief against, or the appointment of a receiver, trustee,
      custodian or other similar official for it or for any substantial part of
      its property) shall occur; or any Material Subsidiary shall take any
      corporate action to authorize any of the actions set forth above in this
      clause (viii) and, in each case, the Required Banks determine that such
      circumstances could have a material adverse effect on the financial
      condition or financial prospects of the Company and its Consolidated
      Subsidiaries, taken as a whole; or

            (ix) Any judgment or order for the payment of money that exceeds any
      applicable insurance coverage by more than $5,000,000 shall be rendered
      against the Company and such judgment or order shall remain unsatisfied or
      unstayed for a period of 30 days; or

            (x) Any judgment or order for the payment of money that exceeds any
      applicable insurance coverage by more than $25,000,000 shall be rendered
      against any Material Subsidiary; such judgment or order shall remain
      unsatisfied or unstayed for 30 days; and the Required Banks determine that
      such judgment or order could have a material adverse effect on the
      financial condition or financial prospects of the Company and its
      Consolidated Subsidiaries, taken as a whole; or

            (xi) An event or condition specified in Section 7(g)(iv) shall occur
      or exist with respect to any Plan or Multiemployer Plan and, as a result
      of such event or condition, together with all other such events or
      conditions, the Company or any ERISA Affiliate shall incur or in the
      opinion of the Required Banks shall be reasonably likely to incur a
      liability to a Plan, a Multiemployer Plan or the PBGC (or any combination
      of the foregoing) which is, in the determination of the Required Banks,
      material in relation to the financial condition or the financial prospects
      of the Company and its Consolidated Subsidiaries, taken as a whole; or

            (xii) any change in Applicable Law or any Governmental Action shall
      occur which has the effect of making the transactions contemplated by the
      Transaction Documents unauthorized, illegal or otherwise contrary to
      Applicable Law; or

                                       32


            (xiii) any event specified in subsection (vii), (viii) or (x) of
      Section 15 of the Facility Lease shall occur; or

            (xiv) the Company shall fail to make, or cause to be made, any
      payment specified in Section 15(i) of the Facility Lease equal to or
      exceeding $1,000,000 within the periods specified in that Section.

then, in every such event the Issuing Bank may, and if instructed to do so by
the Required Banks the Issuing Bank shall, by notice to the Company and the
Equity Participant, terminate the Letter of Credit as provided therein. The
Administrative Agent shall give notice to the Company under Section 9(ii)
promptly upon being requested to do so by the Required Banks and will promptly
notify each Bank of any such notice given at the request of the Required Banks.

      SECTION 10. Amendments and Waivers. No modification, amendment or waiver
of any provision of this Agreement or the Letter of Credit or any consent to the
assignment of the Company's obligations under any of the Transaction Documents
or the Financing Documents (except as provided in Section 8(d)) shall be
effective unless the same shall be in writing and signed by (or with the written
consent of) the Company and the Required Banks (and, if the rights or duties of
the Issuing Bank or the Administrative Agent are affected thereby, by it);
provided that no such modification, amendment, waiver or consent shall, unless
signed by (or with the written consent of) each Bank affected thereby, (i)
increase the Maximum Credit Amount or Maximum Drawing Amount or subject any Bank
to any additional obligation under this Agreement or the Letter of Credit, (ii)
reduce the principal of or rate of interest on any reimbursement obligation or
reduce the letter of credit commission payable under Section 2(b), (iii)
postpone the date fixed for any payment of principal of or interest on any
reimbursement obligation or any payment of such letter of credit commission,
(iv) extend the Stated Termination Date or the Termination Date or (v) change
the definition of Required Banks or the provisions of this Section 10 or any
provision of this Agreement that requires action by all the Banks. Any waiver of
any provision of this Agreement or the Letter of Credit shall be effective only
in the specific instance and for the specific purpose for which given.

      SECTION 11. Notices. (a) All notices, requests, demands and other
communications provided for hereunder shall, unless otherwise stated herein, be
in writing (including facsimile transmission or similar transmission) and
mailed, sent or delivered:

            (i) if to the Company, in the case of deliveries, to its street
      address at 400 North Fifth Street, Phoenix, Arizona 85004; in the case of
      mailings, to its mailing address at P.O. Box 53999, Phoenix, Arizona
      85072-3999; and in the case of facsimile transmission, to telecopy no.
      (602) 250-5640; in each case to the attention of the Treasurer;

                                       33


            (ii) if to the Administrative Agent, in the case of deliveries or
      mailings, to its address at 1 Chase Manhattan Plaza, 8th Floor, New York,
      New York, 10081, Attention: Maggie Swales; and in the case of facsimile
      transmission, to telecopy no. 212-552-5777; and

            (iii) if to the Issuing Bank, in the case of deliveries or mailings,
      to its address at JPMorgan Chase Bank, c/o JPMorgan Treasury Services,
      Attention: Standby Letter of Credit Manager - Immediate Action Required,
      4th Floor, 10420 Highland Manor Drive, Tampa, Florida 33610; and in the
      case of facsimile transmission, to telecopy no. 813-432-5161;

            (iv) if to any other Bank, at such address or number as shall be
      designated by it in its Administrative Questionnaire;

or, as to each party, to such other person and/or to such other address or
number as shall be designated by such party in a written notice to each other
party. All such notices, requests, demands and other communications shall be
effective when mailed or sent, addressed as aforesaid, except that notices to
the Administrative Agent shall not be effective until received by the
Administrative Agent and any notice to the Equity Participant pursuant to
Section 9 shall not be effective until received by the Equity Participant.
Notices of any Reimbursement Default shall be sent by the Company to the
Administrative Agent by facsimile transmission.

      (b) As promptly as practicable after receipt by the Administrative Agent
of any notice or other communication delivered hereunder by the Company, the
Administrative Agent shall furnish a copy thereof to each Bank, to the extent
such notice or other communication is not otherwise required by the terms
thereof to be delivered by the Company to each Bank.

      (c) Notices and other communications to the Banks hereunder may be
delivered or furnished by electronic communications pursuant to procedures
approved by the Administrative Agent; provided that the foregoing shall not
apply to notices pursuant to Sections 2, 14 or 17 unless otherwise agreed by the
Administrative Agent and the applicable Bank. The Administrative Agent and the
Company may, each in its discretion, agree to accept notices and other
communications to it hereunder by electronic communications pursuant to
procedures approved by it; provided that approval of such procedures may be
limited to particular notices or communications.

      SECTION 12. No Waiver; Remedies. No failure on the part of the
Administrative Agent or any Bank to exercise, and no delay in exercising, any
right, power, or privilege hereunder shall operate as a waiver thereof; nor
shall any single or partial exercise of any right hereunder preclude any other
or further exercise thereof or the exercise of any other

                                       34


right. The remedies herein provided are cumulative and not exclusive of any
remedies provided by law.

      SECTION 13. Waiver of Right of Setoff. The Administrative Agent and each
Bank hereby waive any right to set off and apply any and all deposits (general
or special, time or demand, provisional or final) and collateral at any time
held and other indebtedness at any time owing by it to or for the credit or the
account of the Company if there shall be a drawing under the Letter of Credit at
any time during the pendency of any proceeding by or against the Company seeking
to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up,
reorganization, arrangement, adjustment, protection, relief or composition of it
or its debts under any law relating to bankruptcy, insolvency or reorganization
or relief of debtors, or seeking the entry of an order for relief or the
appointment of a receiver, custodian, trustee or other similar official for it
or for any substantial part of its property (collectively the "BANKRUPTCY
EVENTS"), against any and all of the obligations of the Company now or hereafter
existing in respect of any reimbursement obligation of the Company set forth in
Section 2(a), provided that any such waiver shall be deemed ineffective as and
to the extent that the Administrative Agent and each Bank receive, after any of
the bankruptcy events occur, an unqualified opinion of nationally-recognized
counsel with bankruptcy law experience, (which counsel shall be mutually
satisfactory to the Administrative Agent and the Equity Participant, each of
which shall use its best efforts to agree on such counsel), that non-waiver
would not, as a result of the application of bankruptcy or similar laws as then
in effect, lead to the Administrative Agent or any Bank being refused,
prevented, permanently enjoined or restrained from or delayed in fulfilling its
obligation under the Letter of Credit. This Section 13 shall not constitute a
waiver of any right of setoff if there shall be a drawing under the Letter of
Credit at any time other than that described in this Section 13.

      SECTION 14. Participations of the Banks. (a) The Issuing Bank hereby sells
to each other Bank, and each Bank hereby severally purchases from the Issuing
Bank, as of the Restatement Effective Date, a Participation in an amount equal
to such Bank's Participation Percentage of the Letter of Credit and in each
drawing thereunder, all on the terms and conditions set forth herein.

      (b) If at any time on or after the Restatement Effective Date the Company
shall fail to reimburse a drawing under the Letter of Credit in accordance with
Section 2(a), the Administrative Agent shall promptly (but in any event no later
than 1:00 p.m., New York City time, on the date payment is due from the Banks
under this Section 14(b)) advise each Bank thereof and of the amount due from
the Company and the amount of such Bank's Participation therein, and each Bank
shall pay, no later than 4:00 p.m. (New York City time) on such date such Bank's
Participation Percentage of such amount by transferring the same in immediately
available funds to the Administrative Agent for the account of the Issuing Bank
at the Administrative Agent's address specified in Section 11. With respect to
any such drawing, each Bank agrees that the Issuing Bank shall have no
responsibility to the Banks other than obtaining the draft and certificates
referred to in

                                       35


the Letter of Credit and notifying each Bank thereof. The Administrative Agent
shall promptly credit each Bank's account with such Bank's Participation
Percentage of (i) all amounts representing principal of, or interest on, any
reimbursement obligations, in each case in respect of drawings under the Letter
of Credit of which such Bank has funded its Participation Percentage in
accordance with the foregoing provisions of this Section 14(b) and (ii) letter
of credit commissions payable to each Bank pursuant to Section 2(b) of this
Agreement and accruing on and after the Restatement Effective Date, but, in the
case of both clause (i) and clause (ii), only if, when and to the extent
received by the Administrative Agent from the Company. All such payments shall
be made if, when and to the extent the Administrative Agent receives payment
from the Company in respect of reimbursement for drawings under the Letter of
Credit and of the letter of credit commission pursuant to Section 2(b) of this
Agreement, and in the same funds in which such amounts are received, by credit
to an account at a bank located in the United States of America as each Bank
shall designate in writing to the Administrative Agent.

      (c) If the Administrative Agent should for any reason make any payment to
any Bank in anticipation of the receipt of funds from the Company and such funds
are not received by the Administrative Agent from the Company on the date
payment is due, then such Bank shall, on demand by the Administrative Agent,
forthwith return to the Administrative Agent any such amounts transferred to
such Bank by the Administrative Agent in respect of such Bank's Participation
plus interest thereon from the day such amounts were transferred by the
Administrative Agent to such Bank to but not including the day such amounts are
returned by such Bank at a rate per annum equal to the Federal Funds Rate. If
the Administrative Agent is required at any time to return to the Company or to
a trustee, receiver, liquidator, custodian or other similar official any portion
of the payments made by the Company to the Administrative Agent for the account
of any Bank, then such Bank shall, on demand by the Administrative Agent,
forthwith return to the Administrative Agent any such payments transferred to
such Bank by the Administrative Agent in respect of such Bank's Participation,
but without interest on such payments (unless the Administrative Agent is
required to pay interest on such amounts to the Person recovering such
payments).

      (d) Each Bank agrees that if it should receive any amount due to it under
this Agreement in respect of its Participation other than from the
Administrative Agent, such Bank will remit all of the same to the Administrative
Agent to distribute to the Banks pursuant to this Agreement, and such Bank's
Participation shall be adjusted to reflect such remittance. Each Bank further
agrees to send the Administrative Agent a copy of any notice sent by such Bank
to the Company hereunder.

          (e) Each Bank acknowledges and represents that it has made its own
independent appraisal of the Company, and the business, affairs and financial
condition of the Company, based on such documents and information as such Bank
has deemed appropriate, and each Bank will continue to be responsible for making
its own independent appraisal of such matters, based on such documents and
information as such

                                       36


Bank shall deem appropriate at the time, and has not relied upon and will not
hereafter rely upon the Administrative Agent or any other Bank or any
information prepared, distributed or otherwise made available by the
Administrative Agent for such appraisal or other assessment or review of the
Company. Each Bank represents, and in granting a Participation to such Bank it
is specifically understood and agreed, that such Bank is acquiring its
Participation in the Letter of Credit for its own account in the ordinary course
of its commercial banking business and not with a view to, or for sale in
connection with, any distribution thereof.

      SECTION 15. Assignees; Participants. (a) Each Bank shall have the right,
with the prior written consent of the Company (which shall not be unreasonably
withheld, and shall not be required if a Reimbursement Event of Default has
occurred and is continuing) and the prior written consent of the Administrative
Agent, to assign all or a pro rata portion of all of its rights and obligations
under its Participation at any time and from time to time to one or more
Eligible Institutions (each an "ASSIGNEE"); provided that (i) each such Assignee
shall assume such rights and obligations and agree, for the benefit of each
other party hereto, to be bound by the provisions of, and perform the
obligations of a Bank under, this Agreement, pursuant to an assignment and
assumption agreement in form and substance satisfactory to the Administrative
Agent and (ii) the aggregate amount of the Participation or Participations
assigned to each such Assignee pursuant to this Section 15(a) shall not be less
than $10,000,000. Each Bank shall give prompt notice to the Administrative Agent
and the Company of each such assignment made by it.

      (b) (i) Each Bank shall also have the right, without the consent of the
Company, to grant participating interests in its Participation at any time and
from time to time to one or more other financial institutions or other entities
(each a "PARTICIPANT"); provided that (A) such Bank's obligations under this
Agreement shall remain unchanged, (B) such Bank shall remain solely responsible
to the other parties hereto for the performance of such obligations and (C) the
Company, the Administrative Agent and the other Banks shall continue to deal
solely and directly with such Bank in connection with such Bank's rights and
obligations under this Agreement. Each such participation granted by a Bank
shall be evidenced by a participation agreement in form acceptable to such Bank.
Each such participation agreement shall provide that such Bank shall retain the
sole right to exercise its rights under this Agreement and to enforce the
obligations owed to it hereunder pursuant to its Participation including,
without limitation, the right to consent to any modification, amendment or
waiver of any provision of this Agreement or the Letter of Credit or any
assignment of the Company's obligations under any of the Transaction Documents
or the Financing Documents, subject to Section 8(d); provided that any such
participation agreement may provide that such Bank will not, without the consent
of the Participant, consent to any modification, amendment or waiver of this
Agreement or the Letter of Credit that (w) increases the Maximum Credit Amount
or Maximum Drawing Amount or subjects such Bank to any additional obligation
under this Agreement or the Letter of Credit, (x) reduces the principal of or
rate of interest on any reimbursement obligation or reduces the letter of credit
commission payable under

                                       37


Section 2(b), (y) postpones the date fixed for any payment of principal of or
interest on any reimbursement obligation or any payment of such letter of credit
commission or (z) extends the Stated Termination Date or the Termination Date.

            (ii) Subject to clause (iii) below, the Company agrees that each
      Participant shall be entitled to the benefits of Sections 2(d) and 2(e) to
      the same extent as if it were a Bank and had acquired its interest by
      assignment pursuant to Section 15(a).

            (iii) A Participant shall not be entitled to receive any greater
      payment under Section 2(d) or 2(e) than the applicable Bank would have
      been entitled to receive with respect to the participating interest
      granted to such Participant, unless the granting of such interest to such
      Participant is made with the Company's prior written consent. A
      Participant organized under the laws of a jurisdiction outside the United
      States shall not be entitled to the benefits of Section 2(d) or 2(e)
      unless the Company is notified of the participating interest granted to
      such Participant and such Participant agrees, for the benefit of the
      Company, to comply with Section 2(d) or 2(e) as though it were a Bank.

      SECTION 16. Continuing Obligation; Binding Effect. (a) The obligations of
the Company under this Agreement shall continue until the later of (i) the
Termination Date and (ii) the date upon which all amounts due and owing to the
Administrative Agent or any Bank hereunder shall have been paid in full. This
Agreement shall be binding upon and inure to the benefit of each of the parties
hereto and their respective successors. Except as contemplated by Section 16(b),
the Company shall not have the right to assign its rights hereunder or any
interest herein to any Person without the prior written consent of the Issuing
Bank and each Bank. The Issuing Bank shall not have the right to assign its
rights as the Issuing Bank hereunder without the prior written consent of the
Company (which shall not be unreasonably withheld) and each Bank.

      (b) In connection with the Nuclear Transfer, the Company may, with the
consent of the Equity Participant and the Owner Trustee, cause PWEC to assume
the obligations of the Company under this Agreement. No such assumption by PWEC
shall release the Company from any of its obligations hereunder, and as between
the Company, on the one hand, and the Administrative Agent, the Issuing Bank and
the other Banks, on the other hand, the Company shall be directly, primarily and
unconditionally obligated to perform those obligations, unless and until all the
Banks consent in writing to such release; provided, however, that if less than
all the Banks consent to such release, the Company may, with the consent of the
Equity Participant, upon 10 days' prior written notice to the Administrative
Agent, terminate this Agreement, and this Agreement shall thereupon terminate,
subject to (i) receipt by the Administrative Agent for the account of the Banks
of all amounts representing principal of, or accrued interest on, any
outstanding reimbursement obligation of the Company under Section 2(a) and all
accrued fees and other amounts hereunder to (but not including) such date of
termination, whether or not

                                       38


such amounts are otherwise due or payable, and (ii) receipt by the Issuing Bank
of the certificate specified in clause (vii) of the definition of "Termination
Date".

      SECTION 17. Extension of the Letter of Credit. At least 105 days but not
more than 180 days before the Stated Termination Date, the Company may request
the Administrative Agent in writing (each such request being irrevocable and
binding), with a copy to each Bank, to extend for not less than three years, nor
more than eight years, the Stated Termination Date, specifying the terms and
conditions, including fees, to be applicable to such extension. Within 45 days
after receiving such extension request (or such later date as the Company may
authorize in writing, but in no event later than 60 days before the Stated
Termination Date), each Bank shall notify the Company of its consent or
nonconsent to such extension request, and if any Bank shall give no such notice,
it shall be deemed not to have consented to such extension request. No such
requested extension shall be effective without the consent of all the Banks. The
consent of any Bank shall be in its sole discretion and shall be conditional
upon the preparation, execution and delivery of legal documentation in form and
substance satisfactory to such Bank and its counsel, incorporating substantially
the terms and conditions contained in the extension request as the same may be
modified by agreement among the Company, and the Banks, and evidence
satisfactory to it of the due authorization and validity thereof.

      SECTION 18. Limited Liability of the Banks. The Company assumes all risks
of the acts or omissions of the Equity Participant and any beneficiary or
transferee of the Letter of Credit with respect to its use of the Letter of
Credit. None of the Administrative Agent and the Banks, nor their respective
Affiliates nor any officer or director of any of the foregoing shall be liable
or responsible for: (a) the use which may be made of the Letter of Credit or any
acts or omissions of the Equity Participant or any beneficiary or transferee in
connection therewith; (b) the validity, sufficiency or genuineness of documents,
or of any endorsement thereon, even if such documents shall prove to be in any
or all respects invalid, insufficient, fraudulent or forged; (c) payment by the
Issuing Bank against presentation of documents which do not comply with the
terms of the Letter of Credit, including failure of any documents to bear any
reference or adequate reference to the Letter of Credit; or (d) any other
circumstances whatsoever in making or failing to make payment under the Letter
of Credit, except that the Company shall have a claim against the Issuing Bank,
and the Issuing Bank shall be liable to the Company, to the extent, but only to
the extent, of any direct, as opposed to consequential, damages suffered by the
Company which the Company proves were caused by (i) the willful misconduct or
gross negligence of the Issuing Bank in determining whether a draft or
certificate presented under the Letter of Credit complied with the terms of the
Letter of Credit or (ii) the Issuing Bank's willful failure to make lawful
payment under the Letter of Credit after the presentation to it by the Equity
Participant of a draft and certificate strictly complying with the terms and
conditions of the Letter of Credit. In furtherance and not in limitation of the
foregoing, the Issuing Bank may accept documents that appear on their face to be
in order, without responsibility for further investigation, regardless of

                                       39


any notice or information to the contrary unless the Equity Participant and the
Company have notified the Issuing Bank in writing prior to a drawing under the
Letter of Credit that such documents do not comply with the Letter of Credit.

      SECTION 19. Cost, Expenses and Taxes. The Company agrees to pay not later
than 30 days after demand therefor all reasonable costs and expenses in
connection with the preparation, execution, delivery, filing, recording and
administration of this Agreement and any other documents which may be delivered
in connection with this Agreement and any waiver or consent under, or amendment
of, this Agreement or any of the Transaction Documents or Financing Documents,
including, without limitation, the reasonable fees and out-of-pocket expenses of
counsel for the Administrative Agent, and local counsel who may be retained by
said counsel, with respect thereto and with respect to advising the
Administrative Agent as to its rights and responsibilities under this Agreement;
all costs and expenses (including counsel fees and expenses) in connection with
(i) the enforcement of this Agreement and such other documents which may be
delivered in connection with this Agreement or (ii) any action or proceeding
relating to a court order, injunction or other process or decree restraining or
seeking to restrain the Issuing Bank from paying any amount under the Letter of
Credit; and all costs and expenses (including reasonable counsel fees and
expenses) in connection with each transfer of the Letter of Credit in accordance
with its terms. In addition, the Company shall pay any and all stamp,
documentary, filing, recording or other similar taxes and fees payable or
determined to be payable in connection with the execution, delivery, filing and
recording of this Agreement and such other documents, and agrees to save the
Administrative Agent and each Bank harmless from and against any and all
liabilities with respect to or resulting from any delay in paying or omission to
pay such taxes and fees, provided that the Administrative Agent and each Bank
agree promptly to notify the Company of any such taxes and fees which are
incurred by the Administrative Agent or such Bank.

      SECTION 20. Administrative Agent; Issuing Bank. (a) Each Bank irrevocably
appoints and authorizes the Administrative Agent to take such action as agent on
its behalf and to exercise such powers under this Agreement as are delegated to
the Administrative Agent by the terms hereof, together with all such powers as
are reasonably incidental thereto.

      (b) The Administrative Agent and its Affiliates may accept deposits from,
make loans or otherwise extend credit to, and generally engage in any kind of
business with, the Company, the Equity Participant and their respective
Subsidiaries and Affiliates and receive payment on such loans or extensions of
credit and otherwise act with respect thereto freely and without accountability
in the same manner as if this Agreement and the transactions contemplated hereby
were not in effect.

      (c) The Administrative Agent may consult with legal counsel (who may be
counsel for the Company), independent public accountants and other experts as it
may

                                       40


select and shall not be liable for any action taken or omitted to be taken by it
in good faith in accordance with the advice of such counsel, accountants or
experts.

      (d) It is understood that the Issuing Bank will exercise and give the same
care and attention to the Letter of Credit as it gives to its other letters of
credit and loans for its own account and that the Issuing Bank shall have no
obligation to the Company or any other Bank and no duty or responsibility with
respect to this Agreement or the Letter of Credit, except as expressly provided
herein and in the Letter of Credit. Without limiting the generality of the
foregoing, neither the Administrative Agent nor the Issuing Bank shall be
required to take any action with respect to any Reimbursement Default, except as
expressly provided in Section 9 hereof. Neither the Administrative Agent nor the
Issuing Bank shall be liable for any action taken or not taken at the request or
with the approval of the Required Banks (or all the Banks, as applicable) or for
the performance or non-performance of the obligations of any other party under
this Agreement or any Transaction Document or Financing Document or any other
document contemplated thereby. It is further understood that: (i) except as
expressly limited by the provisions of this Agreement, the Issuing Bank retains
the sole right to exercise its rights and enforce the obligations of the Company
under this Agreement, and the Issuing Bank may use its sole discretion with
respect to exercising or refraining from exercising any rights or taking or
refraining from taking any actions which may be vested in it or which it may be
entitled to take or assert under this Agreement or any of the Transaction
Documents or Financing Documents (including, without limitation, the giving of
any notice to any Person of any Reimbursement Event of Default under this
Agreement except as provided in Section 9); and (ii) the Issuing Bank shall not,
in the absence of gross negligence or willful misconduct, be under any liability
to any other Bank with respect to anything which the Issuing Bank may do or
refrain from doing in the exercise of its best judgment or which it may deem to
be necessary or desirable. Neither the Administrative Agent nor the Issuing Bank
shall incur any liability by acting in reliance upon any written communication
or any telephone conversation which it reasonably believes to be genuine and
correct or to have been signed, sent or made by the proper Person. Neither the
Administrative Agent nor the Issuing Bank shall have any obligation to make any
claim on, or assert any lien upon, or assert any setoff against, any property
held by it and, if it elects to do so, it may in its discretion apply the same
against indebtedness of the Company other than the Company's obligations under
this Agreement; provided that, to the extent any funds received pursuant to any
of the foregoing are applied to the obligations of the Company under Section
2(a) or 2(b) hereof, each Bank shall be entitled to receive its pro rata share
thereof in accordance with Section 14(b) above. Any such setoff or other action
in respect of any reimbursement obligation of the Company set forth in Section
2(a) will be subject to Section 13.

      SECTION 21. Indemnification. (a) The Company indemnifies and holds
harmless the Administrative Agent, each Bank, and their respective officers and
directors from and against any and all claims, damages, losses, liabilities,
costs or expenses whatsoever

                                       41


which the Administrative Agent or such Bank may incur (or which may be claimed
against the Administrative Agent or such Bank by any Person whatsoever):

            (i) by reason of any inaccuracy in any material respect, or any
      untrue statement or alleged untrue statement of any material fact
      contained or incorporated by reference in any offering document
      distributed by or on behalf of the Company in connection with obtaining
      purchasers of the Company's undivided interest in Unit 2 of the Palo Verde
      Nuclear Generating Station, or in any supplement or amendment to either
      thereof, or by reason of the omission or alleged omission to state therein
      a material fact necessary to make such statements, in the light of the
      circumstances under which they are or were made, not misleading;

            (ii) by reason of or in connection with the execution, delivery and
      performance of the Transaction Documents and Financing Documents, or any
      transaction contemplated by the Transaction Documents or the Financing
      Documents; or

            (iii) by reason of or in connection with the execution and delivery
      or transfer of, or payment or failure to make lawful payment under, the
      Letter of Credit; provided that the Company shall not be required to
      indemnify the Administrative Agent or any Bank pursuant to this Section 21
      for any claims, damages, losses, liabilities, costs or expenses to the
      extent, but only to the extent, caused by (A) the willful misconduct or
      gross negligence of the Issuing Bank in determining whether a draft or
      certificate presented under the Letter of Credit complied with the terms
      of the Letter of Credit or (B) the Issuing Bank's willful failure to make
      lawful payment under the Letter of Credit after the presentation to it by
      the Equity Participant of a draft and certificate strictly complying with
      the terms and conditions of the Letter of Credit.

Nothing in this Section 21(a) is intended to limit the Company's obligations
contained in Section 2. Without prejudice to the survival of any other
obligation of the Company hereunder, the indemnities and obligations of the
Company contained in this Section 21(a) shall survive the payment in full of all
amounts payable pursuant to Section 2 and the termination of the Letter of
Credit.

      (b) To the extent that the Administrative Agent or the Issuing Bank is not
reimbursed and indemnified by the Company under this Agreement, each Bank will
reimburse and indemnify the Administrative Agent and the Issuing Bank on demand
for and against such Bank's Participation Percentage of any and all claims,
demands, liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements (including fees and
disbursements of counsel) of any kind or nature whatsoever which may be imposed
on, incurred by, or asserted against the Administrative Agent or the Issuing
Bank in any way relating to or arising out of this

                                       42


Agreement, the Letter of Credit, or any of the Transaction Documents or
Financing Documents or any action taken or omitted to be taken by the
Administrative Agent or the Issuing Bank hereunder or thereunder, or the
transactions contemplated hereby and thereby or the enforcement of any of the
terms hereof and thereof; provided that such Bank shall not be liable for any
portion of such claims, demands, liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, out-of-pocket expenses or
disbursements resulting from the gross negligence or willful misconduct of the
Administrative Agent or the Issuing Bank or which are expressly excluded from
the indemnification by the Company by the proviso to Section 21(a)(iii) of this
Agreement. Each Bank's obligations under this Section 21(b) shall survive the
termination of this Agreement and the Letter of Credit. If the Administrative
Agent or the Issuing Bank is reimbursed by the Company for any amounts
previously received from any Bank pursuant to this Section 21(b), it will
promptly pay to such Bank its proportionate share of any amounts so received.

      SECTION 22. Confidentiality. Neither the Administrative Agent nor any Bank
shall disclose any Confidential Information to any Person without the consent of
the Company, other than (a) to the Administrative Agent's or such Bank's
respective Affiliates or any officer, director, employee, accountant and advisor
of any of the foregoing, and to actual or prospective Assignees and
Participants, and then only on a confidential basis, (b) as required by any law,
rule or regulation or judicial process and (c) as requested or required by any
state, federal or foreign authority or examiner regulating banks or banking or
otherwise regulating the business of the Administrative Agent or such Bank, as
the case may be.

      SECTION 23. Severability. Any provision of this Agreement which is
prohibited, unenforceable or not authorized in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition,
unenforceability or non-authorization without invalidating the remaining
provisions hereof or affecting the validity, enforceability or legality of such
provision in any other jurisdiction.

      SECTION 24. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York.

      SECTION 25. Headings. Section headings in this Agreement are included
herein for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose.

      SECTION 26. Counterparts; Integration. This Amendment and Restatement may
be signed in any number of counterparts, each of which shall be an original,
with the same effect as if the signatures thereto and hereto were upon the same
instrument. This Agreement and that certain Letter Agreement dated as of July
22, 2002 between the Issuing Bank and the Company constitute the entire
agreement and understanding among

                                       43


the parties hereto and, subject to Section 3(c), supersede any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof.

      SECTION 27. WAIVER OF JURY TRIAL. EACH OF THE COMPANY, THE BANKS AND THE
ADMINISTRATIVE AGENT HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY
JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.

                             SIGNATURE PAGES FOLLOW

                                       44


      IN WITNESS WHEREOF, the parties hereto have caused this Amendment and
Restatement to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first above written.

                         ARIZONA PUBLIC SERVICE COMPANY

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

                                JPMORGAN CHASE BANK,
                                 as Administrative Agent and Issuing Bank

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

                                BANK HAPOALIM B.M.

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

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


                                BARCLAYS BANK PLC

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

                                UNION BANK OF CALIFORNIA, N.A.

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

                                BANK ONE, NA

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



                                                                      SCHEDULE I

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



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


      For purposes of this Schedule, the following terms have the following
meanings:

      "LEVEL I STATUS" exists at any date if, at such date, the Ratings are A-
or higher by S&P or A3 or higher by Moody's.

      "LEVEL II STATUS" exists at any date if, at such date, (i) Level I Status
does not exist and (ii) the Ratings are BBB+ or higher by S&P or Baa1 or higher
by Moody's.

      "LEVEL III STATUS" exists at any date if, at such date, (i) neither Level
I Status nor Level II Status exists and (ii) the Ratings are BBB or higher by
S&P or Baa2 or higher by Moody's.

      "LEVEL IV STATUS" exists at any date if, at such date, (i) none of Level I
Status, Level II Status and Level III Status exists and (ii) the Ratings are
BBB- or higher by S&P or Baa3 or higher by Moody's.

      "LEVEL V STATUS" exists at any date if, at such date, no other Status
exists.

      "MOODY'S" means Moody's Investors Service, Inc.

      "RATING AGENCIES" means Moody's and S&P.

      "RATINGS" means the credit ratings assigned to the senior unsecured
long-term debt securities of the Company without third-party credit enhancement
by the Rating Agencies. If there is no rating assigned to debt securities, the
corporate credit rating will be used. Any rating assigned to any other debt
security of the Company shall be disregarded. The rating in effect at any date
is that in effect at the close of business on such date. In the case of split
ratings from S&P or Moody's, the rating to be used to determine which pricing
level applies is the higher of the two (e.g., BBB+/Baa2 results in Level II
Status); provided that if the split is more than one full rating category, the
rating category immediately above the lower of the two rating categories will be
used (e.g., BBB+/Baa3 results in Level III Status, as does A-/Baa3).

                                 Schedule I-1


      "S&P" means Standard & Poor's Ratings Services, a division of the
McGraw-Hill Companies, Inc.

      "STATUS" refers to the determination of which of Level I Status, Level II
Status, Level III Status, Level IV Status or Level V Status exists at any date.

                                 Schedule I-2


                                                                     SCHEDULE II



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

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

Barclays Bank PLC                      17.3913043%                      $11,091,426.05

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

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


                                  Schedule II


                                                                       EXHIBIT A

                              AMENDED AND RESTATED
                    IRREVOCABLE TRANSFERABLE LETTER OF CREDIT
                                  No. P-010152
                          (formerly numbered as S-1002)

                                            Originally Issued August 18, 1986
                                            Reissued July 22, 2002

Emerson Finance Co.
8000 W. Florissant Avenue
P.O. Box 4100
St. Louis, Missouri 63136

Attn: President

Dear Sirs:

      We hereby establish, at the request of Arizona Public Service Company (the
"COMPANY"), in your favor, our Irrevocable Transferable Letter of Credit No.
S-1002 (the "LETTER OF CREDIT"), in a maximum amount at any date (the "MAXIMUM
CREDIT AMOUNT") equal to the amount shown opposite the period including such
date in the Table of Maximum Credit Amounts attached hereto as Schedule II-A,
effective immediately and expiring at 5:00 p.m. (New York City time) on the
Termination Date. Capitalized terms used herein and in Schedules II-A, II-B and
III and Exhibits 1, 2, 3 and 4 hereto shall have the meanings set forth in
Schedule I hereto. This Letter of Credit is issued in connection with the
leasing of an undivided interest in Unit 2 of the Palo Verde Nuclear Generating
Station to the Company pursuant to a Facility Lease dated as of August 1, 1986
(the "FACILITY LEASE") as amended and in effect on the date hereof, between the
Company and State Street Bank and Trust Company (as successor to The First
National Bank of Boston), as Owner Trustee under a trust agreement with you.

      We hereby irrevocably authorize you to draw on us, in accordance with the
terms and conditions hereinafter set forth, an amount not in excess of the
amount shown opposite the period including the date of such drawing (the "DATE
OF DRAWING") in the Table of Maximum Drawing Amounts attached hereto as Schedule
II-B as such amounts are modified from time to time in accordance with the next
paragraph. Such amounts, as modified in accordance with the next paragraph, are
hereinafter referred to collectively as the "MAXIMUM DRAWING AMOUNTS" and
individually as the "MAXIMUM DRAWING

                                  Exhibit A-1


AMOUNT". A drawing in respect of a payment hereunder honored by us shall not
exceed the lesser of the Maximum Drawing Amount applicable on the Date of
Drawing and the Maximum Credit Amount applicable on the Date of Drawing. All
payments hereunder shall be made from our own general funds.

      The Maximum Drawing Amounts shall be modified from time to time as
follows:

      (a) upon payment by the Issuing Bank of each drawing under the Letter of
Credit, the Maximum Drawing Amounts applicable to each Date of Drawing
subsequent to such payment shall be automatically reduced by an amount equal to
the amount of the drawing so paid and shall not be reinstated; and

      (b) if adjustments are made to Modified Special Casualty Values,
corresponding adjustments shall be made to the Maximum Drawing Amounts shown in
Schedule II-B, (as theretofore reduced pursuant to clause (a) above), provided
that if any such adjustment of Modified Special Casualty Values would cause the
Maximum Drawing Amount for any period to exceed the Maximum Credit Amount for
such period, the Maximum Credit Amount shall apply for such period and provided
further that adjustments pursuant to this clause (b) shall be effective
automatically upon receipt by us of a notice from you in the form of Exhibit 1
hereto.

      Upon surrender of this Letter of Credit together with a notice in the form
of Exhibit 1 hereto, we will promptly issue an irrevocable transferable letter
of credit containing a revised Schedule II-B reflecting the adjustments
contained in such notice and in all other respects identical to this Letter of
Credit.

      Funds under this Letter of Credit are available to you against
presentation on or prior to the Termination Date of (a) your draft in the form
of Exhibit 2 attached hereto and (b) a completed certificate signed by you in
the form of Exhibit 3 attached hereto. Such draft and certificate shall be dated
the date of its presentation and shall be presented at our Tampa, Florida office
specified below, or at our Brooklyn, New York office specified below (or at any
other office in New York City which may be designated by us by written notice
(given in the manner set forth in the next paragraph) delivered to you at least
15 days prior to the applicable Date of Drawing). If we receive such draft and
certificate at our Tampa, Florida office specified below, all in strict
conformity with the terms and conditions of this Letter of Credit, prior to
10:00 a.m. (New York City time) on any Business Day, we will honor the draft on
the same Business Day. If we receive such draft and certificate at our Tampa,
Florida office specified below on or after 10:00 a.m. and prior to 5:00 p.m.
(New York City time) on any Business Day, or if we receive such draft and
certificate at our Brooklyn, New York office specified below prior to 5:00 p.m.
(New York City time) on any Business Day, in each case all in strict conformity
with the terms and conditions of this Letter of Credit, we will honor the draft
on the next Business Day. If requested by you, payment under this Letter of
Credit may be made by wire transfer of federal funds to your account with any
bank located in the United States of

                                  Exhibit A-2


America or by deposit of immediately available funds into a designated account
that you maintain with us.

      Notwithstanding any provisions of Articles 13(b) and 14(d)(i) of the
Uniform Customs and of Section 5-108(b) of the New York Uniform Commercial Code
to the contrary, which provisions are hereby expressly waived, if the
presentation of such draft and certificate are not in strict conformity with the
terms and conditions of this Letter of Credit, we will give you prompt notice
prior to the time we would have been obliged to make payment as set forth in the
preceding paragraph by facsimile transmission addressed to you at the fax number
set forth in the next succeeding paragraph, effective upon confirmation, that we
have refused such non-conforming draft and certificate, and stating all
discrepancies in respect of which the Issuing Bank refuses such non-conforming
draft and certificate. If you correct such non-conforming demand by presentation
of the draft and certificate corrected to be in strict conformity with the terms
and conditions of the Letter of Credit within two Business Days of your receipt
of our notice of refusal, then we will honor the draft and make payment in
accordance with the terms provided herein based upon the time such corrected
draft and certificate are presented, provided that you may make only one such
corrected demand with respect to any such non-conforming demand, and provided
further that for purposes of determining whether the draft and certificate have
been timely presented, the corrected draft and certificate shall be deemed to
have been presented on the date the non-conforming draft and certificate were
presented.

      Notwithstanding any other provision of this Letter of Credit, we shall
have the right, upon the occurrence of any of the events listed in Schedule III
hereto, to terminate this Letter of Credit by delivering to you a written notice
indicating the date of such termination (the "DATE OF EARLY TERMINATION"),
provided that on or before the Date of Early Termination you will have the right
to draw once an amount not in excess of the lesser of the Maximum Credit Amount
and the Maximum Drawing Amount in accordance with the procedures described
herein. The written notice referred to in the preceding sentence shall be given
by telex or facsimile transmission addressed to you at Emerson Finance Co., 8000
W. Florissant Avenue, P.O. Box 4100, St. Louis, Missouri 63136, Attention:
President, Fax: 314-553-2463 (or to such other address or telex number
designated by you by written notice delivered to us at least 15 days prior to
the notice of early termination) and shall be effective upon receipt of the
appropriate answerback or confirmation of the facsimile transmission. We will
also forward a copy of such notice by overnight delivery service to the address
set forth above. The Date of Early Termination specified in such written notice
shall be:

      (a) in the case of events specified in paragraphs A and G of Schedule III,
not earlier than ten days after such notice is given, and

      (b) in the case of all other events specified in Schedule III, not earlier
than 30 days after such notice is given.

                                  Exhibit A-3


      Except as set forth herein, this Letter of Credit shall be governed by the
Uniform Customs and Practice for Documentary Credits (1993 Revision)
International Chamber of Commerce Publication No. 500, other than the provisions
of Article 48 thereof. This Letter of Credit shall be deemed to be a contract
made under the laws of the State of New York and shall, as to matters not
governed by the Uniform Customs, be governed by and construed in accordance with
the laws of such State.

      All demands for payment, notices and other communications to us in respect
of this Letter of Credit shall be in writing, specifically referring to the
number of this Letter of Credit, and addressed and presented to us (and all
courier or physical deliveries should be addressed to us) at JPMorgan Chase
Bank, c/o JP Morgan Treasury Services, Standby Letter of Credit Manager -
Immediate Action Required, 4th Floor, 10240 Highland Manor Drive, Tampa, Florida
33610. Although we prefer physical presentations be made to our Tampa, Florida
location, our location at 4 Chase Metrotech Center, 10th Floor, Brooklyn, New
York 11245 is also available for your physical presentations. Should you use our
4 Chase Metrotech Center location for physical presentations, documents must be
directed to: Governmental Agency Unit, Attention: Gamal Boulos.

      Notwithstanding Article 48 of the Uniform Customs and Practice for
Documentary Credits referred to above, this Letter of Credit may be transferred
and assigned in its entirety more than once, but in each case only to the
successor Equity Participant under the Trust Agreement dated as of August 1,
1986 between yourself and State Street Bank and Trust Company as successor to
The First National Bank of Boston. Upon receipt by us at the address for
presentation of documents set forth above of a copy of the instrument effecting
such transfer and assignment, signed by the transferor and by the transferee, in
the form of Exhibit 4 hereto (which shall be conclusive evidence of such
assignee's authority without any inquiry by us into the terms of the Trust
Agreement) then, in such case, we will, upon surrender of this Letter of Credit,
issue an irrevocable transferable letter of credit in the name of the transferee
and providing for notices to be sent to the transferee at the address set forth
therein and in all other respects identical to this Letter of Credit and the
transferee, instead of the transferor, shall, without necessity of further act,
be entitled to all the benefits of, and rights under, this Letter of Credit in
the transferor's place.

      By your acceptance of this Letter of Credit, you hereby agree, and we
hereby confirm our agreement, to the terms and conditions of Section 13 of the
Reimbursement Agreement.

      This Letter of Credit sets forth in full our undertaking, and such
undertaking shall not in any way be modified, amended, amplified or limited by
reference to any document, instrument or agreement referred to herein, except
only Schedules I, II-A, II-B and III and Exhibits 1, 2, 3 and 4 hereto and the
notices referred to herein; and any such reference shall not be deemed to
incorporate herein by reference any document, instrument or agreement except as
set forth above.

                                  Exhibit A-4


      This Letter of Credit No. P-010152 (formerly numbered as S-1002) amends
and restates our Letter of Credit No. S-1002 dated as of August 15, 1986, as
heretofore amended.

                                        Very truly yours,

                                        JPMORGAN CHASE BANK

                                        By _____________________________
                                           Name:
                                           Title:

                                  Exhibit A-5


                                                                       EXHIBIT 1
                                                             TO LETTER OF CREDIT

JPMorgan Chase Bank
[c/o JP Morgan Treasury Services
Standby Letter of Credit Manager -
Immediate Action Required
4th Floor
10240 Highland Manor Drive
Tampa, Florida 33610]

[Governmental Agency Unit
4 Chase Metrotech Center
10th Floor
Brooklyn, New York 11245
Attention: Gamal Boulos]

Dear Sirs:

      Reference is made to that certain amended and restated irrevocable
transferable Letter of Credit bearing Letter of Credit No. P-010152 (formerly
numbered as S-1002) dated July 22, 2002, which has been established by you in
favor of [name of Equity Participant] (the "EQUITY PARTICIPANT").

      The undersigned, a duly authorized representative of the Equity
Participant, hereby certifies that Modified Special Casualty Values have been
adjusted and the amounts shown on Schedule II-B to the Letter of Credit should
be modified, in accordance with the terms of clauses (a) and (b) of the third
paragraph of the Letter of Credit, to the amounts shown in Appendix A hereto.

      The Letter of Credit is returned herewith and we request that you issue an
irrevocable transferable letter of credit with the revised Schedule II-B
attached and in all other respects identical to the Letter of Credit.

      Capitalized terms used herein and not otherwise defined herein shall have
the meanings given to them in the Letter of Credit.

                                       _____________________________________
                                       [Name of Equity Participant]

                                       _____________________________________
                                       [Name and Title of Authorized
                                       Representative of Equity Participant]

                                   LC-Ex.1


                                                                       EXHIBIT 2
                                                             TO LETTER OF CREDIT

                                                                         [Place]

                                                                    [Date], 20__

ON [Business Day on which payment is required in accordance with the provisions
of the fifth paragraph of the Letter of Credit]

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

FOR VALUE RECEIVED AND CHARGE TO ACCOUNT OF LETTER OF

CREDIT NO. P-010152 (formerly numbered as S-1002)   OF

         JPMorgan Chase Bank
         [c/o JP Morgan Treasury Services
         Standby Letter of Credit Manager -
         Immediate Action Required
         4th Floor
         10240 Highland Manor Drive
         Tampa, Florida 33610]

         [Governmental Agency Unit
         4 Chase Metrotech Center
         10th Floor
         Brooklyn, New York 11245
         Attention: Gamal Boulos]

                                     [Name and address of Equity Participant]

                                     By________________________________________
                                       [Authorized Representative]

                                   LC-Ex.2


                                                                       EXHIBIT 3
                                                             TO LETTER OF CREDIT

                                   CERTIFICATE

      The undersigned, a duly authorized representative of [name of Equity
Participant] (the "EQUITY PARTICIPANT"), as beneficiary under that certain
amended and restated irrevocable transferable Letter of Credit No. P-010152
(formerly numbered as S-1002) dated July 22, 2002, established by JPMorgan Chase
Bank (the "ISSUING BANK") and issued pursuant to that certain Amended and
Restated Reimbursement Agreement dated as of July 22, 2002 between Arizona
Public Service Company (the "COMPANY"), the Issuing Bank and the other Banks
named therein, hereby certifies as follows:

      1. An Event of Default under the Facility Lease has occurred and is
continuing.

      2. The amount of the accompanying draft does not exceed the Maximum
Drawing Amount available under the Letter of Credit on the date hereof, as
determined in accordance with the terms of the Letter of Credit.

      Capitalized terms used herein and not otherwise defined herein shall have
the meanings given to them in the Letter of Credit.

      IN WITNESS WHEREOF, the undersigned has executed this Certificate as of ,
20__ .

                                  _____________________________________________
                                  [Name of Equity Participant]

                                  _____________________________________________
                                  [Name and title of authorized representative
                                  signing certificate]

                                   LC-Ex.3


                                                                       EXHIBIT 4
                                                             TO LETTER OF CREDIT

JPMorgan Chase Bank
[c/o JP Morgan Treasury Services
Standby Letter of Credit Manager -
Immediate Action Required
4th Floor
10240 Highland Manor Drive
Tampa, Florida 33610]

[Governmental Agency Unit
4 Chase Metrotech Center
10th Floor
Brooklyn, New York 11245
Attention: Gamal Boulos]

Dear Sirs:

      Reference is made to the certain amended and restated irrevocable
transferable Letter of Credit bearing Letter of Credit No. P-010152 (formerly
numbered as S-1002) dated July 22, 2002, which has been established by you in
favor of [name of Equity Participant (the "TRANSFEROR")].

      The Transferor has transferred and assigned (and hereby confirms to you
said transfer and assignment) all of its rights in and under said Letter of
Credit to [name of Transferee (the "TRANSFEREE")] and confirms that the
Transferor no longer has any rights under or interest in said Letter of Credit.

      The Letter of Credit is returned herewith and we request that you issue an
irrevocable transferable letter of credit in the name of the Transferee and
providing for notices to be sent to the Transferee at the address set forth
below and in all other respects identical to the Letter of Credit.

      Transferee hereby certifies that it is a duly authorized transferee under
the terms of said Letter of Credit and is accordingly entitled, upon
presentation of the drafts and certificates called for therein, to receive
payments thereunder. Notices under the Letter of Credit should be sent to us as
follows: [Name], [Address], [Telex Number], Attention: o, [Answerback].

                               ______________________________________________
                                   [Name of Transferor]

                                   LC-Ex.4-1


                        ______________________________________________________
                          [Name and Title of Authorized
                          Representative of Transferor]

                        ______________________________________________________
                          [Name of Transferee]

                        ______________________________________________________
                          [Name and Title of Authorized
                          Representative of Transferee]

                                    LC-Ex.4-2


                                                                      SCHEDULE I
                                                             TO LETTER OF CREDIT

      The following terms have the following meanings for purposes of the Letter
of Credit and the Schedules and Exhibits thereto. Terms defined in the Letter of
Credit have the meanings given to them therein. Terms defined by reference to
the Facility Lease have the meanings assigned to them therein from time to time.

      "ADMINISTRATIVE AGENT" means JPMorgan Chase Bank, in its capacity as
administrative agent for the Banks under the Reimbursement Agreement, and its
successors in such capacity.

      "APPLICABLE LAW" has the meaning assigned to it in the Facility Lease.

      "BANK" means (i) each bank or financial institution listed on the
signature pages of the Reimbursement Agreement, each Assignee that becomes a
Bank pursuant to Section 15(a) of the Reimbursement Agreement, and their
respective successors, and (ii) the Issuing Bank with respect to its
Participation.

      "BUSINESS DAY" means any day except a Saturday, Sunday or other day on
which commercial banks in New York, New York, Chicago, Illinois or the State of
California are authorized by law to close.

      "CAPITAL LEASE OBLIGATIONS" means as to any Person, the obligations of
such Person to pay rent or other amounts under a lease of (or other agreement
conveying the right to use) real and/or personal property, which obligations are
required to be classified and accounted for as a capital lease on the balance
sheet of such Person under generally accepted accounting principles and, for the
purposes of this Agreement, the amount of such obligations shall be the
capitalized amount thereof, determined in accordance with generally accepted
accounting principles.

      "CODE" means the Internal Revenue Code of 1986, as amended, or any
successor statute.

      "EQUITY PARTICIPANT" means Emerson Finance Co., as Equity Participant, and
its successors and assigns.

      "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the regulations promulgated and rulings issued
thereunder.

      "ERISA AFFILIATE" means any corporation or trade or business which is a
member of the same controlled group of corporations (within the meaning of
Section 414(b) of the

                                   LC-Sch.I-1


Code) as the Company or is under common control (within the meaning of Section
414(c) of the Code) with the Company.

      "GOVERNMENTAL ACTION" has the meaning assigned to it in the Facility
Lease.

      "GUARANTEE" means as to any Person, any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Indebtedness
of any other Person or in any manner providing for the payment of any
Indebtedness of any other Person or otherwise protecting the holder of such
Indebtedness against loss (whether by virtue of partnership arrangements,
agreements to keep well, to purchase assets, goods, securities or services, or
to take-or-pay or otherwise), provided that the term "Guarantee" shall not
include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.

      "INDEBTEDNESS" means as to any Person at any date (without duplication):
(a) indebtedness created, issued, incurred or assumed by such Person for
borrowed money or evidenced by bonds, debentures, notes or similar instruments;
(b) all obligations of such Person to pay the deferred purchase price of
property or services, excluding, however, trade accounts payable (other than for
borrowed money) arising in, and accrued expenses incurred in, the ordinary
course of business of such Person so long as such trade accounts payable are
paid within 180 days of the date incurred; (c) all Indebtedness secured by a
lien on any asset of such Person, to the extent such Indebtedness has been
assumed by, or is a recourse obligation of, such Person; (d) all Guarantees by
such Person; (e) all Capital Lease Obligations of such Person; and (f) the
amount of all reimbursement obligations of such Person (whether contingent or
otherwise) in respect of letters of credit, bankers' acceptances, surety or
other bonds and similar instruments in support of Indebtedness.

      "ISSUING BANK" means JPMorgan Chase Bank and its successors in their
capacity as issuer of the Letter of Credit.

      "MATERIAL SUBSIDIARY" means, at any time, a Subsidiary of the Company
which as of such time meets the definition of a "significant subsidiary"
included as of July 22, 2002 in Regulation S-X of the Securities and Exchange
Commission or whose assets at such time exceed 10% of the assets of the Company
and the Subsidiaries (on a consolidated basis).

      "MODIFIED SPECIAL CASUALTY VALUE" has the meaning assigned to it in the
Facility Lease.

      "MULTIEMPLOYER PLAN" means a plan defined as such in Section 3(37) of
ERISA to which contributions have been made by the Company or any ERISA
Affiliate within any of the preceding five plan years and which is covered by
Title IV of ERISA.

      "PARTICIPANT" has the meaning set forth in Section 15(b) of the
Reimbursement Agreement.

                                  LC-Sch.I-2


      "PARTICIPATION" means a participating interest in the credit represented
by the Letter of Credit including, without limitation, the interest therein
retained by the Issuing Bank after giving effect to all participating interests
therein granted by it pursuant to Section 14(a) of the Reimbursement Agreement,
but prior to giving effect to any interest therein granted to any Participant
pursuant to Section 15(b) of the Reimbursement Agreement.

      "PARTICIPATION AMOUNT" means, with respect to any Bank, the amount set
forth in Schedule II to the Reimbursement Agreement opposite the name of such
Bank therein, as such amount may be changed by reason of an assignment by or to
such Bank in accordance with Section 15(a). Such amount shall be reduced from
time to time by such Bank's ratable share of each reduction of the Maximum
Credit Amount.

      "PARTICIPATION PERCENTAGE" means, with respect to any Bank at any time,
the percentage equivalent of a fraction (i) the numerator of which is the
Participation Amount of such Bank at such time and (ii) the denominator of which
is the Maximum Credit Amount at such time.

      "PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.

      "PERSON" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.

      "PLAN" means an employee benefit plan within the meaning of Section 3(3)
of ERISA established or maintained by the Company or any ERISA Affiliate which
is covered by Title IV of ERISA, other than a Multiemployer Plan.

      "REIMBURSEMENT AGREEMENT" means the Reimbursement Agreement as originally
executed as of August 1, 1986, as amended or amended and restated from time to
time before July 22, 2002, as amended and restated as of July 22, 2002 and as
the same may be amended and restated from time to time thereafter.

      "REQUIRED BANKS" means, at any time, Banks holding Participation
Percentages aggregating more than 50% at such time.

      "STATED TERMINATION DATE" means July 22, 2005 or such later date to which
such Stated Termination Date shall have been extended pursuant to Section 17 of
the Reimbursement Agreement.

      "SUBSIDIARY" of any Person means any corporation of which more than 50% of
the issued and outstanding capital stock having ordinary voting power to elect a
majority of the Board of Directors of such corporation (irrespective of whether
at the time capital stock of any other class or classes of such corporation
shall or might have voting power

                                  LC-Sch.I-3


upon the occurrence of any contingency) is at the time directly or indirectly
owned or controlled by such Person and one or more of its other Subsidiaries or
by one or more of such Person's other Subsidiaries.

      "TERMINATION DATE" means the earliest of (i) the date on which the Issuing
Bank pays a drawing under the Letter of Credit for the lesser of the Maximum
Drawing Amount and the Maximum Credit Amount, (ii) if a drawing is not requested
by the Equity Participant after a notice of termination is given under the
Letter of Credit, the Date of Early Termination, (iii) if a drawing is requested
by the Equity Participant after a notice of termination is given under the
Letter of Credit, the date on which the Issuing Bank pays such drawing, (iv) the
date on which the Company delivers a certificate to the Issuing Bank certifying
that the Company has paid the amounts due under Section 9(c) of the Facility
Lease (so long as the Equity Participant shall have acknowledged such payment by
its express confirmation thereof in, and its countersignature to, such
certificate), (v) the date on which the Company delivers a certificate to the
Issuing Bank certifying that the Company has paid the amounts due under Section
9(d) of the Facility Lease (so long as the Equity Participant shall have
acknowledged such payment by its express confirmation thereof in, and its
countersignature to, such certificate), (vi) the latest of (x) the Stated
Termination Date, (y) if a draft and certificate all in strict conformity with
the terms and conditions of the Letter of Credit are presented on the Stated
Termination Date at such time and at such office as specified in the fifth
paragraph of the Letter of Credit, the date on which the Issuing Bank is
required to honor the draft in accordance with the provisions of such paragraph
pursuant to such presentation, and (z) if a corrected draft and certificate all
in strict conformity with the terms and conditions of the Letter of Credit are
presented on such date as specified in, and in accordance with the provisions
of, the sixth paragraph of the Letter of Credit, the date on which the Issuing
Bank is required to honor the draft in accordance with the provisions of such
paragraph pursuant to such presentation, and (vii) the date on which the Company
delivers a certificate to the Issuing Bank certifying that the Reimbursement
Agreement has been terminated pursuant to Section 16(b) thereof (so long as such
certificate shall have been countersigned by the Equity Participant).

      "TRANSACTION DOCUMENTS" means the Participation Agreement, the Refinancing
Agreement, the Indemnity Agreement, the Escrow Deposit Agreement, the Facility
Lease, the Trust Agreement, the Indenture, the Decommissioning Trust Agreement,
the Tax Indemnification Agreement, the Mortgage Release, the Assignment and
Assumption, the Purchase Documents, any ground lease contemplated by Section
10(b)(3)(xvii) of the Participation Agreement and the Notes, each as defined in
the Facility Lease.

                                  LC-Sch.I-4


                                                                   SCHEDULE II-A
                                                             TO LETTER OF CREDIT

                         TABLE OF MAXIMUM CREDIT AMOUNTS
                               EMERSON FINANCE CO.

APPLICABLE PERIOD                         MAXIMUM CREDIT AMOUNT

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

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

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

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

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

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

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

                                  LC-Sch.II-A


                                                                   SCHEDULE II-B
                                                             TO LETTER OF CREDIT

                        TABLE OF MAXIMUM DRAWING AMOUNTS
                               EMERSON FINANCE CO.

APPLICABLE PERIOD                         MAXIMUM DRAWING AMOUNT

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

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

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

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

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

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

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

                                  LC-Sch.II-B


                                                                    SCHEDULE III
                                                             TO LETTER OF CREDIT

      The Issuing Bank shall have the right upon the occurrence of any of the
events listed below to terminate the Letter of Credit in accordance with the
terms of the Letter of Credit:

                  (A) The Company shall fail to pay when due any amount payable
            under Section 2(a) of the Reimbursement Agreement or fail to pay any
            other amount payable under Section 2 of the Reimbursement Agreement
            within five Business Days after the same becomes due and payable; or

                  (B) The Company shall fail to perform or observe (i) any term,
            covenant or agreement contained in Section 7(a)(ii), 7(g)(iv), 7(h),
            8(a), 8(b), 8(c) or 8(e) of the Reimbursement Agreement, or (ii) any
            term, covenant or agreement contained in the Reimbursement Agreement
            (other than those covered by clause (A) above or subclause (i) of
            this clause (B) or Section 7(e) or Section 19 of the Reimbursement
            Agreement) on its part to be performed or observed if the failure to
            perform or observe such term, covenant or agreement shall remain
            unremedied for 30 days after written notice thereof shall have been
            given to the Company by the Administrative Agent; or

                  (C) Any representation or warranty made by the Company in the
            Reimbursement Agreement or by the Company (or any of its officers)
            in any certificate delivered in connection with the Reimbursement
            Agreement shall prove to have been false or misleading in any
            material respect when made; or

                  (D) Any material provision of the Reimbursement Agreement
            shall at any time for any reason cease to be valid and binding upon
            the Company, or shall be declared to be null and void, or the
            validity or enforceability thereof shall be contested by the Company
            or any governmental agency or authority, or the Company shall deny
            that it has any or further liability or obligation under the
            Reimbursement Agreement; or

                  (E) The Company shall fail to pay any principal of or premium
            or interest on any Indebtedness which is outstanding in a principal
            amount of at least $5,000,000 (but excluding Indebtedness owing
            under the Reimbursement Agreement) of the Company, when the same
            becomes due and payable (whether by scheduled maturity, required
            prepayment, acceleration, demand or otherwise), and such failure
            shall continue after

                                    Sch.III-1


            the applicable grace period, if any, specified in the agreement or
            instrument relating to such Indebtedness; or the Company shall fail
            to perform or comply with any other term or covenant in any
            agreement or instrument relating to any such Indebtedness and such
            failure shall continue after the applicable grace period, if any,
            specified in such agreement or instrument, if the effect of such
            failure is to accelerate, or to permit the acceleration of, the
            maturity of such Indebtedness; or

                  (F) The Company shall fail to pay any principal of or premium
            or interest in respect of any operating lease in respect of which
            the payment obligations of the Company have a present value of at
            least $25,000,000, when the same becomes due and payable (whether by
            scheduled maturity, required prepayment, acceleration, demand or
            otherwise), and such failure shall continue after the applicable
            grace period, if any, specified in such operating lease, if the
            effect of such failure is to terminate, or to permit the termination
            of, such operating lease; or

                  (G) The Company shall generally not pay its debts as such
            debts become due, or shall admit in writing its inability to pay its
            debts generally, or shall make a general assignment for the benefit
            of creditors; or any proceeding shall be instituted by or against
            the Company seeking to adjudicate it a bankrupt or insolvent, or
            seeking liquidation, winding up, reorganization, arrangement,
            adjustment, protection, relief, or composition of it or its debts
            under any law relating to bankruptcy, insolvency or reorganization
            or relief of debtors, or seeking the entry of an order for relief or
            the appointment of a receiver, trustee, custodian or other similar
            official for it or for any substantial part of its property and, in
            the case of any such proceeding instituted against it (but not
            instituted by it), either such proceeding shall remain undismissed
            or unstayed for a period of 60 days, or any of the actions sought in
            such proceeding (including, without limitation, the entry of an
            order for relief against, or the appointment of a receiver, trustee,
            custodian or other similar official for, it or for any substantial
            part of its property) shall occur; or the Company shall take any
            corporate action to authorize any of the actions set forth above in
            this clause (G) or

                  (H) Any Material Subsidiary shall generally not pay its debts
            as such debts become due, or shall admit in writing its inability to
            pay its debts generally, or shall make a general assignment for the
            benefit of creditors; or any proceeding shall be instituted by or
            against any Material Subsidiary seeking to adjudicate it a bankrupt
            or insolvent, or seeking liquidation, winding up, reorganization,
            arrangement, adjustment, protection, relief, or composition of it or
            its debts under any law relating to bankruptcy, insolvency or
            reorganization or relief of debtors, or seeking

                                    Sch.III-2


            the entry of an order for relief or the appointment of a receiver,
            trustee, custodian or other similar official for it or for any
            substantial part of its property and, in the case of any such
            proceeding instituted against it (but not instituted by it), either
            such proceeding shall remain undismissed or unstayed for a period of
            60 days, or any of the actions sought in such proceeding (including,
            without limitation, the entry of an order for relief against, or the
            appointment of a receiver, trustee, custodian or other similar
            official for it or for any substantial part of its property) shall
            occur; or any Material Subsidiary shall take any corporate action to
            authorize any of the actions set forth above in this clause (H) and,
            in each case, the Required Banks determine that such circumstances
            could have a material adverse effect on the financial condition or
            financial prospects of the Company and its consolidated
            Subsidiaries, taken as a whole; or

                  (I) Any judgment or order for the payment of money that
            exceeds any applicable insurance coverage by more than $5,000,000
            shall be rendered against the Company and such judgment or order
            shall remain unsatisfied or unstayed for a period of 30 days; or

                  (J) Any judgment or order for the payment of money that
            exceeds any applicable insurance coverage by more than $25,000,000
            shall be rendered against any Material Subsidiary; such judgment or
            order shall remain unsatisfied or unstayed for 30 days; and the
            Required Banks determine that such judgment or order could have a
            material adverse effect on the financial condition or financial
            prospects of the Company and its consolidated Subsidiaries, taken as
            a whole; or

                  (K) An event or condition specified in Section 7(g)(iv) of the
            Reimbursement Agreement shall occur or exist with respect to any
            Plan or Multiemployer Plan and, as a result of such event or
            condition, together with all other such events or conditions, the
            Company or any ERISA Affiliate shall incur or in the opinion of the
            Required Banks shall be reasonably likely to incur a liability to a
            Plan, a Multiemployer Plan or the PBGC (or any combination of the
            foregoing) which is, in the determination of the Required Banks,
            material in relation to the financial condition or the financial
            prospects of the Company and its consolidated Subsidiaries, taken as
            a whole; or

                  (L) any change in Applicable Law or any Governmental Action
            shall occur which has the effect of making the transactions
            contemplated by the Transaction Documents unauthorized, illegal or
            otherwise contrary to Applicable Law; or

                                    Sch.III-3


                  (M) any event specified in Sections 15(vii), (viii) or (x) of
            the Facility Lease shall occur; or

                  (N) the Company shall fail to make, or cause to be made, any
            payment specified in Section 15(i) of the Facility Lease equal to or
            exceeding $1,000,000 within the periods specified in that Section.

      Capitalized terms used herein and not otherwise defined herein shall have
the meanings given to them in the Letter of Credit.

                                  LC-Sch.III-4


                          SCHEDULE OF OMITTED DOCUMENT

      Pursuant to Instruction 2 to Item 601, the registrant is not filing the
Amended and Restated Reimbursement Agreement among Arizona Public Service
Company ("APS"), the Banks Party thereto and JPMorgan Chase Bank, as
Administrative Agent and Issuing Bank, dated as of July 22, 2002 (the
"Additional Reimbursement Agreement") and relating to a second sale and
leaseback transaction entered into by APS in August of 1986. The Additional
Reimbursement Agreement is virtually identical to the filed agreement except
that the beneficiary of the letter of credit is a different equity participant
and the drawing amounts under the letter of credit are different, ranging from a
high of approximately $50.9 million beginning in July of 2002 to a low of
approximately $44.3 million ending in July of 2005.

EX-10.101

                                                                  Exhibit 10.101

                           THREE-YEAR CREDIT AGREEMENT

                            Dated as of May 21, 2004

          ARIZONA PUBLIC SERVICE COMPANY, an Arizona corporation (the
"Borrower"), the banks, financial institutions and other institutional lenders
(the "Initial Lenders") and initial issuing banks (the "Initial Issuing Banks")
listed on the signature pages hereof, CITIGROUP GLOBAL MARKETS INC. and KEYBANK
NATIONAL ASSOCIATION, as joint lead arrangers (the "Arrangers"), KEYBANK
NATIONAL ASSOCIATION, as syndication agent, BANK OF AMERICA, N.A. and THE BANK
OF NEW YORK, as co-documentation agents, and CITIBANK, N.A. ("Citibank"), as
agent (the "Agent") for the Lenders (as hereinafter defined), agree as follows:

                                    ARTICLE I

                        DEFINITIONS AND ACCOUNTING TERMS

          SECTION 1.01. Certain Defined Terms.  As used in this Agreement, the
following terms shall have the following meanings (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):

          "Advance" means an advance by a Lender to the Borrower as part of a
     Borrowing or pursuant to Section 2.03(c) and refers to a Base Rate Advance
     or a Eurodollar Rate Advance (each of which shall be a "Type" of Advance).

          "Affiliate" means, as to any Person, any other Person that, directly
     or indirectly, controls, is controlled by or is under common control with
     such Person or is a director or officer of such Person. For purposes of
     this definition, the term "control" (including the terms "controlling",
     "controlled by" and "under common control with") of a Person means the
     possession, direct or indirect, of the power to direct or cause the
     direction of the management and policies of such Person, whether through
     the ownership of Voting Stock, by contract or otherwise.

          "Agent's Account" means the account of the Agent maintained by the
     Agent at Citibank at its office at 388 Greenwich Street, New York, New York
     10013, Account No. 36852248, Attention: Bank Loan Syndications.

          "Applicable Lending Office" means, with respect to each Lender, such
     Lender's Domestic Lending Office in the case of a Base Rate Advance and
     such Lender's Eurodollar Lending Office in the case of a Eurodollar Rate
     Advance.

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



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




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



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


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



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


          "Assignment and Acceptance" means an assignment and acceptance entered
     into by a Lender and an Eligible Assignee, and accepted by the Agent, in
     substantially the form of Exhibit C hereto.


                                        2



          "Authorized Officer" means the chairman of the board, chief executive
     officer, chief operating officer, chief financial officer, president, any
     vice president, treasurer, controller or any assistant treasurer of the
     Borrower.

          "Available Amount" of any Letter of Credit means, at any time, the
     maximum amount available to be drawn under such Letter of Credit at such
     time (assuming compliance at such time with all conditions to drawing).

          "Base Rate" means a fluctuating interest rate per annum in effect from
     time to time, which rate per annum shall at all times be equal to the
     higher of:

               (a) the rate of interest announced publicly by Citibank in New
          York, New York, from time to time, as Citibank's base rate; and

               (b) 1/2 of one percent per annum above the Federal Funds Rate.

          "Base Rate Advance" means an Advance that bears interest as provided
     in Section 2.07(a)(i).

          "Borrower Information" has the meaning specified in Section 8.08.

          "Borrowing" means a borrowing consisting of simultaneous Advances of
     the same Type made by each of the Lenders pursuant to Section 2.01.

          "Business Day" means a day of the year on which banks are not required
     or authorized by law to close in New York City or Phoenix, Arizona and, if
     the applicable Business Day relates to any Eurodollar Rate Advances, on
     which dealings are carried on in the London interbank market.

          "Commitment" means a Revolving Credit Commitment or a Letter of Credit
     Commitment.

          "Consolidated" refers to the consolidation of accounts in accordance
     with GAAP.

          "Consolidated Cash Coverage Ratio" means, with respect to the Borrower
     and its Consolidated Subsidiaries, for each twelve-month period ending on
     the last day of each fiscal quarter (determined as of the last day of such
     fiscal quarter), the ratio of:

               (a) an amount equal to:

                    (i) Consolidated net income of the Borrower and its
               Consolidated Subsidiaries for such period, plus

                    (ii) all material non-recurring items which decreased said
               net income for such period, minus

                    (iii) all material non-recurring items which increased said
               net income for such period, plus

                    (iv) income taxes deducted in determining said net income
               for such period, plus

                    (v) total "Interest Charges", as defined in clause (b)
               below, of the Borrower and its Consolidated Subsidiaries for such
               period, plus

                    (vi) depreciation and amortization, and nuclear fuel
               amortization for such period, minus


                                        3



                    (vii) allowance for equity and borrowed funds used during
               construction for such period, minus

                    (viii) deferrals as described in Financial Accounting
               Standards Board Statement No. 71 for such period, plus or minus

                    (ix) other significant noncash items for such period as may
               be specified under Financial Accounting Standards Board
               Statements or other accounting guidelines, to

               (b) without duplication of any item, an amount equal to the sum
          (such amount being the "Interest Charges") of:

                    (i) interest on long-term debt for such period as reported
               in the consolidated income statement for such period, plus

                    (ii) interest on short-term debt for such period as reported
               in the consolidated income statement for such period, plus

                    (iii) imputed interest on the Sale Leaseback Obligation
               Bonds for such period, such amount being equal to the product of
               (A) the principal amount of Sale Leaseback Obligation Bonds
               outstanding during such period and (B) the rate of interest
               applicable to such Sale Leaseback Obligation Bonds during such
               period, plus

                    (iv) all rental payments in respect of operating leases
               (excluding any portion of such rental payments attributable to
               operating expenses and excluding any payments in respect of Sale
               Leaseback Obligation Bonds) with respect to which the payment
               obligations of the Borrower or a Consolidated Subsidiary of the
               Borrower have a present value of at least $25,000,000.

          "Consolidated Indebtedness" means, at any date, the Indebtedness of
     the Borrower and its Consolidated Subsidiaries determined on a Consolidated
     basis as of such date.

          "Consolidated Net Worth" means, at any date, the sum as of such date
     of (a) the par value (or value stated on the books of the Borrower) of all
     classes of capital stock of the Borrower and its Subsidiaries, excluding
     the Borrower's capital stock owned by the Borrower and/or its Subsidiaries,
     plus (or minus in the case of a surplus deficit) (b) the amount of the
     Consolidated surplus, whether capital or earned, of the Borrower,
     determined in accordance with GAAP as of the end of the most recent
     calendar month (excluding (x) cumulative charges of up to $300,000,000 to
     Consolidated surplus resulting from, or in anticipation of, discontinuation
     of Financial Accounting Standards Board Statement No. 71, accounting for
     all or part of the business and (y) the effect on the Borrower's
     accumulated other comprehensive income/loss of the ongoing application of
     Financial Accounting Standards Board Statement No. 133).

          "Consolidated Subsidiary" means, at any date, any Subsidiary or other
     entity the accounts of which would be consolidated with those of the
     Borrower on its Consolidated financial statements if such financial
     statements were prepared as of such date.

          "Convert", "Conversion" and "Converted" each refers to a conversion of
     Advances of one Type into Advances of the other Type pursuant to Section
     2.08, 2.09 or 2.12.

          "Default" means any Event of Default or any event that would
     constitute an Event of Default but for the requirement that notice be given
     or time elapse or both.

          "Domestic Lending Office" means, with respect to any Lender, the
     office of such Lender specified as its "Domestic Lending Office" opposite
     its name on Schedule I hereto or in the Assignment and


                                        4



     Acceptance pursuant to which it became a Lender, or such other office of
     such Lender as such Lender may from time to time specify to the Borrower
     and the Agent.

     "Effective Date" has the meaning specified in Section 3.01.

          "Eligible Assignee" means (i) a Lender; (ii) an Affiliate of a Lender
     (that is not a natural person); and (iii) any other Person (that is not a
     natural person) approved by the Agent and, unless an Event of Default has
     occurred and is continuing at the time any assignment is effected in
     accordance with Section 8.07, the Borrower, such approval not to be
     unreasonably withheld or delayed; provided, however, that neither the
     Borrower nor an Affiliate of the Borrower shall qualify as an Eligible
     Assignee.

          "Environmental Action" means any action, suit, demand, demand letter,
     claim, notice of non-compliance or violation, notice of liability or
     potential liability, investigation, proceeding, consent order or consent
     agreement relating in any way to any Environmental Law, Environmental
     Permit or Hazardous Materials or arising from alleged injury or threat of
     injury to health, safety or the environment, including, without limitation,
     (a) by any governmental or regulatory authority for enforcement, cleanup,
     removal, response, remedial or other actions or damages and (b) by any
     governmental or regulatory authority or any third party for damages,
     contribution, indemnification, cost recovery, compensation or injunctive
     relief.

          "Environmental Law" means any federal, state, local or foreign
     statute, law, ordinance, rule, regulation, code, order, judgment, decree or
     judicial or agency interpretation, policy or guidance relating to pollution
     or protection of the environment, health, safety or natural resources,
     including, without limitation, those relating to the use, handling,
     transportation, treatment, storage, disposal, release or discharge of
     Hazardous Materials.

          "Environmental Permit" means any permit, approval, identification
     number, license or other authorization required under any Environmental
     Law.

          "ERISA" means the Employee Retirement Income Security Act of 1974, as
     amended from time to time, and the regulations promulgated and rulings
     issued thereunder.

          "ERISA Affiliate" means any Person that for purposes of Title IV of
     ERISA is a member of the Borrower's controlled group, or under common
     control with the Borrower, within the meaning of Section 414 of the
     Internal Revenue Code.

          "ERISA Event" means (a) (i) the occurrence of a reportable event,
     within the meaning of Section 4043 of ERISA, with respect to any Plan
     unless the 30-day notice requirement with respect to such event has been
     waived by the PBGC, or (ii) the requirements of subsection (1) of Section
     4043(b) of ERISA (without regard to subsection (2) of such Section) are met
     with respect to a contributing sponsor, as defined in Section 4001(a)(13)
     of ERISA, of a Plan, and an event described in paragraph (9), (10), (11),
     (12) or (13) of Section 4043(c) of ERISA is reasonably expected to occur
     with respect to such Plan within the following 30 days; (b) the application
     for a minimum funding waiver with respect to a Plan; (c) the provision by
     the administrator of any Plan of a notice of intent to terminate such Plan
     pursuant to Section 4041(a)(2) of ERISA (including any such notice with
     respect to a plan amendment referred to in Section 4041(e) of ERISA); (d)
     the cessation of operations at a facility of the Borrower or any ERISA
     Affiliate in the circumstances described in Section 4062(e) of ERISA; (e)
     the withdrawal by the Borrower or any ERISA Affiliate from a Multiple
     Employer Plan during a plan year for which it was a substantial employer,
     as defined in Section 4001(a)(2) of ERISA; (f) the conditions for the
     imposition of a lien under Section 302(f) of ERISA shall have been met with
     respect to any Plan; (g) the adoption of an amendment to a Plan requiring
     the provision of security to such Plan pursuant to Section 307 of ERISA; or
     (h) the institution by the PBGC of proceedings to terminate a Plan pursuant
     to Section 4042 of ERISA, or the occurrence of any event or condition
     described in Section 4042 of ERISA that constitutes grounds for the
     termination of, or the appointment of a trustee to administer, a Plan.


                                        5



          "Eurocurrency Liabilities" has the meaning assigned to that term in
     Regulation D of the Board of Governors of the Federal Reserve System, as in
     effect from time to time.

          "Eurodollar Lending Office" means, with respect to any Lender, the
     office of such Lender specified as its "Eurodollar Lending Office" opposite
     its name on Schedule I hereto or in the Assignment and Acceptance pursuant
     to which it became a Lender (or, if no such office is specified, its
     Domestic Lending Office), or such other office of such Lender as such
     Lender may from time to time specify to the Borrower and the Agent.

          "Eurodollar Rate" means, for any Interest Period for each Eurodollar
     Rate Advance comprising part of the same Borrowing, an interest rate per
     annum equal to the rate per annum (rounded upward to the nearest whole
     multiple of 1/16 of 1% per annum) appearing on Moneyline Telerate Markets
     Page 3750 (or any successor page) as the London interbank offered rate for
     deposits in U.S. dollars at approximately 11:00 A.M. (London time) two
     Business Days prior to the first day of such Interest Period for a term
     comparable to such Interest Period or, if for any reason such rate is not
     available, the average (rounded upward to the nearest whole multiple of
     1/16 of 1% per annum, if such average is not such a multiple) of the rate
     per annum at which deposits in U.S. dollars are offered by the principal
     office of each of the Reference Banks in London, England to prime banks in
     the London interbank market at 11:00 A.M. (London time) two Business Days
     before the first day of such Interest Period in an amount substantially
     equal to such Reference Bank's Eurodollar Rate Advance comprising part of
     such Borrowing to be outstanding during such Interest Period and for a
     period equal to such Interest Period, subject, however, to the provisions
     of Section 2.08.

          "Eurodollar Rate Advance" means an Advance that bears interest as
     provided in Section 2.07(a)(ii).

          "Events of Default" has the meaning specified in Section 6.01.

          "Federal Funds Rate" means, for any period, a fluctuating interest
     rate per annum equal for each day during such period to the weighted
     average of the rates on overnight Federal funds transactions with members
     of the Federal Reserve System arranged by Federal funds brokers, as
     published for such day (or, if such day is not a Business Day, for the next
     preceding Business Day) by the Federal Reserve Bank of New York, or, if
     such rate is not so published for any day that is a Business Day, the
     average of the quotations for such day on such transactions received by the
     Agent from three Federal funds brokers of recognized standing selected by
     it.

          "GAAP" has the meaning specified in Section 1.03.

          "Guaranteed Indebtedness" of any Person means, without duplication,
     all Indebtedness guaranteed directly or indirectly in any manner by such
     Person, or in effect guaranteed directly or indirectly by such Person
     through an agreement (i) to pay or purchase such Indebtedness or to advance
     or supply funds for the payment or purchase of such Indebtedness, or (ii)
     to purchase, sell or lease (as lessee or lessor) property, or to purchase
     or sell services, primarily for the purpose of enabling the debtor to make
     payment of such Indebtedness or to assure the holder of such Indebtedness
     against loss, or (iii) to supply funds to or in any other manner invest in
     the debtor (including any agreement to pay for property or services
     irrespective to whether or not such property is received or such services
     are rendered), or (iv) otherwise to assure a creditor against loss.

          "Hazardous Materials" means (a) petroleum and petroleum products,
     byproducts or breakdown products, radioactive materials,
     asbestos-containing materials, polychlorinated biphenyls and radon gas and
     (b) any other chemicals, materials or substances designated, classified or
     regulated as hazardous or toxic or as a pollutant or contaminant under any
     Environmental Law.

          "Hedge Agreement" means any interest rate swap, cap or collar
     agreement, interest rate future or option contract, currency swap
     agreement, currency future or option contract or other similar agreement.


                                        6



          "Indebtedness" of any Person means, without duplication, (i) all
     indebtedness of such Person for borrowed money or for the deferred purchase
     price of property or services, excluding, however, trade accounts payable
     arising in, and accrued expenses incurred in, the ordinary course of
     business of such Person so long as such trade accounts payable are paid
     within 180 days of the date incurred, (ii) all indebtedness created or
     arising under any conditional sale or other title retention agreement with
     respect to property acquired by such Person (even though the rights and
     remedies of the seller or lender under such agreement in the event of
     default are limited to repossession or sale of such property), (iii) all
     obligations under leases which shall have been or should be, in accordance
     with GAAP, recorded as capital leases in respect of which such Person is
     liable as lessee, (iv) all obligations of such Person upon which interest
     charges are customarily paid, (v) all liabilities of such Person in respect
     of unfunded vested benefits under plans covered by Title IV of ERISA, (vi)
     all Guaranteed Indebtedness, and (vii) all Indebtedness referred to in
     clause (i), (ii) or (iii) above secured by (or for which the holder of such
     Indebtedness has an existing right, contingent or otherwise, to be secured
     by) any lien, security interest or other charge or encumbrance upon or in
     property (including, without limitation, accounts and contracts rights)
     owned by such Person, even though such Person has not assumed or become
     liable for the payment of such Indebtedness.

          "Information Memorandum" means the information memorandum dated April
     20, 2004 used by the Arrangers in connection with the syndication of the
     Commitments, as qualified in its entirety by the information provided in
     the SEC Reports.

          "Interest Period" means, for each Eurodollar Rate Advance comprising
     part of the same Borrowing, the period commencing on the date of such
     Eurodollar Rate Advance or the date of the Conversion of any Base Rate
     Advance into such Eurodollar Rate Advance and ending on the last day of the
     period selected by the Borrower pursuant to the provisions below and,
     thereafter, each subsequent period commencing on the last day of the
     immediately preceding Interest Period and ending on the last day of the
     period selected by the Borrower pursuant to the provisions below. The
     duration of each such Interest Period shall be one, two, three or six
     months, as the Borrower may, upon notice received by the Agent not later
     than 12:00 noon (New York City time) on the third Business Day prior to the
     first day of such Interest Period, select; provided, however, that:

               (a) the Borrower may not select any Interest Period that ends
          after the Termination Date;

               (b) Interest Periods commencing on the same date for Eurodollar
          Rate Advances comprising part of the same Borrowing shall be of the
          same duration;

               (c) whenever the last day of any Interest Period would otherwise
          occur on a day other than a Business Day, the last day of such
          Interest Period shall be extended to occur on the next succeeding
          Business Day, provided, however, that, if such extension would cause
          the last day of such Interest Period to occur in the next following
          calendar month, the last day of such Interest Period shall occur on
          the next preceding Business Day; and

               (d) whenever the first day of any Interest Period occurs on a day
          of an initial calendar month for which there is no numerically
          corresponding day in the calendar month that succeeds such initial
          calendar month by the number of months equal to the number of months
          in such Interest Period, such Interest Period shall end on the last
          Business Day of such succeeding calendar month.

          "Internal Revenue Code" means the Internal Revenue Code of 1986, as
     amended from time to time, and the regulations promulgated and rulings
     issued thereunder.

          "Issuing Bank" means an Initial Issuing Bank or any other Lender
     approved by the Borrower that may agree to issue Letters of Credit pursuant
     to an Assignment and Acceptance or other agreement in form satisfactory to
     the Borrower and the Agent, so long as such Lender expressly agrees to
     perform in accordance with their terms all of the obligations that by the
     terms of this Agreement are required to be


                                        7



     performed by it as an Issuing Bank and notifies the Agent of its Applicable
     Lending Office (which information shall be recorded by the Agent in the
     Register), for so long as such Initial Issuing Bank or Lender, as the case
     may be, shall have a Letter of Credit Commitment.

          "L/C Cash Deposit Account" means an interest bearing cash deposit
     account to be established and maintained by the Agent, over which the Agent
     shall have sole dominion and control, upon terms as may be satisfactory to
     the Agent.

          "L/C Related Documents" has the meaning specified in Section
     2.06(b)(i).

          "Lenders" means the Initial Lenders, each Issuing Bank and each Person
     that shall become a party hereto pursuant to Section 8.07.

          "Letter of Credit" has the meaning specified in Section 2.01(b).

          "Letter of Credit Application" has the meaning specified in Section
     2.03(a).

          "Letter of Credit Commitment" means, with respect to each Issuing
     Bank, the obligation of such Issuing Bank to issue Letters of Credit for
     the account of the Borrower from time to time in (a) the maximum aggregate
     amount at any time outstanding set forth opposite the Issuing Bank's name
     on the signature pages hereto under the caption "Letter of Credit
     Commitment" or (b) if such Issuing Bank has entered into one or more
     Assignments and Acceptances or other agreements pursuant to which it became
     an Issuing Bank, the amount set forth for such Issuing Bank in the Register
     maintained by the Agent pursuant to Section 8.07(d) as such Issuing Bank's
     "Letter of Credit Commitment", in each case as such amount may be reduced
     prior to such time pursuant to Section 2.05.

          "Letter of Credit Facility" means, at any time, an amount equal to the
     least of (a) the aggregate amount of the Issuing Banks' Letter of Credit
     Commitments at such time, (b) $75,000,000 and (c) the aggregate amount of
     the Revolving Credit Commitments, as such amount may be reduced at or prior
     to such time pursuant to Section 2.05.

          "Lien" means any lien, security interest or other encumbrance of any
     kind, or any other type of preferential arrangement that has the practical
     effect of creating a security interest, including, without limitation, the
     lien or retained security title of a conditional vendor and any easement,
     right of way or other encumbrance on title to real property.

          "Material Adverse Change" means any material adverse change in the
     financial condition or financial prospects of the Borrower and its
     Subsidiaries taken as a whole.

          "Material Adverse Effect" means a material adverse effect on (a) the
     financial condition or financial prospects of the Borrower and its
     Subsidiaries taken as a whole, (b) the rights and remedies of the Agent or
     any Lender under this Agreement or any Note or (c) the ability of the
     Borrower to perform its obligations under this Agreement or any Note.

          "Material Subsidiary" means, at any time, a Subsidiary of the Borrower
     which as of such time meets the definition of a "significant subsidiary"
     included as of the date hereof in Regulation S-X of the Securities and
     Exchange Commission or whose assets at such time exceed 10% of the assets
     of the Borrower and the Subsidiaries (on a consolidated basis).

          "Moody's" means Moody's Investors Service, Inc.

          "Multiemployer Plan" means a multiemployer plan, as defined in Section
     4001(a)(3) of ERISA, to which the Borrower or any ERISA Affiliate is making
     or accruing an obligation to make contributions, or has within any of the
     preceding five plan years made or accrued an obligation to make
     contributions.


                                        8



          "Multiple Employer Plan" means a single employer plan, as defined in
     Section 4001(a)(15) of ERISA, that (a) is maintained for employees of the
     Borrower or any ERISA Affiliate and at least one Person other than the
     Borrower and the ERISA Affiliates or (b) was so maintained and in respect
     of which the Borrower or any ERISA Affiliate could have liability under
     Section 4064 or 4069 of ERISA in the event such plan has been or were to be
     terminated.

          "1984 Order" means Decision No. 54230, dated November 8, 1984, of the
     Arizona Corporation Commission.

          "1986 Order" means Decision No. 55017, dated May 6, 1986, of the
     Arizona Corporation Commission.

          "Note" means a promissory note of the Borrower payable to the order of
     any Lender, delivered pursuant to a request made under Section 2.16 in
     substantially the form of Exhibit A hereto, evidencing the aggregate
     indebtedness of the Borrower to such Lender resulting from the Advances
     made by such Lender.

          "Notice of Borrowing" has the meaning specified in Section 2.02(a).

          "Notice of Issuance" has the meaning specified in Section 2.03(a).

          "PBGC" means the Pension Benefit Guaranty Corporation (or any
     successor).

          "Permitted Lien" of the Borrower or any Material Subsidiary means any
     of the following:

               (i) Liens for taxes, assessments or other governmental charges or
          levies not at the time delinquent or thereafter payable without
          penalty or being contested in good faith by appropriate proceedings
          and for which adequate reserves in accordance with GAAP shall have
          been made;

               (ii) Liens imposed by or arising by operation of law, such as
          Liens of carriers, warehousemen, mechanics, materialmen and landlords
          incurred in the ordinary course of business, including, without
          limitation, landlord's liens arising under Arizona law under leases
          entered into by the Borrower in the 1986 sale and leaseback
          transactions with respect to Palo Verde Unit 2 and securing the
          payment of rent under such leases, in each case, for sums not overdue
          for a period of more than 30 days or being contested in good faith by
          appropriate proceedings and for which adequate reserves in accordance
          with GAAP shall have been made;

               (iii) Liens incurred in the ordinary course of business in
          connection with worker's compensation, unemployment insurance or other
          forms of governmental insurance or benefits or other similar statutory
          obligations;

               (iv) Liens to secure obligations on surety or appeal bonds;

               (v) rights of setoff and banker's Liens with respect to funds on
          deposit in a financial institution in the ordinary course of business;

               (vi) easements, restrictions, reservations, licenses, covenants,
          and other defects of title that are not, in the aggregate, materially
          adverse to the use of such property for the purpose for which it is
          used;

               (vii) Liens securing claims against any Person other than the
          Borrower or any Subsidiary of the Borrower neither assumed nor
          guaranteed by the Borrower or any Subsidiary of the Borrower nor on
          which the Borrower or any Subsidiary of the Borrower customarily pays
          interest, existing upon real estate or rights in or relating to real
          estate acquired by the Borrower or


                                        9



          any Subsidiary of the Borrower for substation, transmission line,
          transportation line, distribution line or right of way purposes;

               (viii) rights reserved to or vested in any municipality or public
          authority by the terms of any right, power, franchise, grant, license
          or permit, or by any provision of law, to terminate such right, power,
          franchise, grant, license or permit or to purchase or recapture or to
          designate a purchaser of any of the property of the Borrower;

               (ix) rights reserved to or vested in others to take or receive
          any part of the power pursuant to firm power commitment contracts,
          purchased power contracts, tolling agreements and similar agreements,
          gas, oil or other minerals or timber generated, developed,
          manufactured or produced by, or grown on, or acquired with, any
          property of the Borrower;

               (x) rights reserved to or vested in any municipality or public
          authority to control or regulate any property of the Borrower, or to
          use such property in a manner that does not materially impair the use
          of such property for the purposes for which it is held by the
          Borrower;

               (xi) security interests granted in favor of the Unit 2 sale
          leaseback transaction lessors in the Borrower's Decommissioning Trust
          Agreement (PVNGS Unit 2) dated as of January 31, 1992 (such agreement,
          as amended or otherwise modified from time to time, being the "Unit 2
          Trust Agreement") to secure the Borrower's obligations in respect of
          the decommissioning of PVNGS Unit 2 or related facilities;

               (xii) Liens that may exist with respect to the Unit 2 Trust
          Agreement (other than as described in paragraph (xi) above) or with
          respect to either of the Borrower's Decommissioning Trust Agreement
          (PVNGS Unit 1) or Decommissioning Trust Agreement (PVNGS Unit 3), each
          dated as of July 1, 1991, as amended or otherwise modified from time
          to time, relating to the Borrower's obligation to set aside funds for
          the decommissioning and retirement from service of such Units;

               (xiii) pledges of pollution control bonds and related rights to
          secure the Borrower's reimbursement obligations in respect of letters
          of credit, bond insurance, and other credit or liquidity enhancements
          supporting pollution control bond transactions, provided that such
          pollution control bonds are not secured by any other assets of the
          Borrower or any Material Subsidiary;

               (xiv) interests of other participants under agreements governing
          jointly-owned electric generating facilities and transmission
          facilities and transfers of operational or other control of facilities
          to a regional transmission organization or other similar body and
          Liens on such facilities to cover expenses, fees and other costs of
          such an organization or body;

               (xv) Liens established on specified bank accounts of the Borrower
          to secure the Borrower's reimbursement obligations in respect of
          letters of credit supporting commercial paper issued by the Borrower
          and similar arrangements for collateral security with respect to
          refinancings or replacements of the same;

               (xvi) rights of transmission users or any regional transmission
          organizations or similar entities in transmission facilities; and

               (xvii) Liens on property of the Borrower sold to another Person
          pursuant to a conditional sales agreement where the Borrower retains
          title;

          provided, however, that no lien in favor of the PBGC shall, in any
          event, be a Permitted Lien.


                                       10



          "Person" means an individual, partnership, corporation (including a
     business trust), joint stock company, trust, unincorporated association,
     joint venture, limited liability company or other entity, or a government
     or any political subdivision or agency thereof.

          "Plan" means a Single Employer Plan or a Multiple Employer Plan.

          "Public Debt Rating" means, as of any date, the rating that has been
     most recently announced by either S&P or Moody's, as the case may be, for
     any class of non-credit enhanced long-term senior unsecured debt issued by
     the Borrower or, if any such rating agency shall have issued more than one
     such rating, the lowest such rating issued by such rating agency. For
     purposes of the foregoing, (a) if only one of S&P and Moody's shall have in
     effect a Public Debt Rating, the Applicable Margin, the Applicable
     Percentage and the Applicable Utilization Fee shall be determined by
     reference to the available rating; (b) if neither S&P nor Moody's shall
     have in effect a Public Debt Rating, the Applicable Margin, the Applicable
     Percentage and the Applicable Utilization Fee will be set in accordance
     with Level 6 under the definition of "Applicable Margin", "Applicable
     Percentage" or "Applicable Utilization Fee", as the case may be; (c) if the
     ratings established by S&P and Moody's shall fall within different levels
     above Level 6, the Applicable Margin, the Applicable Percentage and the
     Applicable Utilization Fee shall be based upon the higher rating unless the
     such ratings differ by two or more levels, in which case the applicable
     level will be deemed to be one level above the lower of such levels; (d) if
     any rating established by S&P or Moody's shall be changed, such change
     shall be effective as of the date on which such change is first announced
     publicly by the rating agency making such change; and (e) if S&P or Moody's
     shall change the basis on which ratings are established, each reference to
     the Public Debt Rating announced by S&P or Moody's, as the case may be,
     shall refer to the then equivalent rating by S&P or Moody's, as the case
     may be.

          "PWCC" means Pinnacle West Capital Corporation.

          "Ratable Share" of any amount means, with respect to any Lender at any
     time, the product of such amount times a fraction the numerator of which is
     the amount of such Lender's Revolving Credit Commitment at such time (or,
     if the Revolving Credit Commitments shall have been terminated pursuant to
     Section 2.05 or 6.01, such Lender's Revolving Credit Commitment as in
     effect immediately prior to such termination) and the denominator of which
     is the aggregate amount of all Revolving Credit Commitments at such time
     (or, if the Revolving Credit Commitments shall have been terminated
     pursuant to Section 2.05 or 6.01, the aggregate amount of all Revolving
     Credit Commitments as in effect immediately prior to such termination).

          "Reference Banks" means Citibank, KeyBank National Association, Bank
     of America, N.A. and The Bank of New York.

          "Register" has the meaning specified in Section 8.07(d).

          "Required Lenders" means at any time Lenders owed at least a majority
     in interest of the then aggregate unpaid principal amount of the Advances
     owing to Lenders, or, if no such principal amount is then outstanding,
     Lenders having at least a majority in interest of the Revolving Credit
     Commitments.

          "Revolving Credit Commitment" means as to any Lender (a) the amount
     set forth opposite such Lender's name on the signature pages hereof as such
     Lender's "Revolving Credit Commitment" or (b) if such Lender has entered
     into any Assignment and Acceptance, the amount set forth for such Lender in
     the Register maintained by the Agent pursuant to Section 8.07(d), as such
     amount may be reduced pursuant to Section 2.05.

          "S&P" means Standard & Poor's, a division of The McGraw-Hill
     Companies, Inc.

          "Sale Leaseback Obligation Bonds" means PVNGS II Funding Corp.'s (i)
     7.39% Secured Lease Obligation Bonds, Series 1993, due 2005; (ii) 8.00%
     Secured Lease Obligation Bonds, Series 1993, due


                                       11



     2015; (iii) any other bonds issued by the Borrower in connection with a
     sale/leaseback transaction; and (iv) any refinancing or refunding of the
     obligations specified in subclauses (i) through (iii) above.

          "SEC Reports" means the Borrower's (i) Form 10-K Report for the year
     ended December 31, 2003, (ii) Form 10-Q Report for the quarter ended March
     31, 2004 and (iii) Form 8-K Reports filed on January 9, January 28, January
     29, February 4 and April 21, 2004.

          "Single Employer Plan" means a single employer plan, as defined in
     Section 4001(a)(15) of ERISA, that (a) is maintained for employees of the
     Borrower or any ERISA Affiliate and no Person other than the Borrower and
     the ERISA Affiliates or (b) was so maintained and in respect of which the
     Borrower or any ERISA Affiliate could have liability under Section 4069 of
     ERISA in the event such plan has been or were to be terminated.

          "Subsequent Order" means any decision, order or ruling of the Arizona
     Corporation Commission issued after the Effective Date relating to the
     incurrence or maintenance of Indebtedness by the Borrower and that amends,
     supersedes or otherwise modifies the 1984 Order, the 1986 Order or any
     successor decision, order or ruling.

          "Subsidiary" of any Person means any corporation, partnership, joint
     venture, limited liability company, trust or estate of which (or in which)
     more than 50% of (a) the issued and outstanding capital stock having
     ordinary voting power to elect a majority of the Board of Directors of such
     corporation (irrespective of whether at the time capital stock of any other
     class or classes of such corporation shall or might have voting power upon
     the occurrence of any contingency), (b) the interest in the capital or
     profits of such limited liability company, partnership or joint venture or
     (c) the beneficial interest in such trust or estate, is at the time
     directly or indirectly owned or controlled by such Person, by such Person
     and one or more of its other Subsidiaries or by one or more of such
     Person's other Subsidiaries.

          "Termination Date" means the earlier of (a) May 21, 2007 and (b) the
     date of termination in whole of the Commitments pursuant to Section 2.05 or
     6.01.

          "Unissued Letter of Credit Commitment" means, with respect to any
     Issuing Bank, the obligation of such Issuing Bank to issue Letters of
     Credit for the account of the Borrower in an amount equal to the excess of
     (a) the amount of its Letter of Credit Commitment over (b) the aggregate
     Available Amount of all Letters of Credit issued by such Issuing Bank.

          "Unused Commitment" means, with respect to each Lender at any time,
     (a) such Lender's Revolving Credit Commitment at such time minus (b) the
     sum of (i) the aggregate principal amount of all Advances made by such
     Lender (in its capacity as a Lender) and outstanding at such time, plus
     (ii) such Lender's Ratable Share of (A) the aggregate Available Amount of
     all the Letters of Credit outstanding at such time and (B) the aggregate
     principal amount of all Advances made by each Issuing Bank pursuant to
     Section 2.03(c) that have not been ratably funded by such Lender and
     outstanding at such time.

          "Voting Stock" means capital stock issued by a corporation, or
     equivalent interests in any other Person, the holders of which are
     ordinarily, in the absence of contingencies, entitled to vote for the
     election of directors (or persons performing similar functions) of such
     Person, even if the right so to vote has been suspended by the happening of
     such a contingency.

          SECTION 1.02. Computation of Time Periods.  In this Agreement in the
computation of periods of time from a specified date to a later specified date,
the word "from" means "from and including" and the words "to" and "until" each
mean "to but excluding".

          SECTION 1.03. Accounting Terms.  Unless otherwise specified herein,
all accounting terms used herein shall be interpreted, all accounting
determinations hereunder shall be made, and all financial statements required to
be delivered hereunder shall be prepared, in accordance with generally accepted
accounting principles as in effect from time to time, applied on a basis
consistent (except for changes concurred in by the Borrower's


                                       12



independent public accountants) with the most recent audited Consolidated
financial statements of the Borrower delivered to the Agent ("GAAP").

                                   ARTICLE II

             AMOUNTS AND TERMS OF THE ADVANCES AND LETTERS OF CREDIT

          SECTION 2.01. The Advances and Letters of Credit.  (a) The Advances.
Each Lender severally agrees, on the terms and conditions hereinafter set forth,
to make Advances to the Borrower from time to time on any Business Day during
the period from the Effective Date until the Termination Date in an amount not
to exceed such Lender's Unused Commitment. Each Borrowing shall be in an
aggregate amount of $10,000,000 or an integral multiple of $1,000,000 in excess
thereof and shall consist of Advances of the same Type made on the same day by
the Lenders ratably according to their respective Revolving Credit Commitments.
Within the limits of each Lender's Revolving Credit Commitment, the Borrower may
borrow under this Section 2.01(a), prepay pursuant to Section 2.10 and reborrow
under this Section 2.01(a).

          (b) Letters of Credit.  Each Issuing Bank agrees, on the terms and
conditions hereinafter set forth, in reliance upon the agreements of the other
Lenders set forth in this Agreement, to issue letters of credit (each, a "Letter
of Credit") for the account of the Borrower from time to time on any Business
Day during the period from the Effective Date until 30 days before the
Termination Date in an aggregate Available Amount (i) for all Letters of Credit
issued by each Issuing Bank not to exceed at any time the lesser of (x) the
Letter of Credit Facility at such time and (y) such Issuing Bank's Letter of
Credit Commitment at such time and (ii) for each such Letter of Credit not to
exceed an amount equal to the Unused Commitments of the Lenders at such time. No
Letter of Credit shall have an expiration date (including all rights of the
Borrower or the beneficiary to require renewal) later than five Business Days
before the Termination Date. Within the limits referred to above, the Borrower
may from time to time request the issuance of Letters of Credit under this
Section 2.01(b). Each letter of credit listed on Schedule 2.01(b) shall be
deemed to constitute a Letter of Credit issued hereunder, and each Lender that
is an issuer of such a Letter of Credit shall, for purposes of Section 2.03, be
deemed to be an Issuing Bank for each such letter of credit, provided than any
renewal or replacement of any such letter of credit shall be issued by an
Issuing Bank pursuant to the terms of this Agreement. The terms "issue",
"issued", "issuance" and all similar terms, when applied to a Letter of Credit,
shall include any renewal, extension or amendment thereof.

          SECTION 2.02. Making the Advances.  (a) Except as otherwise provided
in Section 2.03(c), each Borrowing shall be made on notice, given not later than
(x) 12:00 noon (New York City time) on the third Business Day prior to the date
of the proposed Borrowing in the case of a Borrowing consisting of Eurodollar
Rate Advances or (y) 12:00 noon (New York City time) on the date of the proposed
Borrowing in the case of a Borrowing consisting of Base Rate Advances, by the
Borrower to the Agent, which shall give to each Lender prompt notice thereof by
facsimile. Each such notice of a Borrowing (a "Notice of Borrowing") shall be in
writing or by facsimile in substantially the form of Exhibit B hereto,
specifying therein the requested (i) date of such Borrowing, (ii) Type of
Advances comprising such Borrowing, (iii) aggregate amount of such Borrowing,
and (iv) in the case of a Borrowing consisting of Eurodollar Rate Advances,
initial Interest Period for each such Advance. Each Lender shall, in the case of
a Borrowing consisting of Base Rate Advances, before 2:00 P.M. (New York City
time) on the date of such Borrowing, and in the case of a Borrowing consisting
of Eurodollar Rate Advances, before 11:00 A.M. (New York City time) on date of
such Borrowing, make available for the account of its Applicable Lending Office
to the Agent at the Agent's Account, in same day funds, such Lender's ratable
portion of such Borrowing. After the Agent's receipt of such funds and upon
fulfillment of the applicable conditions set forth in Article III, the Agent
will make such funds available to the Borrower at the Agent's address referred
to in Section 8.02.

          (b) Anything in subsection (a) above to the contrary notwithstanding,
(i) the Borrower may not select Eurodollar Rate Advances for any Borrowing if
the aggregate amount of such Borrowing is less than $10,000,000 or if the
obligation of the Lenders to make Eurodollar Rate Advances shall then be
suspended pursuant to Section 2.08 or 2.12 and (ii) at no time shall there be
more than eight different Interest Periods outstanding for Eurodollar Rate
Advances.


                                       13



          (c) Each Notice of Borrowing shall be irrevocable and binding on the
Borrower. In the case of any Borrowing that the related Notice of Borrowing
specifies is to be comprised of Eurodollar Rate Advances, the Borrower shall
indemnify each Lender against any loss, cost or expense reasonably incurred by
such Lender as a result of any failure to fulfill on or before the date
specified in such Notice of Borrowing for such Borrowing the applicable
conditions set forth in Article III, including, without limitation, any loss
(excluding loss of anticipated profits), cost or expense incurred by reason of
the liquidation or reemployment of deposits or other funds acquired by such
Lender to fund the Advance to be made by such Lender as part of such Borrowing
when such Advance, as a result of such failure, is not made on such date.

          (d) Unless the Agent shall have received notice from a Lender prior to
the time of any Borrowing that such Lender will not make available to the Agent
such Lender's ratable portion of such Borrowing, the Agent may assume that such
Lender has made such portion available to the Agent on the date of such
Borrowing in accordance with subsection (a) of this Section 2.02 and the Agent
may, in reliance upon such assumption, make available to the Borrower on such
date a corresponding amount. If and to the extent that such Lender shall not
have so made such ratable portion available to the Agent, such Lender and the
Borrower severally agree to repay to the Agent within one Business Day after
demand for such Lender and within three Business Days after demand for the
Borrower such corresponding amount together with interest thereon, for each day
from the date such amount is made available to the Borrower until the date such
amount is repaid to the Agent, at (i) in the case of the Borrower, the interest
rate applicable at the time to Advances comprising such Borrowing and (ii) in
the case of such Lender, the Federal Funds Rate. If such Lender shall repay to
the Agent such corresponding amount, such amount so repaid shall constitute such
Lender's Advance as part of such Borrowing for purposes of this Agreement.

          (e) The failure of any Lender to make the Advance to be made by it as
part of any Borrowing shall not relieve any other Lender of its obligation, if
any, hereunder to make its Advance on the date of such Borrowing, but no Lender
shall be responsible for the failure of any other Lender to make the Advance to
be made by such other Lender on the date of any Borrowing.

          SECTION 2.03. Issuance of and Drawings and Reimbursement Under Letters
of Credit.  (a) Request for Issuance. (i) Each Letter of Credit shall be issued
upon notice, given not later than 11:00 A.M. (New York City time) on the third
Business Day prior to the date of the proposed issuance of such Letter of Credit
(or on such shorter notice as the applicable Issuing Bank may agree), by the
Borrower to any Issuing Bank, and such Issuing Bank shall give the Agent, prompt
notice thereof. Each such notice by the Borrower of issuance of a Letter of
Credit (a "Notice of Issuance") shall be by facsimile or telephone, confirmed
immediately in writing, specifying therein the requested (A) date of such
issuance (which shall be a Business Day), (B) Available Amount of such Letter of
Credit, (C) expiration date of such Letter of Credit (which shall not be later
than five Business Days before the Termination Date), (D) name and address of
the beneficiary of such Letter of Credit and (E) form of such Letter of Credit.
Each Letter of Credit shall be issued pursuant to such application for letter of
credit as such Issuing Bank may specify to the Borrower for use in connection
with such requested Letter of Credit (a "Letter of Credit Application"). If the
requested form of such Letter of Credit is acceptable to such Issuing Bank in
its sole discretion, such Issuing Bank will, upon fulfillment of the applicable
conditions set forth in Article III, make such Letter of Credit available to the
Borrower at its office referred to in Section 8.02 or as otherwise agreed with
the Borrower in connection with such issuance. In the event and to the extent
that the provisions of any Letter of Credit Application shall conflict with this
Agreement, the provisions of this Agreement shall govern. Without limitation of
the immediately preceding sentence, no such Letter of Credit Application may
impose any additional conditions on the issuance of a Letter of Credit nor
obligations of the Borrower to the Issuing Bank, other than as stated in this
Agreement.

          (b) Participations.  By the issuance of a Letter of Credit (or an
amendment to a Letter of Credit increasing the amount thereof) and without any
further action on the part of the applicable Issuing Bank or the Lenders, such
Issuing Bank hereby grants to each Lender, and each Lender hereby acquires from
such Issuing Bank, a participation in such Letter of Credit equal to such
Lender's Ratable Share of the Available Amount of such Letter of Credit. The
Borrower hereby agrees to each such participation. In consideration and in
furtherance of the foregoing, each Lender hereby absolutely and unconditionally
agrees to pay to the Agent, for the account of such Issuing Bank, such Lender's
Ratable Share of each drawing made under a Letter of Credit funded by such
Issuing Bank and not reimbursed by the Borrower on the date made, or of any
reimbursement payment required to be refunded to the Borrower for any reason,
which amount will be advanced, and deemed to be an Advance to the


                                       14



Borrower hereunder, regardless of the satisfaction of the conditions set forth
in Section 3.02. Each Lender acknowledges and agrees that its obligation to
acquire participations pursuant to this paragraph in respect of Letters of
Credit is absolute and unconditional and shall not be affected by any
circumstance whatsoever, including any amendment, renewal or extension of any
Letter of Credit or the occurrence and continuance of a Default or reduction or
termination of the Revolving Credit Commitments, and that each such payment
shall be made without any offset, abatement, withholding or reduction
whatsoever. Each Lender further acknowledges and agrees that its participation
in each Letter of Credit will be automatically adjusted to reflect such Lender's
Ratable Share of the Available Amount of such Letter of Credit at each time such
Lender's Revolving Credit Commitment is amended pursuant to an assignment in
accordance with Section 8.07 or otherwise pursuant to this Agreement.

          (c) Drawing and Reimbursement.  The payment by an Issuing Bank of a
draft drawn under any Letter of Credit which is not reimbursed by the Borrower
on the date made shall constitute for all purposes of this Agreement the making
by any such Issuing Bank of an Advance regardless of the conditions set forth in
Section 3.02, which shall be a Base Rate Advance, in the amount of such draft,
without regard to whether the making of such an Advance would exceed such
Issuing Bank's Unused Commitment. Each Issuing Bank shall give prompt notice of
each drawing under any Letter of Credit issued by it to the Borrower and the
Agent. Upon written demand by such Issuing Bank, with a copy of such demand to
the Agent and the Borrower, each Lender shall pay to the Agent such Lender's
Ratable Share of such outstanding Advance pursuant to Section 2.03(b). Each
Lender acknowledges and agrees that its obligation to make Advances pursuant to
this paragraph in respect of Letters of Credit is absolute and unconditional and
shall not be affected by any circumstance whatsoever, including any amendment,
renewal or extension of any Letter of Credit or the occurrence and continuance
of a Default or reduction or termination of the Revolving Credit Commitments,
and that each such payment shall be made without any offset, abatement,
withholding or reduction whatsoever. Promptly after receipt thereof, the Agent
shall transfer such funds to such Issuing Bank. Each Lender agrees to fund its
Ratable Share of an outstanding Advance on (i) the Business Day on which demand
therefor is made by such Issuing Bank, provided that notice of such demand is
given not later than 11:00 A.M. (New York City time) on such Business Day, or
(ii) the first Business Day next succeeding such demand if notice of such demand
is given after such time. If and to the extent that any Lender shall not have so
made the amount of such Advance available to the Agent, such Lender agrees to
pay to the Agent forthwith on demand such amount together with interest thereon,
for each day from the date of demand by any such Issuing Bank until the date
such amount is paid to the Agent, at the Federal Funds Rate for its account or
the account of such Issuing Bank, as applicable. If a Lender shall pay to the
Agent any amount for the account of any such Issuing Bank on any Business Day,
such amount so paid in respect of principal shall constitute an Advance made by
such Lender on such Business Day for purposes of this Agreement, and the
outstanding principal amount of the Advance made by such Issuing Bank shall be
reduced by such amount on such Business Day.

          (d) Letter of Credit Reports.  Each Issuing Bank shall furnish (A) to
the Agent and each Lender on the first Business Day of each month a written
report summarizing issuance and expiration dates of Letters of Credit issued by
such Issuing Bank during the preceding month and drawings during such month
under all such Letters of Credit and (B) to the Agent and each Lender on the
first Business Day of each calendar quarter a written report setting forth the
average daily aggregate Available Amount during the preceding calendar quarter
of all Letters of Credit issued by such Issuing Bank.

          (e) Failure to Make Advances.  The failure of any Lender to make the
Advance to be made by it on the date specified in Section 2.03(c) shall not
relieve any other Lender of its obligation hereunder to make its Advance on such
date, but no Lender shall be responsible for the failure of any other Lender to
make the Advance to be made by such other Lender on such date.

          SECTION 2.04. Fees. (a) Commitment Fee.  The Borrower agrees to pay to
the Agent for the account of each Lender a commitment fee on such Lender's
Unused Commitment from the Effective Date in the case of each Initial Lender and
from the later of the Effective Date and the effective date specified in the
Assignment and Acceptance pursuant to which it became a Lender in the case of
each other Lender until the Termination Date at a rate per annum equal to the
Applicable Percentage in effect from time to time, payable in arrears quarterly
on the last day of each March, June, September and December, commencing June 30,
2004, and on the Termination Date.


                                       15



          (b) Letter of Credit Fees.  (i) The Borrower shall pay to the Agent
for the account of each Lender a commission on such Lender's Ratable Share of
the average daily aggregate Available Amount of all Letters of Credit
outstanding from time to time at a rate per annum equal to the Applicable Margin
for Eurodollar Rate Advances in effect from time to time plus the Applicable
Utilization Fee, if any, during such calendar quarter, payable in arrears
quarterly on the last day of each March, June, September and December,
commencing with the quarter ended June 30, 2004, and on the Termination Date;
provided that the Applicable Margin shall be 2% above the Applicable Margin in
effect upon the occurrence and during the continuation of an Event of Default if
the Borrower is required to pay default interest pursuant to Section 2.07(b).

          (ii) The Borrower shall pay to each Issuing Bank, for its own account,
     a fronting fee of 0.125% per annum on the Available Amount of each Letter
     of Credit issued by such Issuing Bank, payable in arrears quarterly on the
     last day of each March, June, September and December, commencing with the
     first such quarter in which any Letter of Credit is issued, and such other
     commissions, issuance fees, transfer fees and other fees and charges in
     connection with the issuance or administration of each Letter of Credit as
     the Borrower and such Issuing Bank shall agree promptly following receipt
     of an invoice therefor.

          (c) Agent's Fees.  The Borrower shall pay to the Agent for its own
account such fees as are agreed between the Borrower and the Agent pursuant to
the Fee Letter dated April 20, 2004, as amended from time to time.

          SECTION 2.05. Optional Termination or Reduction of the Commitments.
The Borrower shall have the right, upon at least three Business Days' notice to
the Agent, to terminate in whole or permanently reduce ratably in part the
Unused Commitments or the Unissued Letter of Credit Commitments of the Lenders,
provided that each partial reduction shall be in the aggregate amount of
$10,000,000 or an integral multiple of $1,000,000 in excess thereof.

          SECTION 2.06. Repayment of Advances and Letter of Credit Drawings.
(a) The Borrower shall repay to the Agent for the ratable account of the Lenders
on the Termination Date the aggregate principal amount of the Advances then
outstanding.

          (b) The obligations of the Borrower hereunder relating to any Letter
of Credit shall be unconditional and irrevocable, and shall be paid strictly in
accordance with the terms of this Agreement under all circumstances, including,
without limitation, the following circumstances (it being understood that any
such payment by the Borrower is without prejudice to, and does not constitute a
waiver of, any rights the Borrower might have or might acquire as a result of
the payment by any Lender of any draft or the reimbursement by the Borrower
thereof):

          (i) any lack of validity or enforceability of this Agreement, any
     Note, any Letter of Credit or any other agreement or instrument relating
     thereto (all of the foregoing being, collectively, the "L/C Related
     Documents");

          (ii) any change in the time, manner or place of payment of, or in any
     other term of, all or any of the obligations of the Borrower in respect of
     any L/C Related Document or any other amendment or waiver of or any consent
     to departure from all or any of the L/C Related Documents;

          (iii) the existence of any claim, set-off, defense or other right that
     the Borrower may have at any time against any beneficiary or any transferee
     of a Letter of Credit (or any Persons for which any such beneficiary or any
     such transferee may be acting), any Issuing Bank, any Agent, any Lender or
     any other Person, whether in connection with the transactions contemplated
     by the L/C Related Documents or any unrelated transaction;

          (iv) any statement or any other document presented under a Letter of
     Credit proving to be forged, fraudulent, invalid or insufficient in any
     respect or any statement therein being untrue or inaccurate in any respect;


                                       16



          (v) payment by any Issuing Bank under a Letter of Credit against
     presentation of a draft or certificate that does not strictly comply with
     the terms of such Letter of Credit;

          (vi) any exchange, release or non-perfection of any collateral, or any
     release or amendment or waiver of or consent to departure from any
     guarantee, for all or any of the obligations of the Borrower in respect of
     the L/C Related Documents; or

          (vii) any other circumstance or happening whatsoever, whether or not
     similar to any of the foregoing, including, without limitation, any other
     circumstance that might otherwise constitute a defense available to, or a
     discharge of, the Borrower or a guarantor;

     provided, however, that nothing in this Section 2.06 shall limit the rights
     of the Borrower under Section 8.12.

          SECTION 2.07. Interest on Advances. (a) Scheduled Interest.  The
Borrower shall pay interest on the unpaid principal amount of each Advance owing
to each Lender from the date of such Advance until such principal amount shall
be paid in full, at the following rates per annum:

          (i) Base Rate Advances.  During such periods as such Advance is a Base
     Rate Advance, a rate per annum equal at all times to the sum of (x) the
     Base Rate in effect from time to time plus (y) the Applicable Margin in
     effect from time to time plus (z) the Applicable Utilization Fee, if any,
     in effect from time to time, payable in arrears quarterly on the last day
     of each March, June, September and December during such periods and on the
     date such Base Rate Advance shall be Converted or paid in full.

          (ii) Eurodollar Rate Advances.  During such periods as such Advance is
     a Eurodollar Rate Advance, a rate per annum equal at all times during each
     Interest Period for such Advance to the sum of (x) the Eurodollar Rate for
     such Interest Period for such Advance plus (y) the Applicable Margin in
     effect from time to time plus (z) the Applicable Utilization Fee, if any,
     in effect from time to time, payable in arrears on the last day of such
     Interest Period and, if such Interest Period has a duration of more than
     three months, on each day that occurs during such Interest Period every
     three months from the first day of such Interest Period and on the date
     such Eurodollar Rate Advance shall be Converted or paid in full.

          (b) Default Interest.  Upon the occurrence and during the continuance
of an Event of Default under Section 6.01(a), the Agent may, and upon the
request of the Required Lenders shall, require the Borrower to pay interest
("Default Interest") on (i) the unpaid principal amount of each Advance owing to
each Lender, payable in arrears on the dates referred to in clause (a)(i) or
(a)(ii) above, at a rate per annum equal at all times to 2% per annum above the
rate per annum required to be paid on such Advance pursuant to clause (a)(i) or
(a)(ii) above and (ii) to the fullest extent permitted by law, the amount of any
interest, fee or other amount payable hereunder that is not paid when due, from
the date such amount shall be due until such amount shall be paid in full,
payable in arrears on the date such amount shall be paid in full and on demand,
at a rate per annum equal at all times to 2% per annum above the rate per annum
required to be paid on Base Rate Advances pursuant to clause (a)(i) above,
provided, however, that following acceleration of the Advances pursuant to
Section 6.01, Default Interest shall accrue and be payable hereunder whether or
not previously required by the Agent.

          SECTION 2.08. Interest Rate Determination.  (a) Each Reference Bank
agrees to furnish to the Agent timely information for the purpose of determining
each Eurodollar Rate. If any one or more of the Reference Banks shall not
furnish such timely information to the Agent for the purpose of determining any
such interest rate, the Agent shall determine such interest rate on the basis of
timely information furnished by the remaining Reference Banks. The Agent shall
give prompt notice to the Borrower and the Lenders of the applicable interest
rate determined by the Agent for purposes of Section 2.07(a)(i) or (ii), and the
rate, if any, furnished by each Reference Bank for the purpose of determining
the interest rate under Section 2.07(a)(ii).

          (b) If, with respect to any Eurodollar Rate Advances, the Required
Lenders notify the Agent that the Eurodollar Rate for any Interest Period for
such Advances will not adequately reflect the cost to such Required Lenders of
making, funding or maintaining their respective Eurodollar Rate Advances for
such Interest


                                       17



Period, the Agent shall forthwith so notify the Borrower and the Lenders,
whereupon (i) each Eurodollar Rate Advance will automatically, on the last day
of the then existing Interest Period therefor, Convert into a Base Rate Advance,
and (ii) the obligation of the Lenders to make, or to Convert Advances into,
Eurodollar Rate Advances shall be suspended until the Agent shall notify the
Borrower and the Lenders that the circumstances causing such suspension no
longer exist.

          (c) If the Borrower shall fail to select the duration of any Interest
Period for any Eurodollar Rate Advances in accordance with the provisions
contained in the definition of "Interest Period" in Section 1.01, the Agent will
forthwith so notify the Borrower and the Lenders and such Advances will
automatically, on the last day of the then existing Interest Period therefor,
Convert into Base Rate Advances.

          (d) On the date on which the aggregate unpaid principal amount of
Eurodollar Rate Advances comprising any Borrowing shall be reduced, by payment
or prepayment or otherwise, to less than $10,000,000, such Advances shall
automatically Convert into Base Rate Advances.

          (e) Upon the occurrence and during the continuance of any Event of
Default, (i) each Eurodollar Rate Advance will automatically, on the last day of
the then existing Interest Period therefor, Convert into a Base Rate Advance and
(ii) the obligation of the Lenders to make, or to Convert Advances into,
Eurodollar Rate Advances shall be suspended.

          (f) If Moneyline Telerate Markets Page 3750 is unavailable and fewer
than two Reference Banks furnish timely information to the Agent for determining
the Eurodollar Rate for any Eurodollar Rate Advances,

          (i) the Agent shall forthwith notify the Borrower and the Lenders that
     the interest rate cannot be determined for such Eurodollar Rate Advances,

          (ii) with respect to Eurodollar Rate Advances, each such Advance will
     automatically, on the last day of the then existing Interest Period
     therefor, Convert into a Base Rate Advance (or if such Advance is then a
     Base Rate Advance, will continue as a Base Rate Advance), and

          (iii) the obligation of the Lenders to make Eurodollar Rate Advances
     or to Convert Advances into Eurodollar Rate Advances shall be suspended
     until the Agent shall notify the Borrower and the Lenders that the
     circumstances causing such suspension no longer exist.

          SECTION 2.09. Optional Conversion of Advances.  The Borrower may on
any Business Day, upon notice given to the Agent not later than 12:00 noon (New
York City time) on the third Business Day prior to the date of the proposed
Conversion and subject to the provisions of Sections 2.08 and 2.12, Convert all
Advances of one Type comprising the same Borrowing into Advances of the other
Type; provided, however, that any Conversion of Eurodollar Rate Advances into
Base Rate Advances shall be made only on the last day of an Interest Period for
such Eurodollar Rate Advances, any Conversion of Base Rate Advances into
Eurodollar Rate Advances shall be in an amount not less than the minimum amount
specified in Section 2.02(b) and no Conversion of any Advances shall result in
more separate Borrowings than permitted under Section 2.02(b). Each such notice
of a Conversion shall, within the restrictions specified above, specify (i) the
date of such Conversion, (ii) the Advances to be Converted, and (iii) if such
Conversion is into Eurodollar Rate Advances, the duration of the initial
Interest Period for each such Advance. Each notice of Conversion shall be
irrevocable and binding on the Borrower.

          SECTION 2.10. Prepayments of Advances. (a) Optional.  The Borrower
may, upon notice at least two Business Days' prior to the date of such
prepayment, in the case of Eurodollar Rate Advances, and not later than 11:00
A.M. (New York City time) on the date of such prepayment, in the case of Base
Rate Advances, to the Agent stating the proposed date and aggregate principal
amount of the prepayment, and if such notice is given the Borrower shall, prepay
the outstanding principal amount of the Advances comprising part of the same
Borrowing in whole or ratably in part, together with accrued interest to the
date of such prepayment on the principal amount prepaid; provided, however, that
(x) each partial prepayment shall be in an aggregate principal amount of
$5,000,000 or an integral multiple of $1,000,000 in excess thereof and (y) in
the event of any such prepayment of a


                                       18



Eurodollar Rate Advance, the Borrower shall be obligated to reimburse the
Lenders in respect thereof pursuant to Section 8.04(c).

          (b) Mandatory.  The Borrower shall prepay the aggregate principal
amount of the Advances, together with accrued interest to the date of prepayment
on the principal amount prepaid, without requirement of demand therefor, or
shall pay or prepay any other Indebtedness then outstanding at any time when and
to the extent required to comply with applicable Arizona laws, rules or
regulations, including the 1984 Order and the 1986 Order, or applicable
resolutions of the Board of Directors of the Borrower.

          SECTION 2.11. Increased Costs.  (a) If, due to either (i) the
introduction of or any change in or in the interpretation of any law or
regulation or (ii) the compliance with any new guideline or unanticipated
request from any central bank or other governmental authority (whether or not
having the force of law), there shall be any increase in the cost to any Lender
of agreeing to make or making, funding or maintaining Eurodollar Rate Advances
or agreeing to issue or of issuing or maintaining or participating in Letters of
Credit (excluding for purposes of this Section 2.11 any such increased costs
resulting from (i) Taxes or Other Taxes (as to which Section 2.14 shall govern),
(ii) changes in the basis of taxation of overall net income or overall gross
income by the United States or by the foreign jurisdiction or state under the
laws of which such Lender is organized or has its Applicable Lending Office or
any political subdivision thereof and (iii) reserve requirements included in the
calculation required by Section 2.11(d)), then the Borrower shall from time to
time, upon demand by such Lender (with a copy of such demand to the Agent), pay
to the Agent for the account of such Lender additional amounts that the Lender
reasonably determines sufficient to compensate such Lender for such increased
cost. A certificate as to the amount of such increased cost, submitted to the
Borrower and the Agent by such Lender, shall be conclusive and binding for all
purposes, absent manifest error.

          (b) If any Lender determines that compliance with any new law or
regulation or any new guideline or unanticipated request from any central bank
or other governmental authority (whether or not having the force of law) affects
or would affect the amount of capital required or expected to be maintained by
such Lender or any corporation controlling such Lender and that the amount of
such capital is increased by or based upon the existence of such Lender's
commitment to lend or to issue or participate in Letters of Credit hereunder and
other commitments of this type, then, upon demand by such Lender (with a copy of
such demand to the Agent), the Borrower shall pay to the Agent for the account
of such Lender, from time to time as specified by such Lender, additional
amounts that the Lender reasonably determines sufficient to compensate such
Lender or such corporation in the light of such circumstances, to the extent
that such Lender reasonably determines such increase in capital to be allocable
to the existence of such Lender's commitment to lend or to issue or participate
in Letters of Credit hereunder. A certificate as to such amounts submitted to
the Borrower and the Agent by such Lender shall be conclusive and binding for
all purposes, absent manifest error.

          (c) Each Lender will notify the Borrower of any change that will
entitle such Lender to compensation under Section 2.11(a) or (b) as promptly as
practicable, but in any event within 90 days after such Lender obtains knowledge
thereof; provided, however, that, if any Lender fails to give such notice within
90 days after it obtains knowledge of such change, such Lender shall, with
respect to compensation payable in respect of any costs resulting from such
change, only be entitled to payment for costs incurred from and after the date
that such Lender does give such notice plus, if such change shall have
retroactive effect, costs resulting from such change during the period of
retroactive effect thereof. Any Lender claiming any additional amounts payable
pursuant to this Section agrees to use reasonable efforts (consistent with its
internal policy and legal and regulatory restrictions) to change the
jurisdiction of its Eurodollar Lending Office if the making of such a change
would avoid the need for, or reduce the amount of, any such additional amounts
that may thereafter accrue and would not, in the reasonable judgment of such
Lender, be otherwise disadvantageous to such Lender.

          (d) The Borrower shall pay to the Agent for the account of each Lender
that requests such a payment, so long as such Lender shall be required under
regulations of the Board of Governors of the Federal Reserve System to maintain
reserves with respect to Eurocurrency Liabilities, an additional amount
determined by such Lender up to but not exceeding an amount equal to the sum of
the products of the following for each Eurodollar Rate Advance for each day
during the applicable Interest Period therefor:


                                       19



          (i) the principal amount of such Eurodollar Rate Advance outstanding
     on such day; multiplied by

          (ii) the remainder of (x) a fraction the numerator of which is the
     rate (expressed as a decimal) at which interest accrues on such Eurodollar
     Rate Advance for such Interest Period as provided in this Agreement (less
     the Applicable Eurodollar Margin and any Applicable Utilization Fee), and
     the denominator of which is one minus the effective rate (expressed as a
     decimal) at which such reserve requirements are imposed on such Lender on
     such day, minus (y) such numerator; multiplied by

          (iii) 1/360.

          Such additional amount shall be determined by such Lender and notified
to the Borrower through the Agent and shall be payable on each date on which
interest is payable on such Eurodollar Rate Advance. Any such determination,
when submitted by a Lender to the Borrower and accompanied by the calculations
showing the basis for such determination, shall be conclusive and binding for
all purposes absent manifest error.

          SECTION 2.12. Illegality.  Notwithstanding any other provision of this
Agreement, if any Lender shall notify the Agent that the introduction of or any
change in or in the interpretation of any law or regulation makes it unlawful,
or any central bank or other governmental authority asserts that it is unlawful,
for any Lender or its Eurodollar Lending Office to perform its obligations
hereunder to make Eurodollar Rate Advances or to fund or maintain Eurodollar
Rate Advances hereunder, (a) each Eurodollar Rate Advance will automatically, on
the last day of the applicable Interest Period or, if required by applicable
law, immediately upon such demand, Convert into a Base Rate Advance and (b) the
obligation of the Lenders to make Eurodollar Rate Advances or to Convert
Advances into Eurodollar Rate Advances shall be suspended until the Agent shall
notify the Borrower and the Lenders that the circumstances causing such
suspension no longer exist.

          SECTION 2.13. Payments and Computations.  (a) The Borrower shall make
each payment hereunder, irrespective of any right of counterclaim or set-off,
not later than 1:00 P.M. (New York City time) on the day when due in U.S.
dollars to the Agent at the Agent's Account in same day funds. The Agent will
promptly thereafter cause to be distributed like funds relating to the payment
of principal, interest, fees or commissions ratably (other than amounts payable
pursuant to Section 2.11, 2.14 or 8.04(c)) to the Lenders for the account of
their respective Applicable Lending Offices, and like funds relating to the
payment of any other amount payable to any Lender to such Lender for the account
of its Applicable Lending Office, in each case to be applied in accordance with
the terms of this Agreement. Upon its acceptance of an Assignment and Acceptance
and recording of the information contained therein in the Register pursuant to
Section 8.07(c), from and after the effective date specified in such Assignment
and Acceptance, the Agent shall make all payments hereunder and under the Notes
in respect of the interest assigned thereby to the Lender assignee thereunder,
and the parties to such Assignment and Acceptance shall make all appropriate
adjustments in such payments for periods prior to such effective date directly
between themselves.

          (b) All computations of interest based on the Base Rate shall be made
by the Agent on the basis of a year of 365 or 366 days, as the case may be, and
all computations of interest based on the Eurodollar Rate or the Federal Funds
Rate and of fees and Letter of Credit commissions shall be made by the Agent on
the basis of a year of 360 days, in each case for the actual number of days
(including the first day but excluding the last day) occurring in the period for
which such interest, fees or commissions are payable. Each determination by the
Agent of an interest rate hereunder shall be conclusive and binding for all
purposes, absent manifest error.

          (c) Whenever any payment hereunder or under the Notes shall be stated
to be due on a day other than a Business Day, such payment shall be made on the
next succeeding Business Day, and such extension of time shall in such case be
included in the computation of payment of interest, fees or commissions, as the
case may be; provided, however, that, if such extension would cause payment of
interest on or principal of Eurodollar Rate Advances to be made in the next
following calendar month, such payment shall be made on the next preceding
Business Day.

          (e) Unless the Agent shall have received notice from the Borrower
prior to the date on which any payment is due to the Lenders hereunder that the
Borrower will not make such payment in full, the Agent may


                                       20



assume that the Borrower has made such payment in full to the Agent on such date
and the Agent may, in reliance upon such assumption, cause to be distributed to
each Lender on such due date an amount equal to the amount then due such Lender.
If and to the extent the Borrower shall not have so made such payment in full to
the Agent, each Lender shall repay to the Agent forthwith on demand such amount
distributed to such Lender together with interest thereon, for each day from the
date such amount is distributed to such Lender until the date such Lender repays
such amount to the Agent, at the Federal Funds Rate.

          SECTION 2.14. Taxes.  (a) Any and all payments by the Borrower to or
for the account of any Lender or the Agent hereunder or under the Notes or any
other documents to be delivered hereunder shall be made, in accordance with
Section 2.13 or the applicable provisions of such other documents, free and
clear of and without deduction for any and all present or future taxes, levies,
imposts, deductions, charges or withholdings, and all liabilities with respect
thereto, excluding, in the case of each Lender and the Agent, taxes imposed on
its overall net income, and franchise taxes imposed on it in lieu of net income
taxes, by the United States and the jurisdiction under the laws of which such
Lender or the Agent (as the case may be) is organized or does business or any
political subdivision thereof and, in the case of each Lender, taxes imposed on
its overall net income, and franchise taxes imposed on it in lieu of net income
taxes, by the jurisdiction of such Lender's Applicable Lending Office or any
political subdivision thereof (all such non-excluded taxes, levies, imposts,
deductions, charges, withholdings and liabilities in respect of payments
hereunder or under the Notes being hereinafter referred to as "Taxes"). If the
Borrower shall be required by law to deduct any Taxes from or in respect of any
sum payable hereunder or under any Note or any other documents to be delivered
hereunder to any Lender or the Agent, (i) the sum payable shall be increased as
may be necessary so that after making all required deductions (including
deductions applicable to additional sums payable under this Section 2.14) such
Lender or the Agent (as the case may be) receives an amount equal to the sum it
would have received had no such deductions been made, (ii) the Borrower shall
make such deductions and (iii) the Borrower shall pay the full amount deducted
to the relevant taxation authority or other authority in accordance with
applicable law.

          (b) In addition, the Borrower shall pay any present or future stamp or
documentary taxes or any other excise or property taxes, charges or similar
levies that arise from any payment made hereunder or under the Notes or any
other documents to be delivered hereunder or from the execution, delivery or
registration of, performing under, or otherwise with respect to, this Agreement
or the Notes or any other documents to be delivered hereunder (hereinafter
referred to as "Other Taxes").

          (c) The Borrower shall indemnify each Lender and the Agent for and
hold it harmless against the full amount of Taxes or Other Taxes (including,
without limitation, taxes of any kind imposed or asserted by any jurisdiction on
amounts payable under this Section 2.14) imposed on or paid by such Lender or
the Agent (as the case may be) and any liability (including penalties, interest
and expenses) arising therefrom or with respect thereto. This indemnification
shall be made within 30 days from the date such Lender or the Agent (as the case
may be) makes written demand therefor. Such demand shall be made as promptly as
practicable, but in any event within 90 days after such Lender or the Agent (as
the case may be) obtains actual knowledge of such event; provided, however, that
if any Lender or the Agent fails to make such demand within 90 days after such
Lender or the Agent (as the case may be) obtains knowledge of such event, such
Lender or the Agent shall, with respect to compensation payable in respect of
such event, not be entitled to compensation in respect of the costs and losses
incurred between the 90th day after such Lender or the Agent (as the case may
be) obtains actual knowledge of such event and the date such Lender or the Agent
makes such demand.

          (d) Within 30 days after the date of any payment of Taxes, the
Borrower shall furnish to the Agent, at its address referred to in Section 8.02,
the original or a certified copy of a receipt evidencing such payment to the
extent such a receipt is issued therefor, or other written proof of payment
thereof that is reasonably satisfactory to the Agent. In the case of any payment
hereunder or under the Notes or any other documents to be delivered hereunder by
or on behalf of the Borrower through an account or branch outside the United
States or by or on behalf of the Borrower by a payor that is not a United States
person, if the Borrower determines that no Taxes are payable in respect thereof,
the Borrower shall furnish, or shall cause such payor to furnish, to the Agent,
at such address, an opinion of counsel acceptable to the Agent stating that such
payment is exempt from Taxes. For purposes of this subsection (d) and subsection
(e), the terms "United States" and "United States person" shall have the
meanings specified in Section 7701 of the Internal Revenue Code.


                                       21



          (e) Each Lender organized under the laws of a jurisdiction outside the
United States (i) on or prior to the date of its execution and delivery of this
Agreement in the case of each Initial Lender and on the date of the Assignment
and Acceptance pursuant to which it becomes a Lender in the case of each other
Lender, (ii) at any time that a change of circumstances occurs of which such
Lender is aware that makes any information on the form so provided incorrect and
(iii) from time to time thereafter as reasonably requested in writing by the
Borrower (but only so long as such Lender remains lawfully able to do so), shall
provide each of the Agent and the Borrower with two original Internal Revenue
Service Forms W-8BEN or W-8ECI or other relevant Form W-8, as appropriate, or
any successor or other form prescribed by the Internal Revenue Service,
certifying that such Lender is exempt from or entitled to a reduced rate of
United States withholding tax on payments pursuant to this Agreement or the
Notes. Further, each such Lender that is not an exempt recipient listed in
Section 6049(b)(4) of the Internal Revenue Code shall provide the Borrower and
the Agent with the appropriate Internal Revenue Service Form W-8 or Internal
Revenue Service Form W-9, as appropriate, or other successor form prescribed by
the Internal Revenue Service, certifying that it is exempt from United States
back-up withholding. If the form provided by a Lender at the time such Lender
first becomes a party to this Agreement indicates a United States interest
withholding tax rate in excess of zero, withholding tax at such rate shall be
considered excluded from Taxes unless and until such Lender provides the
appropriate forms certifying that a lesser rate applies, whereupon withholding
tax at such lesser rate only shall be considered excluded from Taxes for periods
governed by such form; provided, however, that, if at the date of the Assignment
and Acceptance pursuant to which a Lender assignee becomes a party to this
Agreement, the Lender assignor was entitled to payments under subsection (a) in
respect of United States withholding tax with respect to interest paid at such
date, then, to such extent, the term Taxes shall include (in addition to
withholding taxes that may be imposed in the future or other amounts otherwise
includable in Taxes) United States withholding tax, if any, applicable with
respect to the Lender assignee on such date. If any form or document referred to
in this subsection (e) requires the disclosure of information, other than
information necessary to compute the tax payable and information required on the
date hereof by Internal Revenue Service Form W-8BEN or W-8ECI, that the Lender
reasonably considers to be confidential, the Lender shall give notice thereof to
the Borrower and shall not be obligated to include in such form or document such
confidential information.

          (f) For any period with respect to which a Lender has failed to
provide the Borrower with the appropriate form, certificate or other document
described in Section 2.14(e) (other than if such failure is due to a change in
law, or in the interpretation or application thereof, occurring subsequent to
the date on which a form, certificate or other document originally was required
to be provided, or if such form, certificate or other document otherwise is not
required under subsection (e) above), such Lender shall not be entitled to gross
up under Section 2.14(a) and shall not be entitled to indemnification under
Section 2.14(a) or (c) with respect to Taxes imposed by the United States by
reason of such failure; provided, however, that should a Lender become subject
to Taxes because of its failure to deliver a form, certificate or other document
required hereunder, the Borrower shall take such steps as the Lender shall
reasonably request to assist the Lender to recover such Taxes.

          (g) Any Lender claiming any additional amounts payable pursuant to
this Section 2.14 agrees to use reasonable efforts (consistent with its internal
policy and legal and regulatory restrictions) to change the jurisdiction of its
Eurodollar Lending Office if the making of such a change would avoid the need
for, or reduce the amount of, any such additional amounts that may thereafter
accrue and would not, in the reasonable judgment of such Lender, be otherwise
disadvantageous to such Lender.

          SECTION 2.15. Sharing of Payments, Etc.  If any Lender shall obtain
any payment (whether voluntary, involuntary, through the exercise of any right
of set-off, or otherwise) on account of the Advances owing to it (other than as
payment of an Advance made by an Issuing Bank pursuant to the first sentence of
Section 2.03(c) or pursuant to Section 2.11, 2.14 or 8.04(c)) in excess of its
Ratable Share of payments on account of the Advances obtained by all the
Lenders, such Lender shall forthwith purchase from the other Lenders such
participations in the Advances owing to them as shall be necessary to cause such
purchasing Lender to share the excess payment ratably with each of them;
provided, however, that if all or any portion of such excess payment is
thereafter recovered from such purchasing Lender, such purchase from each Lender
shall be rescinded and such Lender shall repay to the purchasing Lender the
purchase price to the extent of such recovery together with an amount equal to
such Lender's ratable share (according to the proportion of (i) the amount of
such Lender's required repayment to (ii) the total amount so recovered from the
purchasing Lender) of any interest or other amount paid or payable by the
purchasing Lender in respect of the total amount so recovered. The Borrower
agrees that any Lender so purchasing a participation from another Lender
pursuant to this Section 2.15 may, to the fullest extent permitted by law,
exercise


                                       22



all its rights of payment (including the right of set-off) with respect to such
participation as fully as if such Lender were the direct creditor of the
Borrower in the amount of such participation.

          SECTION 2.16. Evidence of Debt.  (a) Each Lender shall maintain in
accordance with its usual practice an account or accounts evidencing the
indebtedness of the Borrower to such Lender resulting from each Advance owing to
such Lender from time to time, including the amounts of principal and interest
payable and paid to such Lender from time to time hereunder in respect of
Advances. The Borrower agrees that upon notice by any Lender to the Borrower
(with a copy of such notice to the Agent) to the effect that a Note is required
or appropriate in order for such Lender to evidence (whether for purposes of
pledge, enforcement or otherwise) the Advances owing to, or to be made by, such
Lender, the Borrower shall promptly execute and deliver to such Lender a Note
payable to the order of such Lender in a principal amount up to the Revolving
Credit Commitment of such Lender.

          (b) The Register maintained by the Agent pursuant to Section 8.07(d)
shall include a control account, and a subsidiary account for each Lender, in
which accounts (taken together) shall be recorded (i) the date and amount of
each Borrowing made hereunder, the Type of Advances comprising such Borrowing
and, if appropriate, the Interest Period applicable thereto, (ii) the terms of
each Assignment and Acceptance delivered to and accepted by it, (iii) the amount
of any principal or interest due and payable or to become due and payable from
the Borrower to each Lender hereunder and (iv) the amount of any sum received by
the Agent from the Borrower hereunder and each Lender's share thereof.

          (c) Entries made in good faith by the Agent in the Register pursuant
to subsection (b) above, and by each Lender in its account or accounts pursuant
to subsection (a) above, shall be prima facie evidence of the amount of
principal and interest due and payable or to become due and payable from the
Borrower to, in the case of the Register, each Lender and, in the case of such
account or accounts, such Lender, under this Agreement, absent manifest error;
provided, however, that the failure of the Agent or such Lender to make an
entry, or any finding that an entry is incorrect, in the Register or such
account or accounts shall not limit or otherwise affect the obligations of the
Borrower under this Agreement.

          SECTION 2.17. Use of Proceeds.  The proceeds of the Advances shall be
available (and the Borrower agrees that it shall use such proceeds) solely for
general corporate purposes of the Borrower.

                                   ARTICLE III

                     CONDITIONS TO EFFECTIVENESS AND LENDING

          SECTION 3.01. Conditions Precedent to Effectiveness of Section 2.01.
Section 2.01 of this Agreement shall become effective on and as of the first
date (the "Effective Date") on which the following conditions precedent have
been satisfied:

          (a) Nothing shall have come to the attention of the Lenders during the
     course of their due diligence investigation to lead them to believe that
     the Information Memorandum was or has become misleading, incorrect or
     incomplete in any material respect; without limiting the generality of the
     foregoing, the Lenders shall have been given such access to the management,
     records, books of account, contracts and properties of the Borrower and its
     Subsidiaries as they shall have requested.

          (b) The Borrower shall have paid all accrued fees and agreed expenses
     of the Agent and the Lenders and the reasonable accrued fees and expenses
     of counsel to the Agent that have been invoiced at least one Business Day
     prior to the Effective Date.

          (c) On the Effective Date, the following statements shall be true and
     the Agent shall have received for the account of each Lender a certificate
     signed by a duly authorized officer of the Borrower, dated the Effective
     Date, stating that:

               (i) The representations and warranties contained in Section 4.01
          are correct on and as of the Effective Date, and


                                       23



               (ii) No event has occurred and is continuing that constitutes a
          Default.

          (d) The Agent shall have received on or before the Effective Date the
     following, each dated such day, in form and substance satisfactory to the
     Agent and (except for the Notes) in sufficient copies for each Lender:

               (i) The Notes, payable to the order of the Lenders to the extent
          requested by any Lender pursuant to Section 2.16.

               (ii) Certified copies of the resolutions of the Board of
          Directors of the Borrower approving this Agreement and the Notes, and
          of all documents evidencing other necessary corporate action and
          governmental approvals, if any, with respect to this Agreement and the
          Notes.

               (iii) A certificate of the Secretary or an Associate Secretary of
          the Borrower certifying the names and true signatures of the officers
          of the Borrower authorized to sign this Agreement and the Notes and
          the other documents to be delivered hereunder.

               (iv) A favorable opinion of Snell & Wilmer L.L.P., counsel for
          the Borrower, substantially in the form of Exhibit D hereto and as to
          such other matters as any Lender through the Agent may reasonably
          request.

               (v) A favorable opinion of Shearman & Sterling LLP, counsel for
          the Arrangers, in form and substance satisfactory to the Arrangers.

          (e) The Borrower shall have terminated the commitments, and paid in
     full all advances, interest, fees and other amounts outstanding, under the
     364-Day Credit Agreement dated as of May 30, 2003, as amended, among the
     Borrower, the lenders parties thereto and Citibank, as agent, and each of
     the Lenders that is a party to such credit facility hereby waives, upon
     execution of this Agreement, the three Business Days' notice required by
     Section 2.04 of said Credit Agreement relating to the termination of
     commitments thereunder.

          SECTION 3.02. Conditions Precedent to Each Borrowing and Issuance.
The obligation of each Lender to make an Advance (other than an Advance made by
any Issuing Bank or any Lender pursuant to Section 2.03(c)) on the occasion of
each Borrowing and the obligation of each Issuing Bank to issue a Letter of
Credit shall be subject to the conditions precedent that the Effective Date
shall have occurred and on the date of such Borrowing or such issuance (as the
case may be) the following statements shall be true (and each of the giving of
the applicable Notice of Borrowing or Notice of Issuance, and the acceptance by
the Borrower of the proceeds of such Borrowing shall constitute a representation
and warranty by the Borrower that on the date of such Borrowing or date of such
issuance such statements are true):

          (a) the representations and warranties contained in Section 4.01
     (other than Section 4.01(l), and in the case of a Borrowing the proceeds of
     which are used to refund commercial paper, Sections 4.01(e)(ii), (f)(ii)
     and (j)) are correct on and as of such date, before and after giving effect
     to such Borrowing or issuance and to the application of the proceeds
     therefrom, as though made on and as of such date,

          (b) no event has occurred and is continuing, or would result from such
     Borrowing or such issuance or from the application of the proceeds
     therefrom, that constitutes a Default,

          (c) before and after giving effect to such Borrowing or such issuance
     and to the application of the proceeds therefrom, as though made on and as
     of such date, to the extent that the applicable Borrowings are required to
     be treated as short-term debt pursuant to the 1984 Order, the aggregate
     amount of Authorized Short Term Debt (as such term is defined in the 1984
     Order) including the aggregate


                                       24



     principal amount of all outstanding Advances that are required to be
     treated by the Borrower as short-term debt does not exceed 7% of the
     Borrower's total capitalization,

          (d) to the extent that the applicable Borrowings or issuances are
     required to be treated as long-term debt pursuant to the 1986 Order, the
     aggregate amount of Continuing Debt (as such term is defined in the 1986
     Order) including the aggregate principal amount of all outstanding Advances
     and Letters of Credit that are required to be treated by the Borrower as
     long-term debt has not exceeded, during any period of more than 30 days
     immediately prior to and including the date of the Borrowing or issuance,
     and will not exceed, during any period of more than 30 days at any time
     such Borrowing or Letter of Credit is outstanding, $2,698,917,000, and

          (e) before and after giving effect to such Borrowing or such issuance
     and to the application of the proceeds therefrom, as though made on and as
     of such date, the Indebtedness of the Borrower does not exceed that
     permitted by (i) applicable resolutions of the Board of Directors of the
     Borrower or (ii) applicable Arizona laws, rules or regulations;

     provided, however, that if the 1984 Order or the 1986 Order is superseded
     or modified by any Subsequent Order, the Borrower may, in consultation with
     the Lenders, revise the Notices of Borrowing or Notice of Issuance to the
     extent necessary to take into account any applicable limitations on the
     incurrence or maintenance of Indebtedness, so long as any revised Notice of
     Borrowing or Notice of Issuance (x) demonstrates that such Borrowing or
     issuance is authorized by the Subsequent Order and (y) is accompanied by a
     favorable opinion of Snell & Wilmer L.L.P. or such other counsel to the
     Borrower as the Borrower may select and the Agent and the Required Lenders
     may approve, concerning such Subsequent Order, in form and substance
     satisfactory to the Lenders.

          SECTION 3.03. Determinations Under Section 3.01.  For purposes of
determining compliance with the conditions specified in Section 3.01, each
Lender shall be deemed to have consented to, approved or accepted or to be
satisfied with each document or other matter required thereunder to be consented
to or approved by or acceptable or satisfactory to the Lenders unless an officer
of the Agent responsible for the transactions contemplated by this Agreement
shall have received notice from such Lender prior to the date that the Borrower
designates as the proposed Effective Date, specifying its objection thereto. The
Agent shall promptly notify the Lenders and the Borrower of the occurrence of
the Effective Date.

                                   ARTICLE IV

                         REPRESENTATIONS AND WARRANTIES

          SECTION 4.01. Representations and Warranties of the Borrower.  The
Borrower represents and warrants as follows:

          (a) Each of the Borrower and each Material Subsidiary: (i) is a
     corporation or other entity duly organized and validly existing under the
     laws of the jurisdiction of its incorporation or organization; (ii) has all
     requisite corporate or if the Material Subsidiary is not a corporation,
     other comparable power necessary to own its assets and carry on its
     business as presently conducted; (iii) has all governmental licenses,
     authorizations, consents and approvals necessary to own its assets and
     carry on its business as presently conducted, unless the failure to have
     any such license, authorization, consent or approval would not have a
     Material Adverse Effect and except as disclosed to the Lenders in the SEC
     Reports or by means of a letter from the Borrower to the Lenders delivered
     prior to the execution and delivery of this Agreement; and (iv) is
     qualified to do business in all jurisdictions in which the nature of the
     business conducted by it makes such qualification necessary and where
     failure so to qualify would have a Material Adverse Effect.

          (b) The execution, delivery and performance by the Borrower of this
     Agreement and the Notes to be delivered by it, and the consummation of the
     transactions contemplated hereby, are within the Borrower's corporate
     powers, have been duly authorized by all necessary corporate action, and do
     not


                                       25



     (i) contravene the Borrower's articles of incorporation or by-laws, (ii)
     contravene any law or any contractual restriction binding on or affecting
     the Borrower or (iii) cause the creation or imposition of any Lien upon the
     assets of the Borrower or any Material Subsidiary.

          (c) No authorization or approval or other action by, and no notice to
     or filing with, any governmental authority or regulatory body is required
     for the due execution, delivery and performance by the Borrower of this
     Agreement or the Notes to be delivered by it, except for the 1984 Order and
     the 1986 Order, both of which have been duly obtained and are in full force
     and effect (except to the extent that the 1986 Order modifies or supersedes
     the 1984 Order with respect to long-term debt).

          (d) This Agreement has been, and each of the Notes to be delivered by
     it when delivered hereunder will have been, duly executed and delivered by
     the Borrower. This Agreement is, and each of the Notes when delivered
     hereunder will be, the legal, valid and binding obligation of the Borrower
     enforceable against the Borrower in accordance with their respective terms,
     subject, however, to the application by a court of general principles of
     equity and to the effect of any applicable bankruptcy, insolvency,
     reorganization, moratorium or similar laws affecting creditors' rights
     generally.

          (e) (i) The Consolidated balance sheet of the Borrower and its
     Consolidated Subsidiaries as at December 31, 2003, and the related
     Consolidated statements of income and cash flows of the Borrower and its
     Consolidated Subsidiaries for the fiscal year then ended, accompanied by an
     opinion thereon of Deloitte & Touche LLP, independent public accountants,
     and the Consolidated balance sheet of the Borrower and its Consolidated
     Subsidiaries as at March 31, 2004, and the related Consolidated statements
     of income and cash flows of the Borrower and its Consolidated Subsidiaries
     for the three months then ended, duly certified by the chief financial
     officer of the Borrower, copies of which have been furnished to each
     Lender, fairly present in all material respects, subject, in the case of
     said balance sheet at March 31, 2004, and said statements of income and
     cash flows for the three months then ended, to year-end audit adjustments,
     the Consolidated financial condition of the Borrower and its Consolidated
     Subsidiaries as at such dates and the Consolidated results of the
     operations of the Borrower and its Consolidated Subsidiaries for the
     periods ended on such dates, all in accordance with GAAP (except as
     disclosed therein). (ii) Except as disclosed in the SEC Reports or by means
     of a letter delivered to the Lenders prior to the execution and delivery of
     this Agreement, since December 31, 2003, there has been no Material Adverse
     Change.

          (f) There is no pending or, to the knowledge of an Authorized Officer
     of the Borrower, threatened action, suit, investigation, litigation or
     proceeding, including, without limitation, any Environmental Action,
     affecting the Borrower or any of its Subsidiaries before any court,
     governmental agency or arbitrator that (i) purports to affect the legality,
     validity or enforceability of this Agreement or any Note or the
     consummation of the transactions contemplated hereby or (ii) would be
     reasonably likely to have a Material Adverse Effect (except as disclosed to
     the Lenders in the SEC Reports or by means of a letter from the Borrower to
     the Lenders delivered prior to the execution and delivery of this
     Agreement) and there has been no adverse change in the status, or financial
     effect on the Borrower or any of its Subsidiaries, of such disclosed
     litigation that would be reasonably likely to have a Material Adverse
     Effect.

          (g) No proceeds of any Advance will be used to acquire any equity
     security not issued by the Borrower of a class that is registered pursuant
     to Section 12 of the Securities Exchange Act of 1934.

          (h) The Borrower is not engaged in the business of extending credit
     for the purpose of purchasing or carrying margin stock (within the meaning
     of Regulation U issued by the Board of Governors of the Federal Reserve
     System), and no proceeds of any Advance will be used to purchase or carry
     any margin stock or to extend credit to others for the purpose of
     purchasing or carrying any margin stock.

          (i) The Borrower and its Subsidiaries have filed all United States
     Federal income tax returns and all other material tax returns which are
     required to be filed by them and have paid all taxes due pursuant to such
     returns or pursuant to any assessment received by the Borrower or any of
     its Subsidiaries, except to the extent that (i) such taxes are being
     contested in good faith and by appropriate proceedings and


                                       26



     that appropriate reserves for the payment thereof have been maintained by
     the Borrower and its Subsidiaries in accordance with GAAP or (ii) the
     failure to make such filings or such payments is not likely to have a
     Material Adverse Effect. The charges, accruals and reserves on the books of
     the Borrower and its Material Subsidiaries as set forth in the most recent
     financial statements of the Borrower delivered to the Lenders pursuant to
     Section 4.01(e) or Section 5.01(h)(i) or (ii) hereof in respect of taxes
     and other governmental charges are, in the opinion of the Borrower,
     adequate.

          (j) The operations and properties of the Borrower and its Subsidiaries
     comply in all material respects with all Environmental Laws, the
     noncompliance with which would have a Material Adverse Effect, except as
     set forth in the SEC Reports or by means of a letter from the Borrower to
     the Lenders delivered prior to the execution and delivery of this
     Agreement.

          (k) Set forth on Schedule 4.01(k) hereto (as such schedule may be
     modified from time to time by the Borrower by written notice to the Agent)
     is a complete and accurate list of all the Subsidiaries of the Borrower
     and, as of the Effective Date, no such Subsidiary of the Borrower is a
     Material Subsidiary.

          (l) Set forth on Schedule 4.01(l) hereto is a complete and accurate
     list identifying any Indebtedness of the Borrower outstanding in a
     principal amount equal to or exceeding $5,000,000 and which is not
     described in the financial statements referred to in Section 4.01(e).

          (m) The Borrower is not an "investment company", or a company
     "controlled" by an "investment company", within the meaning of the
     Investment Company Act of 1940, as amended.

                                    ARTICLE V

                            COVENANTS OF THE BORROWER

          SECTION 5.01. Affirmative Covenants.  So long as any Advance shall
remain unpaid or any Lender shall have any Commitment hereunder, the Borrower
will:

          (a) Compliance with Laws, Etc.  (i) Comply, and cause each of its
     Material Subsidiaries to comply, in all material respects, with all
     applicable laws, rules, regulations and orders of governmental or
     regulatory authorities, such compliance to include, without limitation,
     compliance with ERISA and Environmental Laws, unless the failure to so
     comply would not have a Material Adverse Effect and (ii) comply at all
     times with the 1984 Order, the 1986 Order, any Subsequent Order, Arizona
     Revised Statutes, Section 40-302 and all similar or comparable Arizona
     laws, rules or regulations relating to the incurrence or maintenance of
     Indebtedness by the Borrower, unless the failure to so comply could not
     affect the validity or enforceability of the indebtedness of the Borrower
     pursuant to this Agreement.

          (b) Payment of Taxes, Etc.  Pay and discharge, and cause each of its
     Subsidiaries to pay and discharge, before the same shall become delinquent,
     all taxes, assessments and governmental charges or levies imposed upon it
     or upon its property; provided, however, that neither the Borrower nor any
     of its Subsidiaries shall be required to pay or discharge any such tax,
     assessment, charge or levy (i) that is being contested in good faith and by
     proper proceedings and as to which appropriate reserves are being
     maintained in accordance with GAAP or (ii) if the failure to pay such tax,
     assessment, charge or levy is not likely to have a Material Adverse Effect.

          (c) Maintenance of Insurance.  Maintain, and cause each of its
     Material Subsidiaries to maintain, insurance with responsible and reputable
     insurance companies or associations in such amounts and covering such risks
     as is usually carried by companies engaged in similar businesses and owning
     similar properties in the same general areas in which the Borrower or such
     Subsidiary operates; provided, however, that the Borrower and its
     Subsidiaries may self-insure to the same extent as other companies engaged
     in similar businesses and owning similar properties in the same general
     areas in which the Borrower or such Subsidiary operates and to the extent
     consistent with prudent business practice.


                                       27



          (d) Preservation of Corporate Existence, Etc.  Preserve and maintain,
     and cause each of its Material Subsidiaries to preserve and maintain, its
     corporate existence, rights (charter and statutory) and franchises (other
     than "franchises" as described in Arizona Revised Statutes, Section 40-283
     or any successor provision) reasonably necessary in the normal conduct of
     its business, unless the failure to maintain such rights or privileges
     would not have a Material Adverse Effect, and use its commercially
     reasonable efforts to preserve and maintain such franchises reasonably
     necessary in the normal conduct of its business, except that (i) the
     Borrower from time to time may make minor extensions of its lines, plants,
     services or systems prior to the time a related franchise, certificate of
     convenience and necessity, license or permit is procured, (ii) from time to
     time communities served by the Borrower may become incorporated and
     considerable time may elapse before such a franchise is procured, (iii)
     certain such franchises may have expired prior to the renegotiation
     thereof, (iv) certain minor defects and exceptions may exist which,
     individually and in the aggregate, are not material and (v) certain
     franchises, certificates, licenses and permits may not be specific as to
     their geographical scope; provided, however, that the Borrower and its
     Subsidiaries may consummate any merger or consolidation permitted under
     Section 5.02(b).

          (e) Visitation Rights.  At any reasonable time and from time to time,
     permit and cause each of its Subsidiaries to permit the Agent or any of the
     Lenders or any agents or representatives thereof, to examine and make
     copies of and abstracts from the records and books of account of, and visit
     the properties of, the Borrower and any of its Subsidiaries, and to discuss
     the affairs, finances and accounts of the Borrower and any of its
     Subsidiaries with any of their officers or directors; provided, however,
     that the Borrower and its Subsidiaries reserve the right to restrict access
     to any of its properties in accordance with reasonably adopted procedures
     relating to safety and security; and provided further that the costs and
     expenses incurred by such Lender or agents or representatives in connection
     with any such examinations, copies, abstracts, visits or discussions shall
     be, upon the occurrence and during the continuation of a Default, for the
     account of the Borrower and, in all other circumstances, for the account of
     such Lender.

          (f) Keeping of Books.  Keep, and cause each of its Material
     Subsidiaries to keep, proper books of record and account, in which full and
     correct entries shall be made of all financial transactions and the assets
     and business of the Borrower and each such Subsidiary in accordance with
     GAAP.

          (g) Maintenance of Properties, Etc.  Keep, and cause each Material
     Subsidiary to keep, all property useful and necessary in its business in
     good working order and condition (ordinary wear and tear excepted), it
     being understood that this covenant relates only to the working order and
     condition of such properties and shall not be construed as a covenant not
     to dispose of properties.

          (h) Reporting Requirements.  Furnish to the Lenders:

               (i) as soon as available and in any event within 60 days after
          the end of each of the first three fiscal quarters of each fiscal year
          of the Borrower, (A) for each such fiscal quarter of the Borrower,
          statements of income and cash flows of the Borrower and its
          Consolidated Subsidiaries for such fiscal quarter setting forth in
          each case in comparative form the corresponding figures for the
          corresponding fiscal quarter in the preceding fiscal year and (B) for
          the period commencing at the end of the previous fiscal year and
          ending with the end of each fiscal quarter, statements of income and
          cash flows of the Borrower and its Consolidated Subsidiaries for such
          period setting forth in each case in comparative form the
          corresponding figures for the corresponding period in the preceding
          fiscal year; provided that so long as the Borrower remains subject to
          the reporting requirements of the Securities Exchange Act of 1934, as
          amended, the Borrower may provide, in satisfaction of the requirements
          of this first sentence of this Section 5.01(h)(i), its report on Form
          10-Q for such fiscal quarter. Each set of financial statements
          provided under this Section 5.01(h)(i) shall be accompanied by a
          certificate of an Authorized Officer, which certificate shall state
          that said financial statements fairly present in all material respects
          the financial condition and results of operations of the Borrower and
          its Consolidated Subsidiaries in accordance with GAAP (except as
          disclosed therein) as at the end of, and for, such period (subject to
          normal year-end audit adjustments) and shall set forth reasonably
          detailed calculations demonstrating compliance with Section 5.03;


                                       28



               (ii) as soon as available and in any event within 105 days after
          the end of each fiscal year of the Borrower, statements of income and
          cash flows of the Borrower and its Consolidated Subsidiaries for such
          year and the related balance sheet of the Borrower and its
          Consolidated Subsidiaries as at the end of such year, setting forth in
          each case in comparative form the corresponding figures for the
          preceding fiscal year; provided that, so long as the Borrower remains
          subject to the reporting requirements of the Securities Exchange Act
          of 1934, as amended, the Borrower may provide, in satisfaction of the
          requirements of this first sentence of this Section 5.01(h)(ii), its
          report on Form 10-K for such fiscal year. Each set of financial
          statements provided pursuant to this Section 5.01(h)(ii) shall be
          accompanied by (A) an opinion thereon of independent certified public
          accountants of recognized national standing, which opinion shall state
          that said financial statements fairly present in all material respects
          the financial condition and results of operations of the Borrower and
          its Consolidated Subsidiaries as at the end of, and for, such fiscal
          year, in accordance with GAAP (except as disclosed therein) and (B) a
          certificate of an Authorized Officer, which certificate shall set
          forth reasonably detailed calculations demonstrating compliance with
          Section 5.03;

               (iii) as soon as possible and in any event within five days after
          any officer of the Borrower knows of the occurrence of each Default
          continuing on the date of such statement, a statement of an Authorized
          Officer of the Borrower setting forth details of such Default and the
          action that the Borrower has taken and proposes to take with respect
          thereto;

               (iv) promptly after the sending or filing thereof, copies of all
          reports and registration statements that the Borrower or any
          Subsidiary files with the Securities and Exchange Commission;

               (v) promptly after an Authorized Officer becomes aware of the
          commencement thereof, notice of all actions and proceedings before any
          court, governmental agency or arbitrator affecting the Borrower or any
          of its Subsidiaries of the type described in Section 4.01(f);

               (vi) promptly after (A) any amendment or modification of the 1984
          Order or the 1986 Order, (B) any amendment or modification of Arizona
          Revised Statutes, Section 40-302, or the promulgation, amendment or
          modification of any successor or similar statute, or (C) the
          promulgation, amendment or modification of any Subsequent Order by the
          Arizona Corporation Commission or any successor thereto, in any case
          if such amendment, modification or promulgation could affect the
          validity or enforceability of the indebtedness of the Borrower
          pursuant to this Agreement, a copy thereof; and

               (vii) such other information respecting the Borrower or any of
          its Subsidiaries as any Lender through the Agent may from time to time
          reasonably request.

          (i) Change in Nature of Business.  Conduct the same general type of
     business conducted on the date hereof.

          SECTION 5.02. Negative Covenants.  So long as any Advance shall remain
unpaid or any Lender shall have any Commitment hereunder, the Borrower will not:

          (a) Liens, Etc.  Create or suffer to exist, or permit any of its
     Material Subsidiaries to create or suffer to exist, any Lien on or with
     respect to any of its properties, whether now owned or hereafter acquired,
     or assign, or permit any of its Material Subsidiaries to assign, any right
     to receive income, other than:

               (i) Permitted Liens,

               (ii) Liens upon or in, or conditional sales agreements or other
          title retention agreements with respect to, any real or personal
          property acquired or held by the Borrower or any


                                       29



          Subsidiary in the ordinary course of business to secure the purchase
          price of such property, or the construction of or improvements to such
          property, or to secure Indebtedness incurred solely for the purpose of
          financing the acquisition, construction or improvement of such
          property to be subject to such Liens (including any Liens placed on
          such property within 180 days after the latest of the acquisition,
          completion of construction or improvement of such property), or Liens
          existing on such property at the time of its acquisition (other than
          any such Liens created in contemplation of such acquisition that were
          not incurred to finance the acquisition of such property) or
          extensions, renewals, refundings or replacements of any of the
          foregoing for the same or a lesser amount, provided, however, that no
          such Lien shall extend to or cover any properties of any character
          other than the property being acquired, constructed or improved and
          proceeds, improvements and replacements thereof and no such extension,
          renewal, refunding or replacement shall extend to or cover any
          properties not theretofore subject to the Lien being extended,
          renewed, refunded or replaced,

               (iii) assignments of the right to receive income, and Liens on
          property, of a Person existing at the time such Person is merged into
          or consolidated with the Borrower or any Subsidiary of the Borrower or
          becomes a Subsidiary of the Borrower,

               (iv) Liens on the leased interests in Unit 2 of the Palo Verde
          Nuclear Generating Station and related rights if the Borrower
          reacquires ownership in any of those interests or acquires any of the
          equity or owner participants' interests in the trusts that hold title
          to such leased interests, whether or not it also directly assumes the
          Sale Leaseback Obligation Bonds, and Liens on the Borrower's interests
          in the trusts that hold title to such leased interests and related
          rights in the event that the Borrower acquires any of the equity or
          owner participants' interests in such trusts pursuant to a "special
          transfer" under the Borrower's existing Palo Verde Nuclear Generating
          Station Unit 2 sale and leaseback transactions and any Liens resulting
          or deemed to have resulted if the Unit 2 leases are required to be
          accounted for as capital leases in accordance with GAAP,

               (v) other assignments of the right to receive income and Liens
          securing Indebtedness or claims in an aggregate principal amount not
          to exceed 20% of the Borrower's total assets as stated on its balance
          sheet for the year ended December 31, 2003 provided pursuant to
          Section 4.01(e) hereof at any time outstanding, and

               (vi) the replacement, extension or renewal of any Lien permitted
          by clause (iii) or (iv) above upon or in the same property theretofore
          subject thereto or the replacement, extension or renewal (without
          increase in the amount or change in any direct or contingent obligor)
          of the Indebtedness secured thereby.

          (b) Mergers, Etc.  Merge or consolidate with or into any Person, or
     permit any of its Material Subsidiaries to do so, except that (i) any
     Material Subsidiary of the Borrower may merge or consolidate with or into
     any other Material Subsidiary of the Borrower, (ii) any Subsidiary of the
     Borrower may merge into the Borrower or any Material Subsidiary of the
     Borrower and (iii) the Borrower or any Material Subsidiary may merge with
     any other Person so long as the Borrower or such Material Subsidiary is the
     surviving corporation, provided, in each case, that no Default shall have
     occurred and be continuing at the time of such proposed transaction or
     would result therefrom.

          (c) Sales, Etc. of Assets.  Sell, lease, transfer or otherwise dispose
     of, or permit any of its Material Subsidiaries to sell, lease, transfer or
     otherwise dispose of, any assets, or grant any option or other right to
     purchase, lease or otherwise acquire any assets to any Person other than
     the Borrower or any Subsidiary of the Borrower, except (i) sales of
     inventory in the ordinary course of its business, (ii) in a transaction
     authorized by subsection (b) of this Section, (iii) individual dispositions
     occurring in the ordinary course of business which involve assets with a
     book value not exceeding $5,000,000 and (iv) sales of assets during the
     term of this Agreement having an aggregate book value not to exceed 20% of
     the total of all assets properly appearing on the December 31, 2003 balance
     sheet referred to in Section 4.01(e). No Lien on any asset will be
     considered a sale, lease, transfer or disposition under this provision, but
     will be governed exclusively under Section 5.02(a).


                                       30



          SECTION 5.03. Financial Covenants.  So long as any Advance shall
remain unpaid or any Lender shall have any Commitment hereunder, the Borrower
will:

          (a) Debt to Capitalization Ratio.  Maintain a ratio of (i)
          Consolidated Indebtedness to (ii) the sum of Consolidated Indebtedness
          plus Consolidated Net Worth of not greater than 0.65 to 1.

          (b) Consolidated Cash Coverage Ratio.  Maintain for each twelve-month
     period ending on the last day of each fiscal quarter (determined as of the
     last day of such quarter) a Consolidated Cash Coverage Ratio of not less
     than 2.00 to 1.

                                   ARTICLE VI

                                EVENTS OF DEFAULT

          SECTION 6.01. Events of Default.  If any of the following events
("Events of Default") shall occur and be continuing:

          (a) The Borrower shall fail to pay any principal of any Advance when
     the same becomes due and payable; or the Borrower shall fail to pay any
     interest on any Advance or make any other payment of fees or other amounts
     payable under this Agreement or any Note within three Business Days after
     the same becomes due and payable; or

          (b) Any representation or warranty made by the Borrower herein or by
     the Borrower (or any of its officers) in any certificate or other document
     delivered in connection with this Agreement shall prove to have been
     incorrect in any material respect when made or deemed made; or

          (c) (i) The Borrower shall fail to perform or observe any term,
     covenant or agreement contained in Section 5.01(d) (as to the corporate
     existence of the Borrower), (h)(iii) or (h)(vi), 5.02 or 5.03, or (ii) the
     Borrower shall fail to perform or observe any other term, covenant or
     agreement contained in Section 5.01(e) if such failure shall remain
     unremedied for 15 days after written notice thereof shall have been given
     to the Borrower by the Agent or any Lender or (iii) the Borrower shall fail
     to perform or observe any other term, covenant or agreement contained in
     this Agreement on its part to be performed or observed if such failure
     shall remain unremedied for 30 days after written notice thereof shall have
     been given to the Borrower by the Agent or any Lender; or

          (d) (i) The Borrower or any of its Material Subsidiaries shall fail to
     pay any principal of or premium or interest on any Indebtedness that is
     outstanding in a principal or notional amount of at least $5,000,000 in the
     aggregate (but excluding Indebtedness outstanding hereunder), or fail to
     pay an amount, or post collateral as contractually required in an amount,
     of at least $5,000,000 in respect of any Hedge Agreement, of the Borrower
     or such Material Subsidiary (as the case may be), in each case, when the
     same becomes due and payable (whether by scheduled maturity, required
     prepayment, acceleration, demand or otherwise), and such failure shall
     continue after the applicable grace period, if any, specified in the
     agreement or instrument relating to such Indebtedness or Hedge Agreement;
     (ii) any event of default shall exist under any agreement or instrument
     relating to any such Indebtedness and shall continue after the applicable
     grace period, if any, specified in such agreement or instrument, if the
     effect of such event is to accelerate, or to permit the acceleration of,
     the maturity of such Indebtedness; or

          (e) The Borrower shall fail to pay any principal of or premium or
     interest in respect of any operating lease in respect of which the payment
     obligations of the Borrower have a present value of at least $25,000,000,
     when the same becomes due and payable (whether by scheduled maturity,
     required prepayment, acceleration, demand or otherwise), and such failure
     shall continue after the applicable grace period, if any, specified in such
     operating lease, if the effect of such failure is to terminate, or to
     permit the termination of, such operating lease; or


                                       31



          (f) The Borrower or any of its Material Subsidiaries shall generally
     not pay its debts as such debts become due, or shall admit in writing its
     inability to pay its debts generally, or shall make a general assignment
     for the benefit of creditors; or any proceeding shall be instituted by or
     against the Borrower or any of its Material Subsidiaries seeking to
     adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up,
     reorganization, arrangement, adjustment, protection, relief, or composition
     of it or its debts under any law relating to bankruptcy, insolvency or
     reorganization or relief of debtors, or seeking the entry of an order for
     relief or the appointment of a receiver, trustee, custodian or other
     similar official for it or for any substantial part of its property and, in
     the case of any such proceeding instituted against it (but not instituted
     by it), either such proceeding shall remain undismissed or unstayed for a
     period of 30 days, or any of the actions sought in such proceeding
     (including, without limitation, the entry of an order for relief against,
     or the appointment of a receiver, trustee, custodian or other similar
     official for, it or for any substantial part of its property) shall occur;
     or the Borrower or any of its Material Subsidiaries shall take any
     corporate action to authorize any of the actions set forth above in this
     subsection (f); or

          (g) Unsatisfied judgments or orders for the payment of money in excess
     of $5,000,000 in the aggregate shall be rendered against the Borrower or
     unsatisfied judgments or orders for the payment of money in excess of
     $25,000,000 in the aggregate shall be rendered against any of the
     Borrower's Material Subsidiaries and there shall be any period of 30
     consecutive days during which a stay of enforcement of such judgment or
     order, by reason of a pending appeal or otherwise, shall not be in effect;
     provided, however, that any such judgment or order shall not be an Event of
     Default under this Section 6.01(g) if and for so long as and to the extent
     that (i) the amount of such judgment or order is covered by a policy of
     insurance between the defendant and the insurer covering payment thereof
     and (ii) such insurer, which shall be rated at least "A" by A.M. Best
     Company, has been notified of, and has not disputed the claim made for
     payment of, the amount of such judgment or order; or

          (h) (i) Any Person or two or more Persons acting in concert shall have
     acquired beneficial ownership (within the meaning of Rule 13d-3 of the
     Securities and Exchange Commission under the Securities Exchange Act of
     1934), directly or indirectly, of Voting Stock of PWCC (or other securities
     convertible into such Voting Stock) representing 30% or more of the
     combined voting power of all Voting Stock of PWCC; or (ii) during any
     period of up to 24 consecutive months, commencing after the date of this
     Agreement, individuals who at the beginning of such 24-month period were
     directors of PWCC shall cease for any reason (other than due to death or
     disability) to constitute a majority of the board of directors of PWCC
     (except to the extent that individuals who at the beginning of such
     24-month period were replaced by individuals (x) elected by a majority of
     the remaining members of the board of directors of PWCC or (y) nominated
     for election by a majority of the remaining members of the board of
     directors of the PWCC and thereafter elected as directors by the
     shareholders of PWCC); or (iii) PWCC shall cease for any reason to own,
     directly or indirectly 80% of the Voting Stock of the Borrower; or

          (i) The Borrower or any of its ERISA Affiliates shall incur, or, with
     respect to clause (i) of this Section 6.01(i), shall be reasonably likely
     to incur liability in excess of $5,000,000 in the aggregate as a result of
     one or more of the following: (i) the occurrence of any ERISA Event; (ii)
     the partial or complete withdrawal of the Borrower or any of its ERISA
     Affiliates from a Multiemployer Plan; or (iii) the reorganization or
     termination of a Multiemployer Plan; and, in any such case, such
     incurrence, in the determination of the Lenders, is material in relation to
     the financial condition or the financial prospects of the Borrower and its
     Subsidiaries, taken as a whole;

then, and in any such event, the Agent (i) shall at the request, or may with the
consent, of the Required Lenders, by notice to the Borrower, declare the
obligation of each Lender to make Advances (other than Advances by an Issuing
Bank or a Lender pursuant to Section 2.03(c)) and of the Issuing Banks to issue
Letters of Credit to be terminated, whereupon the same shall forthwith
terminate, and (ii) shall at the request, or may with the consent, of the
Required Lenders, by notice to the Borrower, declare the Advances, all interest
thereon and all other amounts payable under this Agreement to be forthwith due
and payable, whereupon the Advances, all such interest and all such amounts
shall become and be forthwith due and payable, without presentment, demand,
protest or further notice of any kind, all of which are hereby expressly waived
by the Borrower; provided, however, that in the event of an actual or deemed
entry of an order for relief with respect to the Borrower under the Federal
Bankruptcy Code, (A) the obligation of each Lender to make Advances (other than
Advances by an Issuing Bank or a Lender pursuant to


                                       32



Section 2.03(c)) and of the Issuing Banks to issue Letters of Credit shall
automatically be terminated and (B) the Advances, all such interest and all such
amounts shall automatically become and be due and payable, without presentment,
demand, protest or any notice of any kind, all of which are hereby expressly
waived by the Borrower.

          SECTION 6.02. Actions in Respect of Letters of Credit upon Default.
If any Event of Default shall have occurred and be continuing, the Agent may
with 8the consent, or shall at the request, of the Required Lenders,
irrespective of whether it is taking any of the actions described in Section
6.01 or otherwise, make demand upon the Borrower to, and forthwith upon such
demand the Borrower will, (a) pay to the Agent for the benefit of the Lenders in
same day funds at the Agent's office designated in such demand, for deposit in
the L/C Cash Deposit Account, an amount equal to the aggregate Available Amount
of all Letters of Credit then outstanding, provided, however, that in the event
of an actual or deemed entry of an order for relief with respect to the Borrower
under the Federal Bankruptcy Code, the Borrower will pay to the Agent on behalf
of the Lenders in same day funds , for deposit to the L/C Cash Deposit Account,
an amount equal to the aggregate Available Amount of all Letters of Credit then
outstanding, without presentment, demand, protest or any notice of any kind, all
of which are hereby expressly waived by the Borrower, or (b) make such other
arrangements in respect of the outstanding Letters of Credit as shall be
acceptable to the Required Lenders. If at any time the Agent determines that any
funds held in the L/C Cash Deposit Account are subject to any right or interest
of any Person other than the Agent and the Lenders or that the total amount of
such funds is less than the aggregate Available Amount of all Letters of Credit,
the Borrower will, forthwith upon demand by the Agent, pay to the Agent, as
additional funds to be deposited and held in the L/C Cash Deposit Account, an
amount equal to the excess of (a) such aggregate Available Amount over (b) the
total amount of funds, if any, then held in the L/C Cash Deposit Account that
are free and clear of any such right and interest. Upon the drawing of any
Letter of Credit, to the extent funds are on deposit in the L/C Cash Deposit
Account, such funds shall be applied to reimburse the Issuing Banks to the
extent permitted by applicable law, and if so applied, then such reimbursement
shall be deemed a repayment of the corresponding Advance in respect of such
Letter of Credit. After all such Letters of Credit shall have expired or been
fully drawn upon and all other obligations of the Borrower hereunder and under
the Notes shall have been paid in full, the balance, if any, in such L/C Cash
Deposit Account shall be promptly returned to the Borrower.

                                   ARTICLE VII

                                    THE AGENT

          SECTION 7.01. Authorization and Action.  Each Lender (in its
capacities as a Lender and Issuing Bank, as applicable) hereby appoints and
authorizes the Agent to take such action as agent on its behalf and to exercise
such powers and discretion under this Agreement as are delegated to the Agent by
the terms hereof, together with such powers and discretion as are reasonably
incidental thereto. As to any matters not expressly provided for by this
Agreement (including, without limitation, enforcement or collection of the
Notes), the Agent shall not be required to exercise any discretion or take any
action, but shall be required to act or to refrain from acting (and shall be
fully protected in so acting or refraining from acting) upon the instructions of
the Required Lenders, and such instructions shall be binding upon all Lenders
and all holders of Notes; provided, however, that the Agent shall not be
required to take any action that exposes the Agent to personal liability or that
is contrary to this Agreement or applicable law. The Agent agrees to give to
each Lender prompt notice of each notice given to it by the Borrower pursuant to
the terms of this Agreement.

          SECTION 7.02. Agent's Reliance, Etc.  Neither the Agent nor any of its
directors, officers, agents or employees shall be liable for any action taken or
omitted to be taken by it or them under or in connection with this Agreement,
except for its or their own gross negligence or willful misconduct. Without
limitation of the generality of the foregoing, the Agent: (i) may treat the
Lender that made any Advance as the holder of the Indebtedness resulting
therefrom until the Agent receives and accepts an Assignment and Acceptance
entered into by such Lender, as assignor, and an Eligible Assignee, as assignee,
as provided in Section 8.07; (ii) may consult with legal counsel (including
counsel for the Borrower), independent public accountants and other experts
selected by it and shall not be liable for any action taken or omitted to be
taken in good faith by it in accordance with the advice of such counsel,
accountants or experts; (iii) makes no warranty or representation to any Lender
and shall not be responsible to any Lender for any statements, warranties or
representations (whether written or oral) made in or in connection with this
Agreement; (iv) shall not have any duty to ascertain or to inquire as to the
performance, observance or satisfaction of any of the terms, covenants or
conditions of this Agreement on the part of the


                                       33



Borrower or the existence at any time of any Default or to inspect the property
(including the books and records) of the Borrower; (v) shall not be responsible
to any Lender for the due execution, legality, validity, enforceability,
genuineness, sufficiency or value of, or the perfection or priority of any lien
or security interest created or purported to be created under or in connection
with, this Agreement or any other instrument or document furnished pursuant
hereto; and (vi) shall incur no liability under or in respect of this Agreement
by acting upon any notice, consent, certificate or other instrument or writing
(which may be by facsimile) believed by it to be genuine and signed or sent by
the proper party or parties.

          SECTION 7.03. Citibank and Affiliates.  With respect to its
Commitments, the Advances made by it and any Note issued to it, Citibank shall
have the same rights and powers under this Agreement as any other Lender and may
exercise the same as though it were not the Agent; and the term "Lender" or
"Lenders" shall, unless otherwise expressly indicated, include Citibank in its
individual capacity. Citibank and its Affiliates may accept deposits from, lend
money to, act as trustee under indentures of, accept investment banking
engagements from and generally engage in any kind of business with, the
Borrower, any of its Subsidiaries and any Person who may do business with or own
securities of the Borrower or any such Subsidiary, all as if Citibank were not
the Agent and without any duty to account therefor to the Lenders. The Agent
shall have no duty to disclose any information obtained or received by it or any
of its Affiliates relating to the Borrower or any of its Subsidiaries to the
extent such information was obtained or received in any capacity other than as
Agent.

          SECTION 7.04. Lender Credit Decision.  Each Lender acknowledges that
it has, independently and without reliance upon the Agent or any other Lender
and based on the financial statements referred to in Section 4.01 and such other
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement. Each Lender also
acknowledges that it will, independently and without reliance upon the Agent or
any other Lender and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under this Agreement.

          SECTION 7.05. Indemnification.  (a) Each Lender severally agrees to
indemnify the Agent (to the extent not promptly reimbursed by the Borrower) from
and against such Lender's Ratable Share of any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever that may be imposed on, incurred
by, or asserted against the Agent in any way relating to or arising out of this
Agreement or any action taken or omitted by the Agent under this Agreement
(collectively, the "Indemnified Costs"), provided that no Lender shall be liable
for any portion of the Indemnified Costs resulting from the Agent's gross
negligence or willful misconduct. Without limitation of the foregoing, each
Lender agrees to reimburse the Agent promptly upon demand for its Ratable Share
of any out-of-pocket expenses (including counsel fees) incurred by the Agent in
connection with the preparation, execution, delivery, administration,
modification, amendment or enforcement (whether through negotiations, legal
proceedings or otherwise) of, or legal advice in respect of rights or
responsibilities under, this Agreement, to the extent that the Agent is not
reimbursed for such expenses by the Borrower. In the case of any investigation,
litigation or proceeding giving rise to any Indemnified Costs, this Section 7.05
applies whether any such investigation, litigation or proceeding is brought by
the Agent, any Lender or a third party.

          (b) Each Lender severally agrees to indemnify the Issuing Banks (to
the extent not promptly reimbursed by the Borrower) from and against such
Lender's Ratable Share of any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind or nature whatsoever that may be imposed on, incurred by, or asserted
against any such Issuing Bank in any way relating to or arising out of this
Agreement or any action taken or omitted by such Issuing Bank hereunder or in
connection herewith; provided, however, that no Lender shall be liable for any
portion of such liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements resulting from such Issuing
Bank's gross negligence or willful misconduct. Without limitation of the
foregoing, each Lender agrees to reimburse any such Issuing Bank promptly upon
demand for its Ratable Share of any costs and expenses (including, without
limitation, fees and expenses of counsel) payable by the Borrower under Section
8.04, to the extent that such Issuing Bank is not promptly reimbursed for such
costs and expenses by the Borrower.

          (c) The failure of any Lender to reimburse the Agent or any Issuing
Bank promptly upon demand for its Ratable Share of any amount required to be
paid by the Lenders to the Agent as provided herein shall


                                       34



not relieve any other Lender of its obligation hereunder to reimburse the Agent
or any Issuing Bank for its Ratable Share of such amount, but no Lender shall be
responsible for the failure of any other Lender to reimburse the Agent or any
Issuing Bank for such other Lender's Ratable Share of such amount. Without
prejudice to the survival of any other agreement of any Lender hereunder, the
agreement and obligations of each Lender contained in this Section 7.05 shall
survive the payment in full of principal, interest and all other amounts payable
hereunder and under the Notes. Each of the Agent and each Issuing Bank agrees to
return to the Lenders their respective Ratable Shares of any amounts paid under
this Section 7.05 that are subsequently reimbursed by the Borrower.

          SECTION 7.06. Successor Agent.  The Agent may resign at any time by
giving written notice thereof to the Lenders and the Borrower and may be removed
at any time with or without cause by the Required Lenders. Upon any such
resignation or removal, the Required Lenders shall have the right to appoint a
successor Agent approved, so long as no Event of Default has occurred and is
continuing, by the Borrower, which consent shall not be unreasonably withheld or
delayed. If no successor Agent shall have been so appointed by the Required
Lenders, and shall have accepted such appointment, within 30 days after the
retiring Agent's giving of notice of resignation or the Required Lenders'
removal of the retiring Agent, then the retiring Agent may, on behalf of the
Lenders, appoint a successor Agent, which shall be a commercial bank organized
under the laws of the United States of America or of any State thereof and
having a combined capital and surplus of at least $500,000,000. Upon the
acceptance of any appointment as Agent hereunder by a successor Agent, such
successor Agent shall thereupon succeed to and become vested with all the
rights, powers, discretion, privileges and duties of the retiring Agent, and the
retiring Agent shall be discharged from its duties and obligations under this
Agreement. After any retiring Agent's resignation or removal hereunder as Agent,
the provisions of this Article VII shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was Agent under this Agreement.

          SECTION 7.07. Other Agents.  Each Lender hereby acknowledges that
neither the documentation agent nor any other Lender designated as any "Agent"
on the signature pages hereof has any liability hereunder other than in its
capacity as a Lender.

                                  ARTICLE VIII

                                  MISCELLANEOUS

          SECTION 8.01. Amendments, Etc.  No amendment or waiver of any
provision of this Agreement or the Notes, nor consent to any departure by the
Borrower therefrom, shall in any event be effective unless the same shall be in
writing and signed by the Required Lenders, and then such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given; provided, however, that no amendment, waiver or consent shall,
unless in writing and signed by all the Lenders, do any of the following: (a)
waive any of the conditions specified in Section 3.01, (b) increase the
Commitments of the Lenders, (c) reduce the principal of, or interest on, the
Advances or any fees or other amounts payable hereunder due to such Lenders, (d)
postpone any date fixed for any payment of principal of, or interest on, the
Advances or any fees payable hereunder due to such Lenders, (e) change the
percentage of the Revolving Credit Commitments or of the aggregate unpaid
principal amount of the Advances, or the number of Lenders, that shall be
required for the Lenders or any of them to take any action hereunder or (f)
amend this Section 8.01; and provided further that (x) no amendment, waiver or
consent shall, unless in writing and signed by the Agent in addition to the
Lenders required above to take such action, affect the rights or duties of the
Agent under this Agreement or any Note and (y) no amendment, waiver or consent
shall, unless in writing and signed by the Issuing Banks in addition to the
Lenders required above to take such action, adversely affect the rights or
obligations of the Issuing Banks in their capacities as such under this
Agreement.

          SECTION 8.02. Notices, Etc.  (a) All notices and other communications
provided for hereunder shall be either (x) in writing (including facsimile
communication) and mailed, faxed or delivered or (y) as and to the extent set
forth in Section 8.02(b) and in the proviso to this Section 8.02(a), if to the
Borrower, at its address at P.O. Box 53999, Phoenix, Arizona 85072-3999,
Attention: Treasurer; if to any Initial Lender, at its Domestic Lending Office
specified opposite its name on Schedule I hereto; if to any other Lender, at its
Domestic Lending Office specified in the Assignment and Acceptance pursuant to
which it became a Lender; and if to the Agent, at its address at Two Penns Way,
New Castle, Delaware 19720, Attention: Bank Loan Syndications Department; or, as
to the Borrower or the Agent, at such other address as shall be designated by
such party in a written notice to the other parties and, as to each other party,
at such other address as shall be designated by such party in a written notice
to


                                       35



the Borrower and the Agent, provided that materials required to be delivered
pursuant to Section 5.01(h)(i), (ii) and (iv) shall be delivered to the Agent as
specified in Section 8.02(b). All such notices and communications shall, when
mailed, faxed or e-mailed, be effective when deposited in the mails, faxed or
confirmed by e-mail, respectively, except that notices and communications to the
Agent pursuant to Article II, III or VII shall not be effective until received
by the Agent. Delivery by facsimile of an executed counterpart of any amendment
or waiver of any provision of this Agreement or the Notes or of any Exhibit
hereto to be executed and delivered hereunder shall be effective as delivery of
a manually executed counterpart thereof.

          (b) So long as Citibank or any of its Affiliates is the Agent,
materials required to be delivered pursuant to Section 5.01(h)(i), (ii) and (iv)
shall be delivered to the Agent in an electronic medium in a format acceptable
to the Agent and the Lenders by e-mail at oploanswebadmin@citigroup.com. The
Borrower agrees that the Agent may make such materials, as well as any other
written information, documents, instruments and other material relating to the
Borrower, any of its Subsidiaries or any other materials or matters relating to
this Agreement, the Notes or any of the transactions contemplated hereby
(collectively, the "Communications") available to the Lenders by posting such
notices on Intralinks or a substantially similar electronic system (the
"Platform"). The Borrower acknowledges that (i) the distribution of material
through an electronic medium is not necessarily secure and that there are
confidentiality and other risks associated with such distribution, (ii) the
Platform is provided "as is" and "as available" and (iii) neither the Agent nor
any of its Affiliates warrants the accuracy, adequacy or completeness of the
Communications or the Platform and each expressly disclaims liability for errors
or omissions in the Communications or the Platform. No warranty of any kind,
express, implied or statutory, including, without limitation, any warranty of
merchantability, fitness for a particular purpose, non-infringement of third
party rights or freedom from viruses or other code defects, is made by the Agent
or any of its Affiliates in connection with the Platform.

          (c) Each Lender agrees that notice to it (as provided in the next
sentence) (a "Notice") specifying that any Communications have been posted to
the Platform shall constitute effective delivery of such information, documents
or other materials to such Lender for purposes of this Agreement; provided that
if requested by any Lender the Agent shall deliver a copy of the Communications
to such Lender by email, facsimile or mail. Each Lender agrees (i) to notify the
Agent in writing of such Lender's e-mail address to which a Notice may be sent
by electronic transmission (including by electronic communication) on or before
the date such Lender becomes a party to this Agreement (and from time to time
thereafter to ensure that the Agent has on record an effective e-mail address
for such Lender) and (ii) that any Notice may be sent to such e-mail address.

          SECTION 8.03. No Waiver; Remedies.  No failure on the part of any
Lender or the Agent to exercise, and no delay in exercising, any right hereunder
or under any Note shall operate as a waiver thereof; nor shall any single or
partial exercise of any such right preclude any other or further exercise
thereof or the exercise of any other right. The remedies herein provided are
cumulative and not exclusive of any remedies provided by law.

          SECTION 8.04. Costs and Expenses.  (a) The Borrower agrees to pay on
demand all costs and expenses of the Agent in connection with the
administration, modification and amendment of this Agreement, the Notes and the
other documents to be delivered hereunder, including, without limitation, the
reasonable fees and expenses of counsel for the Agent with respect thereto and
with respect to advising the Agent as to its rights and responsibilities under
this Agreement. The Borrower further agrees to pay on demand all costs and
expenses of the Agent and the Lenders, if any (including, without limitation,
reasonable counsel fees and expenses), in connection with the enforcement
(whether through negotiations, legal proceedings or otherwise) of this
Agreement, the Notes and the other documents to be delivered hereunder,
including, without limitation, reasonable fees and expenses of counsel for the
Agent and each Lender in connection with the enforcement of rights under this
Section 8.04(a).

          (b) The Borrower agrees to indemnify and hold harmless the Agent and
each Lender and each of their Affiliates and their officers, directors,
employees, agents and advisors (each, an "Indemnified Party") from and against
any and all claims, damages, losses, liabilities and expenses (including,
without limitation, reasonable fees and expenses of counsel) incurred by or
asserted or awarded against any Indemnified Party, in each case arising out of
or in connection with or by reason of (including, without limitation, in
connection with any investigation, litigation or proceeding or preparation of a
defense in connection therewith) (i) the Notes, this Agreement, any of the
transactions contemplated herein or the actual or proposed use of the proceeds
of the Advances or (ii) the actual or alleged presence of Hazardous Materials on
any property of the Borrower or any of its


                                       36



Subsidiaries or any Environmental Action relating in any way to the Borrower or
any of its Subsidiaries, except to the extent such claim, damage, loss,
liability or expense is found in a final, non-appealable judgment by a court of
competent jurisdiction to have resulted from such Indemnified Party's gross
negligence or willful misconduct. In the case of an investigation, litigation or
other proceeding to which the indemnity in this Section 8.04(b) applies, such
indemnity shall be effective whether or not such investigation, litigation or
proceeding is brought by the Borrower, its directors, equityholders or creditors
or an Indemnified Party or any other Person, whether or not any Indemnified
Party is otherwise a party thereto, unless such litigation or proceeding is
brought by the Borrower and the Borrower prevails, and whether or not the
transactions contemplated hereby are consummated. The Borrower also agrees not
to assert any claim for special, indirect, consequential or punitive damages
against the Agent, any Lender, any of their Affiliates, or any of their
respective directors, officers, employees, attorneys and agents, on any theory
of liability, arising out of or otherwise relating to the Notes, this Agreement,
any of the transactions contemplated herein or the actual or proposed use of the
proceeds of the Advances.

          (c) If any payment of principal of, or Conversion of, any Eurodollar
Rate Advance is made by the Borrower to or for the account of a Lender other
than on the last day of the Interest Period for such Advance, as a result of a
payment or Conversion pursuant to Section 2.08(d) or (e), 2.10 or 2.12,
acceleration of the maturity of the Notes pursuant to Section 6.01 or for any
other reason, or by an Eligible Assignee to a Lender other than on the last day
of the Interest Period for such Advance upon an assignment of rights and
obligations under this Agreement pursuant to Section 8.07 as a result of a
demand by the Borrower pursuant to Section 8.07(a), the Borrower shall, upon
demand by such Lender (with a copy of such demand to the Agent), pay to the
Agent for the account of such Lender any amounts required to compensate such
Lender for any additional losses, costs or expenses that it may reasonably incur
as a result of such payment or Conversion, including, without limitation, any
loss (excluding loss of anticipated profits), cost or expense incurred by reason
of the liquidation or reemployment of deposits or other funds acquired by any
Lender to fund or maintain such Advance.

          (d) Without prejudice to the survival of any other agreement of the
Borrower hereunder, the agreements and obligations of the Borrower contained in
Sections 2.11, 2.14 and 8.04 shall survive the payment in full of principal,
interest and all other amounts payable hereunder and under the Notes.

          SECTION 8.05. Right of Set-off.  Upon (i) the occurrence and during
the continuance of any Event of Default and (ii) the making of the request or
the granting of the consent specified by Section 6.01 to authorize the Agent to
declare the Notes due and payable pursuant to the provisions of Section 6.01,
each Lender is hereby authorized at any time and from time to time, to the
fullest extent permitted by law, to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held and
other indebtedness at any time owing by such Lender to or for the credit or the
account of the Borrower against any and all of the obligations of the Borrower
now or hereafter existing under this Agreement and the Note held by such Lender,
whether or not such Lender shall have made any demand under this Agreement or
such Note and although such obligations may be unmatured. Each Lender agrees
promptly to notify the Borrower after any such set-off and application, provided
that the failure to give such notice shall not affect the validity of such
set-off and application. The rights of each Lender under this Section are in
addition to other rights and remedies (including, without limitation, other
rights of set-off) that such Lender may have.

          SECTION 8.06. Binding Effect.  This Agreement shall become effective
(other than Section 2.01, which shall only become effective upon satisfaction of
the conditions precedent set forth in Section 3.01) when it shall have been
executed by the Borrower and the Agent and when the Agent shall have been
notified by each Initial Lender that such Initial Lender has executed it and
thereafter shall be binding upon and inure to the benefit of the Borrower, the
Agent and each Lender and their respective successors and assigns, except that
the Borrower shall not have the right to assign its rights hereunder or any
interest herein without the prior written consent of the Lenders.

          SECTION 8.07. Assignments and Participations.  (a) Each Lender may
and, if demanded by the Borrower (following a demand by such Lender pursuant to
Section 2.11 or 2.14) upon at least five Business Days' notice to such Lender
and the Agent, will assign to one or more Persons all or a portion of its rights
and obligations under this Agreement (including, without limitation, all or a
portion of its Revolving Credit Commitment, its Unissued Letter of Credit
Commitment, the Advances owing to it, its participations in Letters of Credit
and the Note or Notes held by it); provided, however, that (i) each such
assignment shall be of a constant, and not a varying, percentage of all rights
and obligations under this Agreement, (ii) except in the case of an assignment
to a Person


                                       37



that, immediately prior to such assignment, was a Lender or an assignment of all
of a Lender's rights and obligations under this Agreement, the amount of the
Revolving Credit Commitment or Unissued Letter of Credit Commitment of the
assigning Lender being assigned pursuant to each such assignment (determined as
of the date of the Assignment and Acceptance with respect to such assignment)
shall in no event be less than $5,000,000 or an integral multiple of $1,000,000
in excess thereof unless the Borrower and the Agent otherwise agree, (iii) each
such assignment shall be to an Eligible Assignee, (iv) each such assignment made
as a result of a demand by the Borrower pursuant to this Section 8.07(a) shall
be arranged by the Borrower after consultation with the Agent and shall be
either an assignment of all of the rights and obligations of the assigning
Lender under this Agreement or an assignment of a portion of such rights and
obligations made concurrently with another such assignment or other such
assignments that together cover all of the rights and obligations of the
assigning Lender under this Agreement, (v) no Lender shall be obligated to make
any such assignment as a result of a demand by the Borrower pursuant to this
Section 8.07(a) unless and until such Lender shall have received one or more
payments from either the Borrower or one or more Eligible Assignees in an
aggregate amount at least equal to the aggregate outstanding principal amount of
the Advances owing to such Lender, together with accrued interest thereon to the
date of payment of such principal amount and all other amounts payable to such
Lender under this Agreement, and (vi) the parties to each such assignment shall
execute and deliver to the Agent, for its acceptance and recording in the
Register, an Assignment and Acceptance, together with any Note subject to such
assignment and a processing and recordation fee of $3,500 payable by the parties
to each such assignment, provided, however, that in the case of each assignment
made as a result of a demand by the Borrower, such recordation fee shall be
payable by the Borrower except that no such recordation fee shall be payable in
the case of an assignment made at the request of the Borrower to an Eligible
Assignee that is an existing Lender, and (vii) any Lender may, without the
approval of the Borrower and the Agent, assign all or a portion of its rights to
any Lender or to any of its or their Affiliates that is not a natural person.
Upon such execution, delivery, acceptance and recording, from and after the
effective date specified in each Assignment and Acceptance, (x) the assignee
thereunder shall be a party hereto and, to the extent that rights and
obligations hereunder have been assigned to it pursuant to such Assignment and
Acceptance, have the rights and obligations of a Lender hereunder and (y) the
Lender assignor thereunder shall, to the extent that rights and obligations
hereunder have been assigned by it pursuant to such Assignment and Acceptance,
relinquish its rights (other than its rights under Sections 2.11, 2.14 and 8.04
to the extent any claim thereunder relates to an event arising prior to such
assignment) and be released from its obligations (other than its obligations
under Section 7.05 to the extent any claim thereunder relates to an event
arising prior such assignment) under this Agreement (and, in the case of an
Assignment and Acceptance covering all or the remaining portion of an assigning
Lender's rights and obligations under this Agreement, such Lender shall cease to
be a party hereto). For the avoidance of doubt, no assignment by an Issuing Bank
pursuant to this Section 8.07(a) shall affect its rights and obligations in its
capacity as an Issuing Bank with respect to any Letters of Credit issued by it
and than outstanding.

          (b) By executing and delivering an Assignment and Acceptance, the
Lender assignor thereunder and the assignee thereunder confirm to and agree with
each other and the other parties hereto as follows: (i) other than as provided
in such Assignment and Acceptance, such assigning Lender makes no representation
or warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with this Agreement or
the execution, legality, validity, enforceability, genuineness, sufficiency or
value of, or the perfection or priority of any lien or security interest created
or purported to be created under or in connection with, this Agreement or any
other instrument or document furnished pursuant hereto; (ii) such assigning
Lender makes no representation or warranty and assumes no responsibility with
respect to the financial condition of the Borrower or the performance or
observance by the Borrower of any of its obligations under this Agreement or any
other instrument or document furnished pursuant hereto; (iii) such assignee
confirms that it has received a copy of this Agreement, together with copies of
the financial statements referred to in Section 4.01 and such other documents
and information as it has deemed appropriate to make its own credit analysis and
decision to enter into such Assignment and Acceptance; (iv) such assignee will,
independently and without reliance upon the Agent, such assigning Lender or any
other Lender and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under this Agreement; (v) such assignee confirms that it is an
Eligible Assignee; (vi) such assignee appoints and authorizes the Agent to take
such action as agent on its behalf and to exercise such powers and discretion
under this Agreement as are delegated to the Agent by the terms hereof, together
with such powers and discretion as are reasonably incidental thereto; and (vii)
such assignee agrees that it will perform in accordance with their terms all of
the obligations that by the terms of this Agreement are required to be performed
by it as a Lender.


                                       38



          (c) Upon its receipt of an Assignment and Acceptance executed by an
assigning Lender and an assignee representing that it is an Eligible Assignee,
together with any Note or Notes subject to such assignment, the Agent shall, if
such Assignment and Acceptance has been completed and is in substantially the
form of Exhibit C hereto, (i) accept such Assignment and Acceptance, (ii) record
the information contained therein in the Register and (iii) give prompt notice
thereof to the Borrower.

          (d) The Agent shall maintain at its address referred to in Section
8.02 a copy of each Assignment and Acceptance delivered to and accepted by it
and a register for the recordation of the names and addresses of the Lenders and
the Commitment of, and principal amount of the Advances owing to, each Lender
from time to time (the "Register"). The entries in the Register shall be
conclusive and binding for all purposes, absent manifest error, and the
Borrower, the Agent and the Lenders may treat each Person whose name is recorded
in the Register as a Lender hereunder for all purposes of this Agreement. The
Register shall be available for inspection by the Borrower or any Lender at any
reasonable time and from time to time upon reasonable prior notice.

          (e) Each Lender may sell participations to one or more banks or other
entities (other than the Borrower or any of its Affiliates) in or to all or a
portion of its rights and/or obligations under this Agreement (including,
without limitation, all or a portion of its Commitment, the Advances owing to it
and any Note or Notes held by it); provided, however, that (i) such Lender's
obligations under this Agreement (including, without limitation, its Commitment
to the Borrower hereunder) shall remain unchanged, (ii) such Lender shall remain
solely responsible to the other parties hereto for the performance of such
obligations, (iii) such Lender shall remain the holder of any such Note for all
purposes of this Agreement, (iv) the Borrower, the Agent and the other Lenders
shall continue to deal solely and directly with such Lender in connection with
such Lender's rights and obligations under this Agreement and (v) no participant
under any such participation shall have any right to approve any amendment or
waiver of any provision of this Agreement or any Note, or any consent to any
departure by the Borrower therefrom, except to the extent that such amendment,
waiver or consent would reduce the principal of, or interest on, the Notes or
any fees or other amounts payable hereunder, in each case to the extent subject
to such participation, or postpone any date fixed for any payment of principal
of, or interest on, the Notes or any fees or other amounts payable hereunder, in
each case to the extent subject to such participation.

          (f) Any Lender may, in connection with any assignment or participation
or proposed assignment or participation pursuant to this Section 8.07, disclose
to the assignee or participant or proposed assignee or participant, any
information relating to the Borrower furnished to such Lender by or on behalf of
the Borrower; provided that, prior to any such disclosure, the assignee or
participant or proposed assignee or participant shall agree to preserve the
confidentiality of any Borrower Information relating to the Borrower received by
it from such Lender as provided in Section 8.08.

          (g) Notwithstanding anything to the contrary contained herein, any
Lender (a "Granting Bank") may grant to a special purpose funding vehicle (a
"SPC"), identified as such in writing from time to time by the Granting Bank to
the Agent and the Borrower, the option to provide to the Borrower all or any
part of any Advance that such Granting Bank would otherwise be obligated to make
to the Borrower pursuant to this Agreement; provided that (i) nothing herein
shall constitute a commitment by any SPC to make any Advance, (ii) if an SPC
elects not to exercise such option or otherwise fails to provide all or any part
of such Advance, the Granting Bank shall be obligated, as a principal and not as
a surety, to make such Advance pursuant to the terms hereof and (iii) all voting
rights under this Agreement, except with respect to the consent contemplated in
the last sentence of this Section 8.07(g), shall be exercised by the Granting
Bank, all payments hereunder shall continue to be made to the Granting Bank as
agent for its SPC and the Granting Bank will continue to be the sole Lender for
all purposes of this Agreement except as expressly provided in this Section
8.07(g). The making of an Advance by an SPC hereunder shall utilize the
Commitment of the Granting Bank to the same extent, and as if, such Advance were
made by such Granting Bank. Each party hereto hereby agrees that no SPC shall be
liable for any indemnity or similar payment obligation under this Agreement (all
liability for which shall remain with the Granting Bank). In furtherance of the
foregoing, each party hereto hereby agrees (which agreement shall survive the
termination of this Agreement) that, prior to the date that is one year and one
day after the payment in full of all outstanding commercial paper or other
senior indebtedness of any SPC, it will not institute against, or join any other
person in instituting against, such SPC any bankruptcy, reorganization,
arrangement, insolvency or liquidation proceedings under the laws of the United
States or any State thereof. In addition, notwithstanding anything to the
contrary contained in this Section 8.07, any SPC may (i) with notice to, but
without the prior written consent of, the Borrower


                                       39



and the Agent and without paying any processing fee therefor, assign all or a
portion of its interests in any Advances to the Granting Bank or to any
financial institutions (consented to by the Borrower and Agent) providing
liquidity and/or credit support to or for the account of such SPC to support the
funding or maintenance of Advances and (ii) disclose on a confidential basis any
non-public information relating to its Advances to any rating agency, commercial
paper dealer or provider of any surety, guarantee or credit or liquidity
enhancement to such SPC. Notwithstanding the foregoing, neither such grant made
hereunder nor the holding of interest hereunder by any SPC shall increase any of
the Borrower's obligations and/or liabilities (including without limitation tax
liabilities and other indemnities) which the Borrower has but for such grant or
holding of interest ("SPC Liabilities") and the Granting Bank shall hold the
Borrower harmless and indemnify the Borrower from and against any and all SPC
Liabilities. This Section may not be amended without the written consent of each
SPC affected thereby.

          (h) Notwithstanding any other provision set forth in this Agreement,
any Lender may at any time create a security interest in all or any portion of
its rights under this Agreement (including, without limitation, the Advances
owing to it and any Note or Notes held by it) in favor of any Federal Reserve
Bank in accordance with Regulation A of the Board of Governors of the Federal
Reserve System.

          SECTION 8.08. Confidentiality.  Neither the Agent nor any Lender may
disclose to any Person any confidential, proprietary or non-public information
of the Borrower furnished to the Agent or the Lenders by the Borrower (such
information being referred to collectively herein as the "Borrower
Information"), except that each of the Agent and each of the Lenders may
disclose Borrower Information (i) to its and its affiliates' employees,
officers, directors, agents and advisors (it being understood that the Persons
to whom such disclosure is made will be informed of the confidential nature of
such Borrower Information and instructed to keep such Borrower Information
confidential on substantially the same terms as provided herein), (ii) to the
extent requested by any regulatory authority, (iii) to the extent required by
applicable laws or regulations or by any subpoena or similar legal process, (iv)
to any other party to this Agreement, (v) in connection with the exercise of any
remedies hereunder or any suit, action or proceeding relating to this Agreement
or the enforcement of rights hereunder, (vi) subject to an agreement containing
provisions substantially the same as those of this Section 8.08, to any assignee
or participant or prospective assignee or participant, (vii) to the extent such
Borrower Information (A) is or becomes generally available to the public on a
non-confidential basis other than as a result of a breach of this Section 8.08
by the Agent or such Lender, or (B) is or becomes available to the Agent or such
Lender on a nonconfidential basis from a source other than the Borrower
(provided that the source of such information was not known by the recipient
after inquiry to be bound by a confidentiality agreement with or other
contractual, legal or fiduciary obligation of confidentiality to the Borrower or
any other Person with respect to such information) and (viii) with the consent
of the Borrower.

          SECTION 8.09. Governing Law.  This Agreement and the Notes shall be
governed by, and construed in accordance with, the laws of the State of New
York.

          SECTION 8.10. Execution in Counterparts.  This Agreement may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement. Delivery of an executed counterpart of a signature page to this
Agreement by facsimile shall be effective as delivery of a manually executed
counterpart of this Agreement.

          SECTION 8.11. Jurisdiction, Etc.  (a) Each of the parties hereto
hereby submits to the nonexclusive jurisdiction of any New York State court or
federal court of the United States of America sitting in New York City, and any
appellate court from any thereof, in any action or proceeding arising out of or
relating to this Agreement or the Notes, or for recognition or enforcement of
any judgment, and each of the parties hereto hereby agrees that all claims in
respect of any such action or proceeding may be heard and determined in any such
New York State court or, to the extent permitted by law, in such federal court.
Nothing in this Agreement shall affect any right that any party may otherwise
have to bring any action or proceeding relating to this Agreement or the Notes
in the courts of any jurisdiction.

          (b) Each of the parties hereto irrevocably and unconditionally waives,
to the fullest extent it may legally and effectively do so, any objection that
it may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement or the Notes in any New
York State or federal


                                       40



court. Each of the parties hereto hereby irrevocably waives, to the fullest
extent permitted by law, the defense of an inconvenient forum to the maintenance
of such action or proceeding in any such court.

          SECTION 8.12. No Liability of the Issuing Banks  The Borrower assumes
all risks of the acts or omissions of any beneficiary or transferee of any
Letter of Credit with respect to its use of such Letter of Credit. Neither an
Issuing Bank nor any of its officers or directors shall be liable or responsible
for: (a) the use that may be made of any Letter of Credit or any acts or
omissions of any beneficiary or transferee in connection therewith; (b) the
validity, sufficiency or genuineness of documents, or of any endorsement
thereon, even if such documents should prove to be in any or all respects
invalid, insufficient, fraudulent or forged; (c) payment by such Issuing Bank
against presentation of documents that do not comply with the terms of a Letter
of Credit, including failure of any documents to bear any reference or adequate
reference to the Letter of Credit; or (d) any other circumstances whatsoever in
making or failing to make payment under any Letter of Credit, except that the
Borrower shall have a claim against such Issuing Bank, and such Issuing Bank
shall be liable to the Borrower, to the extent of any direct, but not
consequential, damages suffered by the Borrower that the Borrower proves were
caused by (i) such Issuing Bank's willful misconduct or gross negligence as
determined in a final, non-appealable judgment by a court of competent
jurisdiction in determining whether documents presented under any Letter of
Credit comply with the terms of such Letter of Credit or (ii) such Issuing
Bank's willful failure to make lawful payment under a Letter of Credit after the
presentation to it of a draft and certificates strictly complying with the terms
and conditions of the Letter of Credit. In furtherance and not in limitation of
the foregoing, such Issuing Bank may accept documents that appear on their face
to be in order, without responsibility for further investigation, regardless of
any notice or information to the contrary.

          SECTION 8.13. Patriot Act.  Each Lender hereby notifies the Borrower
that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L.
107-56 (signed into law October 26, 2001)) (the "Act"), it is required to
obtain, verify and record information that identifies each borrower, guarantor
or grantor (the "Loan Parties"), which information includes the name and address
of each Loan Party and other information that will allow such Lender to identify
such Loan Party in accordance with the Act.


                                       41



          SECTION 8.14. Waiver of Jury Trial.  Each of the Borrower, the Agent
and the Lenders hereby irrevocably waives all right to trial by jury in any
action, proceeding or counterclaim (whether based on contract, tort or
otherwise) arising out of or relating to this Agreement or the Notes or the
actions of the Borrower, the Agent or any Lender in the negotiation,
administration, performance or enforcement thereof.

          IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers thereunto duly authorized, as of the
date first above written.

                                        ARIZONA PUBLIC SERVICE COMPANY


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


                                        CITIBANK, N.A.,
                                        as Agent


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


Letter of Credit Commitment

$75,000,000                             KEYBANK NATIONAL ASSOCIATION


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


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


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


Revolving Credit Commitment

                                        Joint Lead Arrangers


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


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


$37,500,000                             KEYBANK NATIONAL ASSOCIATION


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


                                        Co-Documentation Agents


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


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


$30,000,000                             THE BANK OF NEW YORK


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


                                       42



                                        Lenders

$20,000,000                             BANK ONE, NA


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


$20,000,000                             BARCLAYS BANK PLC


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


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


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


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


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


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


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


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


$20,000,000                             UBS LOAN FINANCE LLC


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


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


$20,000,000                             UNION BANK OF CALIFORNIA


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


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


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


$15,000,000                             BANCA DI ROMA SPA


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



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


                                       43



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


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


$325,000,000                            Total of the Revolving Credit
                                        Commitments


                                       44



                                                                      SCHEDULE I
                                                  ARIZONA PUBLIC SERVICE COMPANY
                                                     THREE-YEAR CREDIT AGREEMENT
                                                      APPLICABLE LENDING OFFICES



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

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

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

Bank One, NA

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

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

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

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

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

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

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

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




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

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

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




                                        2



                                SCHEDULE 4.01(k)
                                  SUBSIDIARIES

APS Foundation, Inc.
Bixco, Inc.
Axiom Power Solutions, Inc.
PWENewco, Inc.



                                SCHEDULE 4.01(1)
                                  INDEBTEDNESS

                                      none



                                                             EXHIBIT A - FORM OF
                                                                 PROMISSORY NOTE

U.S.$ _______________                                    Dated: __________, 200_

          FOR VALUE RECEIVED, the undersigned, ARIZONA PUBLIC SERVICE COMPANY,
an Arizona corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of
_________________________ (the "Lender") for the account of its Applicable
Lending Office on the Termination Date (as defined in the Credit Agreement
referred to below) the principal sum of U.S.$[amount of the Lender's Commitment
in figures] or, if less, the aggregate principal amount of the Advances made by
the Lender to the Borrower pursuant to the Three-Year Credit Agreement dated as
of May 21, 2004 among the Borrower, the Lender and certain other lenders parties
thereto, Citigroup Global Markets Inc. and KeyBank National Association, as
joint lead arrangers, KeyBank National Association, as syndication agent, Bank
of America, N.A. and The Bank of New York, as co-documentation agents, and
Citibank, N.A. as Agent for the Lender and such other lenders (as amended or
modified from time to time, the "Credit Agreement"; the terms defined therein
being used herein as therein defined) outstanding on such date.

          The Borrower promises to pay interest on the unpaid principal amount
of each Advance from the date of such Advance until such principal amount is
paid in full, at such interest rates, and payable at such times, as are
specified in the Credit Agreement.

          Both principal and interest are payable in lawful money of the United
States of America to Citibank, as Agent, at 388 Greenwich Street, New York, New
York 10013, Account No. 36852248 in same day funds. Each Advance owing to the
Lender by the Borrower pursuant to the Credit Agreement, and all payments made
on account of principal thereof, shall be recorded by the Lender and, prior to
any transfer hereof, endorsed on the grid attached hereto which is part of this
Promissory Note.

          This Promissory Note is one of the Notes referred to in, and is
entitled to the benefits of, the Credit Agreement. The Credit Agreement, among
other things, (i) provides for the making of Advances by the Lender to the
Borrower from time to time in an aggregate amount not to exceed at any time
outstanding the U.S. dollar amount first above mentioned, the indebtedness of
the Borrower resulting from each such Advance being evidenced by this Promissory
Note and (ii) contains provisions for acceleration of the maturity hereof upon
the happening of certain stated events and also for prepayments on account of
principal hereof prior to the maturity hereof upon the terms and conditions
therein specified.

                                        ARIZONA PUBLIC SERVICE COMPANY


                                        By
                                           -------------------------------------
                                           Title:



                       ADVANCES AND PAYMENTS OF PRINCIPAL



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

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

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

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

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

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

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

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

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

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

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

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



                                        2



                                                   EXHIBIT B - FORM OF NOTICE OF
                                                                       BORROWING

Citibank, N.A., as Agent
for the Lenders parties
to the Credit Agreement
referred to below
Two Penns Way
New Castle, Delaware 19720

                                     [Date]

          Attention: Bank Loan Syndications Department

Ladies and Gentlemen:

          The undersigned, Arizona Public Service Company, refers to the
Three-Year Credit Agreement, dated as of May 21, 2004 (as amended or modified
from time to time, the "Credit Agreement", the terms defined therein being used
herein as therein defined), among the undersigned, certain Lenders parties
thereto, Citigroup Global Markets Inc. and KeyBank National Association, as
joint lead arrangers, KeyBank National Association, as syndication agent, Bank
of America, N.A. and The Bank of New York, as co-documentation agents, and
Citibank, N.A., as Agent for said Lenders, and hereby gives you notice,
irrevocably, pursuant to Section 2.02 of the Credit Agreement that the
undersigned hereby requests a Borrowing under the Credit Agreement, and in that
connection sets forth below the information relating to such Borrowing (the
"Proposed Borrowing") as required by Section 2.02(a) of the Credit Agreement:

          (i) The Business Day of the Proposed Borrowing is __________, 200_.

          (ii) The Type of Advances comprising the Proposed Borrowing is [Base
     Rate Advances] [Eurodollar Rate Advances].

          (iii) The aggregate amount of the Proposed Borrowing is
     $_______________.

          [(iv) The initial Interest Period for each Eurodollar Rate Advance
     made as part of the Proposed Borrowing is _____ month[s].]

          The undersigned hereby certifies that the following statements are
true on the date hereof, and will be true on the date of the Proposed Borrowing:

          (A) the representations and warranties contained in Section 4.01
     (other than Section 4.01(l) and, in the case of a Borrowing the proceeds of
     which are used to refund commercial paper, Sections 4.01(e)(ii), (f)(ii)
     and (j)) of the Credit Agreement are correct, before and after giving
     effect to the Proposed Borrowing and to the application of the proceeds
     therefrom, as though made on and as of such date;

          (B) no event has occurred and is continuing, or would result from such
     Proposed Borrowing or from the application of the proceeds therefrom, that
     constitutes a Default;

          (C) after giving effect to the Proposed Borrowing, to the extent that
     the Proposed Borrowing is required to be treated as short-term debt
     pursuant to the 1984 Order, the aggregate amount of Authorized Short Term
     Debt (as such term is defined in the 1984 Order) including the aggregate
     principal amount of all outstanding Advances that are required to be
     treated by the Borrower as short-term debt pursuant to the 1984 Order does
     not exceed 7% of the Borrower's total capitalization,

          (D) to the extent that the Proposed Borrowing is required to be
     treated as long-term debt pursuant to the 1986 Order, the aggregate amount
     of Continuing Debt (as such term is defined in the 1986 Order) including
     the aggregate principal amount of all outstanding Advances that are
     required to be treated by the Borrower as long-term debt pursuant to the
     1986 Order has not exceeded, during any period of more



     than 30 days immediately prior to and including the date of the Borrowing,
     and will not exceed, during any period of more than 30 days at any time
     such Borrowing is outstanding, $2,698,917,000, and

          (E) after giving effect to the Proposed Borrowing, the Indebtedness of
     the Borrower does not exceed that permitted by (A) applicable resolutions
     of the Board of Directors of the Borrower or (B) applicable Arizona laws,
     rules or regulations.

                                        Very truly yours,

                                        ARIZONA PUBLIC SERVICE COMPANY


                                        By
                                           -------------------------------------
                                           Title:.


                                        2



                                                             EXHIBIT C - FORM OF
                                                       ASSIGNMENT AND ACCEPTANCE

          Reference is made to the Three-Year Credit Agreement dated as of May
21, 2004 (as amended or modified from time to time, the "Credit Agreement")
among Arizona Public Service Company, an Arizona corporation (the "Borrower"),
the Lenders (as defined in the Credit Agreement), Citigroup Global Markets Inc.
and KeyBank National Association, as joint lead arrangers, KeyBank National
Association, as syndication agent, Bank of America, N.A. and The Bank of New
York, as co-documentation agents, and Citibank, N.A., as agent for the Lenders
(the "Agent"). Terms defined in the Credit Agreement are used herein with the
same meaning.

          The "Assignor" and the "Assignee" referred to on Schedule I hereto
agree as follows:

          1. The Assignor hereby sells and assigns to the Assignee, and the
Assignee hereby purchases and assumes from the Assignor, an interest in and to
the Assignor's rights and obligations under [the Credit Agreement as of the date
hereof] [the Credit Agreement as it relates to the the Letter of Credit
Facility] equal to the percentage interest specified on Schedule 1 hereto of
[all outstanding rights and obligations under the Credit Agreement together with
participations in Letters of Credit held by the Assignor on the date hereof]
[such Assignor's Unissued Letter of Credit Commitment]. After giving effect to
such sale and assignment, the Assignee's [Revolving Credit Commitment and the
amount of the Advances owing to the Assignee] [Letter of Credit Commitment] will
be as set forth on Schedule 1 hereto.

          2. The Assignor (i) represents and warrants that it is the legal and
beneficial owner of the interest being assigned by it hereunder and that such
interest is free and clear of any adverse claim; (ii) makes no representation or
warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with the Credit Agreement
or the execution, legality, validity, enforceability, genuineness, sufficiency
or value of, or the perfection or priority of any lien or security interest
created or purported to be created under or in connection with, the Credit
Agreement or any other instrument or document furnished pursuant thereto; (iii)
makes no representation or warranty and assumes no responsibility with respect
to the financial condition of the Borrower or the performance or observance by
the Borrower of any of its obligations under the Credit Agreement or any other
instrument or document furnished pursuant thereto; and (iv) attaches the Note[,
if any] held by the Assignor [and requests that the Agent exchange such Note for
a new Note payable to the order of [the Assignee in an amount equal to the
Revolving Credit Commitment assumed by the Assignee pursuant hereto or new Notes
payable to the order of the Assignee in an amount equal to the Revolving Credit
Commitment assumed by the Assignee pursuant hereto and] the Assignor in an
amount equal to the Revolving Credit Commitment retained by the Assignor under
the Credit Agreement, [respectively,] as specified on Schedule 1 hereto.

          3. The Assignee (i) confirms that it has received a copy of the Credit
Agreement, together with copies of the financial statements referred to in
Section 4.01 thereof and such other documents and information as it has deemed
appropriate to make its own credit analysis and decision to enter into this
Assignment and Acceptance; (ii) agrees that it will, independently and without
reliance upon the Agent, the Assignor or any other Lender and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own credit decisions in taking or not taking action under the Credit
Agreement; (iii) confirms that it is an Eligible Assignee; (iv) appoints and
authorizes the Agent to take such action as agent on its behalf and to exercise
such powers and discretion under the Credit Agreement as are delegated to the
Agent by the terms thereof, together with such powers and discretion as are
reasonably incidental thereto; (v) agrees that it will perform in accordance
with their terms all of the obligations that by the terms of the Credit
Agreement are required to be performed by it as a Lender; and (vi) attaches any
U.S. Internal Revenue Service forms required under Section 2.14 of the Credit
Agreement.

          4. Following the execution of this Assignment and Acceptance, it will
be delivered to the Agent for acceptance and recording by the Agent. The
effective date for this Assignment and Acceptance (the "Effective Date") shall
be the date of acceptance hereof by the Agent, unless otherwise specified on
Schedule 1 hereto.



          5. Upon such acceptance and recording by the Agent, as of the
Effective Date, (i) the Assignee shall be a party to the Credit Agreement and,
to the extent provided in this Assignment and Acceptance, have the rights and
obligations of a Lender thereunder and (ii) the Assignor shall, to the extent
provided in this Assignment and Acceptance, relinquish its rights and be
released from its obligations under the Credit Agreement.

          6. Upon such acceptance and recording by the Agent, from and after the
Effective Date, the Agent shall make all payments under the Credit Agreement and
the Notes in respect of the interest assigned hereby (including, without
limitation, all payments of principal, interest, fees and Letter of Credit
commissions with respect thereto) to the Assignee. The Assignor and Assignee
shall make all appropriate adjustments in payments under the Credit Agreement
and the Notes for periods prior to the Effective Date directly between
themselves.

          7. This Assignment and Acceptance shall be governed by, and construed
in accordance with, the laws of the State of New York.

          8. This Assignment and Acceptance may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement. Delivery of an executed
counterpart of Schedule 1 to this Assignment and Acceptance by facsimile shall
be effective as delivery of a manually executed counterpart of this Assignment
and Acceptance.

          IN WITNESS WHEREOF, the Assignor and the Assignee have caused Schedule
1 to this Assignment and Acceptance to be executed by their officers thereunto
duly authorized as of the date specified thereon.


                                        2



                                   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.


                                        3



Accepted [and Approved]** this
____ day of __________, 200_

CITIBANK, N.A., as Agent


By
   ----------------------------------
Title:


[Approved this _____ day
of __________, 200_

ARIZONA PUBLIC SERVICE COMPANY


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

- ----------
**   Required if the Assignee is an Eligible Assignee solely by reason of clause
     (iii) of the definition of "Eligible Assignee".

*    Required if the Assignee is an Eligible Assignee solely by reason of clause
     (iii) of the definition of "Eligible Assignee".


                                        4



                                                                  EXECUTION COPY

                                U.S. $325,000,000

                           THREE-YEAR CREDIT AGREEMENT

                            Dated as of May 21, 2004

                                      Among

                         ARIZONA PUBLIC SERVICE COMPANY

                                   as Borrower

                        THE INITIAL LENDERS NAMED HEREIN

                               as Initial Lenders

                                 CITIBANK, N.A.

                    as Administrative Agent and Issuing Bank

                          KEYBANK NATIONAL ASSOCIATION

                      as Syndication Agent and Issuing Bank

                 BANK OF AMERICA, N.A. and THE BANK OF NEW YORK

                           as Co-Documentation Agents

                                       and

         CITIGROUP GLOBAL MARKETS INC. and KEYBANK NATIONAL ASSOCIATION

                             as Joint Lead Arrangers



                                TABLE OF CONTENTS

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

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

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





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


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

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

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

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

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

ARTICLE VIII
   SECTION 8.01. Amendments, Etc.                                             35





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


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





To each of the Lenders party
to the Credit Agreement
May 21, 2004
Page 4


Schedules

Schedule I - List of Applicable Lending Offices
Schedule 2.01(b) - Existing Letters of Credit
Schedule 4.01(k) - Subsidiaries
Schedule 4.01(1) - Existing Indebtedness

Exhibits
Exhibit A - Form of Note
Exhibit B - Form of Notice of Borrowing
Exhibit C - Form of Assignment and Acceptance
Exhibit D - Form of Opinion of Counsel for the Borrower

EX-10.102

                                                                  EXHIBIT 10.102

                                    AGREEMENT
                                     BETWEEN
                        PINNACLE WEST ENERGY CORPORATION
                                       AND
                         ARIZONA PUBLIC SERVICE COMPANY
                                       FOR
                    TRANSPORTATION AND TREATMENT OF EFFLUENT

This Agreement is made and entered into by and between Pinnacle West Energy
Corporation, an Arizona corporation, acting on its own behalf and on behalf of
potential future owners of Redhawk (hereinafter defined), and Arizona Public
Service Company, an Arizona corporation, acting solely as the Operating Agent on
behalf of the Participants of Palo Verde Nuclear Generating Station ("PVNGS" or
"Palo Verde").

                                    RECITALS

      A. PWE plans to construct a natural gas-fired combined cycle electrical
generating facility ("Redhawk") on land located west of the City of Phoenix,
near PVNGS. PWE's current plans call for Redhawk to be a (nominal) 2120 MW power
generation facility, with four (nominal) 530 MW units to be phased in over
several years.

      B. Participants purchase Effluent for use at PVNGS and transport such
Effluent through the WRF Pipeline. Participants further treat the Effluent at
the WRF for use at PVNGS. There is excess capacity available from time to time
in the WRF Pipeline for transporting Effluent and in the WRF for treating such
Effluent for use by PWE at Redhawk.

      C. PWE desires to purchase and Participants desire to provide to PWE
transportation and treatment services for a certain amount of PWE's Effluent to
be used at Redhawk.

NOW, THEREFORE, for good and valuable consideration, the Parties hereby agree as
follows:

                             ARTICLE 1. DEFINITIONS

      1.1 DEFINITIONS. In addition to certain terms specifically defined in the
body of this Agreement, the following capitalized terms shall have the following
meanings whenever used in this Agreement:

      "APS" means Arizona Public Service Company and its permitted successors
and assigns. Except where APS is identified individually in this Agreement, APS
and any permitted successor or assign is acting solely in its capacity as
Operating Agent on behalf of the Participants. If Pinnacle West Energy
Corporation becomes the permitted successor to the rights and obligations of APS
as a Participant and Operating Agent, all references in this Agreement to APS in
its capacity as Operating Agent shall thereafter refer to Pinnacle West Energy
Corporation solely in its capacity as Operating Agent.



      "Commercially Reasonable Efforts" means those efforts and resources that a
skilled, competent, experienced, and prudent Person would use to perform and
complete the requirements of the Agreement in a timely manner, exercising the
degree of skill and competence customarily required of a Person performing
similar work for wastewater treatment facilities in the United States with
similar technical specifications and capabilities as the WRF and the WRF
Pipeline.

      "Delivery Point" means the geographic location at which the Redhawk
Delivery System crosses the exterior boundary of the real property owned by the
Participants at PVNGS.

      "Effective Date" means that date set forth in Section 7.14 below.

      "Effluent" means treated wastewater effluent purchased by the
Participants, APS, SRP or PWE pursuant to agreement(s) with any municipality,
corporation or other entity now or hereafter producing treated wastewater
effluent and making such effluent available for purchase by the Participants,
APS, SRP or PWE.

      "Environment" means soil, surface water, groundwater, land, stream
sediments, surface or subsurface strata, ambient air, and any environmental
medium.

      "Environmental Law" means any environmental or health and safety-related
law, regulation, rule, ordinance, court decree, administrative order or decree,
bylaw or published governmental agency guideline at the federal, state or local
level, whether existing as of the date hereof, previously enforced or
subsequently enacted.

      "Force Majeure" is an event not anticipated by any Party and not within
the reasonable control of the Party claiming suspension or delay of its
performance due to the event. Force Majeure includes an act or omission of
government, act or omission of civil or military authority, strike, lockout, act
of a public enemy, war, blockade, insurrection, riot, act of God, epidemic,
landslide, earthquake, fire, storm, lightning, flood, unscheduled plant outage
or breakdown, or other casualty. Force Majeure shall also include: (i)
significant changes in Effluent quality before it is introduced into the WRF
resulting in a violation of the Operating Parameters; (ii) major equipment
failures, including WRF Pipeline ruptures or major breakdowns of a pumping
station, WRF effluent treatment equipment, the Redhawk Delivery System, or the
Redhawk storage reservoir; and (iii) other equipment failures that result in
loss of production, treatment, or storage capability below that required to
maintain the minimum reservoir level at Palo Verde specified in Section 2.1.5.

      "Hazardous Material or Substance" means any petroleum, oil, gasoline,
other petroleum derivative products, flammable substances, explosives,
radioactive materials, dioxins, radon gas, urea formaldehyde foam insulation and
any asbestos containing materials; any waste, substance, material, liquid,
chemical substance or mixture, element, compound, or solution included (a) in
the definition of "hazardous substance," "hazardous waste," "hazardous
materials," "extremely hazardous wastes," "extremely hazardous substances,"
"restricted hazardous wastes," "toxic substances," "regulated

                                        2


substances," "pollutant" or "contaminant" in any Environmental Law now in effect
or hereinafter placed into effect, (b) with respect to which any remedial,
removal or reclamation obligations may be imposed under any Environmental Law or
(c) exposure to which may pose a health or safety hazard.

      "Non-Interested Participants" means all Participants (as defined below)
except those Participants who hold any ownership interest in Redhawk, either
directly or through a subsidiary or affiliated organization.

      "Operating Agent" means the Participant responsible for the performance of
operating work and making capital improvements at PVNGS under the Participation
Agreement.

      "Operating Parameters" means the specifications for Treated Effluent water
quality set forth in the WRF Processing Operating Parameters, WRLA-8ZZ08
revision in effect when the Agreement is signed or as amended from time to time
after notice to PWE pursuant to Section 2.1.7.

      "Participants" means APS and the other entities having an ownership or
leasehold interest in PVNGS and related facilities as Parties to the
Participation Agreement, including El Paso Electric Company, Los Angeles
Department of Water and Power, Public Service Company of New Mexico, Salt River
Project Agricultural Improvement and Power District ("SRP"), Southern California
Edison Company, Southern California Public Power Authority, and each additional
entity that may succeed to any such interest in PVNGS and related facilities.

      "Participation Agreement" means the Arizona Nuclear Power Project
Participation Agreement, dated as of August 23, 1973, as amended now and in the
future.

      "Party" means either PWE, acting solely as an owner, and if there is more
than one owner, as agent on behalf of all owners of Redhawk, or APS, acting
solely in its capacity as Operating Agent on behalf of the Participants.
"Parties" means PWE, acting solely as an owner, and if there is more than one
owner, as agent on behalf of all owners of Redhawk, and APS, acting solely in
its capacity as Operating Agent on behalf of the Participants.

      "Per Unit Charge" means the cost per acre-foot for the transportation and
treatment of Effluent, calculated in accordance with Section 2.3.1 of this
Agreement.

      "Permanent Cessation of Operation(s)" means, in the case of PVNGS, as
currently defined in 10 CFR Section 50.2, "for a nuclear power reactor facility,
a certification by a licensee to the NRC that it has permanently ceased or will
permanently cease reactor operation(s), or a final legally effective order to
permanently cease operation(s) has come into effect" or as may be later defined
in 10 CFR Section 50.2 or its successor; this defined term does not refer to the
operational status of the WRF or the WRF Pipeline. In the case of any electric
generating unit at Redhawk, "Permanent Cessation of Operations" means: (i)
initiation of physical decommissioning activities for that unit; (ii) written
notice from PWE to Operating Agent confirming PWE's intention to permanently
cease operation of

                                        3


that unit; or (iii) failure to maintain for that unit all regulatory
certifications and permits required for its operation and to keep such unit in
such condition that it is capable of being restored to active power production
in not more than a 270 day period (except in any circumstance that qualifies as
a Force Majeure under Section 4.1).

      "Person" means any individual, corporation, partnership, joint venture,
limited liability company, firm, association, trust or other entity or
organization.

      "PWE" means Pinnacle West Energy Corporation and its permitted successors
and assigns. For purposes of this Agreement PWE is acting solely as owner of
Redhawk, and if there is more than one owner, as agent on behalf of the owners
of Redhawk in all instances where this Agreement establishes rights or
obligations applicable to PWE as owner of Redhawk, except to the extent that PWE
becomes the permitted successor to the rights and obligations of APS as a
Participant and Operating Agent, in which case: (i) PWE shall act in its
capacity as an owner, and if there is more than one owner, as agent on behalf of
the owners of Redhawk in all instances where this Agreement establishes rights
or obligations applicable to PWE as owner of Redhawk; and (ii) PWE shall act in
its capacity as Operating Agent in all instances where rights and obligations of
the Operating Agent are established in this Agreement.

      "Redhawk Delivery System" means the pipeline, and all associated valves,
meters and other equipment required to measure, control and transport Treated
Effluent from the WRF reservoir discharge header to the Redhawk reservoir,
whether owned by the owners of Redhawk or by the Participants.

      "Redhawk Isolation Valve" means the valve closest to WRF that isolates the
flow of Effluent from WRF to Redhawk as depicted on the diagram attached as
Attachment C.

      "Release" means any releasing, spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, disposing or
dumping into the Environment (including the abandonment or discarding of
barrels, containers, and other closed receptacles).

      "Threat of Release" means a substantial likelihood of a Release that
requires action to prevent or mitigate damage to the Environment that may result
from such Release.

      "Treated Effluent" means that water produced by transporting Effluent to
and treating Effluent at the WRF in accordance with Operating Parameters.

      "WRF" means the tertiary wastewater treatment facility at the PVNGS Water
Reclamation Facility, together with all appurtenant equipment, facilities,
easements and rights of way for treatment of Effluent.

      "WRF Pipeline" means the WRF's associated Water Reclamation Supply System
pipeline that conveys Effluent from the SROG 91st Avenue and Tolleson wastewater
treatment plants, together with all appurtenant equipment, facilities, easements
and rights of way.

                                        4


      1.2 Rules of Construction. Unless the context or the provision in question
requires otherwise, the following rules of construction shall apply to this
Agreement: (i) a reference to an agreement, document or instrument includes all
exhibits, schedules and attachments thereto and all amendments or replacements
thereof; (ii) the singular includes the plural and the plural includes the
singular; (iii) a reference to a Party or Person includes its permitted
successors and permitted assigns; (iv) "include" and "including" are not
limiting; (v) "or" means "one or the other or all" of the specifically
enumerated things, states, or actions; (vi) "shall" or "will" means the listed
duties or actions are mandatory; and (vii) "herein", "hereof", "hereunder" and
similar words used in a document refer to the document as a whole. This
Agreement is the product of negotiation between the Parties and no ambiguity
will be construed in favor of or against any Party solely as the result of such
Party having drafted or proposed the ambiguous provision.

                             ARTICLE 2. TRANSACTION

      2.1 TRANSPORTATION AND TREATMENT OF EFFLUENT.

            2.1.1 This Agreement does not establish, modify or abrogate any
      rights of any Person to the ownership or use of Effluent.

            2.1.2 Operating Agent will transport and treat for use at Redhawk up
      to 7,500 acre-feet of Effluent annually for use at Redhawk Units 1 and 2,
      depending on the available capacity of the WRF and WRF Pipeline, provided
      that PWE has obtained rights to such amount of Effluent. Operating Agent
      shall provide transportation for Effluent acquired by PWE from the point
      of such Effluent's delivery into the WRF Pipeline, through the WRF, where
      tertiary treatment will be provided, and to the Delivery Point, consistent
      with all terms and conditions of this Agreement. PWE shall be responsible
      for obtaining rights to such Effluent; for ensuring that such Effluent
      satisfies the water quality standards specified in Attachment B for
      discharge into the WRF Pipeline including, at a minimum, primary and
      secondary treatment at a wastewater treatment facility; and for arranging
      for discharge of the Effluent into the WRF Pipeline. PWE shall also be
      responsible for ensuring that any Effluent discharged into the WRF
      Pipeline pursuant to PWE's contract rights may be utilized at PVNGS if and
      to the extent that PWE is unable to utilize said Effluent at Redhawk or
      Operating Agent is permitted to curtail deliveries to Redhawk pursuant to
      this Agreement. If PVNGS, in order to satisfy its own operating needs,
      curtails delivery to Redhawk of Effluent already purchased by PWE, PVNGS
      shall reimburse to PWE the price actually paid by PWE for all such
      Effluent used by PVNGS, provided, however, that if the seller of that
      Effluent accepts a lower price because the Effluent is used at PVNGS
      rather than at Redhawk, PVNGS shall reimburse PWE at the lower price
      applicable to use at PVNGS.

            2.1.3 In order to reserve capacity in the WRF Pipeline and WRF for
      transportation and treatment of this initial 7,500 acre-feet of Effluent,
      from and after the Effective Date of this Agreement, PWE shall annually
      pay to Operating

                                        5


      Agent an "Initial Reserve Fee" in the amount of $75,000 (i.e., $10.00 per
      acre-foot of reserved capacity). The first annual installment of this
      Initial Reserve Fee, prorated for the year to the Effective Date of this
      Agreement, shall be paid by PWE within 30 days after the Effective Date of
      this Agreement. All subsequent installments shall be paid by PWE on or
      before January 31 of each year during which this Agreement is in effect.
      Beginning in the year PWE begins accepting deliveries of Treated Effluent
      pursuant to this Agreement, PWE shall be entitled to a credit of up to the
      full amount of the Initial Reserve Fee paid in that year, to be applied
      against Per Unit Charges assessed pursuant to Section 2.3 below, at a rate
      of $10.00 per acre-foot of Treated Effluent delivered to the Delivery
      Point for Redhawk Units 1 and 2.

            2.1.4 Operating Agent shall also provide transportation and
      treatment of up to 7,500 acre feet of additional Effluent for use at
      Redhawk Units 3 and 4, depending on the available capacity of the WRF and
      WRF Pipeline, provided that (i) PWE has secured the rights to any
      additional Effluent it seeks to have transported and treated under this
      Agreement for use at Redhawk and (ii) on or before the following dates,
      PWE commits to take the following specified increments of additional
      Effluent for use at Redhawk:

            September 1, 2005:  Up to 3,750 acre-feet per year
                                of additional Effluent.

            September 1, 2007:  Up to another 3,750 acre-feet per year of
                                additional Effluent.

            2.1.5 In order to reserve capacity in the WRF and WRF Pipeline for
      transportation and treatment of these additional increments of Effluent,
      from and after the Effective Date of this Agreement, PWE shall annually
      pay to Operating Agent an "Additional Reserve Fee" in the amount of
      $75,000 (i.e., $10.00 per acre-foot of additional capacity). The first
      annual installment of this Additional Reserve Fee, prorated for the year
      to the Effective Date of this Agreement, shall be paid by PWE within 30
      days after the Effective Date of this Agreement. All subsequent
      installments shall be paid by PWE on or before January 31 of each year
      during which this Agreement is in effect, and the installment amount shall
      remain unchanged, unless PWE submits written notification to Operating
      Agent that PWE is relinquishing its right to have all or any remaining
      portion of the specified increments of additional Effluent transported and
      treated pursuant to this Agreement, provided, however, that if PWE
      relinquishes only a portion of its right to have the specified increments
      of additional Effluent transported and treated, PWE shall pay a reduced
      Additional Reserve Fee at a rate of $10.00 per acre-foot of additional
      capacity remaining subject to such right. If PWE fails to commit to take
      either of the additional increments of Effluent by the corresponding date
      specified for that increment, Operating Agent shall no longer provide
      transportation and treatment of that increment, and PWE's obligation to
      pay the Additional Reserve Fee shall terminate in proportion to the amount
      relinquished. If PWE commits to take either or both of the additional
      increments

                                        6


      of Effluent, then beginning in the year PWE begins accepting deliveries of
      the additional increment(s), PWE shall be entitled to a credit of up to
      the full amount of the Additional Reserve Fee paid in that year, to be
      applied against Per Unit Charges assessed pursuant to Section 2.3 below,
      at a rate of $10.00 per acre-foot of Treated Effluent delivered to the
      Delivery Point for Redhawk Units 3 and 4.

            2.1.6 Effluent transported, treated and delivered pursuant to this
      Agreement shall be used only at Redhawk Units 1 through 4. Any additional
      units constructed at Redhawk beyond Units 1 through 4 shall not use
      Treated Effluent delivered pursuant to this Agreement unless this
      Agreement is amended, in conformity with Section 7.10, to allow use of
      Treated Effluent at additional Redhawk units. The restrictions of this
      Section shall not be construed to prohibit the use of any other source of
      water at Redhawk units beyond Units 1 through 4. If any other source of
      water is commingled with Treated Effluent delivered to Redhawk pursuant to
      this Agreement, then: (i) that other source of water shall be discharged
      directly into the Redhawk storage reservoir and not into the Redhawk
      Delivery System; and (ii) appropriate administrative controls shall be in
      place to ensure that flow rates of Treated Effluent to Redhawk do not
      exceed demand rates for such Treated Effluent at Redhawk Units 1 through
      4, including demand rates for Treated Effluent storage capacity in the
      Redhawk storage reservoir sufficient for Redhawk Units 1 through 4.

            2.1.7 Notwithstanding the provisions in Sections 2.1.2 and 2.1.4
      above, Operating Agent shall not deliver Treated Effluent to PWE for use
      at Redhawk while: (i) the Treated Effluent level in the WRF reservoir is
      below 948 feet above Mean Sea Level (equivalent to 90% reservoir
      capacity); (ii) the Treated Effluent level in the WRF reservoir is below
      949.5 feet above Mean Sea Level (equivalent to 95% reservoir capacity) and
      the combined demand rate for Treated Effluent at PVNGS and Redhawk exceeds
      the maximum available Treated Effluent production rate of the WRF; or
      (iii) if transportation and treatment of Effluent would pose a risk to the
      operation of the WRF, the WRF Pipeline or PVNGS, as determined in the sole
      and reasonable discretion of the Operating Agent, subject to Section
      7.6.4. If delivery of Treated Effluent is interrupted pursuant to the
      preceding sentence, then as soon as the Treated Effluent level in the WRF
      reservoir exceeds 948 feet above Mean Sea Level, or 949.5 feet above Mean
      Sea Level when the combined demand rate for Treated Effluent at PVNGS and
      Redhawk exceeds the maximum available Treated Effluent production rate of
      WRF, and there is no longer a risk, as determined in the sole and
      reasonable discretion of the Operating Agent, to the operation of the WRF,
      the WRF Pipeline or PVNGS, Operating Agent shall resume delivery of
      Treated Effluent for use at Redhawk. A dispute over the amount set forth
      in any billing statement shall be resolved in accordance with Section
      2.3.5 and Article 6 and shall not constitute a risk to the operation of
      the WRF, the WRF Pipeline or PVNGS.

            2.1.8 The Parties acknowledge and agree that performance required by
      this Agreement may be subject to approvals or consents from third parties
      or from federal, state or local regulatory agencies with jurisdiction over
      the Parties. The

                                        7


      Parties will proceed in a timely manner to obtain such approvals. All
      reasonable costs incurred by Operating Agent in obtaining such approvals
      will be paid by PWE. If, after exercising Commercially Reasonable Efforts,
      the Parties are unable to obtain all necessary approvals and consents by
      December 31, 2001, either Operating Agent, acting pursuant to written
      instructions unanimously approved by all Non-Interested Participants, or
      PWE may terminate this Agreement upon 30 days written notice to the other
      Party.

            2.1.9 Operating Agent will exercise Commercially Reasonable Efforts
      to maintain both: (i) the reliability of the Treated Effluent supply to be
      provided under this Agreement to Redhawk, comparable to the reliability of
      the supply for Palo Verde; and (ii) the Treated Effluent quality for
      Redhawk, with such quality to be comparable to that provided to Palo
      Verde, provided, however, that PWE acknowledges and agrees that in the
      event of any conflict between the current or future demands of PVNGS
      (including demands of any additional units constructed as part of PVNGS)
      and Redhawk, whether as the result of limited capacity or supply in the
      transportation or treatment system, or for any other reason, the water
      supply needs of PVNGS will be served before those of Redhawk. Operating
      Agent will provide thirty (30) days advance written notice to PWE before
      planned changes to the Operating Parameters (and therefore the quality of
      the water provided to Redhawk) in accordance with Attachment A.
      Notwithstanding anything in this Agreement providing or implying the
      contrary, PVNGS may, at any time, call for and make use of any Effluent to
      which PVNGS, Operating Agent or APS has contractual rights to the extent
      such Effluent is required for cooling water purposes at PVNGS.

            2.1.10 Operating Agent shall construct, operate and maintain those
      portions of the Redhawk Delivery System located on PVNGS property. PWE
      shall construct, operate and maintain those portions of the Redhawk
      Delivery System not located on PVNGS property. PWE shall also construct,
      operate and maintain, at Redhawk, reservoir capacity to provide backup
      water for Redhawk for periodic production deficits. PWE shall be
      responsible for all costs, including capital costs, associated with the
      design, construction, operation and maintenance of the Redhawk Delivery
      System, Redhawk storage reservoir, any isolation valves on PVNGS property
      that are not included within the Redhawk Delivery System but which are
      required in the opinion of the Operating Agent to adequately protect
      PVNGS, and the flow control valves and orifice plates and any other
      equipment needed at PVNGS cooling tower makeup headers to provide
      sufficient system operating pressure to pump Treated Effluent to Redhawk.

            2.1.11 PWE shall reimburse Operating Agent for all costs, including
      capital costs, incurred by Operating Agent that are associated with the
      design, construction, operation and maintenance of the Redhawk Delivery
      System, the Redhawk storage reservoir and any isolation valves on PVNGS
      property that are not included within the Redhawk Delivery System but
      which are required in the opinion of the Operating Agent to adequately
      protect PVNGS, and the flow control valves and orifice plates and any
      other equipment needed at PVNGS

                                        8


      cooling tower makeup headers to provide sufficient system operating
      pressure to pump Treated Effluent to Redhawk. Whenever such costs are
      incurred, Operating Agent shall deliver an itemized invoice to PWE for
      payment. PWE shall pay any such invoice within 30 days after receipt. At
      Operating Agent's discretion such costs may be separately itemized on the
      invoices for Per Unit Charges delivered to PWE pursuant to Section 2.3.2.

            2.1.12 PWE will obtain Operating Agent's prior review and
      concurrence on: (i) the design and engineering for the Redhawk Delivery
      System; (ii) the associated construction schedule and related WRF outage
      requirements for constructing the Redhawk Delivery System; and (iii) all
      plans for operation, maintenance, repair or replacement of any component
      of the Redhawk Delivery System. After construction of the Redhawk Delivery
      System is complete, Operating Agent shall inspect and approve final
      construction prior to initial use of the system. PWE shall reimburse
      Operating Agent for all of its reasonably incurred costs associated with
      review, inspection and approval of the Redhawk Delivery System pursuant to
      this Section. Operating Agent's review, inspection and approval of the
      Redhawk Delivery System will be performed solely for the protection of
      PVNGS. Operating Agent approval shall not be unreasonably withheld, and
      Operating Agent shall have no liability to PWE or any other Redhawk
      participant based on its review or approval of the design, engineering or
      construction of the Redhawk Delivery System. Design, construction and
      installation of the Redhawk Delivery System will be performed in
      accordance with the PVNGS design and configuration control program, which
      is inclusive of a 10 C.F.R. Section 50.59, Changes, Tests and Experiments
      evaluation and any required Updated Final Safety Analysis Report updates.
      PWE will be responsible for obtaining all necessary permits and approvals
      for the construction and operation of the Redhawk Delivery System, and for
      ensuring that construction and operation of the Redhawk Delivery System
      complies with all applicable federal, state and local laws and
      regulations.

            2.1.13 Upon completion of construction of the Redhawk Delivery
      System, legal title in the PVNGS portions of the Redhawk Delivery System
      shall reside with the PVNGS Participants; provided, however, that: (i) as
      long as this Agreement is in effect, Operating Agent shall not use the
      PVNGS portions of the Redhawk Delivery System for any purpose other than
      delivery of Treated Effluent to PWE for use at Redhawk without the prior
      written consent of PWE; (ii) upon termination of this Agreement, PWE shall
      be relieved of any future indemnity obligation in relation to the PVNGS
      portions of the Redhawk Delivery System, except to the extent that a PVNGS
      Indemnitee (as defined in Section 3.1.1) receives a claim for any
      liability, damage, loss, or expense, which liability, damage, loss or
      expense was incurred prior to and including the date of termination and is
      subject to indemnity by PWE pursuant to Article 3; (iii) if the
      Participants sell the WRF and WRF Pipeline pursuant to Section 2.4, the
      Participants shall also transfer ownership of the PVNGS Portions of the
      Redhawk Delivery System; and (iv) PWE shall not pursue any claim against
      Operating Agent or the Participants for reimbursement of the cost of
      construction.

                                        9


            2.1.14 Operating Agent shall operate and maintain all devices used
      to measure, regulate and isolate the flow of Treated Effluent from WRF, up
      to and including the downstream isolation valve depicted on the diagram
      attached as Attachment C. PWE shall operate and maintain all other
      portions of the Redhawk Delivery System. Operating Agent and PWE shall
      each designate a representative with relevant technical expertise to
      develop appropriate operating criteria for the future operation of the
      Redhawk Delivery System. The operating criteria shall be approved by
      Operating Agent and PWE and implemented prior to the initiation of
      delivery of Treated Effluent to Redhawk. Operating Agent shall not be
      liable for physical damages, if any, to equipment, pipelines, or other
      facilities downstream from the isolation valve operated by Operating Agent
      that result from action taken by Operating Agent at variance with the
      agreed-upon operating criteria for the Redhawk Delivery System when, in
      the sole and reasonable discretion of Operating Agent, such action is
      necessary to protect PVNGS from damage.

            2.1.15 Except in cases of operational emergency, as determined in
      the sole and reasonable discretion of the Operating Agent, Operating Agent
      will give PWE reasonable notice, in accordance with Attachment A, of
      outages, including planned outages, that may partially or completely
      interrupt the flow of Treated Effluent into the Redhawk Delivery System.
      The Parties agree that planned outages normally will include: (i)
      clarifier cleaning and coating resulting in a reduced capacity (normally
      scheduled from November through March); (ii) planned full WRF maintenance
      outages (normally ten days in both April and October of each year,
      coincident with PVNGS refueling outages); (iii) planned outages for
      inspection, testing, repair, replacement or other maintenance activities
      associated with effluent pipelines or pumping systems; and (iv) any
      planned outages necessary to maintain the quality of Treated Effluent
      provided to PVNGS and Redhawk and to maintain the efficiency of the WRF.
      The Parties acknowledge that unplanned outages may also occur, including
      but not limited to any forced outages such as WRF Pipeline ruptures and
      leaks and outages to address water quality concerns, and all such
      unplanned outages shall be operational emergencies if deemed as such by
      the Operating Agent.

      2.2 Measurement of Effluent. Operating Agent shall determine the amount of
Treated Effluent delivered each month to Redhawk by metering the quantity of
Treated Effluent discharged through the Redhawk Isolation Valve. Operating Agent
shall not discharge through the Redhawk Isolation Valve during any given month
any greater quantity of Treated Effluent than the quantity of such Effluent that
is actually delivered pursuant to PWE's contractual rights into the WRF Pipeline
during that same month (for transportation to and treatment at WRF).

      2.3 PRICE AND BILLING.

            2.3.1 PWE will pay a Per Unit Charge (as hereinafter defined) for
      the transportation and treatment costs for each acre-foot of Treated
      Effluent delivered by Operating Agent to PWE under this Agreement for use
      at Redhawk and that is of comparable quality to that provided to PVNGS.
      The Per Unit Charge shall be

                                       10


      reviewed for adjustment annually and shall be calculated by the Operating
      Agent and provided to PWE on or before August 1 of each year for the
      following calendar year. (The Operating Agent shall reconcile the
      difference between estimated costs and actual expenses using the procedure
      set forth in Section 2.3.4 herein.) The Per Unit Charge to be assessed
      each year shall be calculated as follows (a sample calculation of the Per
      Unit Charge is attached as Attachment D):

            First, the Operating Agent shall determine the sum of: (i) all of
            the Operating Agent's costs of labor attributable to the WRF and the
            WRF Pipeline, whether for direct, contract or matrixed sources of
            labor; (ii) all tertiary treatment and WRF Pipeline operation and
            maintenance costs, including the costs for chemicals, energy,
            maintenance materials, maintenance services (including maintenance
            services provided by outside consultants), and costs for WRF
            treatment equipment or repairs, incurred by Operating Agent after
            the Effective Date, (iii) all capital costs projected for the year
            for the WRF and the WRF Pipeline, and (iv) an allowance for the
            Operating Agent's administrative and general expenses attributable
            to the WRF and the WRF Pipeline and to administering this Agreement,
            including loads and overheads associated with the WRF and the WRF
            Pipeline for those categories of expense normally charged to the
            Participants, provided that there shall be no duplication of charges
            between items (i) through (iv) above.

            Second, the Operating Agent shall divide the sum determined in the
            previous paragraph (First) by the total number of acre-feet of
            Treated Effluent generated by the WRF for use by the Participants at
            PVNGS and by PWE at Redhawk to determine the Per Unit Charge.

            2.3.2 Prior to initiating delivery of Treated Effluent to Redhawk,
      Operating Agent shall establish an operating account to track deliveries
      of Treated Effluent, corresponding Per Unit Charges, and payments due
      from, and paid by, PWE pursuant to this Agreement. Thereafter, upon
      initiation of delivery of Treated Effluent pursuant to this Agreement,
      Operating Agent shall submit to PWE each month a fully itemized invoice,
      which shall reflect the application of the Per Unit Charge to the volume
      of Treated Effluent in acre feet provided to PWE during the previous
      month. Each invoice shall also reflect the amount of the credit, if any,
      due PWE pursuant to Sections 2.1.3 and 2.1.5 for its prior payment of the
      Initial and Additional Reserve Fees.

            2.3.3 Prior to receiving any Treated Effluent pursuant to this
      Agreement, PWE shall pay to Operating Agent $200,000 as a security
      deposit. Operating Agent shall establish a separate interest-bearing
      security deposit account with an Arizona financial institution and shall
      deposit into that account the funds received from PWE pursuant to the
      immediately preceding sentence. All interest earned on this account shall
      be transferred to the operating account as a credit against amounts owed
      by PWE under invoices submitted pursuant to Section 2.3.2. Up to

                                       11


      all of the principal balance in the security deposit account shall be
      transferred to the operating account to offset any unpaid balance owed by
      PWE under invoices submitted pursuant to Sections 2.3.2 and 2.3.4 if such
      invoices have not been paid by PWE within 30 days after receipt.

            2.3.4 Not later than ninety (90) days following the end of a
      calendar year, the Operating Agent shall identify the estimated costs
      described in Section 2.3.1 which were used in calculating the Per Unit
      Charge for the prior year and compare said estimated costs to the actual
      costs incurred by the Operating Agent with respect to such items. The
      Operating Agent shall provide to PWE an invoice at such time reflecting a
      credit balance for payments in excess of actual costs or an additional
      charge in the amount of the deficit from underpayments.

            2.3.5 PWE shall pay in full the amount stated in each invoice
      submitted by Operating Agent pursuant to Sections 2.3.2 and 2.3.4 within
      30 days after receipt of the invoice. If PWE disputes the amount set forth
      in any invoice, PWE shall provide notice of such dispute at the time of
      payment, but may not withhold payment of the disputed amount. As long as
      the amount stated in each invoice is paid when due and a positive balance
      is maintained in the operating account, the Parties will resolve the
      dispute in accordance with the Dispute Resolution procedure set out in
      Article 6 below. If the Parties determine that the amount assessed was
      higher than the amount that should have been billed to PWE, PWE may either
      request a refund, which refund shall be paid by Operating Agent within
      thirty (30) days, or apply such amount toward future monthly billings. If
      PWE fails to pay the amount stated in any invoice within 30 days after
      receipt, and the security deposit account balance is zero, Operating Agent
      may, after providing 30 days written notice to PWE, cease delivering
      Treated Effluent into the Redhawk Delivery System until payment in full
      for any unpaid invoice(s) is received from PWE and a positive balance of
      no less than $200,000 is reestablished in the security deposit account.

            2.3.6 Operating Agent shall maintain accurate and complete
      accounting records relating to its performance under this Agreement,
      including accounting records in support of all billings to PWE. Such
      records shall be retained by Operating Agent and be reasonably available
      for inspection and audit by PWE or any Participant for three (3) years
      after the close of each calendar year that the agreement is in effect.
      Operating Agent shall give PWE and the Participants prior written notice
      of its intention to destroy any records that are the subject of this
      Section, even if the retention period has passed. Operating Agent shall
      provide PWE and the Participants a reasonable opportunity, if requested,
      to inspect and copy any records prior to their destruction.

            2.3.7 PWE will pay when due and indemnify and save harmless each
      Participant from all sales, excise, property, privilege, gross receipts,
      use, compensation and like taxes or assessments, now or hereafter imposed
      or levied by the United States, the State of Arizona or any other state,
      or any city, town, county or other division thereof, in connection with
      this Agreement. PWE shall

                                       12


      be solely responsible for any income taxes imposed upon any or all PVNGS
      Participants with respect to any payments made by PWE for capital
      improvements (the "Income Tax Cost Component" or "ITCC"). The Parties
      understand and agree that: (i) PWE shall be treated for federal, state,
      and local income tax purposes as the owner of the PVNGS portion of the
      Redhawk Delivery System; and (ii) no Party shall take a position or action
      with respect to any tax return or in any filing by it for federal, state,
      or local income tax purposes that is inconsistent with such treatment.

            2.3.8 At PWE's expense, PWE may seek a Private Letter Ruling ("PLR")
      from the Internal Revenue Service ("IRS") asking whether PWE will be
      treated as the tax owner of those portions of the Redhawk Delivery System
      located on PVNGS property. Operating Agent and the Participants shall
      cooperate and coordinate with PWE as necessary in the preparation of the
      application for the PLR. Upon issuance of a favorable PLR concluding that
      PWE is the tax owner of the PVNGS portions of the Redhawk Delivery System,
      the Operating Agent shall refund or credit to PWE all excess amounts of
      ITCC collected from PWE prior to the date of such PLR, and any payments of
      ITCC due thereafter by PWE to the Operating Agent will cease. If a final
      determination is made by the IRS that any of the sums paid by PWE to the
      Operating Agent under the terms of this Agreement are, for federal income
      tax purposes, taxable to the Participant(s) despite the issuance of a
      favorable PLR, PWE shall pay, to the extent such sums are deemed taxable,
      all related ITCC amounts (including interest if applicable) to the
      Operating Agent.

            2.3.9 PWE shall have the right to request that Operating Agent or
      the Participants, at PWE's expense, contest, appeal, or seek abatement of
      any taxes asserted or assessed against any of the Participants for which
      PWE may be required to reimburse the Participants under this Agreement. If
      the Operating Agent or any Participant determines that it will contest,
      appeal, or seek abatement of any tax, then such party shall act in good
      faith to do so. PWE shall reimburse Operating Agent or Participant for any
      costs incurred in such contest, appeal or request for abatement of any
      tax. To the extent that any taxing authority concludes that any such tax
      is lower than previously assessed, the Operating Agent shall refund or
      credit to PWE an amount equal to that which PWE may have previously
      advanced to the Operating Agent for the payment of such tax.

      2.4 OPERATION OR SALE OF WRF AND WRF PIPELINE FOLLOWING PERMANENT
CESSATION OF OPERATIONS AT PVNGS.

            2.4.1 If, during the term of this Agreement, PVNGS undergoes a
      Permanent Cessation of Operation, any continued operation of the WRF and
      WRF Pipeline shall be determined under the terms of the Participation
      Agreement or any subsequent agreement among the Participants concerning
      such continued operation of the WRF and WRF Pipeline. If the Participants
      continue to operate the WRF and WRF Pipeline, Operating Agent shall
      continue to satisfy its obligation to transport and treat Effluent for PWE
      for use at Redhawk consistent

                                       13


      with all terms and conditions of this Agreement. If for any reason, the
      Participants do not continue to operate the WRF and the WRF Pipeline, then
      subject to any necessary notices, consents or approvals required to
      satisfy the terms of any existing sale/leaseback agreements, the
      Participants may dispose of the WRF and WRF Pipeline pursuant to any terms
      or procedures agreed upon by the Participants; provided that if the
      Participants agree to sell the WRF and WRF Pipeline, PWE shall be entitled
      to participate as a potential purchaser on an equal basis with any other
      potential purchasers.

            2.4.2 If the Participants agree to sell the WRF and WRF Pipeline,
      the purchaser shall obtain all necessary permits, consents and regulatory
      approvals required for it to own and operate the WRF and WRF Pipeline and
      shall agree in writing to assume: (i) the Operating Agent's obligations
      set forth in this Agreement to transport and treat Effluent for PWE for
      use at Redhawk; (ii) any obligations established in any separate agreement
      then existing for transportation and treatment of Effluent through the WRF
      Pipeline and WRF; and (iii) any decommissioning obligation applicable to
      the WRF and WRF Pipeline. If all required permits, consents and regulatory
      approvals are obtained by the purchaser, that purchaser and the Operating
      Agent shall in good faith negotiate an agreement for the transfer and
      subsequent operation of the WRF and WRF Pipeline consistent with the terms
      of this Section, which agreement shall be presented to the Participants
      for approval in accordance with any applicable provisions of the
      Participation Agreement prior to execution by Operating Agent.

      ARTICLE 3. INDEMNIFICATION AND LIMITATION OF LIABILITY

      3.1 INDEMNIFICATION BY PWE AS OWNER OF REDHAWK.

            3.1.1 PWE, as owner of Redhawk, shall indemnify, defend and hold
      harmless Participants and their officers, directors, employees, agents,
      successors and assigns (the "PVNGS Indemnitees") for, against and from any
      claim, liability, damage, loss, or expense of any kind or nature
      (including reasonable legal, accounting, consulting, engineering and other
      fees) for personal injury to or death of any person or for loss of or
      damage to property of any person or entity (collectively, "Damages"), in
      each instance to the extent determined to be resulting from any act or
      omission to act of PWE employees, agents or contractors (other than PVNGS
      employees, agents or contractors acting within the scope of their
      employment and for the sole benefit of PVNGS) arising in connection with
      performance under this Agreement by PWE acting as owner of Redhawk. The
      indemnity prescribed by the preceding sentence shall fully apply and not
      be extinguished even if and regardless of whether the damages are
      attributable to the joint or concurrent negligence, gross negligence,
      willful misconduct or strict liability in tort of a PVNGS Indemnitee.

            3.1.2 PWE, as owner of Redhawk, shall indemnify, defend and hold
      harmless the PVNGS Indemnitees for, against and from any claim, liability,
      damage, loss, or expense of any kind or nature (including reasonable
      legal, accounting, consulting, engineering and other fees, as well as
      environmental remediation costs, fines and penalties) that may be imposed
      on, incurred by, or asserted against any of the PVNGS Indemnitees by any
      other party or parties (including a governmental entity) arising out of
      the receipt, transportation and use of Treated Effluent after discharge of
      the same into the Redhawk Delivery System, including but not limited to
      any Release or Threat of Release of Treated Effluent or a Hazardous
      Material or Substance, in connection with or resulting from activities
      pertaining to this Agreement, except to the extent such Release or Threat
      of Release is determined to be attributable to the gross negligence or
      willful misconduct of Operating Agent. PWE, in its capacity as owner of
      Redhawk, shall promptly notify Operating Agent of any such claim and of
      any Release or Threat of Release of Treated Effluent or a Hazardous
      Material or Substance, or violation of Environmental Law or permit
      condition.


                                       14



            3.1.3 PWE, as owner of Redhawk, shall indemnify, defend and hold
      harmless the PVNGS Indemnitees for, against and from any claim, liability,
      damage, loss, or expense of any kind or nature (including reasonable
      legal, accounting, consulting, engineering and other fees, as well as
      environmental remediation costs, fines and penalties) that may be imposed
      upon, incurred by or asserted against any of the PVNGS Indemnitees by any
      supplier of Effluent to Redhawk arising out of, in connection with, or
      relating to any acquisition of Effluent by PWE from such suppliers for use
      at or for Redhawk, or arising out of, in connection with, or relating to
      any transportation to, treatment of, or use at Redhawk of such Effluent
      acquired by PWE in its capacity as owner of Redhawk.

      3.2 PROPORTIONAL LIABILITY. Except for the indemnification provided in
Section 3.1, PWE's proportional share of liability, in its capacity as owner of
Redhawk, for the acts or omissions of Operating Agent or its employees or
contractors when Operating Agent or its employees or contractors are acting for
the joint benefit of PVNGS and Redhawk and prior to discharge into the Redhawk
Delivery System shall initially be set at 10% of the total claim, liability,
damage, loss or expense at issue. PWE's proportional share of liability, in its
capacity as owner of Redhawk, shall remain at 10% until such time as PWE
commences taking the additional Effluent provided for in Section 2.1.4. If PWE
commences taking the additional Effluent provided for in Section 2.1.4, PWE's
proportional share of liability, in its capacity as owner of Redhawk, under this
Section shall be recalculated to reflect the relative quantity of Effluent being
transported and treated through the WRF Pipeline and WRF for PWE's use at
Redhawk in comparison to the total quantity of Effluent being transported and
treated through the WRF Pipeline and WRF.

      3.3 LIMITATIONS ON LIABILITY.

            3.3.1 NEITHER OPERATING AGENT NOR ANY PVNGS PARTICIPANT (IN SUCH
      CAPACITY) SHALL BE LIABLE TO PWE OR ANY OTHER PARTICIPANT IN REDHAWK (IN
      SUCH CAPACITY) FOR ANY LOSS OR DAMAGE IN THE NATURE OF PARTIAL OR COMPLETE
      LOSS OF USE OF ANY GENERATING FACILITY, LOSS OF ELECTRIC

                                       15


      POWER, COST OF REPLACEMENT OF ELECTRIC POWER, OR FOR ANY LOSS OF INTEREST,
      REVENUE, OR ANTICIPATED PROFITS FROM ACTIVITIES UNDER THIS AGREEMENT. NOR
      SHALL OPERATING AGENT OR ANY PVNGS PARTICIPANT BE LIABLE TO PWE OR ANY
      OTHER PARTICIPANT IN REDHAWK FOR ANY INDIRECT, SPECIAL, PUNITIVE, OR
      CONSEQUENTIAL DAMAGES, OR LOST PROFITS, ARISING OUT OF OR RELATED TO THIS
      AGREEMENT.

            3.3.2 EXCEPT FOR CLAIMS FOR INDEMNITY UNDER SECTION 3.1 AND CLAIMS
      UNDER SECTION 3.2 ABOVE, AS TO EACH OF WHICH THE PROVISIONS AND
      LIMITATIONS OF THIS SECTION 3.3.2 SHALL NOT APPLY; (i) PWE AND ALL OTHER
      PARTICIPANTS IN REDHAWK COLLECTIVELY SHALL BE LIABLE TO OPERATING AGENT
      AND ANY PVNGS PARTICIPANT ONLY TO THE EXTENT ANY LOSS OR DAMAGE IS CAUSED
      BY OR ARISES OUT OF THE NEGLIGENCE, GROSS NEGLIGENCE, WILLFUL MISCONDUCT
      OR STRICT LIABILITY IN TORT OF PWE OR ANY OTHER PARTICIPANT IN REDHAWK,
      EVEN IF AND REGARDLESS OF WHETHER THE LOSS OR DAMAGE IS ATTRIBUTABLE TO
      THE JOINT OR CONCURRENT NEGLIGENCE, GROSS NEGLIGENCE, WILLFUL MISCONDUCT
      OR STRICT LIABILITY IN TORT OF OPERATING AGENT; AND (ii) IN NO EVENT SHALL
      THE LIABILITY OF PWE AND ANY OTHER PARTICIPANT IN REDHAWK PURSUANT TO THIS
      SECTION 3.3.2 COLLECTIVELY EXCEED AN AGGREGATE AMOUNT OF FIVE MILLION
      DOLLARS ($5,000,000.00) PER OCCURANCE. THE LIMITATION OF LIABILITY SET
      FORTH IN THIS SECTION 3.3.2 SHALL NOT APPLY TO PAYMENT OF RESERVE CHARGES
      OWED BY PWE PURSUANT TO SECTION 2.1 AND PER UNIT CHARGES OWED BY PWE
      PURSUANT TO SECTION 2.3.

            3.3.3 EXCEPT FOR CLAIMS FOR INDEMNITY UNDER SECTION 3.1, CLAIMS
      UNDER SECTION 3.2 AND CLAIMS UNDER SECTION 3.3.2, AS TO EACH OF WHICH THE
      PROVISIONS AND DISCLAIMERS OF THIS SECTION 3.3.3 SHALL NOT APPLY, NEITHER
      PWE NOR ANY OTHER PARTICIPANT IN REDHAWK SHALL BE LIABLE TO OPERATING
      AGENT OR ANY OTHER PVNGS PARTICIPANT FOR ANY INDIRECT, SPECIAL, PUNITIVE
      OR CONSEQUENTIAL DAMAGES, OR LOST PROFITS, ARISING OUT OF OR RELATED TO
      THIS AGREEMENT.

      3.4 The provisions of this Article 3 shall not be construed so as to
relieve any insurer of its obligation to pay any insurance proceeds in
accordance with the terms and conditions of valid insurance policies.

      3.5 SURVIVAL OF INDEMNIFICATION. The liability and Indemnification
obligations set forth in this Agreement shall survive the expiration or
termination of this Agreement.

                                       16


      3.6 Except as otherwise specifically provided in this Agreement, any
liability of Operating Agent to the Participants for the acts or omissions of
Operating Agent or its employees or contractors shall be determined under the
liability provisions of the Participation Agreement.

ARTICLE 4. FORCE MAJEURE; CONDITIONAL DUTY OF PERFORMANCE

      4.1 FORCE MAJEURE; TIME FOR PERFORMANCE. A Party unable to perform its
duties under this Agreement by reason of a Force Majeure (a "nonperforming
Party") may request that its time for performance be extended for a period equal
to the time performance is delayed by the Force Majeure, by giving written
notice to the other Party within five (5) business days after commencement of
the Force Majeure. The written notice shall include a detailed description of
the event and an estimate of the length of the delay. The other Party shall
agree to extend the time for performance, but it may evaluate its agreement on a
continuing basis, reserving the right to terminate the Agreement as provided in
this paragraph if it determines the delay has a significant adverse effect on
its operations. The nonperforming Party shall use Commercially Reasonable
Efforts to remedy the effects of the Force Majeure. Delay due to an event for
which no notice has been given and the other Party's agreement has not been
obtained shall be an unexcused delay. If a Party's excused delay continues for a
period of more than 36 months, the other Party shall have the right to terminate
this Agreement upon 90 days written notice. If PWE, as owner of Redhawk,
receives a notice of termination from the Operating Agent pursuant to the
preceding sentence, PWE may elect to begin paying an annual fee (the "Retention
Fee") of $10 per acre-foot for each acre-foot of WRF and WRF Pipeline capacity
that is then subject to PWE's transportation and treatment rights under this
Agreement. As long as PWE continues paying the Retention Fee under this Section,
this Agreement shall remain in full force and effect.

      4.2 CONDITIONAL DUTY OF PERFORMANCE.

            4.2.1 NOTWITHSTANDING THE PROVISIONS OF SECTION 5.2.2, PWE EXPRESSLY
      ACKNOWLEDGES THAT ITS RIGHT TO HAVE EFFLUENT TRANSPORTED AND TREATED
      THROUGH THE WRF PIPELINE AND WRF FOR USE AT REDHAWK PURSUANT TO THIS
      AGREEMENT SHALL AT ALL TIMES BE SUBORDINATE TO THE PARTICIPANTS' RIGHT TO
      RECEIVE AND HAVE EFFLUENT TRANSPORTED AND TREATED THROUGH THE WRF PIPELINE
      AND WRF FOR COOLING WATER USE AT PALO VERDE, AS PALO VERDE EXISTS TODAY OR
      AS IT MAY BE EXPANDED IN THE FUTURE, INCLUDING ANY ADDITIONAL UNITS.

            4.2.2 THE PARTIES RECOGNIZE AND ACKNOWLEDGE THAT AT SOME TIME IN THE
      FUTURE, THE PARTICIPANTS MAY ELECT TO EXPAND PALO VERDE. IN THE EVENT OF
      SUCH AN EXPANSION, THE PARTIES RECOGNIZE AND ACKNOWLEDGE THAT THE
      QUANTITIES OF EFFLUENT THAT CAN BE TRANSPORTED AND TREATED FOR PWE FOR THE
      BENEFIT OF REDHAWK MAY NEED TO BE LIMITED OR

                                       17


      RESTRICTED TO TAKE INTO ACCOUNT THE NEEDS OF THE PARTICIPANTS; PROVIDED,
      HOWEVER, THAT THE OPERATING AGENT SHALL GIVE PWE AT LEAST THREE YEARS
      PRIOR WRITTEN NOTICE OF THE AMOUNT OF ANY LIMITATION OR RESTRICTION
      ANTICIPATED TO RESULT FROM SUCH AN EXPANSION. IF THE OPERATING AGENT GIVES
      SUCH NOTICE TO PWE, THE PARTICIPANTS AND PWE SHALL NEGOTIATE IN GOOD FAITH
      REGARDING POTENTIAL PARTICIPATION BY PWE IN THE FUNDING OF ANY EXPANSION
      OF THE WRF PIPELINE AND/OR WRF REQUIRED TO SERVE THE PALO VERDE EXPANSION
      IN RETURN FOR RIGHTS TO HAVE EFFLUENT TRANSPORTED AND TREATED IN THE
      EXPANDED FACILITIES FOR SUBSEQUENT DELIVERY TO REDHAWK.

                         ARTICLE 5. TERM AND TERMINATION

      5.1 TERM. This Agreement shall be effective as of the Effective Date and,
unless otherwise terminated pursuant to the provisions of this Agreement, shall
continue until the earlier of: (i) Permanent Cessation of Operation of PVNGS;
(ii) Permanent Cessation of Operation of all constructed units at Redhawk that
are entitled to receive Treated Effluent under this Agreement; or (iii) December
31, 2027, unless the term of the Participation Agreement is extended beyond
December 31, 2027, in which case this Agreement shall continue in effect for the
extended term of the Participation Agreement unless terminated prior to the end
of that term pursuant to clause (i) or clause (ii) of this Section or as
otherwise provided under the provisions of this Agreement.

      5.2 TERMINATION.

            5.2.1 Either Operating Agent, acting pursuant to written
      instructions unanimously approved by all Non-Interested Participants, or
      PWE may terminate the Agreement by written notice to the other Party at
      any time, if any of the following occurs: (1) a defaulting Party fails to
      cure a material breach under the Agreement; (2) a material adverse change
      in the financial condition of either Party occurs, which affects or will
      adversely affect that Party's performance under the Agreement; or (3)
      proceedings are filed by or against a Party under federal bankruptcy or
      state insolvency statutes, or a Party makes an assignment for the benefit
      of creditors or takes advantage of any insolvency statute or similar
      statute, or a receiver or trustee is appointed for the property and assets
      of that Party and the receivership is not discharged within one hundred
      twenty (120) days of such appointment. If either Party gives a termination
      notice under this Section, the Parties shall cooperate to effect an
      efficient and smooth transition of responsibility with respect to all
      matters governed by the Agreement.

            5.2.2 At any time after the tenth anniversary of the Effective Date,
      either Operating Agent, acting pursuant to instructions unanimously
      approved by all Non-Interested Participants, or PWE may submit notice to
      the other Party either terminating this Agreement, or reducing the
      quantity of Effluent that PWE will be entitled to have transported and
      treated pursuant to this Agreement, for any lawful

                                       18


      reason. The Agreement shall remain in effect for a period of thirty-six
      (36) months after notice is submitted pursuant to this Section. The
      liability and indemnification obligations of this Agreement, as set forth
      in Article 3, shall survive termination of this Agreement. Operating Agent
      acknowledges that actual demand for Treated Effluent will vary from year
      to year during construction and operation of Redhawk, and any such
      variation will not be a basis, absent a breach of this Agreement, for
      limiting PWE's right to have up to 15,000 acre-feet of Effluent
      transported and treated by Operating Agent through the WRF Pipeline and
      WRF in any given year. If PWE permanently ceases operation of one or more
      Redhawk units, PWE's right to have Effluent treated and transported
      pursuant to this Agreement shall be reduced by 3,750 acre-feet per year
      for each Redhawk unit that undergoes such Permanent Cessation of
      Operations. The provisions of this Section 5.2.2 are not intended to, and
      shall not be construed to, limit or modify any right of Operating Agent to
      curtail or interrupt deliveries of Treated Effluent to Redhawk granted
      elsewhere in this Agreement.

            5.2.3 All obligations and liabilities of the Parties under this
      Agreement shall cease upon termination except the obligations of PWE under
      Section 2.3 regarding payment of invoiced amounts when due, the
      obligations of the Parties under Article 3 (Indemnification and Limitation
      of Liability), and the liabilities of any Party resulting from a default
      by such Party leading to termination of this Agreement, all of which shall
      survive termination. Upon the expiration or termination of this Agreement
      and upon the demand of all Non-Interested Participants, PWE shall pay
      Operating Agent to remove all distribution piping, and other parts of the
      Redhawk Delivery System from PVNGS, restoring said property to its prior
      condition within 180 days of the date of expiration or termination, all at
      PWE's own expense. If the Non-Interested Participants do not demand
      removal of the Redhawk Delivery System from PVNGS within six months of
      termination of this Agreement, the Participants may use the PVNGS portions
      of the Redhawk Delivery System for purposes other than delivery of Treated
      Effluent to Redhawk and thereafter PWE shall not be obligated to pay any
      costs associated with subsequent operation, maintenance or removal of the
      PVNGS portions of the Redhawk Delivery System.

                          ARTICLE 6. DISPUTE RESOLUTION

      6.1 SETTLEMENT BY MUTUAL AGREEMENT. The Parties agree it is in their best
interests to settle any dispute as expeditiously and economically as possible.
Therefore, if a dispute arises between them regarding a Party's performance of
its obligations or any other matter governed by the terms of the Agreement, the
Parties shall attempt to resolve the dispute through mediation in the manner
prescribed in this Section. Promptly upon the occurrence of a dispute, the
aggrieved Party shall notify the other Party in writing (the "Claimant's
Statement"), setting forth in reasonable detail the basis for the dispute, the
aggrieved Party's position and its proposal for resolution of the dispute.
Within ten (10) business days following receipt of the Claimant's Statement, the
other Party shall respond in writing (the "Responsive Statement") setting forth
in reasonable detail the respondent's

                                       19


position and its proposal for resolution of the dispute. Within ten (10)
business days after the aggrieved Party's receipt of the Responsive Statement,
the Parties shall meet and attempt in good faith to expeditiously negotiate a
resolution of the dispute. A representative or representatives of each Party who
is authorized to act for the Party and resolve the dispute without resort to
higher authority shall be in attendance at the opening session and throughout
the dispute resolution procedure described in this Section.

      6.2 MEDIATION. If a resolution of the dispute is not obtained within
thirty (30) calendar days after the discussions begin, the Parties shall apply
to the American Arbitration Association ("AAA") or other similar agreed-upon
organization for appointment of a professional mediator who has not previously
been employed by either Party (excluding employment as a mediator) and does not
have a direct or indirect interest in either Party or the subject matter of the
mediation. The mediator's role shall be to facilitate expeditious good faith
negotiations between the Parties, in an effort to resolve the dispute. The cost
of the mediation, including the mediator's fees and expenses, shall be borne
equally by the Parties. The mediator shall not have the authority to impose a
resolution on the Parties but shall serve only as a facilitator to attempt to
reach a solution to the dispute. The Parties will be bound by any schedule set
out by the mediator for continuing good faith negotiations aimed at resolving
the dispute provided that such schedule shall not exceed 180 days. In
establishing this schedule, the mediator shall be guided by the principle that
it is the Parties' intention that disputes be resolved expeditiously, giving due
consideration to reducing expense, minimizing delay and preserving the
relationship of the Parties.

      6.3 BINDING ARBITRATION. Any dispute that cannot be resolved under Section
6.2 shall be submitted to binding arbitration by one arbitrator who has not
previously been employed by either Party (excluding employment as an
arbitrator), and does not have a direct or indirect interest in either Party or
the subject matter of the arbitration. The arbitrator shall either be an
individual mutually agreed upon by the Parties within 15 days after mediation
under Section 6.2 has ended, or failing agreement by the Parties, shall be
selected under the rules of the AAA. The rules of the AAA, including the
Optional Procedures for Large, Complex Commercial Disputes, shall apply to the
arbitration proceedings to the extent not inconsistent with the rules specified
in this section. The Parties shall divide equally the cost of the arbitrator and
the hearing.

      6.4 CONFIDENTIALITY. Negotiations undertaken pursuant to Section 6.1 and
6.2 shall be deemed confidential as settlement discussions. Nothing said by a
Party, nor any position taken during the course of the negotiations shall be
introduced as evidence by the opposing Party in any subsequent arbitration
concerning the same or related transactions.

                          ARTICLE 7. GENERAL PROVISIONS

      7.1 Entire Agreement; No Effect on Participation Agreement. This Agreement
supersedes all prior and contemporaneous conduct and communications, whether
written or oral, pertaining to the Parties' rights and obligations with respect
to the Participants' granting to PWE use of the WRF and WRF Pipeline for
transportation and treatment of Effluent for use at Redhawk. The Parties shall
not be bound by or be liable for any statement or understanding of any kind not
set forth in this Agreement.

                                       20


This Agreement may not be modified, changed or added to except in writing signed
by all Parties hereto. This Agreement is not intended to, and shall not be
construed to, amend, modify or abrogate any provision of the Participation
Agreement.

      7.2 LAWS AND REGULATIONS. The Parties and their employees, agents, and
representatives shall at all times comply with all applicable federal, state,
and local laws, ordinances, statutes, standards, rules, orders, and regulations.

      7.3 DESIGNATED REPRESENTATIVE AND NOTICE.

            7.3.1 Each Party shall advise the other Party of the name, address,
      and telephone number of a designated representative authorized to act on
      its behalf. All communications relating to the day-to-day activities under
      this Agreement shall be between the designated representatives.

            7.3.2 All notices and communications required under this Agreement
      shall be in writing and may be delivered personally to a Party, may be
      delivered by facsimile or may be mailed by deposit in United States
      certified mail, return receipt requested, or by deposit with a reputable
      overnight delivery service. Notices shall be effective: (i) on the date
      delivered by personal delivery or facsimile; (ii) three (3) business days
      following the date deposited in the United States mail; or (iii) the next
      business day following delivery to a reputable overnight delivery service.
      Notices and communications shall be delivered or mailed to the Parties as
      follows:



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


      7.4 WAIVER. Either Party's failure or delay in enforcing the terms and
conditions of this Agreement or in insisting upon strict performance of any of
the other Party's obligations shall not be interpreted as a waiver thereof.
Waiver of any provision of this Agreement shall only be effective if in writing
and shall not be interpreted as a waiver of any subsequent breach or failure
under the same or any other provision of this Agreement. No conduct, statement,
course of conduct, course of dealing, oral expression, or other action shall be
construed as a waiver.

      7.5 ASSIGNMENT. With the prior written consent of Operating Agent (such
consent not to be unreasonably withheld, conditioned or delayed), PWE may
assign, in whole or in part, its rights or delegate its duties under this
Agreement at any time to any other Person now or hereafter participating in all
or a portion of Redhawk, provided that

                                       21


the assignee assumes in writing PWE's obligations. No assignment or delegation
will release PWE from its obligations unless the Participants consent to a
release. With the prior written consent of PWE (such consent not to be
unreasonably withheld, conditioned or delayed), Operating Agent may assign, in
whole or in part, its rights or delegate its duties under this Agreement at any
time to any other Participant, provided that the assignee assumes in writing
Operating Agent's obligations. No assignment or delegation will release
Operating Agent from its obligations hereunder unless PWE consents to a release.

      7.6 THIRD PARTY BENEFICIARIES; ENFORCEMENT OF PROVISIONS.

            7.6.1 Any person or entity other than PWE acquiring an ownership
      interest in Redhawk, and any Participant not a Party to this Agreement is
      expressly intended as a third party beneficiary of this Agreement.
      Otherwise, this Agreement is not intended to and does not create any
      claims, rights, remedies, or benefits exercisable by a third party. The
      Parties agree that the Participants will have standing to enforce the
      provisions of this Agreement and to cure any material default under this
      Agreement by Operating Agent, in the manner described in this Section 7.6,
      if a majority of the Participants other than Operating Agent determine in
      good faith that Operating Agent is not enforcing the Agreement or has
      defaulted on any of its material obligations under the Agreement.

            7.6.2 If any Participant is of the opinion that Operating Agent has,
      by either its actions or inaction, defaulted on any of its material
      obligations under this Agreement, that Participant may give written notice
      to Operating Agent and to the other Participants, together with a
      statement of the reasons for its opinion. The Operating Agent may
      thereafter prepare a statement of the reasons justifying its action or
      failure to take action. If agreement in settling the dispute is not
      reached between Operating Agent and the Participant that gave the notice,
      then, upon a majority (by number) decision of the Participants other than
      Operating Agent the matter shall be submitted to mediation in the manner
      provided for in Section 6.2 and, if necessary, to arbitration as provided
      for in Section 6.3 (as if those Participants were a Party). During the
      continuance of the mediation and, if necessary, the arbitration
      proceedings, Operating Agent may continue the action taken or not taken in
      the manner it deems most advisable and consistent with this Transportation
      and Treatment Agreement unless the complaining Participants have obtained
      a stay or other form of judicial relief requiring a discontinuance
      thereof.

            7.6.3 If, through proceedings conducted under Section 6.3, it is
      determined that Operating Agent has defaulted on any of its material
      obligations under this Agreement, the Operating Agent shall promptly cure
      its default. For defaults by Operating Agent affecting its obligation to
      deliver Treated Effluent to the Delivery Point, Operating Agent shall
      employ commercially reasonable efforts to cure its default as soon as
      reasonably possible under the circumstances. For defaults by Operating
      Agent not affecting its obligation to deliver Treated

                                       22


      Effluent to the Delivery Point, Operating Agent shall commence to cure its
      default within 30 days after conclusion of the proceedings conducted
      pursuant to Section 6.3. If Operating Agent fails to cure, or in good
      faith to commence to cure, its default as provided in this Section, the
      other Participants may, by majority (by number) decision of the
      Participants other than Operating Agent, elect to take appropriate action
      to cure Operating Agent's default.

            7.6.4 If any Participant is of the opinion that: (i) there exists a
      basis under Section 2.1.7 of this Agreement to shut off flow of Treated
      Effluent to Redhawk, and Operating Agent has not acted on that basis to
      shut off such flow; or (ii) Operating Agent has engaged in actions for its
      own benefit, or for the benefit of any owner of Redhawk, and those actions
      present a risk of harm to the WRF, WRF Pipeline or PVNGS; that Participant
      may notify Operating Agent and the other Participants of its opinion and
      request that the flow of Treated Effluent to Redhawk be shut off by
      Operating Agent, or that Operating Agent cease the actions that present a
      risk of harm to the WRF, WRF Pipeline or PVNGS. If Operating Agent fails
      or refuses to comply with the request within 24 hours after receipt of
      such notice, that Participant, and any other Participant that chooses to
      do so, may seek an injunction from a court of competent jurisdiction to
      require that Operating Agent shut off the flow or cease the specified
      actions for the reason(s) stated in the notice. Any Participant that does
      not seek an injunction pursuant to this Section shall not be liable to
      Operating Agent or PWE for any attorneys fees, costs and expenses of
      litigation and investigation awarded pursuant to Section 7.8 in the event
      the Participant(s) seeking the injunction is(are) unsuccessful in that
      effort. In the event the Participant(s) seeking the injunction is(are)
      successful, all other Participants shall be liable to the successful
      parties for reasonable attorneys fees, costs and expenses of litigation
      and investigation awarded pursuant to Section 7.8.

            7.6.5 The terms of this Section 7.6 relate solely to enforcement of
      the provisions of this Agreement by the Participants. All other disputes
      between the Participants and Operating Agent concerning any aspect of the
      operation or management of PVNGS remain exclusively subject to the dispute
      resolution provisions of the Participation Agreement, which are not
      altered, abrogated or amended in any way by this Agreement.

      7.7 GOVERNING LAW. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Arizona and of the United States
without giving effect to the doctrine of conflict of laws. The Agreement shall
be deemed made and entered into in Maricopa County, Arizona.

      7.8 ATTORNEY'S FEES. Except in case of mediation and/or arbitration
conducted pursuant to Section 6.2 and/or 6.3, should any claim be brought by a
Party or intended third party beneficiary (PVNGS Participant) against another
Party or Parties arising out of this Agreement, including any action for
declaratory or injunctive relief, the prevailing party or parties shall be
entitled to reasonable attorney's fees, costs and expenses of litigation and
investigation incurred in the proceedings, including appellate

                                       23


proceedings or in any action or participation in, or in connection with, any
case or proceeding under the United States or other bankruptcy laws, and any
judgment or decree rendered in any such action or proceedings shall include an
award thereof.

      7.9 SEVERABILITY. If any term or condition of this Agreement is held to be
invalid, void, or unenforceable by any court of competent jurisdiction, that
holding shall not affect the validity or enforceability of any other term or
condition of the Agreement, unless enforcing the balance of the Agreement would
deprive either Party of a fundamental benefit of its bargain.

      7.10 AMENDMENT. This Agreement may not be modified or amended except by an
instrument in writing signed by authorized representatives of the Parties, and
in the case of Operating Agent, pursuant to a resolution evidencing unanimous
Participant approval of the amendment.

      7.11 COUNTERPARTS. This Agreement may be executed by the Parties in any
number of separate counterparts, each of which when so executed and delivered
shall be deemed an original, but all such counterparts shall together constitute
one and the same agreement. All signatures need not be on the same counterpart.

      7.12 SECTION HEADINGS. Article and Section headings in this Agreement are
for convenience of reference only, and do not define, limit, or fully describe
the scope or intent of these provisions. This Agreement and any other documents
attached to or incorporated herein shall be interpreted according to their plain
meaning and without regard to such factors as the Party who prepared them or the
relative bargaining power of the Parties.

      7.13 RELATIONSHIP OF THE PARTIES. The execution of this Agreement shall
not create or constitute a partnership, joint venture, entity, or any form of
business organization between the Parties.

      7.14 EXECUTION AND EFFECTIVE DATE. Time is of the essence of the
obligations under this Agreement. This Agreement has been executed by the duly
authorized representatives of the Parties, and shall be effective as of the
10th day of April, 2001.

      PINNACLE WEST ENERGY CORPORATION

      SIGNATURE  /s/ Ajoy K. Banerjee
               _____________________________

      NAME  Ajoy K. Banerjee
          __________________________________

      TITLE  Vice President
           _________________________________

                                       24


      ARIZONA PUBLIC SERVICE COMPANY

      SIGNATURE  /s/ James M. Levine
               __________________________________

      NAME  James M. Levine
          _______________________________________

      TITLE  Executive Vice President, Generation
           ______________________________________

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

                                       25


                                  ATTACHMENT A

                  DELIVERY SCHEDULE AND COMMUNICATIONS PROTOCOL

I.    TARGET DELIVERY SCHEDULE:

In April of each year, PWE will provide a forecast schedule of water use for the
Facility for the following year to Operating Agent in order for Operating Agent
to comply with notification requirements contained in the Agreements with SROG
and/or the City of Tolleson. In June of each year, Operating Agent will provide
a planned schedule of Treated Effluent to be provided to PWE for use in the
Facility.

II.   COMMUNICATIONS PROTOCOL:

      A.    Operating Agent will provide the following notices to PWE:

            1.    Thirty (30) days prior notice before changing Operating
                  Parameters.

            2.    Immediate notification for full or partial interruption of
                  water production, with such notices to include an estimate of
                  the forecast time to return to full production.

            3.    A daily update on return to full production forecast following
                  notification under subparagraph A.2 above.

            4.    Notification at least 10 days in advance of any planned outage
                  including both the start and planned completion times.

      B.    PWE WILL PROVIDE THE FOLLOWING NOTICES TO OPERATING AGENT:

            1.    Immediate notification for partial or full interruption of the
                  ability to receive Treated Effluent.

            2.    A daily update on PWE's ability to receive Treated Effluent
                  following notification under subparagraph B.1 above.

            3.    Notification at least 10 days in advance of any planned PWE
                  equipment or system outage, including both the start and
                  planned completion times, that may impact the transportation
                  or receipt of Treated Effluent by Redhawk.

                                       26

'
                                  ATTACHMENT B

                   WASTEWATER TREATMENT PLANT EFFLUENT QUALITY
               REQUIREMENTS FOR THE PVNGS WATER RECLAMATION PLANT

      At a minimum, all Effluent discharged into the WRF Pipeline pursuant to
this Agreement shall have received, prior to such discharge, both primary and
secondary wastewater treatment at a wastewater treatment facility. All such
Effluent shall also meet the minimum water quality parameters specified in the
following table:



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

          Calcium                        < 150               mg/l as CaCO(3)

         Magnesium                       < 110               mg/l as CaCO(3)

         Alkalinity                      < 200               mg/l as CaCO(3)

          Chloride                       < 250                mg/l as Cl-

          Fluoride                       < 1.0                mg/l as F-

          Nitrate                        < 5.0                 mg/l as N

         Phosphate                      < 10.0                mg/l as PO(4)

          Sulfate                        < 180                mg/l as SO(4)

           Silica                       < 20.0               mg/l as SiO(2)

             Ph                        7.0 - 7.8                  pH

        Conductivity                    < 1350                   Mhos

Total Dissolved Solids(TDS)             < 1000                   mg/l

         Turbidity                       < 15                   N.T.U.

Total Suspended Solids(TSS)              < 15                    mg/l

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


                             27


                                  ATTACHMENT C

                      [DIAGRAM OF REDHAWK DELIVERY SYSTEM]

                         In accordance with Item 304 of
                        Regulation S-T of the Securities
                       Exchange Act of 1934, Attachment C
                       to this Agreement is a diagram of
                          the Redhawk delivery system.

                                       28


                                  ATTACHMENT D

                     SAMPLE CALCULATION OF PER UNIT CHARGES

                      Redhawk Monthly Bill Calculation for
                          Transportation and Treatment

                                    (Example)
                   (Based on Estimates for Calendar Year 2003)

                                  
Manpower                             $     91.00

Maintenance Materials                $     14.00

Contract Service & Labor             $     23.00

Capital Expenses                     $     94.00

A & G/Loads                          $     42.00

Chemicals                            $     49.00

Electricity                          $     14.00

  Total/Unit Cost                    $    327.00

Acre Feet Delivered                       822.00

  Total Charge                       $268,794.00



                                       29

EX-10.103

                                                                  Exhibit 10.103

                       AGREEMENT FOR THE TRANSFER AND USE
                             OF WASTEWATER EFFLUENT

      This Agreement (the "Agreement") is made and entered into this 1st day of
June   , 2001 (the "Effective Date"), by and between Arizona Public Service
Company, an Arizona corporation ("APS"), the Salt River Project Agricultural
Improvement and Power District, an agricultural improvement district organized
pursuant to the laws of the State of Arizona ("SRP"), and Pinnacle West Energy
Corporation, an Arizona Corporation ("PWE"). APS, SRP and PWE are collectively
referred to as the "Parties"; each is individually a "Party" to this Agreement.

                                    RECITALS:

      A. APS, SRP, and the City of Tolleson have executed an "Agreement for the
Sale and Purchase of Wastewater Effluent," dated November 13, 2000 (the
"Tolleson Agreement"), which is attached hereto as Attachment 1;

      B. APS and SRP have entered into a related contract, the "Operating
Agreement for the Co-Ownership of Wastewater Effluent" (the "Co-Ownership
Agreement"), dated November 16, 2000, which is attached hereto as Attachment 2.
The Co-Ownership Agreement sets forth the relative rights and obligations of APS
and SRP in relation to their joint interest in the Tolleson Effluent purchased
pursuant to the Tolleson Agreement;

      C. The primary use of the Tolleson Effluent is intended to be for cooling
water at Palo Verde Nuclear Generating Station ("PVNGS"); the secondary use of
the Tolleson Effluent will be its use at "Other Electric Generating Facilities"
(as defined by the Tolleson Agreement);

      D. To the extent Tolleson Effluent is not used at PVNGS, the Tolleson
Effluent may be used at or for the benefit of Other Electric Generating
Facilities;

      E. PWE, as an affiliate of APS, desires to make use of a portion of the
Tolleson Effluent purchased by APS and SRP at Units 1 and 2 of PWE's Other
Electric Generating Facility commonly referred to as "Redhawk";

      F. APS and SRP are willing to transfer a portion of the Tolleson Effluent
to PWE for use at Redhawk Units 1 and 2 upon the terms and conditions set forth
in this Agreement.

      NOW, THEREFORE, in consideration of the agreements and promises set forth
below, and other good and valuable consideration, the receipt and sufficiency of
which are acknowledged, the parties agree as follows:

                                    ARTICLE 1
                              DEFINITIONS AND USAGE

      1.1 Definitions. As used in this Agreement, the following capitalized
terms shall have the same meaning as they are given by definition in the
Tolleson Agreement: Effluent



Pipeline, Notice of Commitment, Other Electric Generating Facility, Outages,
Surplus Effluent, and Uncontrollable Forces; and the following capitalized terms
shall have the same meaning as they are given in the Co-Ownership Agreement:
Claim, Coordinating Committee, Governmental Authority, Persons, PVNGS
Participants and Tolleson Effluent. All such definitions from the Tolleson
Agreement and the Co-Ownership Agreement are specifically incorporated in this
Agreement by this reference. In addition, the following terms shall have the
specified meanings:

            "ANPP Participation Agreement" means the Arizona Nuclear Power
Project Participation Agreement, dated August 23, 1973, as amended now and in
the future.

            "PVNGS Operating Agent" means the PVNGS Participant responsible for
the performance of operating work and making capital improvements at PVNGS under
the ANPP Participation Agreement.

            "PVNGS Participant" means APS, SRP and the other entities having an
ownership or leasehold interest in PVNGS and related facilities as parties to
the ANPP Participation Agreement, including El Paso Electric Company, the Los
Angeles Department of Water and Power, Public Service Company of New Mexico,
Southern California Edison Company, Southern California Public Power Authority,
and each additional entity that may succeed to any such interest in PVNGS and
related facilities.

            "Redhawk" means the proposed gas-fired electric generating station
to be constructed by PWE on land located west of the City of Phoenix, near
PVNGS. PWE's current plans call for construction of a (nominal) 2120 MW power
generation facility, with four (nominal) 530 MW units to be phased in over
several years.

            "Redhawk Delivery Point" means the Delivery Point specified in the
Transportation and Treatment Agreement for delivery of treated effluent to PWE
for use at Redhawk.

            "Redhawk Delivery System" means the pipeline, and all associated
valves, meters and other equipment, facilities, easements and rights of way
required to measure, control and transport effluent from the WRF (as hereafter
defined) to Redhawk, such system to be more precisely described and defined in
the Transportation and Treatment Agreement.

            "Transportation and Treatment Agreement" means the agreement between
PWE, as owner of Redhawk, and APS, as PVNGS Operating Agent, to provide
transportation and treatment services through PVNGS facilities for effluent to
be used by PWE at Redhawk.

            "WRF" means the tertiary wastewater treatment facility at PVNGS,
together with all appurtenant equipment, facilities, easements and rights of way
for treatment of effluent.

            "WRF Pipeline" means the WRF's associated Water Reclamation Supply
System pipeline that conveys effluent from the SROG 91st Avenue and Tolleson
wastewater treatment plants to the WRF, together with all appurtenant equipment,
facilities, easements and rights of way.

                                       -2-


      1.2 Certain Principles of Interpretation. In this Agreement, unless
otherwise indicated or the context otherwise requires:

            (i) the singular includes the plural and plural the singular when
the context requires;

            (ii) words importing any gender include the other gender;

            (iii) references to "writing" include printing, typing, lithography,
and other means of reproducing words in a tangible visible form;

            (iv) the words "including," "includes," and "include" shall be
deemed to be followed in each instance by the words, "without limitation";

            (v) references to articles, sections, paragraphs, recitals, and
exhibits are to this Agreement unless otherwise stated;

            (vi) references to contracts and related instruments shall be deemed
to include all subsequent amendments, extensions, and other modifications to
such instruments (without, however, limiting any prohibition on any such
amendments, extensions and other modifications by the terms of this Agreement);

            (vii) references to Persons include their respective permitted
successors and assigns and, in the case of Governmental Authorities, persons
succeeding to their respective functions and capacities;

            (viii) the words "hereof," "herein," "hereunder," and words of
similar import shall refer to this Agreement as a whole and not to any
particular provision thereof;

            (ix) both Parties and their counsel participated extensively in the
preparation and drafting of this Agreement; no rule of construction shall apply
that would cause the interpretation of any claimed ambiguity in this Agreement
against a Party determined to be the drafting Party;

            (x) captions and headings in this Agreement are included herein for
convenience of reference only and shall not constitute a part of this Agreement
for any other purpose;

            (xi) any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof or affecting the validity or enforceability of such
provision in any other jurisdiction and the provision that is prohibited or
unenforceable shall be reformed or modified to reflect the parties' intent to
the maximum extent permitted by applicable law; and

                                      -3-


            (xii) references to a "day," "week," "month," or "year" shall be
construed as a calendar day, week, month, or year.

                                    ARTICLE 2
               PURPOSE AND SCOPE OF AGREEMENT; CAPACITY OF PARTIES

      2.1 Purpose. The purpose of this Agreement is to transfer to PWE, for use
at Redhawk Units 1 and 2, a portion of the Tolleson Effluent purchased by APS
and SRP, to establish the terms upon which PWE may make use of the transferred
Tolleson Effluent, and to provide for the payment by PWE of the purchase price
of transferred Tolleson Effluent, as well as a fee to APS and SRP.

      2.2 Scope. This Agreement relates solely to the business, activities and
purposes set forth herein and, except as otherwise expressly provided herein,
does not apply to any other activities, transactions, relationships, contracts,
projects, or work of the Parties. Except to the extent expressly limited by the
terms of this Agreement, no Party shall be restricted in any way from engaging
in any activity or business falling outside the scope of this Agreement.

      2.3 Capacity of Parties.

            2.3.1 Capacity of PWE. For purposes of this Agreement, PWE is acting
solely as an owner, and if there is more than one owner, as agent on behalf of
all owners of Redhawk. PWE may in the future also assume the rights and
obligations of APS under this Agreement as provided in Section 10.3.1, and it
may assume the rights and obligations of APS as a Participant and Operating
Agent of PVNGS pursuant to the terms of the ANPP Participation Agreement. If PWE
assumes the rights and obligations of APS under this Agreement and the rights
and obligations of APS as Operating Agent under the ANPP Participation Agreement
then: (i) PWE shall act solely in its capacity as an owner, and if there is more
than one owner, as agent on behalf of the owners of Redhawk in all instances
where this Agreement establishes rights or obligations applicable to PWE as
owner of Redhawk; (ii) PWE shall act solely in its capacity as successor to the
rights and obligations of APS under this Agreement in all instances where rights
and obligations are established by this Agreement for APS in its individual
capacity; and (iii) PWE shall act solely in its capacity as Operating Agent in
all instances where rights and obligations of the Operating Agent, or APS acting
as Operating Agent, are established by this Agreement.

            2.3.2 Capacity of APS. For purposes of this Agreement, APS is acting
solely in its capacity as an individual party to this Agreement, except for the
specific obligations established in Section 3.5 for APS acting as the Operating
Agent. For purposes of satisfying its obligations under Section 3.5 APS will act
solely in its capacity as Operating Agent for the limited purpose of satisfying
those specific obligations.

            2.3.3 Capacity of SRP. For purposes of this Agreement, SRP is acting
solely in its capacity as an individual party to this Agreement.

                                      -4-


                                    ARTICLE 3
                      TRANSFER AND USE OF TOLLESON EFFLUENT

      3.1 Transfer of Tolleson Effluent to PWE. APS and SRP hereby transfer to
PWE, in one or more increments, up to 7,500 acre-feet per year of Tolleson
Effluent, conditioned upon the existence of the following circumstances at the
time of each transfer:

            3.1.1 PVNGS has available, from all sources other than any emergency
supplies not intended for use during normal operations, sufficient supplies of
treated wastewater to satisfy all of its cooling water needs. Notwithstanding
the transfer of Tolleson Effluent to PWE pursuant to this Agreement, PVNGS may,
at any time, call for and make use of Tolleson Effluent to the extent such
Tolleson Effluent is required for cooling water purposes at PVNGS. Except in
cases of operational emergency, APS, as Operating Agent of PVNGS, shall provide
PWE reasonable notice of any need to begin using Tolleson Effluent at PVNGS that
would otherwise have been available for use at Redhawk.

            3.1.2 PWE provides written notice, on or before the dates specified
in this Section, to APS and SRP of its need for a specified quantity, up to
7,500 acre-feet per year, of Tolleson Effluent to be used at Redhawk Units 1 and
2. PWE may submit one or more notices pursuant to this Section, each specifying
the quantity of Tolleson Effluent required for operation of Redhawk Units 1 and
2. PWE shall provide the notice or notices required by this Section no later
than September 1, 2002 and, in any event, prior to use of any water for cooling
purposes at Redhawk Units 1 and 2. If any of the 7,500 acre-feet of Tolleson
Effluent subject to this Agreement is not specified for use at Redhawk Units 1
and 2 in a notice or notices submitted by PWE to APS and SRP no later than
September 1, 2002, that quantity shall no longer be available to PWE pursuant to
this Agreement after that date.

            3.1.3 The Transportation and Treatment Agreement is in effect and no
uncured default thereunder exists.

            3.1.4 PWE employs commercially reasonable efforts to complete
construction and have Redhawk Units 1 and 2 operational by December 31, 2002,
and thereafter begins to take Tolleson Effluent for use at Redhawk Units 1 and 2
consistent with the terms and conditions of this Agreement and the
Transportation and Treatment Agreement.

            3.1.5 The Tolleson Agreement is in effect, and no uncured default
thereunder exists.

      3.2 Submittal of Notices of Commitment to Tolleson. Upon receipt of a
notice from PWE pursuant to Section 3.1.2, and confirmation of the existence of
the conditions stated in Sections 3.1.1, 3.1.3, 3.1.4 and 3.1.5, APS and SRP
shall promptly submit a Notice of Commitment to Tolleson pursuant to Section 8.2
of the Tolleson Agreement, confirming a commitment to transfer to PWE, for use
at Redhawk Units 1 and 2, the quantity of Tolleson Effluent specified by PWE.

                                      -5-


      3.3 Use of Tolleson Effluent at Redhawk. Upon satisfaction of the
conditions set forth in Section 3.1, and subject to the terms and conditions of
the executed Transportation and Treatment Agreement, PWE shall begin to take
Tolleson Effluent for use at Redhawk Units 1 and 2 when those units are capable
of taking Tolleson Effluent. Use of Tolleson Effluent by PWE pursuant to this
Agreement shall be limited to all or any of the following: (i) direct use for
cooling at Redhawk Units 1 and 2; (ii) incidental, on-site, non-commercial uses
at Redhawk Units 1 and 2; (iii) use in a water exchange by which PWE obtains
other sources of water for direct use for cooling and incidental, on-site,
non-commercial uses at Redhawk Units 1 and 2; (iv) underground storage and
recovery of the Tolleson Effluent, as permitted by state law, for cooling water
use and incidental on-site, non-commercial uses at Redhawk Units 1 and 2. No
other use of Tolleson Effluent transferred pursuant to this Agreement shall be
permitted unless and until the Coordinating Committee established by Article 4
of the Co-Ownership Agreement separately approves such use. Notwithstanding
anything in this Section 3.3 to the contrary, all uses of Tolleson Effluent
shall be consistent with and not in violation of the Tolleson Agreement.

      3.4 PWE Commitment to Use Tolleson Effluent at Redhawk Units 1 and 2.
During the term of this Agreement, PWE shall take Tolleson Effluent made
available to it at the Redhawk Delivery Point, and shall use such Tolleson
Effluent to satisfy all of its cooling water requirements at Redhawk Units 1 and
2 up to the full quantity of Tolleson Effluent made available at the Redhawk
Delivery Point on a daily basis. Only after taking all Tolleson Effluent made
available on a daily basis at the Redhawk Delivery Point may PWE make use of any
other source of treated wastewater or groundwater for cooling water purposes at
Redhawk Units 1 and 2. In addition, subject to the last sentence in this Section
3.4, PWE may pump groundwater at Redhawk for purposes of: (i) providing cooling
water for use at Redhawk Units 1 and 2 to the extent that and during the time
that demand for cooling water at Redhawk Units 1 and 2 exceeds the amount of
Tolleson Effluent made available to PWE at the Redhawk Delivery Point; (ii)
keeping the Redhawk Storage Reservoir full; and (iii) uses at Redhawk other than
cooling water for Redhawk Units 1 and 2. All groundwater pumping and use
pursuant to this Section 3.4 shall be conducted in a manner which does not
interfere with PWE's ability to comply with its obligation to take Tolleson
Effluent made available at the Redhawk Delivery Point on a daily basis for
cooling water purposes at Redhawk Units 1 and 2.

      3.5 Requirement to Withhold Delivery. APS, as PVNGS Operating Agent, shall
stop delivery to Redhawk of Tolleson Effluent whenever PWE is in breach of its
obligations under Section 3.4 herein; provided, however, that upon curing any
breach of its obligations under Section 3.4, PWE shall be entitled to have
delivery to Redhawk restored for Tolleson Effluent to which it has contractual
rights, so long as such deliveries are consistent with the terms of this
Agreement, the Transportation and Treatment Agreement and the Tolleson
Agreement.

      3.6 Enforcement by SRP. Notwithstanding the notice provisions under
Section 7.1, any breach by PWE of its obligations under Sections 3.3 or 3.4, or
any breach by APS of its obligations under Section 3.5, shall entitle SRP to
pursue any available remedies at law or in equity against the breaching Party,
upon five (5) days prior notice to that Party.

                                      -6-


                                    ARTICLE 4
                PAYMENT FOR TOLLESON EFFLUENT TRANSFERRED TO PWE

      4.1 Operating Account. APS shall establish an operating account to track
quantities of Tolleson Effluent delivered to PWE for use at Redhawk Units 1 and
2; corresponding charges to be paid by, and payments received from PWE pursuant
to this Article; and disbursements made by APS pursuant to Section 4.4. Prior to
the initiation of deliveries of Tolleson Effluent to PWE pursuant to this
Agreement, PWE shall pay to APS the sum of $60,000 to establish an initial
balance for this operating account. Thereafter, PWE shall pay such sums to APS
as are necessary to maintain a minimum balance in the operating account equal to
the greater of $60,000 or the amount of the largest monthly invoice delivered to
PWE pursuant to this Agreement during the previous twelve month period (the
"Minimum Balance").

      4.2 Submittal and Payment of Invoices. APS shall, on a monthly basis,
present invoices to PWE for payment of amounts owed by PWE as provided in this
Article. PWE shall submit payment to APS within 30 days after receipt of each
invoice. If PWE disputes the amount set forth in any billing statement, PWE will
provide notice of such dispute at the time of payment, but may not withhold
payment of the disputed amount. The Parties shall attempt to resolve the dispute
through informal consultation as provided in Section 7.2 before resorting to
litigation to resolve the dispute. So long as PWE actually pays the invoiced
amount when due: (i) the act of doing so under protest shall not constitute a
default under this Agreement; and (ii) APS and SRP shall not refuse, based
solely on the protest, to deliver Tolleson Effluent while the protest is being
resolved. If PWE fails to pay the amount stated in any invoice within 30 days
after receipt and the operating account balance is below the minimum balance
established pursuant to Section 4.1, APS shall, after providing ten (10) days
written notice to PWE, cease delivering Treated Effluent into the Redhawk
Delivery System until payment in full for any unpaid invoice(s) is received from
PWE and a positive balance of not less than the Minimum Balance is reestablished
in the operating account. If all amounts due under invoices issued by APS are
not paid in full and the operating account is not reestablished to a positive
balance of not less than the Minimum Balance within ten (10) days after written
notice to PWE pursuant to the immediately preceding sentence, PWE shall be
liable for late payment fees equal to the lesser of 1.5% per month or the
highest amount allowed by law, applied to the amounts due under the unpaid
invoice(s). If PWE's failure to pay amounts due under any invoice continues for
a period of six months after receipt of written notice of default pursuant to
this Section, this Agreement shall automatically terminate, subject to survival
of the payment obligations of this Article 4 and the indemnification provisions
of Article 9.

      4.3 Content of Invoices. Invoices presented to PWE pursuant to this
Article shall itemize charges in the following categories:

            4.3.1 The purchase price payable to Tolleson, as specified in
Section 2.2 of the Tolleson Agreement, for each acre-foot of Tolleson Effluent
actually delivered to PWE at the Redhawk Delivery Point.

            4.3.2 The "take or pay" price payable to Tolleson, as specified in
Section 2.5 of the Tolleson Agreement, for any Surplus Effluent that:

                                      -7-


                  (i)   PWE is committed to purchase by virtue of the notice(s)
                        issued pursuant to Section 3.1;

                  (ii)  meets the water quality requirements of Section 3 of the
                        Tolleson Agreement; and

                  (iii) is not actually used at either Redhawk Units 1 and 2 or
                        at PVNGS.

            During the term of this Agreement, PWE shall be obligated to pay any
applicable "take or pay" charges for Tolleson Effluent PWE is committed to
purchase by virtue of the notices issued pursuant to Section 3.1 regardless of
whether Redhawk Units 1 and 2 are capable of taking that Tolleson Effluent.

            4.3.3 An annual fee of $22,600 payable to APS and SRP, such fee to
be assessed in a separate invoice submitted to PWE no later than January 31 each
year during the term of this Agreement. The first installment of this fee shall
be prorated for the year to the Effective Date of this Agreement and shall be
invoiced by APS to PWE within 30 days after the Effective Date. The final
installment shall also be prorated for the year in which this Agreement is
terminated, up to and including the date of termination. If the fee already has
been paid by PWE during the year of termination, any amount paid in excess of
the prorated amount owed by PWE through the date of termination shall be
refunded by APS and SRP. This fee shall be adjusted for inflation in the same
manner as provided for adjustments to the purchase prices paid to Tolleson for
Tolleson Effluent under Sections 2.1 and 2.2 of the Tolleson Agreement, using
the formula set forth in Exhibit A to the Tolleson Agreement.

      4.4 Processing of Payments Through Operating Account. APS shall promptly
process payments through the operating account in the following manner:

            4.4.1 Payments received from PWE pursuant to invoices submitted
under Section 4.2 shall be deposited into the operating account created pursuant
to Section 4.1.

            4.4.2 The purchase price for Tolleson Effluent used at Redhawk Units
1 and 2 shall be paid to Tolleson as provided in Section 2.3 of the Tolleson
Agreement.

            4.4.3 Any "take or pay" amount owed by PWE, as determined under
Section 4.3.2 of this Agreement, shall be paid to Tolleson as provided in
Section 2.5 of the Tolleson Agreement.

            4.4.4 The fee assessed pursuant to Section 4.3.3 shall be divided
evenly between APS and SRP. APS, in its sole discretion, may choose to forego
payment of its one-half of this fee; in which case, it shall so state in the
invoices submitted to PWE, and thereafter shall disburse the entire remainder of
the fee to SRP.

                                      -8-


                                    ARTICLE 5
                   POTENTIAL TRANSFERS OF ADDITIONAL TOLLESON
           EFFLUENT TO REDHAWK OR OTHER ELECTRIC GENERATING FACILITIES

      Any transfers of additional Tolleson Effluent, for use at Redhawk or any
Other Electric Generating Facility other than Redhawk, will be subject to the
negotiation of a separate agreement between APS and SRP, and confirmation by the
Coordinating Committee. The terms and conditions of any transfer of additional
Tolleson Effluent to Redhawk or Other Electric Generating Facilities shall be
substantially the same as those contained in this Agreement. If APS and SRP
enter into a separate agreement for the transfer of Tolleson Effluent for use at
an Other Electric Generating Facility other than Redhawk and that separate
agreement contains terms and conditions more favorable to the owner(s) of the
Other Electric Generating Facility than are contained in this Agreement, PWE
shall be entitled to have this Agreement modified to incorporate those more
favorable terms and conditions.

                                    ARTICLE 6
                                      TERM

      6.1 Term. This Agreement shall commence on the Effective Date and shall
terminate upon the expiration or termination of the Tolleson Agreement, unless
earlier terminated pursuant to Section 6.2 or 6.3 below.

      6.2 Permanent Cessation of Operations. This Agreement shall terminate
sixty days after permanent cessation of operations of Redhawk Units 1 and 2
unless APS and SRP, acting through the Coordinating Committee, and PWE, as owner
of Redhawk, specifically agree to continue this Agreement in effect within that
sixty day period. For purposes of this Agreement, a permanent cessation of
operations for Redhawk Units 1 and 2 shall mean: (i) initiation of physical
decommissioning activities at both units; (ii) written notice from PWE to APS
and SRP confirming PWE's intention to permanently cease operation of both units;
or (iii) failure to maintain all regulatory certifications and permits required
for operation of at least one of Redhawk Units 1 and 2 and to keep at least one
of Redhawk Units 1 and 2 in such condition that it is capable of being restored
to active power production in not more than a 270 day period. If PWE permanently
ceases operation of only one of Redhawk Units 1 and 2, this Agreement shall not
terminate, but PWE's rights to Tolleson Effluent transferred under this
Agreement shall be reduced to a quantity of 3,750 acre-feet per year, which
shall thereafter be limited to use at the Redhawk unit (of Units 1 and 2) that
has not permanently ceased operation.

      6.3 Temporary Cessation of Operations. If PWE temporarily ceases operation
of Redhawk Units 1 and 2 (for reasons other than because PVNGS is using Tolleson
Effluent to the extent that there is insufficient Tolleson Effluent available
for PWE to operate Redhawk Units 1 and 2), and as a result PWE does not take any
Tolleson Effluent under this Agreement for a period in excess of three years,
APS and SRP shall provide PWE notice of their intention to terminate this
Agreement. Within sixty days after receipt of such notice, PWE may elect to
begin paying a "Holding Fee" to APS and SRP in the amount of $10 per acre-foot
per year for each acre-foot of Tolleson Effluent to which PWE desires to retain
its rights under this Agreement. As long as PWE continues paying the Holding Fee
to APS and SRP, this Agreement

                                      -9-


shall remain in full force and effect, provided, however, that an election to
pay the Holding Fee (i) shall not release PWE from its obligation to satisfy the
"take or pay" obligations required by Article 4 herein and by the Tolleson
Agreement, and (ii) shall obligate PWE to pay the annual fee in Section 4.3.3 in
addition to the Holding Fee. If PWE fails to make the first annual Holding Fee
payment within sixty days after receiving notice from APS and SRP as provided in
this Section, this Agreement shall terminate on the sixty-first day after that
notice is received by PWE.

      6.4 Continued Use of Tolleson Effluent if Transportation and Treatment
Agreement Terminates. If the Transportation and Treatment Agreement is
terminated for any reason during the term of this Agreement, this Agreement
shall remain in effect provided that: (i) within one year of the date of
termination of the Transportation and Treatment Agreement, PWE shall submit to
the Coordinating Committee a plan for construction of an alternative means of
direct Tolleson Effluent deliveries to Redhawk, implementation of a water
exchange, or implementation of an underground storage and recovery project
pursuant to which PWE will be able to continue to use Tolleson Effluent at
Redhawk Units 1 and 2; (ii) within five years of the date of Termination of the
Transportation and Treatment Agreement, PWE shall have obtained all necessary
permits, approvals, consents and agreements required to construct and operate
the alternative means of direct Tolleson Effluent deliveries or implement the
plan for water exchange or underground storage and recovery project, and shall
resume taking Tolleson Effluent; and (iii) within 60 days after termination of
the Transportation and Treatment Agreement, PWE shall begin paying an annual
"Interim Fee" to APS and SRP in the amount of $10 per acre-foot per year for
each acre-foot of Tolleson Effluent to which PWE desires to retain its rights
under this Agreement. PWE shall continue to pay the Interim Fee until it resumes
taking Tolleson Effluent for use at Redhawk Units 1 and 2. If PWE fails to
satisfy all requirements of this section within the specified periods of time
after termination of the Transportation and Treatment Agreement, this Agreement
shall thereafter terminate.

      6.5 No Termination or Material Breach of Tolleson Agreement. During the
term of this Agreement, neither APS nor SRP shall materially breach the Tolleson
Agreement, and, except as provided below in this Section 6.5, they shall
exercise commercially reasonable efforts to maintain their right to purchase
Tolleson Effluent from the City of Tolleson pursuant to that agreement.
Notwithstanding anything in this Agreement to the contrary, APS and SRP may
terminate the Tolleson Agreement to the extent permitted under Sections 2.1 and
12.3.1 of the Tolleson Agreement, as limited by Section 2.5 of the Tolleson
Agreement. Notwithstanding the notice provisions under Section 7.1, any breach
by APS or SRP of their obligations under this Section shall entitle PWE to
pursue any available remedies at law or in equity against a breaching Party,
upon five (5) days prior notice, and to take any action that PWE may be entitled
to take to cure a material breach of the Tolleson Agreement.

      6.6 Survival. All obligations and liabilities of the Parties under this
Agreement shall cease upon termination except the obligations of the Parties
under Article 4 and under Article 9, and the liabilities of any Party resulting
from a default by such Party leading to such termination.

                                      -10-


                                    ARTICLE 7
                         DEFAULT AND DISPUTE RESOLUTION

      7.1 Events of Default. A Party shall be in default under this Agreement
upon the occurrence of the following ("Event of Default"): if it fails to render
performance required under any material provision of this Agreement when due and
such failure continues unremedied for thirty (30) days following written notice
to the Party in default given by any other Party. No Party shall be in default
under this Agreement due to Uncontrollable Forces or Outages as identified in
Section 9.1 of the Tolleson Agreement. It shall also be an Event of Default if a
Party shall have commenced any insolvency, receivership, bankruptcy,
liquidation, or similar proceedings and (i) one hundred twenty (120) days shall
have expired from the commencement of any one or more of such proceedings, and
(ii) a petition commencing the proceeding has not been dismissed or stayed
within that time.

      7.2 Dispute Resolution. In the event of any dispute between the Parties
concerning the rights and obligations created by this Agreement, or concerning
any Event of Default, the Parties shall first confer in an attempt to informally
resolve such dispute without need to resort to arbitration or litigation. Except
in the case of: (i) a material breach by PWE of its obligations under Section
3.3 or 3.4; (ii) a material breach by APS of its obligations under Section 3.5;
or (iii) a material breach by APS or SRP of their obligations under Section 6.5;
the Parties shall not resort to arbitration or litigation to enforce their
rights under this Agreement until 15 days after they begin to confer in good
faith to informally resolve their dispute. If the Parties are unable to resolve
their dispute after conferring as required in the preceding sentence, then
during the period that any Event of Default continues, the non-defaulting Party
or Parties may, without prejudice to any other available rights or remedies
under this Agreement or at law or in equity, and without constituting an
election of an exclusive remedy for an Event of Default, initiate non-binding
arbitration by one arbitrator who has not previously been employed by any Party
(excluding employment as an arbitrator), and does not have a direct or indirect
interest in any Party or the subject matter of the arbitration. The arbitrator
shall either be as mutually agreed by the Parties within fifteen (15) calendar
days after submission of the matter to arbitration, or failing agreement shall
be selected under the expedited rules of the American Arbitration Association
("AAA"). The rules of AAA shall apply to the extent not inconsistent with the
provisions in this Section. Arbitration shall be conducted according to the
following: (a) not later than seven (7) days prior to the hearing date set by
the arbitrator, each Party shall submit a brief with a single proposal for
settlement; (b) the hearing shall be conducted on a confidential basis without
continuance or adjournment; and (c) the Parties shall divide equally the cost of
the arbitrator and the hearing, and each Party shall be responsible for its own
expenses, including its counsel and representatives.

                                    ARTICLE 8
                                     NOTICES

      8.1 Notice Provision. All notices, demands, consents, invoices or other
communications required under this Agreement shall be in writing and may be
delivered personally to a Party, may be delivered by facsimile providing written
confirmation of successful

                                      -11-


transmission, or may be mailed by deposit in the United States Certified Mail,
return receipt requested, or by deposit with a reputable overnight delivery
service. Notices shall be effective:

            (i) on the date delivered by personal delivery or facsimile;

            (ii) three (3) business days following the date deposited in the
United States mail; or

            (iii) the next business day following delivery to a reputable
overnight delivery service.

            8.1.1 Notices or communications shall be delivered and mailed to the
Parties at the following addresses, or at any other address substituted by a
Party from time to time by written notice to the other Parties:

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

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

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

                                    ARTICLE 9
                                    LIABILITY

      9.1 Limitation of Liability. The liability of a Party to any other Party
under this Agreement shall be limited to the direct damages actually sustained
by the other Party or Parties. NO PARTY SHALL BE LIABLE TO THE OTHER PARTIES FOR
ANY LOSS OR

                                      -12-


DAMAGE IN THE NATURE OF PARTIAL OR COMPLETE LOSS OF USE OF ANY GENERATING
FACILITY, LOSS OF ELECTRIC POWER, COST OF REPLACEMENT OF ELECTRIC POWER, OR FOR
ANY LOSS OF INTEREST, REVENUE OR ANTICIPATED PROFITS FROM ACTIVITIES UNDER THIS
AGREEMENT. NO PARTY SHALL BE LIABLE TO THE OTHER PARTIES FOR ANY INDIRECT,
SPECIAL, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR LOST PROFITS (OTHER THAN ANY
UNPAID FEE OWED TO APS AND SRP PURSUANT TO SECTION 4.3.3), ARISING OUT OF OR
RELATED TO THIS AGREEMENT. (The limitations in this Section 9.1 shall not apply
to losses in tort to third parties or to Claims against which a Party is
entitled to indemnitee protection under Section 9.2.)

      9.2 Indemnity For Claims Asserted by Third Parties.

            9.2.1 APS and SRP (each an "Indemnifying Party") shall defend,
indemnify, and hold harmless PWE and its respective affiliates, directors,
officers, partners, members, employees, agents, and representatives (each a "PWE
Indemnitee") from and against any and all Claims, liability, cost, loss or
expense of any kind (including reasonable legal, accounting, consulting,
engineering and other fees) that may be imposed on, incurred by, or asserted
against the PWE Indemnitees by any other party or parties (including a
governmental entity) arising out of the fraud, or a negligent or intentional act
or omission, of the Indemnifying Party or its agents or representatives in
connection with this Agreement. In this obligation APS and SRP shall not be
jointly and severally liable, but each shall be responsible to the PWE
Indemnitees for the claims allegedly arising out if its own fraud, negligent or
intentional act or omission. In the event any such Claim, liability, cost, loss
or expense asserted by a person not a Party to this Agreement is caused by an
alleged joint or concurrent fraud, or negligent or intentional act or omission,
the Parties at fault shall bear liability in proportion to their own degrees of
culpability.

            9.2.2 PWE shall defend, indemnify, and hold harmless APS and SRP and
their respective affiliates, directors, officers, partners, members, employees,
agents, and representatives (each an "APS/SRP Indemnitee") from and against any
and all Claims, liability, cost, loss or expense of any kind (including
reasonable legal, accounting, consulting, engineering and other fees) that may
be imposed on incurred by, or asserted against the APS/SRP Indemnitees by any
other party or parties (including a governmental entity) arising out of the
fraud, or a negligent or intentional act or omission, of PWE or its agents or
representatives in connection with this Agreement.

            9.2.3 PWE shall defend, indemnify, and hold harmless the APS/SRP
Indemnitees from and against any and all Claims, liability, cost, loss or
expense of any kind (including reasonable legal, accounting, consulting,
engineering and other fees) that may be imposed on, incurred by, or asserted
against the APS/SRP Indemnitees by any other party or parties (including a
governmental entity) arising out of the receipt, transportation and use of
Tolleson Effluent after discharge of the same at the Redhawk Delivery Point,
including but not limited to any Release or Threat of Release of a Hazardous
Material or Substance (as defined in the Treatment and Transportation Agreement)
in connection with or resulting from its activities pertaining to this Agreement
or in connection with or resulting from the use by PWE of Tolleson Effluent
after delivery to PWE at the Redhawk Delivery Point. PWE shall promptly notify
APS

                                      -13-


and SRP of any such claim and of any Release or Threatened Release of a
Hazardous Material or Substance, or violation of Environmental Law or permit
condition.

            9.2.4 PWE shall defend, indemnify, and hold harmless the APS/SRP
Indemnitees from and against any and all Claims, liability, cost, loss or
expense of any kind (including reasonable legal, accounting, consulting,
engineering and other fees) that may be imposed on, incurred by, or asserted
against the APS/SRP Indemnitees by any other party or parties (including a
governmental entity) arising out of PWE's withdrawal and use of groundwater at
Redhawk.

      9.3 Responsibility For and Risk Associated With Transferred Tolleson
Effluent.

            9.3.1 All risks associated with the transportation, treatment, use,
disposal and payment for the Tolleson Effluent transferred to PWE pursuant to
this Agreement, shall be the responsibility of PWE from and after discharge of
that Tolleson Effluent into the WRF Pipeline at the Delivery Point specified in
the Tolleson Agreement; provided, however, that: (i) ownership of the Tolleson
Effluent shall not transfer to PWE until it is discharged into the Redhawk
Delivery System as specified in the Transportation and Treatment Agreement; and
(ii) APS, as Operating Agent of PVNGS, shall remain responsible for physical
transportation and treatment of the Tolleson Effluent through the WRF Pipeline
and WRF until the point of discharge into the Redhawk Delivery System,
consistent with the terms and conditions of the Transportation and Treatment
Agreement.

            9.3.2 During such times as Tolleson Effluent is being transported
through the WRF Pipeline and treated in the WRF, PWE, as owner of Redhawk, shall
share proportionally in all risks and liability, if any, associated with or
arising from the transportation, treatment, disposal and other management of the
Tolleson Effluent. Regardless of any allocation or limitation of liabilities and
indemnification under the Transportation and Treatment Agreement, PWE's
proportional share under the preceding sentence shall initially be set at 50% of
the total liability, if any, that is unrelated to the transportation, treatment,
disposal and other management of the Tolleson Effluent (and no other source of
effluent) prior to delivery to PWE at the Redhawk Delivery Point. If the amount
of Tolleson Effluent transferred to PWE for use at Redhawk either materially
increases or materially decreases during the term of this Agreement, or if PVNGS
materially reduces or ceases the delivery of Tolleson Effluent into the Redhawk
Delivery System for a period of time exceeding six months, any Party may request
that PWE's share of potential liability under this Section be adjusted to a
proportion that accurately reflects the percentage of Tolleson Effluent being
transported and treated through the WRF Pipeline and WRF on an annual basis for
PWE's use at Redhawk, in comparison to the percentage of Tolleson Effluent being
transported and treated through the WRF Pipeline and WRF on an annual basis for
other purposes. Upon being notified of a Party's request for such an adjustment,
the Parties shall meet to negotiate in good faith and establish a new
proportional share of PWE's potential liability consistent with the terms of
this Section.

            9.3.3 If Tolleson Effluent transferred pursuant to this Agreement is
delivered or made available to PWE for use at Redhawk by means other than
discharge into the WRF Pipeline for transportation to and treatment at the WRF,
then PWE shall bear all risks associated

                                      -14-


with receipt, management, use, disposal and payment for such Tolleson Effluent
from and after its delivery by Tolleson to or for the benefit of PWE.

      9.4 Claims by Tolleson for Higher Price for Effluent. As provided in
Section 4.3.1 of this Agreement, APS shall bill PWE, as owner of Redhawk, the
price specified in Section 2.2 of the Tolleson Agreement only for that quantity
of Tolleson Effluent actually delivered to PWE at the Redhawk Delivery Point. If
the City of Tolleson claims entitlement to the price specified in Section 2.2 of
the Tolleson Agreement for the full quantity of 7,500 acre-feet being
transferred to PWE pursuant to this Agreement, regardless of whether that full
quantity is actually delivered to PWE for use at Redhawk, PWE shall defend,
indemnify, and hold harmless APS, SRP and the other PVNGS Participants, as well
as their respective affiliates, directors, officers, partners, members,
employees, agents, and representatives from and against any and all Claims,
liability, cost, loss or expense of any kind arising out of Tolleson's claim to
such entitlement. PWE may, in its sole discretion and after 10 days' prior
notice to APS and SRP, choose to pay or settle any such claim without prior
approval by APS or SRP; provided, however, that PWE shall not be entitled to act
as agent for APS and SRP for purposes of amending the Tolleson Agreement or
affecting APS and SRP's rights and obligations thereunder.

      9.5 Survival of Indemnification Obligations. The payment obligations of
PWE set forth in Article 4, and the indemnification obligations of the Parties
set forth in this Article 9 shall survive the termination or expiration of this
Agreement.

      9.6 Liability of PVNGS Operating Agent. Any liability of the PVNGS
Operating Agent to the PVNGS Participants for the acts or omissions of the PVNGS
Operating Agent or its employees or contractors shall be determined under the
provisions of the ANPP Participation Agreement.

                                   ARTICLE 10
                                     GENERAL

      10.1 Entire Agreement. This Agreement supersedes all prior and
contemporaneous conduct and communications, whether written or oral, pertaining
to the transfer of 7,500 acre-feet per year of Tolleson Effluent from APS and
SRP to PWE for use at Redhawk Units 1 and 2. Notwithstanding the foregoing, this
Agreement shall be read together with the November 13, 2000 Tolleson Agreement,
the November 16, 2000 Co-Ownership Agreement, and the Transportation and
Treatment Agreement to obtain necessary definitions and to otherwise determine
the intention of the Parties. This Agreement may not be modified, changed or
added to except in writing signed by all Parties hereto.

      10.2 Waiver. Each Party's failure or delay in enforcing the terms and
conditions of this Agreement or insisting upon strict performance of any of the
other Parties' obligations shall not be interpreted as a waiver thereof. Waiver
of any provision of this Agreement shall only be effective if in writing and
shall not be interpreted as a waiver of any subsequent breach or failure under
the same or any other provision of this Agreement. No conduct, statement, course
of conduct, course of dealing, oral expression or other action shall be
construed as a waiver.

                                      -15-


      10.3 Assignment.

            10.3.1 Assignment by APS to PWE. APS may assign its rights and
delegate its duties under this Agreement at any time to PWE, provided that APS
assigns its entire interest in this Agreement and that PWE assumes in writing
all of the APS obligations under this Agreement, and provided further that such
assignment shall not become effective until and unless PWE has become a party to
the ANPP Participation Agreement. No assignment or delegation under this Section
10.3.1 will release APS from its obligations under this Agreement unless SRP
consents to a release (such consent not to be unreasonably withheld, conditioned
or delayed). Any subsequent assignment of the Operating Agent's obligations
under this Agreement may only be made in conjunction with a corresponding
assignment of the Operating Agent's rights and obligations under the ANPP
Participation Agreement, and such assignment also shall be subject to all terms
and conditions of this Agreement, including the restrictions of Section 10.3.2.

            10.3.2 Assignment to Others. With the prior written consent of the
other Parties (such consent not to be unreasonably withheld, conditioned or
delayed), a Party may assign its rights and delegate its duties under this
Agreement at any time to any other PVNGS Participant or, in the case of PWE as
owner of Redhawk and transferee of the right to use Tolleson Effluent, to any
other owner of Redhawk, provided that such Party's assignee assumes in writing
all of such Party's obligations under this Agreement. No assignment or
delegation under this Section 10.3.2 will release the assigning Party from its
financial and indemnification obligations under this Agreement unless the other
Party or Parties consent to a release (such consent not to be unreasonably
withheld, conditioned or delayed). Any assignee to whom the rights and
obligations of this Agreement are assigned pursuant to this Section 10.3.2 shall
thereafter be subject to all terms and conditions of this Agreement, including
the restrictions of this Section 10.3.2.

      10.4 Governing Law. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Arizona.

      10.5 Attorneys' Fees. Except in case of arbitration conducted pursuant to
Section 7.2, should any Claim be brought by a Party against another Party or
Parties arising out of this Agreement, including any action for declaratory or
injunctive relief, the prevailing Party or Parties shall be entitled to
reasonable attorneys' fees and costs and expenses of litigation and
investigation, all as actually incurred, including attorneys' fees, costs and
expenses of litigation and investigation incurred in the proceedings, including
appellate proceedings, or in any action or participation in, or in connection
with, any case or proceeding under the United States or other bankruptcy laws,
and any judgment or decree rendered in any such action or proceedings shall
include an award thereof.

      10.6 Counterparts. This Agreement may be executed by the Parties in any
number of separate counterparts, each of which when so executed and delivered
shall be deemed an original, but all such counterparts shall together constitute
one and the same agreement. All signatures need not be on the same counterpart.

                                      -16-


      10.7 Relationship of the Parties. The execution of this Agreement shall
not create or constitute a partnership, joint venture, entity or any form of
business organization between the Parties.

            IN WITNESS WHEREOF, the Parties have executed this Agreement to be
effective as of the Effective Date.

                            ARIZONA PUBLIC SERVICE COMPANY,
                            an Arizona corporation,

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

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

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

                            Approved as to form:

                            By /s/ Richard N. Morrison
                              __________________________________________________

                            PINNACLE WEST ENERGY CORPORATION,
                            an Arizona Corporation

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

                                      -17-

                                  ATTACHMENT 1

                       AGREEMENT FOR THE SALE AND PURCHASE

                             OF WASTEWATER EFFLUENT

      THIS AGREEMENT, is made and entered into this 13th day of November 2000,
by and between the City of Tolleson, a municipal corporation organized and
existing under and by virtue of the laws of the State of Arizona ("Tolleson" or
"City"), and Arizona Public Service Company, a corporation organized and
existing under and by virtue of the laws of the State of Arizona ("APS") and
Salt River Project Agricultural Improvement and Power District, an agricultural
improvement district organized and existing under and by virtue of the laws of
the State of Arizona ("SRP"). The City, APS and SRP are collectively referred to
herein as the "Parties." APS and SRP are collectively referred to herein as "The
Companies." All references to "The Companies" in this Agreement shall include
APS or SRP, or both APS and SRP, or any affiliated or successor entity to either
SRP or APS, including but not limited to Pinnacle West Energy Corporation, an
affiliate of APS.

                                   WITNESSETH:

      WHEREAS, Tolleson owns, operates and maintains a wastewater treatment
plant (hereinafter the "Plant") situated approximately 1/4 mile south of State
Route 85 and approximately 1/4 mile west of 91st Avenue at which Tolleson treats
raw sewage collected from sources within and outside of the corporate boundaries
of Tolleson and produces treated wastewater effluent which, unless used by
Tolleson for other purposes, is discharged into the Salt River in accordance
with the laws of the United States and the State of Arizona (hereinafter
"Effluent" or "Tolleson Effluent");

      WHEREAS, the rated treatment capacity of the Plant, assuming typical
influent quality, is currently approximately 17.5 million gallons per day
(hereinafter "M.G.D.") of influent;



      WHEREAS, Tolleson is evaluating the possibility of having the existing
Plant re-rated to a capacity of greater than 17.5 M.G.D. of influent, and
Tolleson may in the future expand Tolleson's capacity in the Plant to create
capacity beyond 17.5 M.G.D.;

      WHEREAS, Tolleson desires to reserve for its use and disposition as it may
in its own discretion elect, 10% of the amount of Effluent produced at the Plant
(hereinafter "Reserved Effluent");

      WHEREAS, Reserved Effluent may be used, sold or otherwise disposed of by
Tolleson for any lawful purpose, including delivery and sale to The Companies
consistent with the terms of this Agreement;

      WHEREAS, Tolleson desires to sell and The Companies desire to purchase all
available "Surplus Effluent," which for the purposes hereof shall be all of the
Effluent produced through the operation of the Plant in excess of the Reserved
Effluent, but not to exceed the maximum capacity of the current interconnection
(the "Interconnection Facilities") between the Plant and the pipeline (the
"Effluent Pipeline") that supplies effluent to the Palo Verde Nuclear Generating
Station ("Palo Verde"), and, when operational, the maximum capacity of the
modified Interconnection Facilities provided for in Section 5.2 below;

      WHEREAS, additional wastewater treatment is provided at Palo Verde's
"Water Reclamation Facility" located at the northern end of the Palo Verde
property and the western terminus of the Effluent Pipeline;

      WHEREAS, the Parties previously entered into an Agreement for the Sale and
Purchase of Effluent dated June 12, 1981 (the "Previous Agreement");

      WHEREAS this Agreement is intended to replace the Previous Agreement,
which will be of no further effect upon execution of this Agreement; and

      WHEREAS, the sale and purchase of the Surplus Effluent will result in its
beneficial use and in the reduction in the demand for the limited supplies of
unused surface waters and groundwaters;

                                     - 2 -



      NOW THEREFORE, for and in consideration of the mutual covenants, terms and
conditions hereinafter stated, the Parties agree as follows:

SECTION 1. SALE AND PURCHASE OF SURPLUS EFFLUENT.

            1.1 Except as provided in other Sections of this Agreement, Tolleson
shall sell and deliver to The Companies, and The Companies shall purchase and
accept, all of the Surplus Effluent produced through the operation of the Plant
during the term of this Agreement. In addition, Tolleson may sell and deliver to
The Companies, and The Companies may purchase and accept any or all of the
Reserved Effluent not used, sold or otherwise disposed of by Tolleson. Nothing
in this Agreement shall impair the right of Tolleson to use, sell or otherwise
dispose of any and all of the Reserved Effluent and any Surplus Effluent that
The Companies do not purchase and receive under this Agreement pursuant to
Sections 2.1, 3.3 or 9.2. The Companies' right to receive Surplus Effluent shall
have priority over Tolleson's use, sale or other disposition of any Surplus
Effluent except under conditions specified in Section 9.2.

            1.2 This Agreement contains no requirement that Tolleson produce any
certain amount of Effluent at the Plant but merely that it deliver to The
Companies whatever amount of Surplus Effluent is produced, except as provided
elsewhere in this Agreement. However, the Parties understand and acknowledge
that since at least 1994 Tolleson has produced between 12,000 and 15,000
acre-feet of Effluent per year. Tolleson agrees that it will undertake all
reasonable, good faith efforts to maintain all existing contracts, operations
and facilities necessary to sustain discharges of Surplus Effluent meeting the
water quality standards of Section 3 at or above the level of 13,000 acre-feet
per year. Tolleson further agrees that it will not construct additional
wastewater treatment facilities at locations other than the current location of
the Plant if such facilities would adversely affect Tolleson's ability to
sustain discharges of Surplus Effluent meeting the water quality standards of
Section 3 at or above the level of 13,000 acre-feet per year. Tolleson further
agrees that it will notify The Companies, as soon as reasonably possible, of any
development or change in circumstances that may adversely affect

                                     - 3 -



Tolleson's ability to continue producing at least 13,000 acre-feet of Surplus
Effluent per year that meets the water quality standards of Section 3.

SECTION 2. PRICE AND PAYMENT.

            2.1 The Companies shall pay to Tolleson, for all Effluent that is
sold and delivered hereunder for use at or for the benefit of Palo Verde, a
price of Thirty Dollars ($30.00) per acre-foot for calendar years 2000 through
2002. Beginning with calendar year 2003 and throughout the remaining term of
this Agreement, the price to be paid in all subsequent years during the term of
this Agreement for all Effluent that is sold and delivered hereunder for use at
or for the benefit of Palo Verde shall be determined by multiplying the previous
year's price by the average annual percentage increase in the Consumer Price
Index ("CPI") during the immediately preceding five years. Exhibit A to this
Agreement, which is specifically incorporated herein by this reference, states
the formula, and provides an example, for making the CPI-based price adjustments
required by this Section. If, in the sole judgement of The Companies, the price
to be paid to Tolleson for Effluent to be delivered and sold for use at or for
the benefit of Palo Verde, after application of the CPI-based price adjustment
mechanism set forth in this Section, becomes too high in comparison to the price
of treated wastewater effluent available to Palo Verde from sources other than
Tolleson, The Companies may elect to terminate their obligation to accept and
pay for Surplus Effluent for use at or for the benefit of Palo Verde. If The
Companies elect to terminate their obligation to accept and pay for Surplus
Effluent for use at or for the benefit of Palo Verde pursuant to this Section,
they shall provide Tolleson one year's advance written notice of such election
to terminate. Provided, however, that upon receipt of written notice of The
Companies' election to terminate pursuant to this Section, Tolleson may elect to
sell Surplus Effluent to The Companies for use at or for the benefit of Palo
Verde at the same price then being paid by The Companies for treated wastewater
effluent used at or for the benefit of Palo Verde and sold by sources other than
Tolleson (the "New Price"). Tolleson shall provide written notice to The
Companies of its election to begin selling Surplus Effluent at the

                                     - 4 -



New Price within 180 days after Tolleson receives notice of The Companies'
election to terminate pursuant to this Section. If Tolleson provides such
written notice within the required 180 day period, The Companies shall continue
to accept and pay for Surplus Effluent used at or for the benefit of Palo Verde
at the New Price, consistent with all other terms of this Agreement. If Tolleson
does not provide such written notice within the said 180 days, any obligation of
Tolleson to supply Surplus Effluent for use at Palo Verde shall be permanently
terminated.

            2.2 If Effluent is used at or for the benefit of the proposed
electric generating facility commonly referred to as "Redhawk" or any electric
generating facilities other than Palo Verde that are owned (in whole or in part)
or operated by The Companies (collectively referred to as "Other Electric
Generating Facilities") pursuant to Section 4.1, the price to be paid for all
such Effluent shall be Seventy Five Dollars ($75.00) per acre-foot during
calendar years 2000 through 2002. Beginning with calendar year 2003 and
throughout the remaining term of this Agreement, the price to be paid by The
Companies for Effluent delivered into the Pipeline and used at or for the
benefit of Other Electric Generating Facilities shall be determined by
multiplying the previous year's price by the average annual percentage increase
in the CPI during the immediately preceding five years. The formula to be used
for making this adjustment, and an example of its application, are contained in
Exhibit A. The Companies shall measure, keep records of, and report to Tolleson
on a monthly basis the quantity, if any, of Effluent used at or for the benefit
of such Other Electric Generating Facilities.

            2.3 The Companies shall pay Tolleson monthly an amount equal to the
price determined pursuant to Section 2.1 and/or 2.2 hereof, as applicable,
multiplied by the number of acre-feet of Effluent that were delivered and
accepted for use at or for the benefit of the respective facilities (Palo Verde
or Other Electric Generating Facilities) during the prior month. Such monthly
payments shall be due and payable 30 days after receipt of the invoice therefor
rendered by Tolleson.

            2.4 In the event of a dispute concerning the quantity of Effluent
delivered and accepted in any month, The Companies shall pay the invoiced
amount, but may do

                                     - 5 -



so under written protest. If any protested amount shall subsequently be
determined to have been excessive, the excessive amount thereof shall be
refunded to The Companies. Any dispute or protest shall be resolved in the
manner provided by Section 12.7 hereof.

            2.5 The Companies shall pay Tolleson the price determined pursuant
to Section 2.1 for each acre-foot of Surplus Effluent made available by Tolleson
for delivery under this Agreement and meeting the water quality standards of
Section 3 that is not accepted by The Companies, up to the then-operational
maximum capacity of the Interconnection Facilities, except during any
Uncontrollable Force event as defined in Section 9.1. Payments under this
Section shall be made to Tolleson monthly in an amount equal to the price
determined pursuant to Section 2.1 multiplied by the number of acre-feet of
Surplus Effluent meeting the water quality standards of Section 3 made available
by Tolleson for delivery, but not accepted by The Companies, during the prior
month. Such monthly payments shall be due and payable 30 days after receipt of
the invoice therefor rendered by Tolleson. The Companies shall have no
obligation to pay for Reserved Effluent not actually accepted into the Effluent
Pipeline for use at or for the benefit of Palo Verde or Other Electric
Generating Facilities. If The Companies elect to terminate their obligation to
accept and pay for Surplus Effluent for use at or for the benefit of Palo Verde
pursuant to Section 2.1, the obligation to pay for Surplus Effluent, whether
taken or not, under this Section shall remain in effect for any Other Electric
Generating Facility for which one or more Notices of Commitment have been
submitted to Tolleson pursuant to Section 8.2. Provided, however, that if The
Companies terminate their obligation as to Palo Verde, the number of acre-feet
thereafter subject to the payment obligation imposed by this Section shall be
the number of acre-feet specified in the Notice(s) of Commitment previously
submitted to Tolleson. Provided further that, if The Companies terminate their
obligation as to Palo Verde, the Parties shall meet to determine, based on
actual operating history and projected future needs, the number of acre-feet of
Surplus Effluent that will remain committed to such Other Electric Generating
Facilities. Such remaining committed Surplus Effluent shall be used only at or
for the benefit of such Other Electric Generating Facilities.

                                     - 6 -



            2.6 The methods identified in Paragraphs 2.1 and 2.2 above for
determining the price to be paid by The Companies pursuant to this Agreement for
each acre-foot of Effluent delivered into the Effluent Pipeline by Tolleson and
accepted by The Companies for use at Palo Verde or Other Electric Generating
Facilities, and the resulting prices established by those methods, shall remain
in effect throughout the term of this Agreement. Provided, however, that: (i) if
The Companies enter into a new contract, or amend an existing contract, for
supplying treated wastewater effluent to Palo Verde or Other Electric Generating
Facilities physically capable of being economically served by Tolleson Effluent
delivered into the Effluent Pipeline; and (ii) that new contract or amendment of
that existing contract provides for a higher price, or a different method of
determining the price, of treated wastewater effluent supplied to Palo Verde or
Other Electric Generating Facilities physically capable of being economically
served by Tolleson Effluent delivered into the Effluent Pipeline; then (iii)
Sections 2.1 and/or 2.2 of this Agreement, as applicable, shall be revised to
incorporate that higher price or new method of determining the price. The
application of any different method of determining the price of effluent under
this Section 2.6 shall not result in a lower price being paid to Tolleson than
if such different method were not used. The provisions of this Section shall not
apply to any contract entered into by The Companies for a backup supply of
treated wastewater effluent that allows The Companies to purchase such effluent
when Tolleson is unable to deliver into the Pipeline at least 13,000 acre-feet
per year of Surplus Effluent meeting the water quality standards of Section 3.
The price benefits afforded to Tolleson by this Section shall apply if The
Companies purchase another source of treated wastewater effluent, other than a
backup supply pursuant to the immediately preceding sentence, for use at or for
the benefit of any Other Electric Generating Facility physically capable of
being economically served by Tolleson Effluent delivered into the Effluent
Pipeline, whether or not the other source of treated wastewater effluent is
delivered into the Effluent Pipeline. For purposes of this Agreement, the phrase
"physically capable of being economically served by Tolleson Effluent delivered
into the Effluent Pipeline" shall apply only to any Other Electric Generating
Facilities located within: (i) the area described in the legal

                                     - 7 -



description and accompanying map attached to this Agreement as Exhibit B, which
exhibit is specifically incorporated herein by this reference; or (ii) within
one mile north or two miles south of any portion of the Effluent Pipeline. The
Companies agree, as a covenant of good faith, to comply with the requirements of
this Section and Section 4.2 by refraining from constructing or acquiring Other
Electric Generating Facilities in locations immediately outside the area defined
in the preceding sentence as subject to the "physically capable of being
economically served by Tolleson Effluent delivered into the Effluent Pipeline"
standard if such construction or acquisition is intended to avoid the
requirements of this Section or Section 4.2.

            2.7 In addition to any amounts The Companies are required to pay
under paragraphs 2.3 and 2.5 of this Agreement, The Companies shall also pay
Tolleson monthly, from the date of execution of this Agreement until June 30,
2002, an amount equal to the difference between: (1) the sum of the amounts paid
under paragraphs 2.3 and 2.5 of this Agreement; and (2) the amount that The
Companies would have been required to pay Tolleson for an equal quantity of
Effluent under the Previous Agreement among APS, SRP and Tolleson dated June 12,
1981.

            2.8 If at any time The Companies fail to pay to Tolleson the amounts
they are obligated to pay under Sections 2.3 and 2.5 within the 30 days provided
for such payment, Tolleson may, after providing 10 days advance written notice,
cease delivering Surplus Effluent into the Effluent Pipeline until all past due
amounts are paid in full.

SECTION 3. QUALITY OF THE SURPLUS EFFLUENT.

            3.1 All Effluent sold and delivered hereunder shall have received
wastewater treatment, and shall meet the standards required by law and specified
in Permit No. AZ0020338 issued to Tolleson by the Environmental Protection
Agency (hereinafter "EPA"), including any amendments or replacements thereof as
may be made from time to time and/or in any other required permit or
authorization as may hereafter be issued by the Arizona Department of
Environmental Quality (hereinafter "ADEQ"), or any other federal or state agency
having

                                     - 8 -



jurisdiction respecting the treatment and/or discharge of wastewater effluent,
except that disinfection (by chlorination or otherwise) of such Effluent sold
and delivered hereunder shall be required and performed only upon the terms and
conditions hereinafter provided.

            3.2 In addition to meeting the permit-based water quality
requirements specified in Section 3.1, Tolleson shall use its best efforts to
operate and maintain its existing Plant in a manner that will treat Effluent
such that the Effluent does not exceed: (i) 30 milligrams per liter (mg/l) of
Biological Oxygen Demand ("BOD") for any period of time; (ii) 25 mg/l BOD for
any period longer than two consecutive days; (iii) 20 mg/l BOD for any period
longer than one week; or (iv) 15 mg/l BOD for any period longer than one month.
Nothing contained in this Section 3.2 shall require Tolleson to upgrade or
improve the Plant or otherwise compel Tolleson to incur any additional expense
in the operation of the Plant.

            3.3 The Companies shall not be required to purchase, accept or pay
for any Effluent that does not meet the water quality standards set forth in
Sections 3.1 and 3.2 hereof. The Companies' sole remedy for breach of Tolleson's
obligation to meet the water quality standards of Sections 3.1 and 3.2 shall be
the right to refuse to purchase, accept or pay for any Effluent that does not
meet those standards.

            3.4 Tolleson, on the written request of The Companies, shall
disinfect the surplus Effluent to be delivered to The Companies, provided that
The Companies shall reimburse Tolleson for its direct costs associated with such
disinfection.

            3.5 Tolleson shall promptly notify APS by telephone, and in writing
as soon as reasonable thereafter, of any changes in wastewater treatment
processes or operational anomalies at the Plant that have the potential to
significantly change the composition of the Effluent delivered to The Companies,
including, but not limited to, changes that would affect compliance with the
water quality standards addressed in this Section 3. The Companies acknowledge
that the Plant has exceeded, and will exceed the foregoing BOD levels, and
Tolleson acknowledges that The Companies will not be obligated to purchase any
Effluent produced by Tolleson that exceeds the foregoing BOD levels.

                                     - 9 -



SECTION 4. USE OF EFFLUENT.

            4.1 The primary use of the Effluent purchased and accepted by The
Companies under this Agreement is for cooling required for generation of
electric power at Palo Verde. The Companies may also use, transfer or execute a
water exchange for any or all of the Effluent made available under this
Agreement for use at or for the benefit of any Other Electric Generating
Facilities that The Companies may now or in the future develop, own (in whole or
in part) or operate. All such Effluent used at or for the benefit of Other
Electric Generating Facilities shall be subject to the price established in
Section 2.2.

            4.2 If at any time The Companies use any treated wastewater effluent
at or for the benefit of Other Electric Generating Facilities physically capable
of being economically served by Tolleson Effluent delivered into the Effluent
Pipeline, Tolleson shall have the first right to sell to The Companies, and The
Companies shall have the obligation to purchase from Tolleson, all such treated
wastewater effluent, up to the then-operational maximum capacity of the
Interconnection Facilities, provided that:

      (a)   the treated wastewater effluent requirements of Palo Verde are being
            fully satisfied, whether by Tolleson Effluent or by effluent from
            other sources;

      (b)   the Participants in Palo Verde consent to the use of the Effluent
            Pipeline, Water Reclamation Facility and any other property or
            facilities owned by such Participants for transportation and
            treatment of Effluent for use at or for Other Electric Generating
            Facilities (provided, however, that if such consent is not obtained
            from the Palo Verde Participants by December 31, 2001, Tolleson may
            elect to terminate its obligation under this Agreement to deliver
            and sell Surplus Effluent to the Companies); by its execution of
            this Agreement, APS confirms its consent, as a Palo Verde
            Participant, to the use of the Effluent Pipeline, Water Reclamation
            Facility and any other Palo Verde property or facilities required
            for transportation and treatment of Effluent for use at or for Other
            Electric Generating Facilities; and

                                     - 10 -



      (c)   Tolleson produces the lesser of 12,000 acre feet per year of
            Effluent or sufficient Surplus Effluent meeting the water quality
            standards of Section 3 to satisfy the quantity specified in any
            Notices of Commitment delivered to Tolleson by The Companies
            pursuant to Section 8.2.

To the extent that all of the preceding requirements are satisfied, Tolleson
shall have the first right to sell to The Companies, and The Companies shall be
obligated to purchase from Tolleson, treated wastewater effluent for use at or
for the benefit of Other Electric Generating Facilities physically capable of
being economically served by Tolleson Effluent delivered into the Effluent
Pipeline, up to the lesser of: (i) the maximum quantity of effluent used at or
for the benefit of such Other Electric Generating Facilities physically capable
of being economically served by Tolleson Effluent delivered into the Effluent
Pipeline; or (ii) the then-operational maximum capacity of the Interconnection
Facilities. For the purpose of determining the times when The Companies must
take Surplus Effluent first at Other Electric Generating Facilities physically
capable of being economically served by Tolleson Effluent delivered into the
Effluent Pipeline, The Companies shall allocate all treated wastewater effluent
that The Companies acquire, other than Surplus Effluent, first for use at Palo
Verde. Only after purchasing all available Surplus Effluent meeting the water
quality standards of Section 3 may The Companies purchase treated wastewater
effluent from another source for use at or for the benefit of such Other
Electric Generating Facilities physically capable of being economically served
by Tolleson Effluent delivered into the Effluent Pipeline, or use groundwater
for condenser cooling in lieu of such Surplus Effluent, except to the extent
that groundwater is necessary to make up any shortfall in cooling water
requirements resulting from physical constraints in the Effluent Pipeline, Water
Reclamation Facility or other Palo Verde facilities. Nothing in this Agreement
shall prohibit or limit the right of The Companies to enter into additional
contracts with other parties for the sale and purchase of wastewater effluent to
be used at Palo Verde or Other Electric Generating Facilities, provided that
such contracts do not limit Tolleson's rights under this Agreement. To the
extent that any amount of Surplus Effluent is used at or for the benefit of
Other Electric

                                     - 11 -



Generating Facilities, Tolleson shall be relieved of any obligation it may have
under this Agreement to supply that quantity of Surplus Effluent for use at or
for the benefit of Palo Verde.

SECTION 5. DELIVERY POINT AND METERING.

            5.1 Effluent sold and purchased hereunder shall be delivered by
Tolleson and accepted by The Companies at the valve that controls the flow of
Effluent into the Effluent Pipeline (hereinafter the "Delivery Point") at the
interconnection between the two outfall wastewater lines from the Plant to the
Salt River (hereinafter the "Outfall Lines") and the Effluent Pipeline. Such
Effluent delivered by Tolleson and accepted by The Companies at the Delivery
Point shall be deemed "delivered into the Effluent Pipeline" as that phrase is
used in this Agreement.

            5.2 Within one year after the execution of this contract, The
Companies shall design and construct a modification to the existing
Interconnection Facilities between the Outfall Lines and the Effluent Pipeline
to allow delivery by Tolleson into the Effluent Pipeline of at least 21 M.G.D.
of Surplus Effluent. All costs associated with the design, construction,
operation and maintenance of this modification shall be borne by The Companies,
and title to the modified Interconnection Facilities shall be vested consistent
with the provisions of Exhibit C, which identifies specific components of the
Interconnection Facilities and the Party or Parties in which title to each such
component is vested. The Companies shall be responsible for, and the Parties
shall cooperate as necessary, to ensure the timely design, construction,
operation and maintenance of the existing and modified Interconnection
Facilities required by this Section and to ensure that such activities do not
interfere with the operation of the Plant or the Effluent Pipeline. If The
Companies cease using the Interconnection Facilities for acceptance of Effluent
from Tolleson, The Companies shall either continue to operate and maintain the
Interconnection Facilities to ensure that operation of the Plant will not be
adversely affected, or shall offer to transfer to Tolleson title over any
portion of the Interconnection Facilities that is necessary to the operation of
the Plant, provided, however, that if Tolleson refuses to accept such

                                     - 12 -



title, The Companies shall have no obligation to continue to operate or maintain
the Interconnection Facilities.

            5.3 The quantity of Effluent delivered by Tolleson and accepted by
The Companies at the Delivery Point shall be measured by metering devices
installed by The Companies as close to the Delivery Point as practicable. The
quantity of Effluent supplied by Tolleson and accepted by The Companies for use
at or for the benefit of Other Electrical Generating Facilities shall be
measured by a metering device installed by The Companies at a point which will
measure the amount of Effluent that is used at or for the benefit of Other
Electrical Generating Facilities. Such metering devices shall be of a design and
type acceptable to Tolleson and The Companies. The costs of such devices and
their installation, operation, maintenance, replacements, repair, betterments
and calibration shall be borne by The Companies, except as otherwise provided in
Section 7.2 hereof, and the title thereto shall be vested in The Companies.
Provisions shall be made to permit flow meter information to be continuously
displayed in a panel or panels at the Plant utilizing facilities and equipment
as Tolleson may, at its own expense provide, title to which shall be vested in
Tolleson.

            5.4 In the event that the flow metering device measuring flows of
Tolleson Effluent into the Effluent Pipeline shall fail or be inoperative,
Tolleson shall have the right to use other in-Plant flow metering equipment to
determine the volume of Effluent delivered for billing purposes.

            5.5 If Tolleson concludes that increases in capacity of the Plant
beyond 21 M.G.D. are necessary or desirable, the Parties shall meet, upon
request by Tolleson, to discuss potential additional modifications of the
Interconnection Facilities beyond those required by Section 5.2 above. Any terms
for the design and construction of, and payment for, additional modifications,
and any terms for the purchase and sale of any Effluent made available by an
increase in the capacity of the Interconnection Facilities beyond 21 M.G.D.,
shall be established by mutual agreement of the Parties at that time.

                                     - 13 -



SECTION 6. PERMITS AND AUTHORIZATIONS.

            6.1 Tolleson shall be solely responsible for securing and
maintaining in force and effect any and all permits and authorizations required
by law for the delivery of Effluent to The Companies at the Delivery Point and
for the discharge into the Salt River or other disposal of Effluent which is not
delivered to and accepted by The Companies.

            6.2 The Companies shall be solely responsible for securing and
maintaining in force and effect any and all permits and authorizations required
by law for the transportation of the Effluent from the Delivery Point to Palo
Verde or to any other points and for any uses of the Effluent that are allowed
by Section 4 of this Agreement. Such responsibility of The Companies may be
delegated to others, but as between the Parties the responsibility rests solely
upon The Companies.

            6.3 Each of the Parties shall cooperate with the other Parties in
securing and maintaining in force and effect the permits and authorizations
required in accordance with this Agreement or by local, state or federal laws
and regulations and shall render such assistance to the other Parties as it or
they may reasonably request. Each Party shall furnish to the other Parties a
copy of each permit and authorization obtained pursuant to Sections 6.1 and 6.2
hereof.

            6.4 Should Tolleson be required by law to treat the Effluent in a
manner that results in increased expenses to Tolleson because it is delivering
the Effluent to The Companies under this Agreement, which expense it would not
have incurred if the Effluent was disposed by Tolleson into the Salt River, then
The Companies shall have the right to require Tolleson to so treat the Effluent
and shall reimburse Tolleson for all reasonable expenses (including without
limitation any costs of plant additions or improvements) incurred by Tolleson in
providing such treatment. If The Companies, in their sole discretion, decide not
to exercise their right under this Section to require additional treatment, they
may take other action, including terminating this Agreement, to ensure
continuing compliance with applicable law. However, prior to terminating this
Agreement as allowed in the previous sentence, The

                                     - 14 -



Companies shall meet with Tolleson to discuss any alternatives to termination
that may be available to ensure compliance with applicable law.

SECTION 7. IMPLEMENTATION OF THE AGREEMENT.

            7.1 Within 30 days after the effective date of this Agreement,
Tolleson shall designate a representative and The Companies shall jointly
designate a representative for the purposes of: (i) implementing this Agreement
in accordance with its terms, (ii) coordinating the design and construction by
The Companies of the modifications to the Interconnection Facilities required by
Section 5.2 above, (iii) ensuring the continued satisfactory operation and
maintenance of the Interconnection Facilities, and (iv) discussing any issues of
interest or concern to either or both Parties relating to this Agreement. Either
Tolleson or The Companies may from time to time designate a substitute or
successor authorized representative by giving written notice of such designation
to the other party.

            7.2 The metering devices used to measure the quantity of Effluent
delivered and accepted hereunder, and the quantity of Effluent used at or for
the benefit of Other Electrical Generating Facilities, shall be calibrated in a
manner acceptable to the authorized representatives prior to the date when such
devices are placed in service and thereafter not less frequently than once every
six months. The costs of such scheduled calibrations shall be borne by The
Companies. The authorized representative for Tolleson may request in writing
such additional calibrations as he in his sole discretion deems appropriate;
provided that the cost incurred by The Companies for each such additional
calibration shall be reimbursed by Tolleson unless any such additional
calibration reveals that the inaccuracy of the metering devices is greater than
(plus/minus) 2% in which case the cost of such additional calibration shall be
borne by The Companies. Copies of all records showing calibration of meters
shall be delivered to Tolleson after each calibration, and copies of all records
of measurements of Effluent supplied to or for the benefit of Palo Verde or
Other Electrical Generating Facilities shall be delivered to Tolleson monthly,
with cover letters acknowledging the records to be true copies.

                                     - 15 -



SECTION 8. DELIVERY AND ACCEPTANCE OF EFFLUENT.

            8.1 The obligation of Tolleson to sell and deliver Surplus Effluent
under this Agreement shall commence on the date this Agreement is executed and
shall continue throughout the term of this Agreement, except as otherwise
provided in this Agreement.

            8.2 At any time after the effective date of this Agreement, provided
that the treated wastewater effluent requirements of Palo Verde are being fully
satisfied, The Companies may deliver to Tolleson one or more written notices of
The Companies' commitment ("Notice of Commitment") to purchase up to 13,000
acre-feet of Surplus Effluent for use at or for the benefit of Other Electric
Generating Facilities. The Companies may specify any quantity of Surplus
Effluent in any individual Notice of Commitment, up to the then-operational
maximum capacity of the Interconnection Facilities. The price to be paid for any
Effluent specified in a Notice of Commitment that is actually taken into the
Effluent Pipeline and used at or for the benefit of Other Electric Generating
Facilities shall be as specified in Section 2.2. The price to be paid for any
Effluent specified in a Notice of Commitment that is not actually taken into the
Effluent Pipeline and used at or for the benefit of Other Electric Generating
Facilities shall be as specified in Section 2.5.

            8.3 If The Companies have not delivered one or more Notices of
Commitment to purchase at least the following Minimum Quantities of Surplus
Effluent for use at or for the benefit of Other Electric Generating Facilities
on or before the Commitment Dates identified in the following table, Tolleson
may elect to terminate its continuing obligation to sell and deliver any portion
of the corresponding Minimum Quantity of Surplus Effluent for use at or for the
benefit of Palo Verde or Other Electric Generating Facilities that is not yet
subject to a Notice of Commitment:

                                     - 16 -





 COMMITMENT DATE                MINIMUM QUANTITY
- -----------------           --------------------------------------
                         
December 31, 2002           At least 3,000 acre-feet
December 31, 2003           At least an additional 3,000 acre-feet
December 31, 2005           At least an additional 3,000 acre-feet
December 31, 2007           At least an additional 4,000 acre-feet


For a period of one year following each specified Commitment Date, Tolleson may
terminate its obligation to sell and deliver any portion of the corresponding
Minimum Quantity not yet subject to a Notice of Commitment by delivering to The
Companies one or more written Notices of Intent to Terminate. Each Notice of
Intent to Terminate shall specify the quantity of Surplus Effluent for which
Tolleson has elected to terminate its obligation to sell and deliver to the
Companies for use at or for the benefit of Palo Verde or Other Electric
Generating Facilities. Upon receipt of a Notice of Intent to Terminate, The
Companies shall have ninety days thereafter within which to submit a Notice of
Commitment to Tolleson for the quantity of Surplus Effluent for use at or for
the benefit of Other Electric Generating Facilities specified in the Notice of
Intent to Terminate. If The Companies submit a Notice of Commitment within this
ninety-day period, Tolleson's continuing obligation to sell and deliver Surplus
Effluent to The Companies for use at or for the benefit of Palo Verde or Other
Electric Generating Facilities shall not be terminated. If The Companies do not
submit a Notice of Commitment within this ninety day period, Tolleson's
obligation to sell and deliver the specified quantity of Surplus Effluent for
use at or for the benefit of Palo Verde or Other Electric Generating Facilities
shall be terminated, the specified quantity of Surplus Effluent shall no longer
be eligible for price adjustments pursuant to Sections 2.1, 2.2 or 2.6, and The
Companies shall no longer be obligated to pay, pursuant to Section 2.5, for any
of the specified Surplus Effluent not actually taken into the Pipeline.
Notwithstanding the previous sentence, The Companies may continue to accept into
the Pipeline any or all of the Surplus Effluent specified in the Notice of
Intent to Terminate provided Tolleson desires to continue delivering such
Surplus Effluent, in which event, The Companies shall pay

                                     - 17 -



Tolleson the price for such Surplus Effluent specified in Section 2.1 or Section
2.2, as appropriate.

            8.4 Nothing in Sections 8.2 and 8.3 is intended to limit Tolleson's
first right to deliver into the Effluent Pipeline and sell to The Companies
treated wastewater effluent for use at or for the benefit of Other Electric
Generating Facilities as provided in Section 4.2 or to limit the obligation of
The Companies to purchase and accept all of the Surplus Effluent produced
through the operation of the Plant as provided in Section 1.1. To the extent
that The Companies purchase treated wastewater effluent delivered into the
Effluent Pipeline for use at or for the benefit of Other Electric Generating
Facilities, Tolleson shall have the first right to sell such treated wastewater
effluent consistent with the terms of Section 4.2, regardless of whether The
Companies have submitted one or more Notices of Commitment for that amount of
Surplus Effluent.

            8.5 The Companies shall have the right to refuse delivery of
Effluent whenever, in their sole and reasonable discretion, use of Effluent
would cause significant operational problems in the Effluent Pipeline, Water
Reclamation Facility or other Palo Verde facilities. However, other than during
an Uncontrollable Force event, as defined in Section 9.1, The Companies shall
pay the price established in Section 2.5 for any Surplus Effluent refused
pursuant to this Section 8.5 that is actually available for delivery to the
Delivery Point and meets the water quality standards of Section 3 of this
Agreement.

SECTION 9. UNCONTROLLABLE FORCE AND OUTAGES.

            9.1 Neither Tolleson nor The Companies shall be considered to be in
default in the performance of any of the obligations hereunder if failure of
performance shall be due to an Uncontrollable Force. The term "Uncontrollable
Force" shall mean any cause beyond the control of the Party affected, including,
but not limited to, failure of facilities, flood, earthquake, tornado, storm,
fire, lightning, epidemic, war, riot, civil disturbance or disobedience, labor
dispute, and action or nonaction by or failure to obtain or revocation of the
necessary

                                     - 18 -



authorizations or approvals from any governmental agency or authority or the
electorate, labor or material shortage, sabotage and restraint by Court order or
public authority, which by exercise of due diligence and foresight such Party
could not reasonably have been expected to avoid and which by exercise of due
diligence it shall be unable to overcome. Nothing contained herein shall be
construed so as to require any Party to settle any strike or labor dispute in
which it may be involved. Any Party rendered unable to fulfill any obligation by
reason of any Uncontrollable Force shall exercise due diligence to remove such
inability with all reasonable dispatch.

            9.2 Whenever an Uncontrollable Force as defined in Section 9.1
prevents The Companies from being able to accept or use the Surplus Effluent,
then Tolleson may enter into temporary contracts with any other parties for sale
of the Surplus Effluent. If Tolleson has entered into such a temporary contract,
Tolleson shall be allowed up to 30 days to begin delivery of the Surplus
Effluent to The Companies after receiving written notice from The Companies that
the disability has been removed.

            9.3 Notwithstanding the provisions of Sections 9.1 and 9.2, if,
after the exercise of due diligence, the Party rendered unable to fulfill an
obligation remains unable to remove such inability for one full year, the other
Party may elect to terminate this Agreement anytime thereafter by tendering 90
days written notice of its intention to terminate. However, if The Companies
receive a written termination notice from Tolleson pursuant to the preceding
sentence, The Companies may elect, at any time prior to the expiration of the 90
days, to begin paying the price established in Section 2.5 for any Surplus
Effluent available for delivery and meeting the water quality standards of
Section 3 of this Agreement, up to the then-operational maximum capacity of the
Interconnection Facilities. As long as The Companies continue the payments
required under this paragraph, this Agreement shall remain in full force and
effect.

            9.4 If an Uncontrollable Force or malfunction of any component or
system of the Effluent Pipeline or the Water Reclamation Facility at Palo Verde,
restricts the capability of either of such facilities to transport or treat
wastewater effluent from all sources for a period of one full year or less, then
The Companies may refuse to accept delivery of the Surplus

                                     - 19 -



Effluent and shall not be required to pay therefor. It is understood, however,
that the Surplus Effluent from Tolleson's Plant shall be the last source of
effluent that The Companies cut back on during such Uncontrollable Force or
malfunction and that The Companies shall not refuse to accept and pay for
Tolleson's Surplus Effluent to the extent that they are accepting and paying for
effluent from any other source.

            9.5 If The Companies initiate a Scheduled Outage of Palo Verde, the
Effluent Pipeline or the Water Reclamation Facility, The Companies shall pay the
price established in Section 2.5 for any Surplus Effluent available for delivery
and meeting the water quality standards of Section 3 of this Agreement, up to
the then-operational maximum capacity of the Interconnection Facilities. As long
as The Companies continue the payments required under this Section, this
Agreement shall remain in full force and effect. If Tolleson initiates a
Scheduled Outage of the Plant, any obligation that Tolleson may have to supply
Effluent, and the obligation of The Companies to pay the price established under
Section 2.5, shall be suspended during such Scheduled Outage. "Scheduled Outage"
shall mean any temporary cessation of operations that is planned and controlled
by the Party initiating the Scheduled Outage.

            9.6 Except in emergencies, The Companies shall give 30 days written
notice in advance of any discontinuation of acceptance of Surplus Effluent under
the provisions of this Section 9. Except in emergencies, Tolleson shall give 30
days written notice in advance of any Scheduled Outage that will limit
Tolleson's ability to supply at least 13,000 acre-feet per year of Surplus
Effluent to The Companies. Tolleson shall use its best efforts to minimize the
duration of any Scheduled Outage that will limit Tolleson's ability to supply at
least 13,000 acre-feet per year of Surplus Effluent to The Companies.

SECTION 10. LIABILITY AND INSURANCE.

            10.1 Except for the negligent or intentional acts of The Companies,
their officers, directors, employees and agents, Tolleson shall, to the extent
permitted by law, indemnify and hold The Companies and their officers,
directors, employees and agents harmless

                                     - 20 -



for any physical damage to property, or death of, or personal injury to, any
person, and from any cost, expense, claim or loss from such damage, injury or
death arising out of the ownership, use, occupancy, operation, maintenance,
repair, replacement and reconstruction of the Plant and the Outfall Lines and
that portion of the Interconnection Facilities owned by Tolleson as specified in
Exhibit B.

            10.2 Except for the negligent or intentional acts of Tolleson, its
officers, managers, employees or agents, The Companies shall indemnify and hold
Tolleson and its officers, managers, employees and agents harmless for any
physical damage to property, or death of, or personal injury to, any person, and
from any cost, expense, claim or loss from such damage, injury or death arising
out of the construction, ownership, use, occupancy, operation, maintenance,
repair, replacement and reconstruction of the delivery facilities at the
Delivery Point, that portion of the Interconnection Facilities owned by the
Companies as specified in Exhibit C, the Effluent Pipeline, the facilities at
Palo Verde, or the transportation, use, resale or disposal of Surplus Effluent
delivered and accepted hereunder.

            10.3 Tolleson shall procure and maintain insurance against physical
damage to property, or death of, or personal injury to, any persons, of the kind
and with coverages normally carried by entities operating properties similar to
the Plant and the Outfall Lines. Upon request, Tolleson shall furnish to The
Companies certificates of insurance demonstrating compliance with this Section
10.3.

            10.4 The Companies shall procure and maintain insurance against
physical damage to property, or death of, or personal injury to, any persons, of
the kind and with coverages normally carried by entities operating properties
similar to the Effluent Pipeline and Palo Verde. Upon request, The Companies
shall furnish to Tolleson certificates of insurance demonstrating compliance
with this Section 10.4.

                                     - 21 -



SECTION 11. INSPECTIONS AND ACCESS TO RECORDS.

            11.1 Each of the Parties shall have the right, during reasonable
hours, of access to and inspection of the facilities and operations of the other
Parties which are associated with the treatment, delivery, measurement,
transportation and use of Effluent sold and purchased hereunder.

            11.2 Each of the Parties shall have the right, during reasonable
hours, of access to the records of the other Parties which are relevant for
proving compliance or noncompliance of each of the Parties with any of the terms
of this Agreement.

SECTION 12. GENERAL.

            12.1 Effective Date and Term. This Agreement shall be effective from
and after the date of its execution by the parties and shall expire on December
31, 2050, unless partially or fully terminated before that date under the
provisions of Sections 2.1, 6.4, 8.3, 9.3 or 12.3.1.

            12.2 Assignment of Agreement or Transfer of Facilities.

            12.2.1 Neither Tolleson nor The Companies shall transfer or assign
any of their respective rights, titles and interests in and to this Agreement
without the prior written consent of the other Parties, except that: (i) The
Companies and any of their affiliates, successors or assigns shall each have the
right to transfer and assign all or any portion of its right, title and interest
in this Agreement to the other, to any related corporate entity, or to any other
entity now or hereafter participating in Palo Verde or any Other Electric
Generating Facilities which utilize the Surplus Effluent sold hereunder,
provided that such entity expressly assumes the obligations of the respective
Company, as applicable, under this Agreement; and (ii) either Company, and any
of its respective affiliates, successors or assigns shall have the right to
transfer its right, title and interest in this Agreement to any mortgagee,
trustee or secured party under present or future deeds of trust, mortgages,
indentures or security agreements. A transfer or assignment by any Party shall
not release that party from its obligations as the primary obligor under the
Agreement

                                     - 22 -



without the written consent of the other Parties. In the event of any transfer
or assignment of this Agreement by either Tolleson or The Companies, the terms,
covenants and conditions of this Agreement shall be binding upon and inure to
the benefit of and shall apply to the respective transferees, successors and
assigns of Tolleson and The Companies.

            12.2.2 The Companies shall not convey Palo Verde or any interest
therein without the grantee of such conveyance expressly agreeing to be bound by
all terms of this Agreement, unless The Company that conveys its interest in
Palo Verde expressly agrees to continue to be bound by all terms of this
Agreement. Tolleson shall not convey the Plant or any interest therein, without
the grantee of such conveyance expressly agreeing to be bound by all terms of
this Agreement.

            12.3 Compliance with Laws.

            12.3.1 The Companies shall use the Effluent delivered hereunder in
accordance with the applicable laws of the United States of America, the
applicable laws of the State of Arizona and the rules and regulations of
federal, state and local agencies; provided, however, that in the event any such
laws or regulations shall be amended in the future so as to make it impossible
or uneconomical to use the Effluent for the purposes specified in this
Agreement, The Companies shall, at their option, have the right to cancel and
terminate this Agreement upon giving 90 days notice in writing to Tolleson. In
the event Tolleson is prohibited by any state or federal laws or regulations
from selling Effluent for the uses contemplated herein, Tolleson shall have the
right to cancel and terminate this Agreement upon giving 90 days notice in
writing to The Companies. Until the notice period runs and the termination
becomes effective, The Companies shall continue to pay for the Surplus Effluent
pursuant to Section 2.5, except as otherwise specified in this Agreement.

            12.3.2 If any proceeding in law or equity is instituted challenging
the authority and power of Tolleson and/or The Companies to make, execute and
deliver this Agreement and/or to perform its terms, covenants and conditions, or
relating to the rights, title and interest of Tolleson or The Companies in and
to the Effluent, then Tolleson and The

                                     - 23 -



Companies shall jointly and cooperatively defend the validity of this Agreement
and the sale, delivery and uses of Effluent contemplated herein.

            12.3.3 The Parties acknowledge that this Agreement is subject to the
provisions of Arizona Revised Statutes Section 38-511, and can be cancelled
within three years after its execution by Tolleson if any person significantly
involved in initiating, negotiating, securing, drafting or creating this
Agreement on behalf of Tolleson is, while this Agreement is in effect during
that three year period, an employee or agent of or consultant to any other Party
to this Agreement.

            12.4 Notices. All notices, demands, consents or other writings given
or made pursuant to this Agreement shall be in writing and, unless otherwise
specified herein, shall be deemed to have been duly given when made and
deposited in the United States mail by registered or certified mail with postage
prepaid and addressed as follows:

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

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

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

The address to which any notice, demand, consent or other writing shall be given
to any Party may be changed from time to time by written notice of such Party to
the other Parties as above provided.

                                     - 24 -



            12.5 Relative Responsibilities and Authority of The Companies.

            12.5.1 APS, or any of its affiliates, successors or assigns acting
as Operating Agent of Palo Verde, is authorized to act for and on behalf of SRP
in all matters affecting the implementation and performance of this Agreement
for the use of Effluent at Palo Verde, and all actions and representations taken
or made by APS in the implementation and performance of this Agreement shall be
binding upon SRP.

            12.5.2 In the event all or part of the Effluent is used other than
at Palo Verde, The Companies shall be jointly responsible for implementation and
performance of this Agreement.

            12.5.3 The Companies shall be jointly and severally liable to
perform the obligations to Tolleson that are imposed by this Agreement.

            12.5.4 The Companies represent that they have the authority to enter
into and carry out all obligations to Tolleson under this Agreement.

            12.6 Waivers. The waiver by either Tolleson or The Companies of any
breach of any term, covenant or condition of this Agreement shall not be deemed
a waiver of such term, covenant or condition or of any subsequent breach thereof
or a subsequent breach of any other term, covenant or condition in this
Agreement.

            12.7 Resolution of Conflicts and Disputes. Any conflict or disputes
in: (i) the implementation of this Agreement provided in Section 7, or (ii) the
quantity or quality of Surplus Effluent delivered as discussed in Section 2.4,
shall be resolved by arbitration in accord with the rules of the American
Arbitration Association. No other conflicts or disputes arising out of the
Agreement shall be subject to mandatory arbitration. In all cases, the Agreement
shall be interpreted according to the laws of the State of Arizona.

            12.8 Sales and Use Taxes. In the event the State of Arizona, County
of Maricopa or the federal government should require that Tolleson pay a tax
resulting from the sale of Effluent to The Companies, then the price for the
Effluent shall be increased by the amount of such tax. In the event Tolleson
shall levy a tax on the sale or use of the Effluent, then the

                                     - 25 -



amounts of any such tax paid by The Companies shall be deducted from the amounts
payable under Sections 2.1 or 2.2 hereof.

            12.9 Section Headings. Section headings in this Agreement are for
convenience only and do not purport to describe accurately or completely the
contents of any section. Such headings are not to be construed as a part of this
Agreement or as in any way defining, limiting or amplifying the provisions
hereof.

            12.10 Severability. If any term or provision of this Agreement is
held to be void, invalid or unenforceable by a court of competent jurisdiction,
that term or provision shall be severable from the remainder of this Agreement
and shall not affect or render invalid, void or unenforceable any other
provision or term of this Agreement.

      IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
and attested by their respective duly authorized officers as of the date first
above written.

ATTEST:                                       CITY OF TOLLESON

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

                                        Reviewed By

                                        /s/ Ralph Velez
                                        _________________________________
                                        City Manager

                                        Approved as to Form

                                        /s/ Scott W. Ruby
                                        _________________________________
                                        City Attorney

                                     - 26 -




ATTEST:                                 ARIZONA PUBLIC SERVICE COMPANY

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

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

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

                                - 27 -

                                   EXHIBIT A

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

      Formula:    Pp (1 + A) = Pc

      Where:      Pp Previous year's price

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

                  Pc = New or Current year's price

This adjustment to the prices paid to the City for Effluent will be made each
calendar year, effective in January, using the most recent CPI-U data available.
This method of price adjustment will be used throughout the term of this
Agreement.

      Example of price adjustment using the above formula:

                  Pp (1 +A) = Pc

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

                  A = 11.8%
                      -----
                        5

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

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

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

      Example for year #2:

                  Pp (1+A) = Pc

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

                  A = 2.5%

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

                                    EXHIBIT B

The following legal description, as depicted on the attached map, describes the
area within which Other Electric Generating Facilities are subject to the
"physically capable of being economically served by Tolleson Effluent delivered
into the Effluent Pipeline" standard established in Sections 2.6 and 4.2 of the
"Agreement for the Sale and Purchase of Wastewater Effluent" to which this
Exhibit B is attached:

BEGINNING AT THE NORTH QUARTER CORNER OF SECTION 24, TOWNSHIP 1 NORTH, RANGE 6
WEST;

THENCE WEST ALONG THE NORTH LINE OF SAID SECTION 24 AND ALONG THE NORTH LINE OF
SECTIONS 23, 22 AND 21, TOWNSHIP 1 NORTH, RANGE 6 WEST APPROXIMATELY THREE MILES
TO THE NORTH QUARTER CORNER OF SAID SECTION 21;

THENCE SOUTH ALONG THE NORTH SOUTH MID-SECTION LINE OF SAID SECTION 21
APPROXIMATELY ONE HALF MILE TO THE APPROXIMATE CENTER OF SAID SECTION 21;

THENCE WEST ALONG THE EAST WEST MID-SECTION LINE OF SAID SECTION 21 AND SECTION
20, TOWNSHIP 1 NORTH, RANGE 6 WEST, APPROXIMATELY ONE MILE TO THE APPROXIMATE
CENTER OF SAID SECTION 20;

THENCE SOUTH ALONG THE NORTH-SOUTH MID-SECTION LINE OF SECTIONS 20, 29 AND 32,
TOWNSHIP 1 NORTH, RANGE 6 WEST APPROXIMATELY TWO AND ONE HALF MILES TO THE SOUTH
QUARTER CORNER OF SAID SECTION 32, WHICH IS COINCIDENT WITH THE NORTH QUARTER
CORNER OF SECTION 5, TOWNSHIP 1 SOUTH, RANGE 6 WEST;

THENCE WEST ALONG THE NORTH LINE OF SECTIONS 5 AND 6, TOWNSHIP 1 SOUTH, RANGE 6
WEST, AND ALONG THE NORTH LINE OF SECTION 1, TOWNSHIP 1 SOUTH, RANGE 7 WEST
APPROXIMATELY TWO AND ONE HALF MILES TO THE NORTHWEST CORNER OF SECTION 1,
TOWNSHIP 1 SOUTH, RANGE 7 WEST;

THENCE SOUTH ALONG THE WEST LINE OF SAID SECTION 1, APPROXIMATELY ONE MILE TO
THE SOUTHWEST CORNER OF SAID SECTION 1 WHICH IS COINCIDENT WITH THE NORTHEAST
CORNER OF SECTION 11, TOWNSHIP I SOUTH RANGE 7 WEST;

THENCE WEST ALONG THE NORTH LINE OF SAID SECTION 11 APPROXIMATELY ONE MILE TO
THE NORTHWEST CORNER OF SECTION 11, TOWNSHIP 1 SOUTH, RANGE 7 WEST;

THENCE SOUTH APPROXIMATELY 4 MILES ALONG THE WEST LINE OF SAID SECTION 11 AND
THE WEST LINE OF SECTIONS 14, 23, AND 26, TOWNSHIP 1 SOUTH, RANGE 7 WEST TO THE
SOUTHWEST CORNER OF SAID SECTION 26;

THENCE EAST APPROXIMATELY ONE AND ONE HALF MILES ALONG THE SOUTH LINE OF SAID
SECTION 26 AND THE SOUTH LINE OF SECTION 25, TOWNSHIP 1 SOUTH, RANGE 7 WEST TO
THE SOUTH QUARTER CORNER OF SAID SECTION 25, WHICH IS COINCIDENT WITH THE NORTH
QUARTER CORNER OF SECTION 36, TOWNSHIP 1 SOUTH, RANGE 7 WEST;

THENCE SOUTH ALONG THE NORTH SOUTH MID-SECTION LINE OF SECTION 36, TOWNSHIP 1
SOUTH, RANGE 7 WEST APPROXIMATELY ONE MILE TO THE SOUTH QUARTER CORNER OF SAID
SECTION 36;

THENCE EAST APPROXIMATELY 4 AND ONE HALF MILES ALONG THE SOUTH LINE OF SAID
SECTION 36, TOWNSHIP 1 SOUTH, RANGE 7 WEST AND THE SOUTH LINE OF SECTIONS 31,
32, 33 AND 34, TOWNSHIP 1 SOUTH, RANGE 6 WEST TO THE SOUTHEAST CORNER OF SAID
SECTION 34, WHICH IS COINCIDENT WITH THE NORTHWEST CORNER OF SECTION 2, TOWNSHIP
2 SOUTH, RANGE 6 WEST; THENCE SOUTH ALONG THE WEST LINE OF SAID SECTION 2
APPROXIMATELY ONE HALF MILE TO THE WEST QUARTER CORNER OF SAID SECTION 2;

THENCE EAST APPROXIMATELY ONE MILE ALONG THE EAST WEST MIDSECTION LINE OF SAID
SECTION 2 TO THE EAST QUARTER CORNER OF SAID SECTION 2, WHICH IS COINCIDENT WITH
THE WEST QUARTER CORNER OF SECTION 1, TOWNSHIP 2 SOUTH, RANGE 6 WEST;

THENCE SOUTH APPROXIMATELY ONE HALF MILE ALONG THE WEST LINE OF SAID SECTION 1
TO THE SOUTHWEST CORNER OF SAID SECTION 1;

THENCE EAST ALONG THE SOUTH LINE OF SAID SECTION 1 AND THE SOUTH LINE OF SECTION
6, TOWNSHIP 2 SOUTH, RANGE 5 WEST, APPROXIMATELY 2 MILES TO THE SOUTHEAST CORNER
OF SAID SECTION 6;

THENCE NORTH APPROXIMATELY THREE MILES ALONG THE EAST LINE OF SAID SECTION 6 AND
THE EAST LINE OF SECTIONS 31 AND 30, TOWNSHIP 1 SOUTH, RANGE 5 WEST TO THE
NORTHEAST CORNER OF SAID SECTION 30;

THENCE WEST APPROXIMATELY ONE HALF MILE ALONG THE NORTH LINE OF SAID SECTION 30
TO THE NORTH QUARTER CORNER OF SAID SECTION 30, WHICH IS COINCIDENT WITH THE
SOUTH QUARTER CORNER OF SECTION 19, TOWNSHIP 1 SOUTH, RANGE 5 WEST;

THENCE NORTH APPROXIMATELY ONE MILE ALONG THE NORTH SOUTH MID-SECTION LINE OF
SAID SECTION 19 TO THE NORTH QUARTER CORNER OF SAID SECTION 19;

THENCE WEST APPROXIMATELY ONE HALF MILE ALONG THE NORTH LINE OF SAID SECTION 19
TO THE NORTHWEST CORNER OF SAID SECTION 19, WHICH IS COINCIDENT WITH THE
SOUTHEAST CORNER OF SECTION 13, TOWNSHIP 1 SOUTH, RANGE 6 WEST;

THENCE NORTH APPROXIMATELY TWO MILES ALONG THE EAST LINE OF SECTIONS 13 AND 12
TOWNSHIP 1 SOUTH, RANGE 6 WEST TO THE NORTHEAST CORNER OF SAID SECTION 12;

THENCE WEST APPROXIMATELY ONE HALF MILE TO THE NORTH QUARTER CORNER OF SAID
SECTION 12, WHICH IS COINCIDENT WITH THE SOUTH QUARTER CORNER OF SECTION 1,
TOWNSHIP 1 SOUTH, RANGE 6 WEST;

THENCE NORTH APPROXIMATELY FOUR MILES ALONG THE NORTH SOUTH MID-SECTION LINE OF
SAID SECTION 1 AND THE NORTH SOUTH MIDSECTION LINE OF SECTIONS 36, 25 AND 24,
TOWNSHIP 1 NORTH, RANGE 6 WEST TO THE POINT OF BEGINNING.

ALL LYING WITHIN THE GILA AND SALT RIVER BASE AND MERIDIAN, MARICOPA COUNTY,
ARIZONA

      In accordance with Item 304 of Regulation S-T of the Securities Exchange
Act of 1934, the map on this page of this Agreement shows the Other Electric
Generating Facilities that could be served by Tolleson Effluent under this
Agreement.

                                    EXHIBIT C

The following components of the Interconnection Facilities, as depicted on
drawing Numbers AO-W-Z1C-150, Rev. 7, and AO-W-Z1C-151, Rev. 3 (both drawings
attached), are the property of the City of Tolleson:

1.    The Tolleson Junction Box and the weir and three manual sluice gates
      located within that Junction Box.

2.    The anchor block adjacent to the Tolleson Junction Box.

3.    18 feet of 48-inch pipe connected to the inlet side of the Tolleson
      Junction Box.

4.    Approximately 15 feet of 42-inch pipe connected to the outlet side of the
      Tolleson Junction Box.

5.    The manhole and stub pipe required to connect the 42-inch pipes connected
      to the inlet and outlet sides of the manhole.

6.    The Tolleson Junction Structure Box.

7.    All other portions of the "new" Tolleson Outfall Line.

8.    The portion of the existing Tolleson Outfall Line (30-inch) within the
      Tolleson Junction Box.

9.    All other portions of the existing Tolleson Outfall Line.

The following components of the Interconnection Facilities, as depicted on
drawing Numbers AO-W-Z1C-150, Rev. 7, and AO-W-Z1C-151, Rev. 3 (both drawings
attached), are the property of APS, SRP and the other owners of Palo Verde
Nuclear Generating Station:

1.    The ANPP Effluent Pipeline Junction Box and all facilities and equipment
      located within that Junction Box.

2.    The 30-inch pipe between the Palo Verde Effluent Pipeline Junction Box and
      the Tolleson Junction Box.

3.    The motorized sluice gate (valve) situated in the Tolleson Junction Box.

4.    The flow metering equipment, including without limitations such devices as
      may be necessary for transmission of flow meter data to the control panels
      in the Plant.

5.    The RTU Building and all facilities and equipment located within that
      building.

      In accordance with Item 304 of Regulation S-T of the Securities Exchange
Act of 1934, the drawings on these two pages of this Agreement show the
Interconnection Facilities owned by Palo Verde and the City of Tolleson.

                                  Attachment 2


                           OPERATING AGREEMENT FOR THE
                       CO-OWNERSHIP OF WASTEWATER EFFLUENT

      This Agreement (the "Agreement") is made and entered into this 16th day of
November, 2000 (the "Effective Date"), by and between Arizona Public Service
Company, a corporation organized and existing under and by virtue of the laws of
the State of Arizona ("APS") and Salt River Project Agricultural Improvement and
Power District, an agricultural improvement district organized and existing
under and by virtue of the laws of the State of Arizona ("SRP"). SRP and APS are
collectively referred to herein as the "Parties"; each is individually a "Party"
to this Agreement.

                                    RECITALS:

      A. APS, SRP, and the City of Tolleson have executed an "Agreement for the
Sale and Purchase of Wastewater Effluent," dated November 13, 2000 (the
"Tolleson Agreement"), and each Party to this Agreement desires to more
particularly describe its rights and responsibilities vis-a-vis the other Party
as a co-owner of Tolleson Effluent;

      B. The primary use of the Tolleson Effluent is intended to be for cooling
water at Palo Verde Nuclear Generating Station ("PVNGS"); the secondary use of
the Tolleson Effluent will be its use at "Other Electric Generating Facilities"
(as defined by the Tolleson Agreement);

      C. To the extent Tolleson Effluent is not used at PVNGS, the Tolleson
Effluent may be used at or for the benefit of Other Electric Generating
Facilities;

      D. It is appropriate to establish terms and conditions on which APS, SRP,
and their respective affiliates, including Pinnacle West Energy Corporation
("PWE"), will make use of the Tolleson Effluent and make decisions regarding the
use of same in the future;

      E. The Parties desire to enter into this Agreement to set forth their
respective rights and obligations pertaining to the co-ownership of the Tolleson
Effluent. Accordingly, this Agreement is an ancillary document or companion
agreement in relation to the Tolleson Agreement.

      NOW, THEREFORE, in consideration of the agreements and promises set forth
below, and, other good and valuable considerations, the receipt and sufficiency
of which are acknowledged, the parties hereby agree as follows:

                                    ARTICLE I
                              DEFINITIONS AND USAGE

      1.1 Definitions. As used herein, the following capitalized terms shall
have the same meaning as they are given by definition in the Tolleson Agreement:
Delivery Point, Effluent, Effluent Pipeline, Notice of Commitment, Other
Electric Generating Facilities, Outages, Reserved Effluent, Surplus Effluent,
Tolleson, and Uncontrollable Forces. All such definitions from the Tolleson
Agreement are specifically incorporated in this

Agreement by this reference. In addition, the following terms shall have the
specified meanings:

            "Claim" means any demand, claim, cause of action, lawsuit, or
proceeding of any kind or character, including investigation or audit by a
Governmental Authority.

            "Coordinating Committee" has the meaning specified in Article 4.

            "Effective Date" has the meaning specified in the introductory
paragraph.

            "Event of Default" has the meaning specified in Section 7.1.

            "Governmental Authority" means a federal, state, local or foreign
governmental authority or body politic; a state, province, commonwealth,
territory or district; a county; a city, town, township, village or other
municipality; a district or other subdivision or any of the foregoing; any
executive, legislative or other governing body of any of the foregoing; any
agency, authority, board, department, system, service, office, commission,
committee, council, or other administrative body of any of the foregoing; any
court or other judicial body; a legally recognized tribal authority; and any
officer, official or other representative of any of the foregoing when acting in
their official capacity. For purposes of this Agreement, neither SRP nor APS
shall be considered a Governmental Authority.

            "Legal Requirement" means any statute, law, regulation, ordinance,
rule, judgment, order, decree, constitution, Permit, concession, grant,
franchise, agreement, directive or common law, or any requirement of, or other
governmental restriction or any similar form of decision by, or interpretation
or administration of any of the foregoing by, any Governmental Authority of
competent jurisdiction (or by an arbitrator in a forum involving binding
arbitration to which one of the parties or its business or assets is subject or
bound).

            "Palo Verde Nuclear Generating Station" or "PVNGS" means the Arizona
Nuclear Power Project, as defined in the Arizona Nuclear Power Project
Participation Agreement (including amendments 1-13) among APS, SRP, Southern
California Edison, Public Service Company of New Mexico, El Paso Electric
Company, Southern California Public Power Authority, and the Department of Water
and Power of the City of Los Angeles (collectively, the "PVNGS Participants").

            "Party" or "Parties" has the meaning specified in the introductory
paragraph and shall include permitted successors and assigns.

            "Permit" means any permit, consent, license, rezoning, variance, use
permit, certification, notice, filing, approval, or authorization of any kind
required to be issued by a Governmental Authority and any necessary consent or
approval required to be granted by any non-Governmental Authority, other than a
Party, in order to develop, construct, own, or operate any facility that is
contemplated or required because of decisions made pursuant to this Agreement.

                                        2

            "Person" means any natural person, corporation, limited liability
company, partnership, business trust, Governmental Authority or other entity.

            "PWE" means Pinnacle West Energy Corporation, an Arizona Corporation
and an affiliate of APS.

            "Tolleson Effluent" means all Effluent purchased by APS and SRP from
the City of Tolleson pursuant to the Tolleson Agreement, whether such Effluent
is Surplus Effluent or Reserved Effluent, as those terms are defined in the
Tolleson Agreement.

      1.2 Certain Principles of Interpretation. In this Agreement, unless
otherwise indicated or the context otherwise requires:

            (i) the singular includes the plural and plural the singular when
the context requires;

            (ii) words importing any gender include the other gender;

            (iii) references to "writing" include printing, typing, lithography,
and other means of reproducing words in a tangible visible form;

            (iv) the words "including," "includes," and "include" shall be
deemed to be followed in each instance by the words, "without limitation";

            (v) references to articles, sections, paragraphs, recitals, and
exhibits are to this Agreement unless otherwise stated;

            (vi) references to contracts and related instruments shall be deemed
to include all subsequent amendments, extensions, and other modifications to
such instruments (without, however, limiting any prohibition on any such
amendments, extensions and other modifications by the terms of this Agreement);

            (vii) references to Persons include their respective permitted
successors and assigns and, in the case of Governmental Authorities, persons
succeeding to their respective functions and capacities;

            (viii) the words "hereof," "herein," "hereunder," and words of
similar import shall refer to this Agreement as a whole and not to any
particular provision thereof;

            (ix) both Parties and their counsel participated extensively in the
preparation and drafting of this Agreement; no rule of construction shall apply
that would cause the interpretation of any claimed ambiguity in this Agreement
against a Party determined to be the drafting Party;

            (x) captions and headings in this Agreement are included herein for
convenience of reference only and shall not constitute a part of this Agreement
for any other purpose;

                                        3

            (xi) any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof or affecting the validity or enforceability of such
provision in any other jurisdiction and the provision that is prohibited or
unenforceable shall be reformed or modified to reflect the parties' intent to
the maximum extent permitted by applicable law; and

            (xii) references to a "day," "week," "month," or "year" shall be
construed as a calendar day, week, month, or year.

                                    ARTICLE 2
                                PURPOSE AND SCOPE

      The purpose of this Agreement is to set forth certain agreements and
understandings between the Parties concerning the ownership and use of the
Tolleson Effluent, the allocation of costs incurred in connection with the
Tolleson Agreement and this Agreement, and the responsibilities and obligations
of each Party. This Agreement relates solely to the business, activities, and
purposes set forth herein and, except as otherwise expressly provided herein,
does not apply to any other activities, transactions, relationships, contracts,
projects, or work of the Parties. Subject to Article 4, no Party shall be
restricted in any way from engaging in any activity or business falling outside
the scope of this Agreement.

                                    ARTICLE 3
                     OWNERSHIP AND USE OF TOLLESON EFFLUENT

      3.1 Co-Ownership and Use of Effluent Purchased from Tolleson. APS and SRP
agree that they are and shall be co-owners, as tenants in common, of all
Tolleson Effluent purchased pursuant to the Tolleson Agreement, each Party
possessing a 50% undivided interest in all such Tolleson Effluent. Consistent
with the Tolleson Agreement, the Parties agree that the primary use of the
Tolleson Effluent shall be for cooling water for PVNGS and that PVNGS shall have
a priority right to the use of any or all of the Tolleson Effluent to satisfy
such requirements for cooling water at PVNGS as are not fully satisfied using
effluent from non-emergency sources other than Tolleson. To the extent that
Tolleson Effluent is available for use at Other Electric Generating Facilities,
the allocation of and the benefit from any such Effluent shall be divided
between APS and SRP (or their permitted assigns) in the manner determined by the
Coordinating Committee pursuant to Article 4. Any use of Tolleson Effluent at or
for the benefit of Other Electric Generating Facilities shall be consistent with
the terms of both this Agreement and the Tolleson Agreement.

      3.2 Use of Tolleson Effluent at PVNGS. The Parties hereby agree that all
Tolleson Effluent used at PVNGS shall be transferred to the PVNGS Participants
at the Delivery Point specified in the Tolleson Agreement. All aspects of
transportation, treatment, use, disposal and payment for any Tolleson Effluent
so transferred and used at PVNGS shall be the responsibility of APS, as the
Operating Agent of PVNGS, upon discharge of that Effluent into the Effluent
Pipeline, and commencing upon such discharge, APS's rights and obligations with
respect to such Tolleson Effluent shall be those of the

                                        4

Operating Agent under the terms of the Arizona Nuclear Power Project
Participation Agreement, including but not limited to the liability provisions
set forth in that Participation Agreement. The Parties to this Agreement shall
not receive any fee or other compensation for transfer to the PVNGS Participants
of Tolleson Effluent used at PVNGS.

      3.3 Use of Tolleson Effluent at or For the Benefit of Other Electric
Generating Facilities. Tolleson Effluent, if not required for cooling water
purposes at PVNGS, may be used at or for the benefit of Other Electric
Generating Facilities upon such terms and conditions as the Parties may
separately agree, or as determined by the Coordinating Committee pursuant to
Article 4. In this regard, the Parties contemplate that up to 6,500 acre-feet
per year of available Tolleson Effluent will be transferred to PWE for use at
the proposed electric generating facility commonly referred to as "Redhawk"
pursuant to separate terms and conditions to be negotiated by the Parties,
including, without limitation, payment of a fee by PWE to SRP and APS. Depending
upon circumstances at the time, additional quantities of Tolleson Effluent may
be approved for use at Redhawk after negotiation by the Parties and appropriate
review and approval by the Coordinating Committee of any agreement that may be
negotiated, including, without limitation, payment of a fee by PWE to SRP and
APS.

                                    ARTICLE 4
                             COORDINATING COMMITTEE

      4.1 Coordinating Committee. Each Party shall designate one (1.)
representative ("Representative") to serve on the Coordinating Committee and one
(1) alternate ("Alternate"), each having an appropriate level of technical
expertise and familiarity with the policies of its executive management. The
Parties; hereby form the Coordinating Committee, the initial Representatives and
Alternates of which are as follows:



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


      A Party may change its Representative or Alternate upon notice to the
other Party. (The term "Representative" shall include the designated
Representative or any Alternate that is actually performing the duties of the
Representative.)

      4.2 Coordinating Committee Authority. The Coordinating Committee shall
have the following responsibilities and authority, subject to and consistent
with the other terms of this Agreement and any separate agreement between the
Parties that allocates any portion of Tolleson Effluent for a specific use:

            (i) monitoring, directing, coordinating, and managing the activities
of the Parties undertaken pursuant to this Agreement and, except as provided in
Section 5.1 hereof, allocating the costs and benefits thereof between the
Parties in equal shares;

            (ii) determining whether to issue a Notice of Commitment pursuant to
paragraph 8.2 of the Tolleson Agreement, and approving all proposed uses of
Tolleson Effluent, except to the extent that such issues are determined by the
terms of any separate

                                        5

agreement between the Parties that allocates any portion of Tolleson Effluent
for a specific use;

            (iii) authorizing negotiations and approving all other contracts or
commissioning such studies, investigations, or reports as the Coordinating
Committee deems desirable or necessary;

            (iv) determining the agenda, scope, participants and attendees at
meetings of, and other matters relating to, the Coordinating Committee; and

            (v) performing any other responsibility, duty, or authority granted
from time to time to the Coordinating Committee by amendment of this Agreement.

      4.3 Actions of the Coordinating Committee. No Party shall take any action
with respect to allocation of Tolleson Effluent to any Other Electric Generating
Facility except as may be specifically authorized by this Agreement or as agreed
to and approved by the Coordinating Committee. No action of the Coordinating
Committee shall be binding unless and until: (i) such action has been set forth
in a writing submitted to the Representatives; (ii) the Representatives have had
ten days after receipt of the writing to review it; and (iii) the action has
been approved in writing by the Representative of each of the Parties. Failure
to approve an action within such ten day period shall not constitute approval;
provided, however, that each Party shall make good faith efforts to review and
approve or reject each action within the ten day period. Approval of or failure
to object to the minutes of a meeting of the Coordinating Committee shall not be
deemed to constitute written approval of any action taken thereat. All actions
approved by the Coordinating Committee shall be carried out by one or more of
the Parties, as specified in the written approval of such action; any approval
which does not specify the responsible party for the action shall be carried out
by the Party having principal responsibility, as set forth in. Article 5.

      4.4 Term. The Coordinating Committee shall dissolve and have no further
authority upon (i) the due termination of this Agreement pursuant to any
provision hereof, except to the extent it is expressly agreed in writing that
the Coordinating Committee is needed to manage those matters that survive
termination; or (ii) the unanimous agreement of the Parties to dissolve the
Coordinating Committee.

      4.5 Meetings.

            A. Time and Conduct of Meetings: Quorum. The Coordinating Committee
shall meet during the term of this Agreement, on an "as needed" basis or at the
request of either Representative, at such times and at such places as the
Representatives may from time to time agree. Meetings of the Coordinating
Committee may be held in person or by telephone, video conference, or other
agreed means. Each Representative shall be given reasonable advance notice of
all Coordinating Committee meetings and all matters to be voted on by the
Coordinating Committee. A quorum for a meeting of the Coordinating Committee
shall consist of one representative of each Party. Any substantive decisions of
the Coordinating Committee shall be documented in writing and approved by both
Representatives.

                                        6

            B. Attendance. Each Party shall use reasonable efforts to cause its
Representative to be present at each meeting of the Coordinating Committee and
no Party shall withhold the presence or participation of its Representative to
forestall decisions on any matter pertaining to this Agreement. A Party may,
without notice, cause any of its employees or its legal counsel to attend any
meeting of the Coordinating Committee. In addition, a Party may, upon reasonable
notice to the Coordinating Committee, request that individuals other than its
employees and legal counsel be allowed to attend a meeting of the Coordinating
Committee. No individuals other than the Representatives shall be permitted to
vote on behalf of a Party. The Coordinating Committee may require the execution
of a confidentiality agreement by any individual other than the Representatives,
Alternates, employees, and legal counsel of the Parties as a condition to
approving such individual's attendance at a Coordinating Committee meeting.

                                    ARTICLE 5
                            PRINCIPAL RESPONSIBILITY

      5.1 Implementing Decisions of Coordinating Committee. APS shall have
principal responsibility for carrying out the actions of the Coordinating
Committee, and implementing decisions of the Coordinating Committee, unless
otherwise specified pursuant to Section 4.3 or 5.2 hereof. In addition, as set
forth in paragraph 12.5.1 of the Tolleson Agreement, APS is authorized to act
for and on behalf of SRP in all matters affecting the implementation and
performance of the Tolleson Agreement when the performance in question involves
transportation and use of Tolleson Effluent at PVNGS. The intent of said
paragraph 12.5.1 is to authorize APS to act both as the Party with principal
responsibility under this Agreement and as Operating Agent for PVNGS in managing
all Tolleson Effluent to be used at PVNGS. Notwithstanding the provisions of
this Section, either Party may take any appropriate, lawful action to cure a
breach of the Tolleson Agreement caused by the other Party.

      5.2 Responsibility for Transferred Tolleson Effluent.

            5.2.1 Transfers for Use at PVNGS. Consistent with Section 3.2 above,
APS and SRP shall request acceptance by the PVNGS Participants of responsibility
for, and risks associated with, transportation, treatment, use, disposal and
payment for all Tolleson Effluent to be used at PVNGS. Responsibility for, and
risks associated with, transportation, treatment, use, disposal and payment for
Tolleson Effluent to be used at PVNGS, shall be transferred to the PVNGS
Participants at the Delivery Point specified in the Tolleson Agreement.
Acceptance by the PVNGS Participants of the transfer of Tolleson Effluent, and
responsibility for, and risks associated with, its transportation, treatment,
use disposal and payment, shall be documented in the minutes of the
Administrative Committee established pursuant to Section 6.1.1 of the Arizona
Nuclear Power Project Participation Agreement.

            5.2.2 Transfers for Use at Other Electric Generating Facilities. As
between the Parties to this Agreement and the party or parties owning or
operating a specific Other Electric Generating Facility, responsibility for, and
risks associated with, transportation, treatment, use, disposal and payment for
Tolleson Effluent to be used at the Other Electric Generating Facility shall be
transferred to the party or parties owning an

                                        7

interest in or operating the Other Electric Generating Facility, such transfer
to occur at the Delivery Point specified in the Tolleson Agreement. Acceptance
of this transfer of responsibility for, and risks associated with, Tolleson
Effluent to be used at Other Electric Generating Facilities shall be documented
in the agreement(s) by which the Tolleson Effluent is transferred to the party
owning or operating the Other Electric Generating Facility. Notwithstanding the
transfer of responsibility and risk to the party or parties owning or operating
the Other Electric Generating Facility, ownership of the Tolleson Effluent shall
not transfer until physical delivery of the Tolleson Effluent to that party or
parties at the delivery point specified in the agreement transferring the
Tolleson Effluent.

      5.3 Permitting. APS shall have principal responsibility to ensure
compliance with any Legal Requirement applicable to the actions of the
Coordinating Committee and to ensure that any Person using Tolleson Effluent
purchased by the Parties secures any Permit and otherwise satisfies any Legal
Requirement applicable to the transportation and delivery of Tolleson Effluent
to the point of delivery agreed upon by the Parties; provided, however, that in
any case where SRP will make use of Tolleson Effluent at or for the benefit of
Other Electric Generating Facilities operated or solely owned by SRP or any
affiliated or successor entity, then from and after the delivery point agreed
upon by the Parties, SRP shall have principal responsibility to ensure
compliance with any Legal Requirement, and to secure any Permit, applicable to
its intended use of the Tolleson Effluent.

                                    ARTICLE 6
                                      TERM

      6.1 Term. This Agreement shall commence on the Effective Date and shall
terminate upon the expiration or termination of the Tolleson Agreement.

      6.2 Survival. All obligations and liabilities of the Parties under this
Agreement shall cease upon termination except the obligation of the Parties
under Article 9, obligations assigned pursuant to this Agreement to the
Coordinating Committee with the expressed, written intent that they survive this
Agreement, and the liabilities of any Party resulting from a default by such
Party leading to such termination.

                                    ARTICLE 7
                                     DEFAULT

      7.1 Events of Default. A Party shall be in default under this Agreement
upon the occurrence of the following ("Event of Default"): if it fails to render
performance required under any material provision of this Agreement when due and
such failure continues unremedied for thirty (30) days following written notice
to the Party in default given by the other Party. Neither APS nor SRP shall be
in default under this Agreement due to Uncontrollable Forces and Outages as
identified in Section 9.1 of the Tolleson Agreement. It shall also be an Event
of Default if a Party shall have commenced any insolvency, receivership,
bankruptcy, liquidation, or similar proceedings and (i) one hundred twenty (120)
days shall have expired from the commencement of any one or more of such
proceedings, and (ii) a petition commencing the proceeding has not been
dismissed or stayed within that time.

                                        8

      7.2 Actions upon Event of Default. In the event of any dispute between the
Parties concerning the rights and obligations created by this Agreement, or
concerning any Event of Default, the Parties shall first confer in an attempt to
informally resolve such dispute without need to resort to arbitration or
litigation. The Parties shall not resort to arbitration or litigation to enforce
their rights under this Agreement until they have conferred in good faith over a
period of not less than fifteen days in an attempt to informally resolve their
dispute. If the Parties are unable to resolve their dispute after conferring as
required in the preceding sentence, then during the period that any Event of
Default continues, the non-defaulting Party may, without prejudice to any other
available rights or remedies under this Agreement or at law or in equity, and
without constituting an election of an exclusive remedy for an Event of Default,
initiate either or both of the following: (i) proceedings to partition the
Tolleson Effluent and thereby terminate the co-tenancy of the Parties in the
Tolleson Effluent, or (ii) non-binding arbitration by one arbitrator who has not
previously been employed by either party (excluding employment as an
arbitrator), and does not have a direct or indirect interest in either Party or
the subject matter of the arbitration. The arbitrator shall either be as
mutually agreed by the Parties within fifteen (15) calendar days after
submission of the matter to arbitration, or failing agreement shall be selected
under the expedited rules of the American Arbitration Association ("AAA"). The
rules of AAA shall apply to the extent not inconsistent with the provisions in
this Section. Arbitration shall be conducted according to the following: (a) not
later than seven (7) days prior to the hearing date set by the arbitrator, each
party shall submit a brief with a single proposal for settlement; (b) the
hearing shall be conducted on a confidential basis without continuance or
adjournment; and (c) the Parties shall divide equally the cost of the arbitrator
and the hearing, and each Party shall be responsible for its own expenses,
including its counsel and representatives.

                                    ARTICLE 8
                                     NOTICES

      8.1 Notice Provision. All notices, demands, consents or other
communications required under this Agreement shall be in writing and may be
delivered personally to a Party, may be delivered by facsimile providing written
confirmation of successful transmission, or may be mailed by deposit in the
United States Certified Mail, return receipt requested, or by deposit with a
reputable overnight delivery service. Notices shall be effective:

            (i) on the date delivered by personal delivery or facsimile;

            (ii) three (3) business days following the date deposited in the
United States mail; or

            (iii) the next business day following delivery to a reputable
overnight delivery service.

Notices or communications shall be delivered and mailed to the Parties at the
addresses set forth in paragraph 12.4 of the Tolleson Agreement, or to any
address of a Party which is substituted from time to time by written notice of
such Party pursuant to paragraph 12.4 of the Tolleson Agreement.

                                        9

                                    ARTICLE 9
                                    LIABILITY

      9.1 Limitation of Liability. The liability of a Party to the other Party
under this Agreement shall be limited to the direct damages actually sustained
by the other Party. NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR ANY
LOSS OR DAMAGE IN THE NATURE OF PARTIAL OR COMPLETE LOSS OF USE OF ANY
GENERATING FACILITY, LOSS OF ELECTRIC POWER, COST OF REPLACEMENT OF ELECTRIC
POWER, OR FOR ANY LOSS OF INTEREST, REVENUE OR ANTICIPATED PROFITS FROM
ACTIVITIES UNDER THIS AGREEMENT. NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR
ANY INDIRECT, SPECIAL, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR LOST PROFITS,
ARISING OUT OF OR RELATED TO THIS AGREEMENT. (The limitations in this Section
9.1 shall not apply to losses in tort to third parties or to Claims against
which a Party is entitled to indemnitee protection under Section 9.2.)

      9.2 Indemnity. Except as otherwise provided in any subsequent agreement
between the Parties (or between the Parties and other entities), each Party
("Indemnifying Party") shall defend, indemnify, and hold harmless the other
Party and its respective affiliates, directors, officers, partners, members,
employees, agents, and representatives (each an "Indemnitee") from and against
any and all Claims, liability, cost, loss or expense of any kind incurred by the
Indemnitees arising out of the fraud or willful misconduct of the Indemnifying
Party or its agents or representatives in connection with this Agreement, or
arising out of a material breach of the Tolleson Agreement by the Indemnifying
Party. Except as limited by any separate agreement between the Parties, each
Party shall also indemnify and hold harmless the other Party against any and all
Claims, liability, cost, loss or expense of any kind resulting from the
Indemnifying Party's control, transportation, use or disposal of Tolleson
Effluent at or for the benefit of any of the Indemnifying Party's Other Electric
Generating Facilities In the event any such Claim, liability, cost, loss or
expense asserted by a person not a Party to this Agreement is caused by an
alleged joint or concurrent fraud, negligence or willful misconduct, the Parties
at fault shall bear liability in proportion to their own degrees of culpability.
Each Indemnitee is an intended beneficiary of this Section 9.2. The
indemnification obligation of the parties set forth in this Section shall
survive the termination or expiration of this Agreement.

                                   ARTICLE 10
                                     GENERAL

      10.1 Entire Agreement. This Agreement supersedes all prior and
contemporaneous conduct and communications between the Parties pertaining to
co-ownership of the Tolleson Effluent, whether written or oral. Notwithstanding
the foregoing, this Agreement shall be read together with the Tolleson
Agreement, and any agreement by which APS and SRP transfer any portion of the
Tolleson Effluent for use at or for the benefit of Other Electric Generating
Facilities, to obtain necessary definitions and to otherwise determine the
intention of the Parties. This Agreement is not intended to modify or abrogate
either the Tolleson Agreement or any subsequent agreement by which APS and SRP
transfer any portion of the Tolleson Effluent for use at or for the benefit of
Other Electric Generating

                                       10

Facilities. This Agreement may not be modified, changed or added to except in
writing signed by all Parties hereto.

      10.2 Waiver. Each Party's failure or delay in enforcing the terms and
conditions of this Agreement or insisting upon strict performance of any of the
other Party's obligations shall not be interpreted as a waiver thereof. Waiver
of any provision of this Agreement shall only be effective if in writing and
shall not be interpreted as a waiver of any subsequent breach or failure under
the same or any other provision of this Agreement. No conduct, statement, course
of conduct, course of dealing, oral expression or other action shall be
construed as a waiver.

     10.3. Assignment.

            10.3.1 Assignment by APS to PWE. APS may assign its rights and
delegate its duties under this Agreement at any time to PWE, provided that: (i)
APS assigns' its entire interest in this Agreement; (ii) PWE assumes in writing
all of the APS obligations under this Agreement; (iii) APS also assigns all of
its rights and obligations under the Tolleson Agreement to PWE at the same time
as its assignment of this Agreement; and (iv) such assignment shall not become
effective until and unless PWE has become a party to the Arizona Nuclear Power
Project Participation Agreement. No assignment or delegation under this Section
10.3.1 will release the assigning Party from its obligations under this
Agreement unless the other Party consents to a release (such consent not to be
unreasonably withheld, conditioned or delayed). Any subsequent assignee of PWE's
rights and obligations under this Agreement shall be subject to all terms and
conditions of this Agreement, including, without limitation, the restrictions of
this Section 10.3.1.

            10.3.2 Assignment to Others. With the prior written consent of the
other Party (such consent not to be unreasonably withheld, conditioned or
delayed), a Party may assign its rights or delegate its duties under this
Agreement at any time to any other PVNGS Participant, provided that such Party
assigns its entire interest in this Agreement and that its assignee assumes in
writing all of such Party's obligations under this Agreement. No assignment or
delegation under this Section 10.3.2 will release the assigning Party from its
obligations under this Agreement unless the other Party consents to a release
(such consent not to be unreasonably withheld, conditioned or delayed). Any
assignee to whom the rights and obligations of this Agreement are assigned
pursuant to this Section 10.3.2 shall thereafter be subject to all terms and
conditions of this Agreement, including, without limitation, the restrictions of
this Section 10.3.2.

      10.4 Governing Law. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Arizona.

      10.5 Attorneys' Fees. Each Party shall bear its own attorneys' fees,
costs, and expenses in case of a partition action or arbitration initiated under
the provisions of Section 7.2. Should any Claim be brought by a Party against
another Party arising out of this Agreement, including any action for
declaratory or injunctive relief, the prevailing Party shall be entitled to
reasonable. attorneys' fees and costs and expenses of litigation and
investigation, all as actually incurred, including attorneys' fees, costs and
expenses of litigation and investigation incurred in appellate proceedings or in
any action or participation

                                       11

in, or in connection with, any case or proceeding under the United States or
other bankruptcy laws, and any judgment or decree rendered in any such action or
proceedings shall include an award thereof.

      10.6 Counterparts. This Agreement may be executed by the Parties in any
number of separate counterparts, each of which when so executed and delivered
shall be deemed an original, but all such counterparts shall together constitute
one and the same agreement. All signatures need not be on the same counterpart.

      10.7 Relationship of the Parties. The execution of this Agreement shall
not create or constitute a partnership, joint venture, entity or any form of
business organization between the Parties.

      IN WITNESS WHEREOF, the Parties have executed this Agreement to be
effective as of the Effective Date.

                                       ARIZONA PUBLIC SERVICE COMPANY, an
                                       Arizona corporation,

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

                                       Approved as to form:

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

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

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

                                       Approved as to form:

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

                                       12

EX-10.104

                                                                  EXHIBIT 10.104

                       AGREEMENT FOR THE SALE AND PURCHASE

                             OF WASTEWATER EFFLUENT

      THIS AGREEMENT, is made and entered into this 13th day of November 2000,
by and between the City of Tolleson, a municipal corporation organized and
existing under and by virtue of the laws of the State of Arizona ("Tolleson" or
"City"), and Arizona Public Service Company, a corporation organized and
existing under and by virtue of the laws of the State of Arizona ("APS") and
Salt River Project Agricultural Improvement and Power District, an agricultural
improvement district organized and existing under and by virtue of the laws of
the State of Arizona ("SRP"). The City, APS and SRP are collectively referred to
herein as the "Parties." APS and SRP are collectively referred to herein as "The
Companies." All references to "The Companies" in this Agreement shall include
APS or SRP, or both APS and SRP, or any affiliated or successor entity to either
SRP or APS, including but not limited to Pinnacle West Energy Corporation, an
affiliate of APS.

                                   WITNESSETH:

      WHEREAS, Tolleson owns, operates and maintains a wastewater treatment
plant (hereinafter the "Plant") situated approximately 1/4 mile south of State
Route 85 and approximately 1/4 mile west of 91st Avenue at which Tolleson treats
raw sewage collected from sources within and outside of the corporate boundaries
of Tolleson and produces treated wastewater effluent which, unless used by
Tolleson for other purposes, is discharged into the Salt River in accordance
with the laws of the United States and the State of Arizona (hereinafter
"Effluent" or "Tolleson Effluent");

      WHEREAS, the rated treatment capacity of the Plant, assuming typical
influent quality, is currently approximately 17.5 million gallons per day
(hereinafter "M.G.D.") of influent;



      WHEREAS, Tolleson is evaluating the possibility of having the existing
Plant re-rated to a capacity of greater than 17.5 M.G.D. of influent, and
Tolleson may in the future expand Tolleson's capacity in the Plant to create
capacity beyond 17.5 M.G.D.;

      WHEREAS, Tolleson desires to reserve for its use and disposition as it may
in its own discretion elect, 10% of the amount of Effluent produced at the Plant
(hereinafter "Reserved Effluent");

      WHEREAS, Reserved Effluent may be used, sold or otherwise disposed of by
Tolleson for any lawful purpose, including delivery and sale to The Companies
consistent with the terms of this Agreement;

      WHEREAS, Tolleson desires to sell and The Companies desire to purchase all
available "Surplus Effluent," which for the purposes hereof shall be all of the
Effluent produced through the operation of the Plant in excess of the Reserved
Effluent, but not to exceed the maximum capacity of the current interconnection
(the "Interconnection Facilities") between the Plant and the pipeline (the
"Effluent Pipeline") that supplies effluent to the Palo Verde Nuclear Generating
Station ("Palo Verde"), and, when operational, the maximum capacity of the
modified Interconnection Facilities provided for in Section 5.2 below;

      WHEREAS, additional wastewater treatment is provided at Palo Verde's
"Water Reclamation Facility" located at the northern end of the Palo Verde
property and the western terminus of the Effluent Pipeline;

      WHEREAS, the Parties previously entered into an Agreement for the Sale and
Purchase of Effluent dated June 12, 1981 (the "Previous Agreement");

      WHEREAS this Agreement is intended to replace the Previous Agreement,
which will be of no further effect upon execution of this Agreement; and

      WHEREAS, the sale and purchase of the Surplus Effluent will result in its
beneficial use and in the reduction in the demand for the limited supplies of
unused surface waters and groundwaters;

                                     - 2 -



      NOW THEREFORE, for and in consideration of the mutual covenants, terms and
conditions hereinafter stated, the Parties agree as follows:

SECTION 1. SALE AND PURCHASE OF SURPLUS EFFLUENT.

            1.1 Except as provided in other Sections of this Agreement, Tolleson
shall sell and deliver to The Companies, and The Companies shall purchase and
accept, all of the Surplus Effluent produced through the operation of the Plant
during the term of this Agreement. In addition, Tolleson may sell and deliver to
The Companies, and The Companies may purchase and accept any or all of the
Reserved Effluent not used, sold or otherwise disposed of by Tolleson. Nothing
in this Agreement shall impair the right of Tolleson to use, sell or otherwise
dispose of any and all of the Reserved Effluent and any Surplus Effluent that
The Companies do not purchase and receive under this Agreement pursuant to
Sections 2.1, 3.3 or 9.2. The Companies' right to receive Surplus Effluent shall
have priority over Tolleson's use, sale or other disposition of any Surplus
Effluent except under conditions specified in Section 9.2.

            1.2 This Agreement contains no requirement that Tolleson produce any
certain amount of Effluent at the Plant but merely that it deliver to The
Companies whatever amount of Surplus Effluent is produced, except as provided
elsewhere in this Agreement. However, the Parties understand and acknowledge
that since at least 1994 Tolleson has produced between 12,000 and 15,000
acre-feet of Effluent per year. Tolleson agrees that it will undertake all
reasonable, good faith efforts to maintain all existing contracts, operations
and facilities necessary to sustain discharges of Surplus Effluent meeting the
water quality standards of Section 3 at or above the level of 13,000 acre-feet
per year. Tolleson further agrees that it will not construct additional
wastewater treatment facilities at locations other than the current location of
the Plant if such facilities would adversely affect Tolleson's ability to
sustain discharges of Surplus Effluent meeting the water quality standards of
Section 3 at or above the level of 13,000 acre-feet per year. Tolleson further
agrees that it will notify The Companies, as soon as reasonably possible, of any
development or change in circumstances that may adversely affect

                                     - 3 -



Tolleson's ability to continue producing at least 13,000 acre-feet of Surplus
Effluent per year that meets the water quality standards of Section 3.

SECTION 2. PRICE AND PAYMENT.

            2.1 The Companies shall pay to Tolleson, for all Effluent that is
sold and delivered hereunder for use at or for the benefit of Palo Verde, a
price of Thirty Dollars ($30.00) per acre-foot for calendar years 2000 through
2002. Beginning with calendar year 2003 and throughout the remaining term of
this Agreement, the price to be paid in all subsequent years during the term of
this Agreement for all Effluent that is sold and delivered hereunder for use at
or for the benefit of Palo Verde shall be determined by multiplying the previous
year's price by the average annual percentage increase in the Consumer Price
Index ("CPI") during the immediately preceding five years. Exhibit A to this
Agreement, which is specifically incorporated herein by this reference, states
the formula, and provides an example, for making the CPI-based price adjustments
required by this Section. If, in the sole judgement of The Companies, the price
to be paid to Tolleson for Effluent to be delivered and sold for use at or for
the benefit of Palo Verde, after application of the CPI-based price adjustment
mechanism set forth in this Section, becomes too high in comparison to the price
of treated wastewater effluent available to Palo Verde from sources other than
Tolleson, The Companies may elect to terminate their obligation to accept and
pay for Surplus Effluent for use at or for the benefit of Palo Verde. If The
Companies elect to terminate their obligation to accept and pay for Surplus
Effluent for use at or for the benefit of Palo Verde pursuant to this Section,
they shall provide Tolleson one year's advance written notice of such election
to terminate. Provided, however, that upon receipt of written notice of The
Companies' election to terminate pursuant to this Section, Tolleson may elect to
sell Surplus Effluent to The Companies for use at or for the benefit of Palo
Verde at the same price then being paid by The Companies for treated wastewater
effluent used at or for the benefit of Palo Verde and sold by sources other than
Tolleson (the "New Price"). Tolleson shall provide written notice to The
Companies of its election to begin selling Surplus Effluent at the

                                     - 4 -



New Price within 180 days after Tolleson receives notice of The Companies'
election to terminate pursuant to this Section. If Tolleson provides such
written notice within the required 180 day period, The Companies shall continue
to accept and pay for Surplus Effluent used at or for the benefit of Palo Verde
at the New Price, consistent with all other terms of this Agreement. If Tolleson
does not provide such written notice within the said 180 days, any obligation of
Tolleson to supply Surplus Effluent for use at Palo Verde shall be permanently
terminated.

            2.2 If Effluent is used at or for the benefit of the proposed
electric generating facility commonly referred to as "Redhawk" or any electric
generating facilities other than Palo Verde that are owned (in whole or in part)
or operated by The Companies (collectively referred to as "Other Electric
Generating Facilities") pursuant to Section 4.1, the price to be paid for all
such Effluent shall be Seventy Five Dollars ($75.00) per acre-foot during
calendar years 2000 through 2002. Beginning with calendar year 2003 and
throughout the remaining term of this Agreement, the price to be paid by The
Companies for Effluent delivered into the Pipeline and used at or for the
benefit of Other Electric Generating Facilities shall be determined by
multiplying the previous year's price by the average annual percentage increase
in the CPI during the immediately preceding five years. The formula to be used
for making this adjustment, and an example of its application, are contained in
Exhibit A. The Companies shall measure, keep records of, and report to Tolleson
on a monthly basis the quantity, if any, of Effluent used at or for the benefit
of such Other Electric Generating Facilities.

            2.3 The Companies shall pay Tolleson monthly an amount equal to the
price determined pursuant to Section 2.1 and/or 2.2 hereof, as applicable,
multiplied by the number of acre-feet of Effluent that were delivered and
accepted for use at or for the benefit of the respective facilities (Palo Verde
or Other Electric Generating Facilities) during the prior month. Such monthly
payments shall be due and payable 30 days after receipt of the invoice therefor
rendered by Tolleson.

            2.4 In the event of a dispute concerning the quantity of Effluent
delivered and accepted in any month, The Companies shall pay the invoiced
amount, but may do

                                     - 5 -



so under written protest. If any protested amount shall subsequently be
determined to have been excessive, the excessive amount thereof shall be
refunded to The Companies. Any dispute or protest shall be resolved in the
manner provided by Section 12.7 hereof.

            2.5 The Companies shall pay Tolleson the price determined pursuant
to Section 2.1 for each acre-foot of Surplus Effluent made available by Tolleson
for delivery under this Agreement and meeting the water quality standards of
Section 3 that is not accepted by The Companies, up to the then-operational
maximum capacity of the Interconnection Facilities, except during any
Uncontrollable Force event as defined in Section 9.1. Payments under this
Section shall be made to Tolleson monthly in an amount equal to the price
determined pursuant to Section 2.1 multiplied by the number of acre-feet of
Surplus Effluent meeting the water quality standards of Section 3 made available
by Tolleson for delivery, but not accepted by The Companies, during the prior
month. Such monthly payments shall be due and payable 30 days after receipt of
the invoice therefor rendered by Tolleson. The Companies shall have no
obligation to pay for Reserved Effluent not actually accepted into the Effluent
Pipeline for use at or for the benefit of Palo Verde or Other Electric
Generating Facilities. If The Companies elect to terminate their obligation to
accept and pay for Surplus Effluent for use at or for the benefit of Palo Verde
pursuant to Section 2.1, the obligation to pay for Surplus Effluent, whether
taken or not, under this Section shall remain in effect for any Other Electric
Generating Facility for which one or more Notices of Commitment have been
submitted to Tolleson pursuant to Section 8.2. Provided, however, that if The
Companies terminate their obligation as to Palo Verde, the number of acre-feet
thereafter subject to the payment obligation imposed by this Section shall be
the number of acre-feet specified in the Notice(s) of Commitment previously
submitted to Tolleson. Provided further that, if The Companies terminate their
obligation as to Palo Verde, the Parties shall meet to determine, based on
actual operating history and projected future needs, the number of acre-feet of
Surplus Effluent that will remain committed to such Other Electric Generating
Facilities. Such remaining committed Surplus Effluent shall be used only at or
for the benefit of such Other Electric Generating Facilities.

                                     - 6 -



            2.6 The methods identified in Paragraphs 2.1 and 2.2 above for
determining the price to be paid by The Companies pursuant to this Agreement for
each acre-foot of Effluent delivered into the Effluent Pipeline by Tolleson and
accepted by The Companies for use at Palo Verde or Other Electric Generating
Facilities, and the resulting prices established by those methods, shall remain
in effect throughout the term of this Agreement. Provided, however, that: (i) if
The Companies enter into a new contract, or amend an existing contract, for
supplying treated wastewater effluent to Palo Verde or Other Electric Generating
Facilities physically capable of being economically served by Tolleson Effluent
delivered into the Effluent Pipeline; and (ii) that new contract or amendment of
that existing contract provides for a higher price, or a different method of
determining the price, of treated wastewater effluent supplied to Palo Verde or
Other Electric Generating Facilities physically capable of being economically
served by Tolleson Effluent delivered into the Effluent Pipeline; then (iii)
Sections 2.1 and/or 2.2 of this Agreement, as applicable, shall be revised to
incorporate that higher price or new method of determining the price. The
application of any different method of determining the price of effluent under
this Section 2.6 shall not result in a lower price being paid to Tolleson than
if such different method were not used. The provisions of this Section shall not
apply to any contract entered into by The Companies for a backup supply of
treated wastewater effluent that allows The Companies to purchase such effluent
when Tolleson is unable to deliver into the Pipeline at least 13,000 acre-feet
per year of Surplus Effluent meeting the water quality standards of Section 3.
The price benefits afforded to Tolleson by this Section shall apply if The
Companies purchase another source of treated wastewater effluent, other than a
backup supply pursuant to the immediately preceding sentence, for use at or for
the benefit of any Other Electric Generating Facility physically capable of
being economically served by Tolleson Effluent delivered into the Effluent
Pipeline, whether or not the other source of treated wastewater effluent is
delivered into the Effluent Pipeline. For purposes of this Agreement, the phrase
"physically capable of being economically served by Tolleson Effluent delivered
into the Effluent Pipeline" shall apply only to any Other Electric Generating
Facilities located within: (i) the area described in the legal

                                     - 7 -



description and accompanying map attached to this Agreement as Exhibit B, which
exhibit is specifically incorporated herein by this reference; or (ii) within
one mile north or two miles south of any portion of the Effluent Pipeline. The
Companies agree, as a covenant of good faith, to comply with the requirements of
this Section and Section 4.2 by refraining from constructing or acquiring Other
Electric Generating Facilities in locations immediately outside the area defined
in the preceding sentence as subject to the "physically capable of being
economically served by Tolleson Effluent delivered into the Effluent Pipeline"
standard if such construction or acquisition is intended to avoid the
requirements of this Section or Section 4.2.

            2.7 In addition to any amounts The Companies are required to pay
under paragraphs 2.3 and 2.5 of this Agreement, The Companies shall also pay
Tolleson monthly, from the date of execution of this Agreement until June 30,
2002, an amount equal to the difference between: (1) the sum of the amounts paid
under paragraphs 2.3 and 2.5 of this Agreement; and (2) the amount that The
Companies would have been required to pay Tolleson for an equal quantity of
Effluent under the Previous Agreement among APS, SRP and Tolleson dated June 12,
1981.

            2.8 If at any time The Companies fail to pay to Tolleson the amounts
they are obligated to pay under Sections 2.3 and 2.5 within the 30 days provided
for such payment, Tolleson may, after providing 10 days advance written notice,
cease delivering Surplus Effluent into the Effluent Pipeline until all past due
amounts are paid in full.

SECTION 3. QUALITY OF THE SURPLUS EFFLUENT.

            3.1 All Effluent sold and delivered hereunder shall have received
wastewater treatment, and shall meet the standards required by law and specified
in Permit No. AZ0020338 issued to Tolleson by the Environmental Protection
Agency (hereinafter "EPA"), including any amendments or replacements thereof as
may be made from time to time and/or in any other required permit or
authorization as may hereafter be issued by the Arizona Department of
Environmental Quality (hereinafter "ADEQ"), or any other federal or state agency
having

                                     - 8 -



jurisdiction respecting the treatment and/or discharge of wastewater effluent,
except that disinfection (by chlorination or otherwise) of such Effluent sold
and delivered hereunder shall be required and performed only upon the terms and
conditions hereinafter provided.

            3.2 In addition to meeting the permit-based water quality
requirements specified in Section 3.1, Tolleson shall use its best efforts to
operate and maintain its existing Plant in a manner that will treat Effluent
such that the Effluent does not exceed: (i) 30 milligrams per liter (mg/l) of
Biological Oxygen Demand ("BOD") for any period of time; (ii) 25 mg/l BOD for
any period longer than two consecutive days; (iii) 20 mg/l BOD for any period
longer than one week; or (iv) 15 mg/l BOD for any period longer than one month.
Nothing contained in this Section 3.2 shall require Tolleson to upgrade or
improve the Plant or otherwise compel Tolleson to incur any additional expense
in the operation of the Plant.

            3.3 The Companies shall not be required to purchase, accept or pay
for any Effluent that does not meet the water quality standards set forth in
Sections 3.1 and 3.2 hereof. The Companies' sole remedy for breach of Tolleson's
obligation to meet the water quality standards of Sections 3.1 and 3.2 shall be
the right to refuse to purchase, accept or pay for any Effluent that does not
meet those standards.

            3.4 Tolleson, on the written request of The Companies, shall
disinfect the surplus Effluent to be delivered to The Companies, provided that
The Companies shall reimburse Tolleson for its direct costs associated with such
disinfection.

            3.5 Tolleson shall promptly notify APS by telephone, and in writing
as soon as reasonable thereafter, of any changes in wastewater treatment
processes or operational anomalies at the Plant that have the potential to
significantly change the composition of the Effluent delivered to The Companies,
including, but not limited to, changes that would affect compliance with the
water quality standards addressed in this Section 3. The Companies acknowledge
that the Plant has exceeded, and will exceed the foregoing BOD levels, and
Tolleson acknowledges that The Companies will not be obligated to purchase any
Effluent produced by Tolleson that exceeds the foregoing BOD levels.

                                     - 9 -



SECTION 4. USE OF EFFLUENT.

            4.1 The primary use of the Effluent purchased and accepted by The
Companies under this Agreement is for cooling required for generation of
electric power at Palo Verde. The Companies may also use, transfer or execute a
water exchange for any or all of the Effluent made available under this
Agreement for use at or for the benefit of any Other Electric Generating
Facilities that The Companies may now or in the future develop, own (in whole or
in part) or operate. All such Effluent used at or for the benefit of Other
Electric Generating Facilities shall be subject to the price established in
Section 2.2.

            4.2 If at any time The Companies use any treated wastewater effluent
at or for the benefit of Other Electric Generating Facilities physically capable
of being economically served by Tolleson Effluent delivered into the Effluent
Pipeline, Tolleson shall have the first right to sell to The Companies, and The
Companies shall have the obligation to purchase from Tolleson, all such treated
wastewater effluent, up to the then-operational maximum capacity of the
Interconnection Facilities, provided that:

      (a)   the treated wastewater effluent requirements of Palo Verde are being
            fully satisfied, whether by Tolleson Effluent or by effluent from
            other sources;

      (b)   the Participants in Palo Verde consent to the use of the Effluent
            Pipeline, Water Reclamation Facility and any other property or
            facilities owned by such Participants for transportation and
            treatment of Effluent for use at or for Other Electric Generating
            Facilities (provided, however, that if such consent is not obtained
            from the Palo Verde Participants by December 31, 2001, Tolleson may
            elect to terminate its obligation under this Agreement to deliver
            and sell Surplus Effluent to the Companies); by its execution of
            this Agreement, APS confirms its consent, as a Palo Verde
            Participant, to the use of the Effluent Pipeline, Water Reclamation
            Facility and any other Palo Verde property or facilities required
            for transportation and treatment of Effluent for use at or for Other
            Electric Generating Facilities; and

                                     - 10 -



      (c)   Tolleson produces the lesser of 12,000 acre feet per year of
            Effluent or sufficient Surplus Effluent meeting the water quality
            standards of Section 3 to satisfy the quantity specified in any
            Notices of Commitment delivered to Tolleson by The Companies
            pursuant to Section 8.2.

To the extent that all of the preceding requirements are satisfied, Tolleson
shall have the first right to sell to The Companies, and The Companies shall be
obligated to purchase from Tolleson, treated wastewater effluent for use at or
for the benefit of Other Electric Generating Facilities physically capable of
being economically served by Tolleson Effluent delivered into the Effluent
Pipeline, up to the lesser of: (i) the maximum quantity of effluent used at or
for the benefit of such Other Electric Generating Facilities physically capable
of being economically served by Tolleson Effluent delivered into the Effluent
Pipeline; or (ii) the then-operational maximum capacity of the Interconnection
Facilities. For the purpose of determining the times when The Companies must
take Surplus Effluent first at Other Electric Generating Facilities physically
capable of being economically served by Tolleson Effluent delivered into the
Effluent Pipeline, The Companies shall allocate all treated wastewater effluent
that The Companies acquire, other than Surplus Effluent, first for use at Palo
Verde. Only after purchasing all available Surplus Effluent meeting the water
quality standards of Section 3 may The Companies purchase treated wastewater
effluent from another source for use at or for the benefit of such Other
Electric Generating Facilities physically capable of being economically served
by Tolleson Effluent delivered into the Effluent Pipeline, or use groundwater
for condenser cooling in lieu of such Surplus Effluent, except to the extent
that groundwater is necessary to make up any shortfall in cooling water
requirements resulting from physical constraints in the Effluent Pipeline, Water
Reclamation Facility or other Palo Verde facilities. Nothing in this Agreement
shall prohibit or limit the right of The Companies to enter into additional
contracts with other parties for the sale and purchase of wastewater effluent to
be used at Palo Verde or Other Electric Generating Facilities, provided that
such contracts do not limit Tolleson's rights under this Agreement. To the
extent that any amount of Surplus Effluent is used at or for the benefit of
Other Electric

                                     - 11 -



Generating Facilities, Tolleson shall be relieved of any obligation it may have
under this Agreement to supply that quantity of Surplus Effluent for use at or
for the benefit of Palo Verde.

SECTION 5. DELIVERY POINT AND METERING.

            5.1 Effluent sold and purchased hereunder shall be delivered by
Tolleson and accepted by The Companies at the valve that controls the flow of
Effluent into the Effluent Pipeline (hereinafter the "Delivery Point") at the
interconnection between the two outfall wastewater lines from the Plant to the
Salt River (hereinafter the "Outfall Lines") and the Effluent Pipeline. Such
Effluent delivered by Tolleson and accepted by The Companies at the Delivery
Point shall be deemed "delivered into the Effluent Pipeline" as that phrase is
used in this Agreement.

            5.2 Within one year after the execution of this contract, The
Companies shall design and construct a modification to the existing
Interconnection Facilities between the Outfall Lines and the Effluent Pipeline
to allow delivery by Tolleson into the Effluent Pipeline of at least 21 M.G.D.
of Surplus Effluent. All costs associated with the design, construction,
operation and maintenance of this modification shall be borne by The Companies,
and title to the modified Interconnection Facilities shall be vested consistent
with the provisions of Exhibit C, which identifies specific components of the
Interconnection Facilities and the Party or Parties in which title to each such
component is vested. The Companies shall be responsible for, and the Parties
shall cooperate as necessary, to ensure the timely design, construction,
operation and maintenance of the existing and modified Interconnection
Facilities required by this Section and to ensure that such activities do not
interfere with the operation of the Plant or the Effluent Pipeline. If The
Companies cease using the Interconnection Facilities for acceptance of Effluent
from Tolleson, The Companies shall either continue to operate and maintain the
Interconnection Facilities to ensure that operation of the Plant will not be
adversely affected, or shall offer to transfer to Tolleson title over any
portion of the Interconnection Facilities that is necessary to the operation of
the Plant, provided, however, that if Tolleson refuses to accept such

                                     - 12 -



title, The Companies shall have no obligation to continue to operate or maintain
the Interconnection Facilities.

            5.3 The quantity of Effluent delivered by Tolleson and accepted by
The Companies at the Delivery Point shall be measured by metering devices
installed by The Companies as close to the Delivery Point as practicable. The
quantity of Effluent supplied by Tolleson and accepted by The Companies for use
at or for the benefit of Other Electrical Generating Facilities shall be
measured by a metering device installed by The Companies at a point which will
measure the amount of Effluent that is used at or for the benefit of Other
Electrical Generating Facilities. Such metering devices shall be of a design and
type acceptable to Tolleson and The Companies. The costs of such devices and
their installation, operation, maintenance, replacements, repair, betterments
and calibration shall be borne by The Companies, except as otherwise provided in
Section 7.2 hereof, and the title thereto shall be vested in The Companies.
Provisions shall be made to permit flow meter information to be continuously
displayed in a panel or panels at the Plant utilizing facilities and equipment
as Tolleson may, at its own expense provide, title to which shall be vested in
Tolleson.

            5.4 In the event that the flow metering device measuring flows of
Tolleson Effluent into the Effluent Pipeline shall fail or be inoperative,
Tolleson shall have the right to use other in-Plant flow metering equipment to
determine the volume of Effluent delivered for billing purposes.

            5.5 If Tolleson concludes that increases in capacity of the Plant
beyond 21 M.G.D. are necessary or desirable, the Parties shall meet, upon
request by Tolleson, to discuss potential additional modifications of the
Interconnection Facilities beyond those required by Section 5.2 above. Any terms
for the design and construction of, and payment for, additional modifications,
and any terms for the purchase and sale of any Effluent made available by an
increase in the capacity of the Interconnection Facilities beyond 21 M.G.D.,
shall be established by mutual agreement of the Parties at that time.

                                     - 13 -



SECTION 6. PERMITS AND AUTHORIZATIONS.

            6.1 Tolleson shall be solely responsible for securing and
maintaining in force and effect any and all permits and authorizations required
by law for the delivery of Effluent to The Companies at the Delivery Point and
for the discharge into the Salt River or other disposal of Effluent which is not
delivered to and accepted by The Companies.

            6.2 The Companies shall be solely responsible for securing and
maintaining in force and effect any and all permits and authorizations required
by law for the transportation of the Effluent from the Delivery Point to Palo
Verde or to any other points and for any uses of the Effluent that are allowed
by Section 4 of this Agreement. Such responsibility of The Companies may be
delegated to others, but as between the Parties the responsibility rests solely
upon The Companies.

            6.3 Each of the Parties shall cooperate with the other Parties in
securing and maintaining in force and effect the permits and authorizations
required in accordance with this Agreement or by local, state or federal laws
and regulations and shall render such assistance to the other Parties as it or
they may reasonably request. Each Party shall furnish to the other Parties a
copy of each permit and authorization obtained pursuant to Sections 6.1 and 6.2
hereof.

            6.4 Should Tolleson be required by law to treat the Effluent in a
manner that results in increased expenses to Tolleson because it is delivering
the Effluent to The Companies under this Agreement, which expense it would not
have incurred if the Effluent was disposed by Tolleson into the Salt River, then
The Companies shall have the right to require Tolleson to so treat the Effluent
and shall reimburse Tolleson for all reasonable expenses (including without
limitation any costs of plant additions or improvements) incurred by Tolleson in
providing such treatment. If The Companies, in their sole discretion, decide not
to exercise their right under this Section to require additional treatment, they
may take other action, including terminating this Agreement, to ensure
continuing compliance with applicable law. However, prior to terminating this
Agreement as allowed in the previous sentence, The

                                     - 14 -



Companies shall meet with Tolleson to discuss any alternatives to termination
that may be available to ensure compliance with applicable law.

SECTION 7. IMPLEMENTATION OF THE AGREEMENT.

            7.1 Within 30 days after the effective date of this Agreement,
Tolleson shall designate a representative and The Companies shall jointly
designate a representative for the purposes of: (i) implementing this Agreement
in accordance with its terms, (ii) coordinating the design and construction by
The Companies of the modifications to the Interconnection Facilities required by
Section 5.2 above, (iii) ensuring the continued satisfactory operation and
maintenance of the Interconnection Facilities, and (iv) discussing any issues of
interest or concern to either or both Parties relating to this Agreement. Either
Tolleson or The Companies may from time to time designate a substitute or
successor authorized representative by giving written notice of such designation
to the other party.

            7.2 The metering devices used to measure the quantity of Effluent
delivered and accepted hereunder, and the quantity of Effluent used at or for
the benefit of Other Electrical Generating Facilities, shall be calibrated in a
manner acceptable to the authorized representatives prior to the date when such
devices are placed in service and thereafter not less frequently than once every
six months. The costs of such scheduled calibrations shall be borne by The
Companies. The authorized representative for Tolleson may request in writing
such additional calibrations as he in his sole discretion deems appropriate;
provided that the cost incurred by The Companies for each such additional
calibration shall be reimbursed by Tolleson unless any such additional
calibration reveals that the inaccuracy of the metering devices is greater than
(plus/minus) 2% in which case the cost of such additional calibration shall be
borne by The Companies. Copies of all records showing calibration of meters
shall be delivered to Tolleson after each calibration, and copies of all records
of measurements of Effluent supplied to or for the benefit of Palo Verde or
Other Electrical Generating Facilities shall be delivered to Tolleson monthly,
with cover letters acknowledging the records to be true copies.

                                     - 15 -



SECTION 8. DELIVERY AND ACCEPTANCE OF EFFLUENT.

            8.1 The obligation of Tolleson to sell and deliver Surplus Effluent
under this Agreement shall commence on the date this Agreement is executed and
shall continue throughout the term of this Agreement, except as otherwise
provided in this Agreement.

            8.2 At any time after the effective date of this Agreement, provided
that the treated wastewater effluent requirements of Palo Verde are being fully
satisfied, The Companies may deliver to Tolleson one or more written notices of
The Companies' commitment ("Notice of Commitment") to purchase up to 13,000
acre-feet of Surplus Effluent for use at or for the benefit of Other Electric
Generating Facilities. The Companies may specify any quantity of Surplus
Effluent in any individual Notice of Commitment, up to the then-operational
maximum capacity of the Interconnection Facilities. The price to be paid for any
Effluent specified in a Notice of Commitment that is actually taken into the
Effluent Pipeline and used at or for the benefit of Other Electric Generating
Facilities shall be as specified in Section 2.2. The price to be paid for any
Effluent specified in a Notice of Commitment that is not actually taken into the
Effluent Pipeline and used at or for the benefit of Other Electric Generating
Facilities shall be as specified in Section 2.5.

            8.3 If The Companies have not delivered one or more Notices of
Commitment to purchase at least the following Minimum Quantities of Surplus
Effluent for use at or for the benefit of Other Electric Generating Facilities
on or before the Commitment Dates identified in the following table, Tolleson
may elect to terminate its continuing obligation to sell and deliver any portion
of the corresponding Minimum Quantity of Surplus Effluent for use at or for the
benefit of Palo Verde or Other Electric Generating Facilities that is not yet
subject to a Notice of Commitment:

                                     - 16 -





 COMMITMENT DATE                MINIMUM QUANTITY
- -----------------           --------------------------------------
                         
December 31, 2002           At least 3,000 acre-feet
December 31, 2003           At least an additional 3,000 acre-feet
December 31, 2005           At least an additional 3,000 acre-feet
December 31, 2007           At least an additional 4,000 acre-feet


For a period of one year following each specified Commitment Date, Tolleson may
terminate its obligation to sell and deliver any portion of the corresponding
Minimum Quantity not yet subject to a Notice of Commitment by delivering to The
Companies one or more written Notices of Intent to Terminate. Each Notice of
Intent to Terminate shall specify the quantity of Surplus Effluent for which
Tolleson has elected to terminate its obligation to sell and deliver to the
Companies for use at or for the benefit of Palo Verde or Other Electric
Generating Facilities. Upon receipt of a Notice of Intent to Terminate, The
Companies shall have ninety days thereafter within which to submit a Notice of
Commitment to Tolleson for the quantity of Surplus Effluent for use at or for
the benefit of Other Electric Generating Facilities specified in the Notice of
Intent to Terminate. If The Companies submit a Notice of Commitment within this
ninety-day period, Tolleson's continuing obligation to sell and deliver Surplus
Effluent to The Companies for use at or for the benefit of Palo Verde or Other
Electric Generating Facilities shall not be terminated. If The Companies do not
submit a Notice of Commitment within this ninety day period, Tolleson's
obligation to sell and deliver the specified quantity of Surplus Effluent for
use at or for the benefit of Palo Verde or Other Electric Generating Facilities
shall be terminated, the specified quantity of Surplus Effluent shall no longer
be eligible for price adjustments pursuant to Sections 2.1, 2.2 or 2.6, and The
Companies shall no longer be obligated to pay, pursuant to Section 2.5, for any
of the specified Surplus Effluent not actually taken into the Pipeline.
Notwithstanding the previous sentence, The Companies may continue to accept into
the Pipeline any or all of the Surplus Effluent specified in the Notice of
Intent to Terminate provided Tolleson desires to continue delivering such
Surplus Effluent, in which event, The Companies shall pay

                                     - 17 -



Tolleson the price for such Surplus Effluent specified in Section 2.1 or Section
2.2, as appropriate.

            8.4 Nothing in Sections 8.2 and 8.3 is intended to limit Tolleson's
first right to deliver into the Effluent Pipeline and sell to The Companies
treated wastewater effluent for use at or for the benefit of Other Electric
Generating Facilities as provided in Section 4.2 or to limit the obligation of
The Companies to purchase and accept all of the Surplus Effluent produced
through the operation of the Plant as provided in Section 1.1. To the extent
that The Companies purchase treated wastewater effluent delivered into the
Effluent Pipeline for use at or for the benefit of Other Electric Generating
Facilities, Tolleson shall have the first right to sell such treated wastewater
effluent consistent with the terms of Section 4.2, regardless of whether The
Companies have submitted one or more Notices of Commitment for that amount of
Surplus Effluent.

            8.5 The Companies shall have the right to refuse delivery of
Effluent whenever, in their sole and reasonable discretion, use of Effluent
would cause significant operational problems in the Effluent Pipeline, Water
Reclamation Facility or other Palo Verde facilities. However, other than during
an Uncontrollable Force event, as defined in Section 9.1, The Companies shall
pay the price established in Section 2.5 for any Surplus Effluent refused
pursuant to this Section 8.5 that is actually available for delivery to the
Delivery Point and meets the water quality standards of Section 3 of this
Agreement.

SECTION 9. UNCONTROLLABLE FORCE AND OUTAGES.

            9.1 Neither Tolleson nor The Companies shall be considered to be in
default in the performance of any of the obligations hereunder if failure of
performance shall be due to an Uncontrollable Force. The term "Uncontrollable
Force" shall mean any cause beyond the control of the Party affected, including,
but not limited to, failure of facilities, flood, earthquake, tornado, storm,
fire, lightning, epidemic, war, riot, civil disturbance or disobedience, labor
dispute, and action or nonaction by or failure to obtain or revocation of the
necessary

                                     - 18 -



authorizations or approvals from any governmental agency or authority or the
electorate, labor or material shortage, sabotage and restraint by Court order or
public authority, which by exercise of due diligence and foresight such Party
could not reasonably have been expected to avoid and which by exercise of due
diligence it shall be unable to overcome. Nothing contained herein shall be
construed so as to require any Party to settle any strike or labor dispute in
which it may be involved. Any Party rendered unable to fulfill any obligation by
reason of any Uncontrollable Force shall exercise due diligence to remove such
inability with all reasonable dispatch.

            9.2 Whenever an Uncontrollable Force as defined in Section 9.1
prevents The Companies from being able to accept or use the Surplus Effluent,
then Tolleson may enter into temporary contracts with any other parties for sale
of the Surplus Effluent. If Tolleson has entered into such a temporary contract,
Tolleson shall be allowed up to 30 days to begin delivery of the Surplus
Effluent to The Companies after receiving written notice from The Companies that
the disability has been removed.

            9.3 Notwithstanding the provisions of Sections 9.1 and 9.2, if,
after the exercise of due diligence, the Party rendered unable to fulfill an
obligation remains unable to remove such inability for one full year, the other
Party may elect to terminate this Agreement anytime thereafter by tendering 90
days written notice of its intention to terminate. However, if The Companies
receive a written termination notice from Tolleson pursuant to the preceding
sentence, The Companies may elect, at any time prior to the expiration of the 90
days, to begin paying the price established in Section 2.5 for any Surplus
Effluent available for delivery and meeting the water quality standards of
Section 3 of this Agreement, up to the then-operational maximum capacity of the
Interconnection Facilities. As long as The Companies continue the payments
required under this paragraph, this Agreement shall remain in full force and
effect.

            9.4 If an Uncontrollable Force or malfunction of any component or
system of the Effluent Pipeline or the Water Reclamation Facility at Palo Verde,
restricts the capability of either of such facilities to transport or treat
wastewater effluent from all sources for a period of one full year or less, then
The Companies may refuse to accept delivery of the Surplus

                                     - 19 -



Effluent and shall not be required to pay therefor. It is understood, however,
that the Surplus Effluent from Tolleson's Plant shall be the last source of
effluent that The Companies cut back on during such Uncontrollable Force or
malfunction and that The Companies shall not refuse to accept and pay for
Tolleson's Surplus Effluent to the extent that they are accepting and paying for
effluent from any other source.

            9.5 If The Companies initiate a Scheduled Outage of Palo Verde, the
Effluent Pipeline or the Water Reclamation Facility, The Companies shall pay the
price established in Section 2.5 for any Surplus Effluent available for delivery
and meeting the water quality standards of Section 3 of this Agreement, up to
the then-operational maximum capacity of the Interconnection Facilities. As long
as The Companies continue the payments required under this Section, this
Agreement shall remain in full force and effect. If Tolleson initiates a
Scheduled Outage of the Plant, any obligation that Tolleson may have to supply
Effluent, and the obligation of The Companies to pay the price established under
Section 2.5, shall be suspended during such Scheduled Outage. "Scheduled Outage"
shall mean any temporary cessation of operations that is planned and controlled
by the Party initiating the Scheduled Outage.

            9.6 Except in emergencies, The Companies shall give 30 days written
notice in advance of any discontinuation of acceptance of Surplus Effluent under
the provisions of this Section 9. Except in emergencies, Tolleson shall give 30
days written notice in advance of any Scheduled Outage that will limit
Tolleson's ability to supply at least 13,000 acre-feet per year of Surplus
Effluent to The Companies. Tolleson shall use its best efforts to minimize the
duration of any Scheduled Outage that will limit Tolleson's ability to supply at
least 13,000 acre-feet per year of Surplus Effluent to The Companies.

SECTION 10. LIABILITY AND INSURANCE.

            10.1 Except for the negligent or intentional acts of The Companies,
their officers, directors, employees and agents, Tolleson shall, to the extent
permitted by law, indemnify and hold The Companies and their officers,
directors, employees and agents harmless

                                     - 20 -



for any physical damage to property, or death of, or personal injury to, any
person, and from any cost, expense, claim or loss from such damage, injury or
death arising out of the ownership, use, occupancy, operation, maintenance,
repair, replacement and reconstruction of the Plant and the Outfall Lines and
that portion of the Interconnection Facilities owned by Tolleson as specified in
Exhibit B.

            10.2 Except for the negligent or intentional acts of Tolleson, its
officers, managers, employees or agents, The Companies shall indemnify and hold
Tolleson and its officers, managers, employees and agents harmless for any
physical damage to property, or death of, or personal injury to, any person, and
from any cost, expense, claim or loss from such damage, injury or death arising
out of the construction, ownership, use, occupancy, operation, maintenance,
repair, replacement and reconstruction of the delivery facilities at the
Delivery Point, that portion of the Interconnection Facilities owned by the
Companies as specified in Exhibit C, the Effluent Pipeline, the facilities at
Palo Verde, or the transportation, use, resale or disposal of Surplus Effluent
delivered and accepted hereunder.

            10.3 Tolleson shall procure and maintain insurance against physical
damage to property, or death of, or personal injury to, any persons, of the kind
and with coverages normally carried by entities operating properties similar to
the Plant and the Outfall Lines. Upon request, Tolleson shall furnish to The
Companies certificates of insurance demonstrating compliance with this Section
10.3.

            10.4 The Companies shall procure and maintain insurance against
physical damage to property, or death of, or personal injury to, any persons, of
the kind and with coverages normally carried by entities operating properties
similar to the Effluent Pipeline and Palo Verde. Upon request, The Companies
shall furnish to Tolleson certificates of insurance demonstrating compliance
with this Section 10.4.

                                     - 21 -



SECTION 11. INSPECTIONS AND ACCESS TO RECORDS.

            11.1 Each of the Parties shall have the right, during reasonable
hours, of access to and inspection of the facilities and operations of the other
Parties which are associated with the treatment, delivery, measurement,
transportation and use of Effluent sold and purchased hereunder.

            11.2 Each of the Parties shall have the right, during reasonable
hours, of access to the records of the other Parties which are relevant for
proving compliance or noncompliance of each of the Parties with any of the terms
of this Agreement.

SECTION 12. GENERAL.

            12.1 Effective Date and Term. This Agreement shall be effective from
and after the date of its execution by the parties and shall expire on December
31, 2050, unless partially or fully terminated before that date under the
provisions of Sections 2.1, 6.4, 8.3, 9.3 or 12.3.1.

            12.2 Assignment of Agreement or Transfer of Facilities.

            12.2.1 Neither Tolleson nor The Companies shall transfer or assign
any of their respective rights, titles and interests in and to this Agreement
without the prior written consent of the other Parties, except that: (i) The
Companies and any of their affiliates, successors or assigns shall each have the
right to transfer and assign all or any portion of its right, title and interest
in this Agreement to the other, to any related corporate entity, or to any other
entity now or hereafter participating in Palo Verde or any Other Electric
Generating Facilities which utilize the Surplus Effluent sold hereunder,
provided that such entity expressly assumes the obligations of the respective
Company, as applicable, under this Agreement; and (ii) either Company, and any
of its respective affiliates, successors or assigns shall have the right to
transfer its right, title and interest in this Agreement to any mortgagee,
trustee or secured party under present or future deeds of trust, mortgages,
indentures or security agreements. A transfer or assignment by any Party shall
not release that party from its obligations as the primary obligor under the
Agreement

                                     - 22 -



without the written consent of the other Parties. In the event of any transfer
or assignment of this Agreement by either Tolleson or The Companies, the terms,
covenants and conditions of this Agreement shall be binding upon and inure to
the benefit of and shall apply to the respective transferees, successors and
assigns of Tolleson and The Companies.

            12.2.2 The Companies shall not convey Palo Verde or any interest
therein without the grantee of such conveyance expressly agreeing to be bound by
all terms of this Agreement, unless The Company that conveys its interest in
Palo Verde expressly agrees to continue to be bound by all terms of this
Agreement. Tolleson shall not convey the Plant or any interest therein, without
the grantee of such conveyance expressly agreeing to be bound by all terms of
this Agreement.

            12.3 Compliance with Laws.

            12.3.1 The Companies shall use the Effluent delivered hereunder in
accordance with the applicable laws of the United States of America, the
applicable laws of the State of Arizona and the rules and regulations of
federal, state and local agencies; provided, however, that in the event any such
laws or regulations shall be amended in the future so as to make it impossible
or uneconomical to use the Effluent for the purposes specified in this
Agreement, The Companies shall, at their option, have the right to cancel and
terminate this Agreement upon giving 90 days notice in writing to Tolleson. In
the event Tolleson is prohibited by any state or federal laws or regulations
from selling Effluent for the uses contemplated herein, Tolleson shall have the
right to cancel and terminate this Agreement upon giving 90 days notice in
writing to The Companies. Until the notice period runs and the termination
becomes effective, The Companies shall continue to pay for the Surplus Effluent
pursuant to Section 2.5, except as otherwise specified in this Agreement.

            12.3.2 If any proceeding in law or equity is instituted challenging
the authority and power of Tolleson and/or The Companies to make, execute and
deliver this Agreement and/or to perform its terms, covenants and conditions, or
relating to the rights, title and interest of Tolleson or The Companies in and
to the Effluent, then Tolleson and The

                                     - 23 -



Companies shall jointly and cooperatively defend the validity of this Agreement
and the sale, delivery and uses of Effluent contemplated herein.

            12.3.3 The Parties acknowledge that this Agreement is subject to the
provisions of Arizona Revised Statutes Section 38-511, and can be cancelled
within three years after its execution by Tolleson if any person significantly
involved in initiating, negotiating, securing, drafting or creating this
Agreement on behalf of Tolleson is, while this Agreement is in effect during
that three year period, an employee or agent of or consultant to any other Party
to this Agreement.

            12.4 Notices. All notices, demands, consents or other writings given
or made pursuant to this Agreement shall be in writing and, unless otherwise
specified herein, shall be deemed to have been duly given when made and
deposited in the United States mail by registered or certified mail with postage
prepaid and addressed as follows:

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

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

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

The address to which any notice, demand, consent or other writing shall be given
to any Party may be changed from time to time by written notice of such Party to
the other Parties as above provided.

                                     - 24 -



            12.5 Relative Responsibilities and Authority of The Companies.

            12.5.1 APS, or any of its affiliates, successors or assigns acting
as Operating Agent of Palo Verde, is authorized to act for and on behalf of SRP
in all matters affecting the implementation and performance of this Agreement
for the use of Effluent at Palo Verde, and all actions and representations taken
or made by APS in the implementation and performance of this Agreement shall be
binding upon SRP.

            12.5.2 In the event all or part of the Effluent is used other than
at Palo Verde, The Companies shall be jointly responsible for implementation and
performance of this Agreement.

            12.5.3 The Companies shall be jointly and severally liable to
perform the obligations to Tolleson that are imposed by this Agreement.

            12.5.4 The Companies represent that they have the authority to enter
into and carry out all obligations to Tolleson under this Agreement.

            12.6 Waivers. The waiver by either Tolleson or The Companies of any
breach of any term, covenant or condition of this Agreement shall not be deemed
a waiver of such term, covenant or condition or of any subsequent breach thereof
or a subsequent breach of any other term, covenant or condition in this
Agreement.

            12.7 Resolution of Conflicts and Disputes. Any conflict or disputes
in: (i) the implementation of this Agreement provided in Section 7, or (ii) the
quantity or quality of Surplus Effluent delivered as discussed in Section 2.4,
shall be resolved by arbitration in accord with the rules of the American
Arbitration Association. No other conflicts or disputes arising out of the
Agreement shall be subject to mandatory arbitration. In all cases, the Agreement
shall be interpreted according to the laws of the State of Arizona.

            12.8 Sales and Use Taxes. In the event the State of Arizona, County
of Maricopa or the federal government should require that Tolleson pay a tax
resulting from the sale of Effluent to The Companies, then the price for the
Effluent shall be increased by the amount of such tax. In the event Tolleson
shall levy a tax on the sale or use of the Effluent, then the

                                     - 25 -



amounts of any such tax paid by The Companies shall be deducted from the amounts
payable under Sections 2.1 or 2.2 hereof.

            12.9 Section Headings. Section headings in this Agreement are for
convenience only and do not purport to describe accurately or completely the
contents of any section. Such headings are not to be construed as a part of this
Agreement or as in any way defining, limiting or amplifying the provisions
hereof.

            12.10 Severability. If any term or provision of this Agreement is
held to be void, invalid or unenforceable by a court of competent jurisdiction,
that term or provision shall be severable from the remainder of this Agreement
and shall not affect or render invalid, void or unenforceable any other
provision or term of this Agreement.

      IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
and attested by their respective duly authorized officers as of the date first
above written.

ATTEST:                                       CITY OF TOLLESON

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

                                        Reviewed By

                                        /s/ Ralph Velez
                                        _________________________________
                                        City Manager

                                        Approved as to Form

                                        /s/ Scott W. Ruby
                                        _________________________________
                                        City Attorney

                                     - 26 -




ATTEST:                                 ARIZONA PUBLIC SERVICE COMPANY

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

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

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

                                - 27 -

                                   EXHIBIT A

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

      Formula:    Pp (1 + A) = Pc

      Where:      Pp Previous year's price

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

                  Pc = New or Current year's price

This adjustment to the prices paid to the City for Effluent will be made each
calendar year, effective in January, using the most recent CPI-U data available.
This method of price adjustment will be used throughout the term of this
Agreement.

      Example of price adjustment using the above formula:

                  Pp (1 +A) = Pc

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

                  A = 11.8%
                      -----
                        5

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

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

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

      Example for year #2:

                  Pp (1+A) = Pc

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

                  A = 2.5%

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

                                    EXHIBIT B

The following legal description, as depicted on the attached map, describes the
area within which Other Electric Generating Facilities are subject to the
"physically capable of being economically served by Tolleson Effluent delivered
into the Effluent Pipeline" standard established in Sections 2.6 and 4.2 of the
"Agreement for the Sale and Purchase of Wastewater Effluent" to which this
Exhibit B is attached:

BEGINNING AT THE NORTH QUARTER CORNER OF SECTION 24, TOWNSHIP 1 NORTH, RANGE 6
WEST;

THENCE WEST ALONG THE NORTH LINE OF SAID SECTION 24 AND ALONG THE NORTH LINE OF
SECTIONS 23, 22 AND 21, TOWNSHIP 1 NORTH, RANGE 6 WEST APPROXIMATELY THREE MILES
TO THE NORTH QUARTER CORNER OF SAID SECTION 21;

THENCE SOUTH ALONG THE NORTH SOUTH MID-SECTION LINE OF SAID SECTION 21
APPROXIMATELY ONE HALF MILE TO THE APPROXIMATE CENTER OF SAID SECTION 21;

THENCE WEST ALONG THE EAST WEST MID-SECTION LINE OF SAID SECTION 21 AND SECTION
20, TOWNSHIP 1 NORTH, RANGE 6 WEST, APPROXIMATELY ONE MILE TO THE APPROXIMATE
CENTER OF SAID SECTION 20;

THENCE SOUTH ALONG THE NORTH-SOUTH MID-SECTION LINE OF SECTIONS 20, 29 AND 32,
TOWNSHIP 1 NORTH, RANGE 6 WEST APPROXIMATELY TWO AND ONE HALF MILES TO THE SOUTH
QUARTER CORNER OF SAID SECTION 32, WHICH IS COINCIDENT WITH THE NORTH QUARTER
CORNER OF SECTION 5, TOWNSHIP 1 SOUTH, RANGE 6 WEST;

THENCE WEST ALONG THE NORTH LINE OF SECTIONS 5 AND 6, TOWNSHIP 1 SOUTH, RANGE 6
WEST, AND ALONG THE NORTH LINE OF SECTION 1, TOWNSHIP 1 SOUTH, RANGE 7 WEST
APPROXIMATELY TWO AND ONE HALF MILES TO THE NORTHWEST CORNER OF SECTION 1,
TOWNSHIP 1 SOUTH, RANGE 7 WEST;

THENCE SOUTH ALONG THE WEST LINE OF SAID SECTION 1, APPROXIMATELY ONE MILE TO
THE SOUTHWEST CORNER OF SAID SECTION 1 WHICH IS COINCIDENT WITH THE NORTHEAST
CORNER OF SECTION 11, TOWNSHIP I SOUTH RANGE 7 WEST;

THENCE WEST ALONG THE NORTH LINE OF SAID SECTION 11 APPROXIMATELY ONE MILE TO
THE NORTHWEST CORNER OF SECTION 11, TOWNSHIP 1 SOUTH, RANGE 7 WEST;

THENCE SOUTH APPROXIMATELY 4 MILES ALONG THE WEST LINE OF SAID SECTION 11 AND
THE WEST LINE OF SECTIONS 14, 23, AND 26, TOWNSHIP 1 SOUTH, RANGE 7 WEST TO THE
SOUTHWEST CORNER OF SAID SECTION 26;

THENCE EAST APPROXIMATELY ONE AND ONE HALF MILES ALONG THE SOUTH LINE OF SAID
SECTION 26 AND THE SOUTH LINE OF SECTION 25, TOWNSHIP 1 SOUTH, RANGE 7 WEST TO
THE SOUTH QUARTER CORNER OF SAID SECTION 25, WHICH IS COINCIDENT WITH THE NORTH
QUARTER CORNER OF SECTION 36, TOWNSHIP 1 SOUTH, RANGE 7 WEST;

THENCE SOUTH ALONG THE NORTH SOUTH MID-SECTION LINE OF SECTION 36, TOWNSHIP 1
SOUTH, RANGE 7 WEST APPROXIMATELY ONE MILE TO THE SOUTH QUARTER CORNER OF SAID
SECTION 36;

THENCE EAST APPROXIMATELY 4 AND ONE HALF MILES ALONG THE SOUTH LINE OF SAID
SECTION 36, TOWNSHIP 1 SOUTH, RANGE 7 WEST AND THE SOUTH LINE OF SECTIONS 31,
32, 33 AND 34, TOWNSHIP 1 SOUTH, RANGE 6 WEST TO THE SOUTHEAST CORNER OF SAID
SECTION 34, WHICH IS COINCIDENT WITH THE NORTHWEST CORNER OF SECTION 2, TOWNSHIP
2 SOUTH, RANGE 6 WEST; THENCE SOUTH ALONG THE WEST LINE OF SAID SECTION 2
APPROXIMATELY ONE HALF MILE TO THE WEST QUARTER CORNER OF SAID SECTION 2;

THENCE EAST APPROXIMATELY ONE MILE ALONG THE EAST WEST MIDSECTION LINE OF SAID
SECTION 2 TO THE EAST QUARTER CORNER OF SAID SECTION 2, WHICH IS COINCIDENT WITH
THE WEST QUARTER CORNER OF SECTION 1, TOWNSHIP 2 SOUTH, RANGE 6 WEST;

THENCE SOUTH APPROXIMATELY ONE HALF MILE ALONG THE WEST LINE OF SAID SECTION 1
TO THE SOUTHWEST CORNER OF SAID SECTION 1;

THENCE EAST ALONG THE SOUTH LINE OF SAID SECTION 1 AND THE SOUTH LINE OF SECTION
6, TOWNSHIP 2 SOUTH, RANGE 5 WEST, APPROXIMATELY 2 MILES TO THE SOUTHEAST CORNER
OF SAID SECTION 6;

THENCE NORTH APPROXIMATELY THREE MILES ALONG THE EAST LINE OF SAID SECTION 6 AND
THE EAST LINE OF SECTIONS 31 AND 30, TOWNSHIP 1 SOUTH, RANGE 5 WEST TO THE
NORTHEAST CORNER OF SAID SECTION 30;

THENCE WEST APPROXIMATELY ONE HALF MILE ALONG THE NORTH LINE OF SAID SECTION 30
TO THE NORTH QUARTER CORNER OF SAID SECTION 30, WHICH IS COINCIDENT WITH THE
SOUTH QUARTER CORNER OF SECTION 19, TOWNSHIP 1 SOUTH, RANGE 5 WEST;

THENCE NORTH APPROXIMATELY ONE MILE ALONG THE NORTH SOUTH MID-SECTION LINE OF
SAID SECTION 19 TO THE NORTH QUARTER CORNER OF SAID SECTION 19;

THENCE WEST APPROXIMATELY ONE HALF MILE ALONG THE NORTH LINE OF SAID SECTION 19
TO THE NORTHWEST CORNER OF SAID SECTION 19, WHICH IS COINCIDENT WITH THE
SOUTHEAST CORNER OF SECTION 13, TOWNSHIP 1 SOUTH, RANGE 6 WEST;

THENCE NORTH APPROXIMATELY TWO MILES ALONG THE EAST LINE OF SECTIONS 13 AND 12
TOWNSHIP 1 SOUTH, RANGE 6 WEST TO THE NORTHEAST CORNER OF SAID SECTION 12;

THENCE WEST APPROXIMATELY ONE HALF MILE TO THE NORTH QUARTER CORNER OF SAID
SECTION 12, WHICH IS COINCIDENT WITH THE SOUTH QUARTER CORNER OF SECTION 1,
TOWNSHIP 1 SOUTH, RANGE 6 WEST;

THENCE NORTH APPROXIMATELY FOUR MILES ALONG THE NORTH SOUTH MID-SECTION LINE OF
SAID SECTION 1 AND THE NORTH SOUTH MIDSECTION LINE OF SECTIONS 36, 25 AND 24,
TOWNSHIP 1 NORTH, RANGE 6 WEST TO THE POINT OF BEGINNING.

ALL LYING WITHIN THE GILA AND SALT RIVER BASE AND MERIDIAN, MARICOPA COUNTY,
ARIZONA

      In accordance with Item 304 of Regulation S-T of the Securities Exchange
Act of 1934, the map on this page of this Agreement shows the Other Electric
Generating Facilities that could be served by Tolleson Effluent under this
Agreement.

                                    EXHIBIT C

The following components of the Interconnection Facilities, as depicted on
drawing Numbers AO-W-Z1C-150, Rev. 7, and AO-W-Z1C-151, Rev. 3 (both drawings
attached), are the property of the City of Tolleson:

1.    The Tolleson Junction Box and the weir and three manual sluice gates
      located within that Junction Box.

2.    The anchor block adjacent to the Tolleson Junction Box.

3.    18 feet of 48-inch pipe connected to the inlet side of the Tolleson
      Junction Box.

4.    Approximately 15 feet of 42-inch pipe connected to the outlet side of the
      Tolleson Junction Box.

5.    The manhole and stub pipe required to connect the 42-inch pipes connected
      to the inlet and outlet sides of the manhole.

6.    The Tolleson Junction Structure Box.

7.    All other portions of the "new" Tolleson Outfall Line.

8.    The portion of the existing Tolleson Outfall Line (30-inch) within the
      Tolleson Junction Box.

9.    All other portions of the existing Tolleson Outfall Line.

The following components of the Interconnection Facilities, as depicted on
drawing Numbers AO-W-Z1C-150, Rev. 7, and AO-W-Z1C-151, Rev. 3 (both drawings
attached), are the property of APS, SRP and the other owners of Palo Verde
Nuclear Generating Station:

1.    The ANPP Effluent Pipeline Junction Box and all facilities and equipment
      located within that Junction Box.

2.    The 30-inch pipe between the Palo Verde Effluent Pipeline Junction Box and
      the Tolleson Junction Box.

3.    The motorized sluice gate (valve) situated in the Tolleson Junction Box.

4.    The flow metering equipment, including without limitations such devices as
      may be necessary for transmission of flow meter data to the control panels
      in the Plant.

5.    The RTU Building and all facilities and equipment located within that
      building.

      In accordance with Item 304 of Regulation S-T of the Securities Exchange
Act of 1934, the drawings on these two pages of this Agreement show the
Interconnection Facilities owned by Palo Verde and the City of Tolleson.

EX-10.105

Exhibit 10.105

OPERATING AGREEMENT FOR THE
CO-OWNERSHIP OF WASTEWATER EFFLUENT

     This Agreement (the “Agreement”) is made and entered into this 16^th day of November, 2000 (the “Effective Date”), by and between Arizona Public Service Company, a corporation organized and existing under and by virtue of the laws of the State of Arizona (“APS”) and Salt River Project Agricultural Improvement and Power District, an agricultural improvement district organized and existing under and by virtue of the laws of the State of Arizona (“SRP”). SRP and APS are collectively referred to herein as the “Parties”; each is individually a “Party” to this Agreement.

RECITALS:

     A. APS, SRP, and the City of Tolleson have executed an “Agreement for the Sale and Purchase of Wastewater Effluent,” dated November 13, 2000 (the “Tolleson Agreement”), and each Party to this Agreement desires to more particularly describe its rights and responsibilities vis-a-vis the other Party as a co-owner of Tolleson Effluent;

     B. The primary use of the Tolleson Effluent is intended to be for cooling water at Palo Verde Nuclear Generating Station (“PVNGS”); the secondary use of the Tolleson Effluent will be its use at “Other Electric Generating Facilities” (as defined by the Tolleson Agreement);

     C. To the extent Tolleson Effluent is not used at PVNGS, the Tolleson Effluent may be used at or for the benefit of Other Electric Generating Facilities;

     D. It is appropriate to establish terms and conditions on which APS, SRP, and their respective affiliates, including Pinnacle West Energy Corporation (“PWE”), will make use of the Tolleson Effluent and make decisions regarding the use of same in the future;

     E. The Parties desire to enter into this Agreement to set forth their respective rights and obligations pertaining to the co-ownership of the Tolleson Effluent. Accordingly, this Agreement is an ancillary document or companion agreement in relation to the Tolleson Agreement.

     NOW, THEREFORE, in consideration of the agreements and promises set forth below, and, other good and valuable considerations, the receipt and sufficiency of which are acknowledged, the parties hereby agree as follows:

ARTICLE I
DEFINITIONS AND USAGE

     1.1 Definitions. As used herein, the following capitalized terms shall have the same meaning as they are given by definition in the Tolleson Agreement: Delivery Point, Effluent, Effluent Pipeline, Notice of Commitment, Other Electric Generating Facilities, Outages, Reserved Effluent, Surplus Effluent, Tolleson, and Uncontrollable Forces. All such definitions from the Tolleson Agreement are specifically incorporated in this

Agreement by this reference. In addition, the following terms shall have the specified meanings:

          “Claim” means any demand, claim, cause of action, lawsuit, or proceeding of any kind or character, including investigation or audit by a Governmental Authority.

          “Coordinating Committee” has the meaning specified in Article 4.

          “Effective Date” has the meaning specified in the introductory paragraph.

          “Event of Default” has the meaning specified in Section 7.1.

          “Governmental Authority” means a federal, state, local or foreign governmental authority or body politic; a state, province, commonwealth, territory or district; a county; a city, town, township, village or other municipality; a district or other subdivision or any of the foregoing; any executive, legislative or other governing body of any of the foregoing; any agency, authority, board, department, system, service, office, commission, committee, council, or other administrative body of any of the foregoing; any court or other judicial body; a legally recognized tribal authority; and any officer, official or other representative of any of the foregoing when acting in their official capacity. For purposes of this Agreement, neither SRP nor APS shall be considered a Governmental Authority.

          “Legal Requirement” means any statute, law, regulation, ordinance, rule, judgment, order, decree, constitution, Permit, concession, grant, franchise, agreement, directive or common law, or any requirement of, or other governmental restriction or any similar form of decision by, or interpretation or administration of any of the foregoing by, any Governmental Authority of competent jurisdiction (or by an arbitrator in a forum involving binding arbitration to which one of the parties or its business or assets is subject or bound).

          “Palo Verde Nuclear Generating Station” or “PVNGS” means the Arizona Nuclear Power Project, as defined in the Arizona Nuclear Power Project Participation Agreement (including amendments 1-13) among APS, SRP, Southern California Edison, Public Service Company of New Mexico, El Paso Electric Company, Southern California Public Power Authority, and the Department of Water and Power of the City of Los Angeles (collectively, the “PVNGS Participants”).

          “Party” or “Parties” has the meaning specified in the introductory paragraph and shall include permitted successors and assigns.

          “Permit” means any permit, consent, license, rezoning, variance, use permit, certification, notice, filing, approval, or authorization of any kind required to be issued by a Governmental Authority and any necessary consent or approval required to be granted by any non-Governmental Authority, other than a Party, in order to develop, construct, own, or operate any facility that is contemplated or required because of decisions made pursuant to this Agreement.

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          “Person” means any natural person, corporation, limited liability company, partnership, business trust, Governmental Authority or other entity.

          “PWE” means Pinnacle West Energy Corporation, an Arizona Corporation and an affiliate of APS.

          “Tolleson Effluent” means all Effluent purchased by APS and SRP from the City of Tolleson pursuant to the Tolleson Agreement, whether such Effluent is Surplus Effluent or Reserved Effluent, as those terms are defined in the Tolleson Agreement.

     1.2 Certain Principles of Interpretation. In this Agreement, unless otherwise indicated or the context otherwise requires:

          (i) the singular includes the plural and plural the singular when the context requires;

          (ii) words importing any gender include the other gender;

          (iii) references to “writing” include printing, typing, lithography, and other means of reproducing words in a tangible visible form;

          (iv) the words “including,” “includes,” and “include” shall be deemed to be followed in each instance by the words, “without limitation”;

          (v) references to articles, sections, paragraphs, recitals, and exhibits are to this Agreement unless otherwise stated;

          (vi) references to contracts and related instruments shall be deemed to include all subsequent amendments, extensions, and other modifications to such instruments (without, however, limiting any prohibition on any such amendments, extensions and other modifications by the terms of this Agreement);

          (vii) references to Persons include their respective permitted successors and assigns and, in the case of Governmental Authorities, persons succeeding to their respective functions and capacities;

          (viii) the words “hereof,” “herein,” “hereunder,” and words of similar import shall refer to this Agreement as a whole and not to any particular provision thereof;

          (ix) both Parties and their counsel participated extensively in the preparation and drafting of this Agreement; no rule of construction shall apply that would cause the interpretation of any claimed ambiguity in this Agreement against a Party determined to be the drafting Party;

          (x) captions and headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose;

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          (xi) any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction and the provision that is prohibited or unenforceable shall be reformed or modified to reflect the parties’ intent to the maximum extent permitted by applicable law; and

          (xii) references to a “day,” “week,” “month,” or “year” shall be construed as a calendar day, week, month, or year.

ARTICLE 2
PURPOSE AND SCOPE

     The purpose of this Agreement is to set forth certain agreements and understandings between the Parties concerning the ownership and use of the Tolleson Effluent, the allocation of costs incurred in connection with the Tolleson Agreement and this Agreement, and the responsibilities and obligations of each Party. This Agreement relates solely to the business, activities, and purposes set forth herein and, except as otherwise expressly provided herein, does not apply to any other activities, transactions, relationships, contracts, projects, or work of the Parties. Subject to Article 4, no Party shall be restricted in any way from engaging in any activity or business falling outside the scope of this Agreement.

ARTICLE 3
OWNERSHIP AND USE OF TOLLESON EFFLUENT

     3.1 Co-Ownership and Use of Effluent Purchased from Tolleson. APS and SRP agree that they are and shall be co-owners, as tenants in common, of all Tolleson Effluent purchased pursuant to the Tolleson Agreement, each Party possessing a 50% undivided interest in all such Tolleson Effluent. Consistent with the Tolleson Agreement, the Parties agree that the primary use of the Tolleson Effluent shall be for cooling water for PVNGS and that PVNGS shall have a priority right to the use of any or all of the Tolleson Effluent to satisfy such requirements for cooling water at PVNGS as are not fully satisfied using effluent from non-emergency sources other than Tolleson. To the extent that Tolleson Effluent is available for use at Other Electric Generating Facilities, the allocation of and the benefit from any such Effluent shall be divided between APS and SRP (or their permitted assigns) in the manner determined by the Coordinating Committee pursuant to Article 4. Any use of Tolleson Effluent at or for the benefit of Other Electric Generating Facilities shall be consistent with the terms of both this Agreement and the Tolleson Agreement.

     3.2 Use of Tolleson Effluent at PVNGS. The Parties hereby agree that all Tolleson Effluent used at PVNGS shall be transferred to the PVNGS Participants at the Delivery Point specified in the Tolleson Agreement. All aspects of transportation, treatment, use, disposal and payment for any Tolleson Effluent so transferred and used at PVNGS shall be the responsibility of APS, as the Operating Agent of PVNGS, upon discharge of that Effluent into the Effluent Pipeline, and commencing upon such discharge, APS’s rights and obligations with respect to such Tolleson Effluent shall be those of the

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Operating Agent under the terms of the Arizona Nuclear Power Project Participation Agreement, including but not limited to the liability provisions set forth in that Participation Agreement. The Parties to this Agreement shall not receive any fee or other compensation for transfer to the PVNGS Participants of Tolleson Effluent used at PVNGS.

     3.3 Use of Tolleson Effluent at or For the Benefit of Other Electric Generating Facilities. Tolleson Effluent, if not required for cooling water purposes at PVNGS, may be used at or for the benefit of Other Electric Generating Facilities upon such terms and conditions as the Parties may separately agree, or as determined by the Coordinating Committee pursuant to Article 4. In this regard, the Parties contemplate that up to 6,500 acre-feet per year of available Tolleson Effluent will be transferred to PWE for use at the proposed electric generating facility commonly referred to as “Redhawk” pursuant to separate terms and conditions to be negotiated by the Parties, including, without limitation, payment of a fee by PWE to SRP and APS. Depending upon circumstances at the time, additional quantities of Tolleson Effluent may be approved for use at Redhawk after negotiation by the Parties and appropriate review and approval by the Coordinating Committee of any agreement that may be negotiated, including, without limitation, payment of a fee by PWE to SRP and APS.

ARTICLE 4
COORDINATING COMMITTEE

     4.1 Coordinating Committee. Each Party shall designate one (1_.) representative (“Representative”) to serve on the Coordinating Committee and one (1) alternate (“Alternate”), each having an appropriate level of technical expertise and familiarity with the policies of its executive management. The Parties; hereby form the Coordinating Committee, the initial Representatives and Alternates of which are as follows:

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

     A Party may change its Representative or Alternate upon notice to the other Party. (The term “Representative” shall include the designated Representative or any Alternate that is actually performing the duties of the Representative.)

     4.2 Coordinating Committee Authority. The Coordinating Committee shall have the following responsibilities and authority, subject to and consistent with the other terms of this Agreement and any separate agreement between the Parties that allocates any portion of Tolleson Effluent for a specific use:

          (i) monitoring, directing, coordinating, and managing the activities of the Parties undertaken pursuant to this Agreement and, except as provided in Section 5.1 hereof, allocating the costs and benefits thereof between the Parties in equal shares;

          (ii) determining whether to issue a Notice of Commitment pursuant to paragraph 8.2 of the Tolleson Agreement, and approving all proposed uses of Tolleson Effluent, except to the extent that such issues are determined by the terms of any separate

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agreement between the Parties that allocates any portion of Tolleson Effluent for a specific use;

          (iii) authorizing negotiations and approving all other contracts or commissioning such studies, investigations, or reports as the Coordinating Committee deems desirable or necessary;

          (iv) determining the agenda, scope, participants and attendees at meetings of, and other matters relating to, the Coordinating Committee; and

          (v) performing any other responsibility, duty, or authority granted from time to time to the Coordinating Committee by amendment of this Agreement.

     4.3 Actions of the Coordinating Committee. No Party shall take any action with respect to allocation of Tolleson Effluent to any Other Electric Generating Facility except as may be specifically authorized by this Agreement or as agreed to and approved by the Coordinating Committee. No action of the Coordinating Committee shall be binding unless and until: (i) such action has been set forth in a writing submitted to the Representatives; (ii) the Representatives have had ten days after receipt of the writing to review it; and (iii) the action has been approved in writing by the Representative of each of the Parties. Failure to approve an action within such ten day period shall not constitute approval; provided, however, that each Party shall make good faith efforts to review and approve or reject each action within the ten day period. Approval of or failure to object to the minutes of a meeting of the Coordinating Committee shall not be deemed to constitute written approval of any action taken thereat. All actions approved by the Coordinating Committee shall be carried out by one or more of the Parties, as specified in the written approval of such action; any approval which does not specify the responsible party for the action shall be carried out by the Party having principal responsibility, as set forth in. Article 5.

     4.4 Term. The Coordinating Committee shall dissolve and have no further authority upon (i) the due termination of this Agreement pursuant to any provision hereof, except to the extent it is expressly agreed in writing that the Coordinating Committee is needed to manage those matters that survive termination; or (ii) the unanimous agreement of the Parties to dissolve the Coordinating Committee.

     4.5 Meetings.

          A. Time and Conduct of Meetings: Quorum. The Coordinating Committee shall meet during the term of this Agreement, on an “as needed” basis or at the request of either Representative, at such times and at such places as the Representatives may from time to time agree. Meetings of the Coordinating Committee may be held in person or by telephone, video conference, or other agreed means. Each Representative shall be given reasonable advance notice of all Coordinating Committee meetings and all matters to be voted on by the Coordinating Committee. A quorum for a meeting of the Coordinating Committee shall consist of one representative of each Party. Any substantive decisions of the Coordinating Committee shall be documented in writing and approved by both Representatives.

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          B. Attendance. Each Party shall use reasonable efforts to cause its Representative to be present at each meeting of the Coordinating Committee and no Party shall withhold the presence or participation of its Representative to forestall decisions on any matter pertaining to this Agreement. A Party may, without notice, cause any of its employees or its legal counsel to attend any meeting of the Coordinating Committee. In addition, a Party may, upon reasonable notice to the Coordinating Committee, request that individuals other than its employees and legal counsel be allowed to attend a meeting of the Coordinating Committee. No individuals other than the Representatives shall be permitted to vote on behalf of a Party. The Coordinating Committee may require the execution of a confidentiality agreement by any individual other than the Representatives, Alternates, employees, and legal counsel of the Parties as a condition to approving such individual’s attendance at a Coordinating Committee meeting.

ARTICLE 5
PRINCIPAL RESPONSIBILITY

     5.1 Implementing Decisions of Coordinating Committee. APS shall have principal responsibility for carrying out the actions of the Coordinating Committee, and implementing decisions of the Coordinating Committee, unless otherwise specified pursuant to Section 4.3 or 5.2 hereof. In addition, as set forth in paragraph 12.5.1 of the Tolleson Agreement, APS is authorized to act for and on behalf of SRP in all matters affecting the implementation and performance of the Tolleson Agreement when the performance in question involves transportation and use of Tolleson Effluent at PVNGS. The intent of said paragraph 12.5.1 is to authorize APS to act both as the Party with principal responsibility under this Agreement and as Operating Agent for PVNGS in managing all Tolleson Effluent to be used at PVNGS. Notwithstanding the provisions of this Section, either Party may take any appropriate, lawful action to cure a breach of the Tolleson Agreement caused by the other Party.

     5.2 Responsibility for Transferred Tolleson Effluent.

          5.2.1 Transfers for Use at PVNGS. Consistent with Section 3.2 above, APS and SRP shall request acceptance by the PVNGS Participants of responsibility for, and risks associated with, transportation, treatment, use, disposal and payment for all Tolleson Effluent to be used at PVNGS. Responsibility for, and risks associated with, transportation, treatment, use, disposal and payment for Tolleson Effluent to be used at PVNGS, shall be transferred to the PVNGS Participants at the Delivery Point specified in the Tolleson Agreement. Acceptance by the PVNGS Participants of the transfer of Tolleson Effluent, and responsibility for, and risks associated with, its transportation, treatment, use disposal and payment, shall be documented in the minutes of the Administrative Committee established pursuant to Section 6.1.1 of the Arizona Nuclear Power Project Participation Agreement.

          5.2.2 Transfers for Use at Other Electric Generating Facilities. As between the Parties to this Agreement and the party or parties owning or operating a specific Other Electric Generating Facility, responsibility for, and risks associated with, transportation, treatment, use, disposal and payment for Tolleson Effluent to be used at the Other Electric Generating Facility shall be transferred to the party or parties owning an

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interest in or operating the Other Electric Generating Facility, such transfer to occur at the Delivery Point specified in the Tolleson Agreement. Acceptance of this transfer of responsibility for, and risks associated with, Tolleson Effluent to be used at Other Electric Generating Facilities shall be documented in the agreement(s) by which the Tolleson Effluent is transferred to the party owning or operating the Other Electric Generating Facility. Notwithstanding the transfer of responsibility and risk to the party or parties owning or operating the Other Electric Generating Facility, ownership of the Tolleson Effluent shall not transfer until physical delivery of the Tolleson Effluent to that party or parties at the delivery point specified in the agreement transferring the Tolleson Effluent.

     5.3 Permitting. APS shall have principal responsibility to ensure compliance with any Legal Requirement applicable to the actions of the Coordinating Committee and to ensure that any Person using Tolleson Effluent purchased by the Parties secures any Permit and otherwise satisfies any Legal Requirement applicable to the transportation and delivery of Tolleson Effluent to the point of delivery agreed upon by the Parties; provided, however, that in any case where SRP will make use of Tolleson Effluent at or for the benefit of Other Electric Generating Facilities operated or solely owned by SRP or any affiliated or successor entity, then from and after the delivery point agreed upon by the Parties, SRP shall have principal responsibility to ensure compliance with any Legal Requirement, and to secure any Permit, applicable to its intended use of the Tolleson Effluent.

ARTICLE 6
TERM

     6.1 Term. This Agreement shall commence on the Effective Date and shall terminate upon the expiration or termination of the Tolleson Agreement.

     6.2 Survival. All obligations and liabilities of the Parties under this Agreement shall cease upon termination except the obligation of the Parties under Article 9, obligations assigned pursuant to this Agreement to the Coordinating Committee with the expressed, written intent that they survive this Agreement, and the liabilities of any Party resulting from a default by such Party leading to such termination.

ARTICLE 7
DEFAULT

     7.1 Events of Default. A Party shall be in default under this Agreement upon the occurrence of the following (“Event of Default”): if it fails to render performance required under any material provision of this Agreement when due and such failure continues unremedied for thirty (30) days following written notice to the Party in default given by the other Party. Neither APS nor SRP shall be in default under this Agreement due to Uncontrollable Forces and Outages as identified in Section 9.1 of the Tolleson Agreement. It shall also be an Event of Default if a Party shall have commenced any insolvency, receivership, bankruptcy, liquidation, or similar proceedings and (i) one hundred twenty (120) days shall have expired from the commencement of any one or more of such proceedings, and (ii) a petition commencing the proceeding has not been dismissed or stayed within that time.

8

     7.2 Actions upon Event of Default. In the event of any dispute between the Parties concerning the rights and obligations created by this Agreement, or concerning any Event of Default, the Parties shall first confer in an attempt to informally resolve such dispute without need to resort to arbitration or litigation. The Parties shall not resort to arbitration or litigation to enforce their rights under this Agreement until they have conferred in good faith over a period of not less than fifteen days in an attempt to informally resolve their dispute. If the Parties are unable to resolve their dispute after conferring as required in the preceding sentence, then during the period that any Event of Default continues, the non-defaulting Party may, without prejudice to any other available rights or remedies under this Agreement or at law or in equity, and without constituting an election of an exclusive remedy for an Event of Default, initiate either or both of the following: (i) proceedings to partition the Tolleson Effluent and thereby terminate the co-tenancy of the Parties in the Tolleson Effluent, or (ii) non-binding arbitration by one arbitrator who has not previously been employed by either party (excluding employment as an arbitrator), and does not have a direct or indirect interest in either Party or the subject matter of the arbitration. The arbitrator shall either be as mutually agreed by the Parties within fifteen (15) calendar days after submission of the matter to arbitration, or failing agreement shall be selected under the expedited rules of the American Arbitration Association (“AAA”). The rules of AAA shall apply to the extent not inconsistent with the provisions in this Section. Arbitration shall be conducted according to the following: (a) not later than seven (7) days prior to the hearing date set by the arbitrator, each party shall submit a brief with a single proposal for settlement; (b) the hearing shall be conducted on a confidential basis without continuance or adjournment; and (c) the Parties shall divide equally the cost of the arbitrator and the hearing, and each Party shall be responsible for its own expenses, including its counsel and representatives.

ARTICLE 8
NOTICES

     8.1 Notice Provision. All notices, demands, consents or other communications required under this Agreement shall be in writing and may be delivered personally to a Party, may be delivered by facsimile providing written confirmation of successful transmission, or may be mailed by deposit in the United States Certified Mail, return receipt requested, or by deposit with a reputable overnight delivery service. Notices shall be effective:

          (i) on the date delivered by personal delivery or facsimile;

          (ii) three (3) business days following the date deposited in the United States mail; or

          (iii) the next business day following delivery to a reputable overnight delivery service.

Notices or communications shall be delivered and mailed to the Parties at the addresses set forth in paragraph 12.4 of the Tolleson Agreement, or to any address of a Party which is substituted from time to time by written notice of such Party pursuant to paragraph 12.4 of the Tolleson Agreement.

9

ARTICLE 9
LIABILITY

     9.1 Limitation of Liability. The liability of a Party to the other Party under this Agreement shall be limited to the direct damages actually sustained by the other Party. NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR ANY LOSS OR DAMAGE IN THE NATURE OF PARTIAL OR COMPLETE LOSS OF USE OF ANY GENERATING FACILITY, LOSS OF ELECTRIC POWER, COST OF REPLACEMENT OF ELECTRIC POWER, OR FOR ANY LOSS OF INTEREST, REVENUE OR ANTICIPATED PROFITS FROM ACTIVITIES UNDER THIS AGREEMENT. NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY INDIRECT, SPECIAL, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR LOST PROFITS, ARISING OUT OF OR RELATED TO THIS AGREEMENT. (The limitations in this Section 9.1 shall not apply to losses in tort to third parties or to Claims against which a Party is entitled to indemnitee protection under Section 9.2.)

     9.2 Indemnity. Except as otherwise provided in any subsequent agreement between the Parties (or between the Parties and other entities), each Party (“Indemnifying Party”) shall defend, indemnify, and hold harmless the other Party and its respective affiliates, directors, officers, partners, members, employees, agents, and representatives (each an “Indemnitee”) from and against any and all Claims, liability, cost, loss or expense of any kind incurred by the Indemnitees arising out of the fraud or willful misconduct of the Indemnifying Party or its agents or representatives in connection with this Agreement, or arising out of a material breach of the Tolleson Agreement by the Indemnifying Party. Except as limited by any separate agreement between the Parties, each Party shall also indemnify and hold harmless the other Party against any and all Claims, liability, cost, loss or expense of any kind resulting from the Indemnifying Party’s control, transportation, use or disposal of Tolleson Effluent at or for the benefit of any of the Indemnifying Party’s Other Electric Generating Facilities In the event any such Claim, liability, cost, loss or expense asserted by a person not a Party to this Agreement is caused by an alleged joint or concurrent fraud, negligence or willful misconduct, the Parties at fault shall bear liability in proportion to their own degrees of culpability. Each Indemnitee is an intended beneficiary of this Section 9.2. The indemnification obligation of the parties set forth in this Section shall survive the termination or expiration of this Agreement.

ARTICLE 10
GENERAL

     10.1 Entire Agreement. This Agreement supersedes all prior and contemporaneous conduct and communications between the Parties pertaining to co-ownership of the Tolleson Effluent, whether written or oral. Notwithstanding the foregoing, this Agreement shall be read together with the Tolleson Agreement, and any agreement by which APS and SRP transfer any portion of the Tolleson Effluent for use at or for the benefit of Other Electric Generating Facilities, to obtain necessary definitions and to otherwise determine the intention of the Parties. This Agreement is not intended to modify or abrogate either the Tolleson Agreement or any subsequent agreement by which APS and SRP transfer any portion of the Tolleson Effluent for use at or for the benefit of Other Electric Generating

10

Facilities. This Agreement may not be modified, changed or added to except in writing signed by all Parties hereto.

     10.2 Waiver. Each Party’s failure or delay in enforcing the terms and conditions of this Agreement or insisting upon strict performance of any of the other Party’s obligations shall not be interpreted as a waiver thereof. Waiver of any provision of this Agreement shall only be effective if in writing and shall not be interpreted as a waiver of any subsequent breach or failure under the same or any other provision of this Agreement. No conduct, statement, course of conduct, course of dealing, oral expression or other action shall be construed as a waiver.

     10.3. Assignment.

          10.3.1 Assignment by APS to PWE. APS may assign its rights and delegate its duties under this Agreement at any time to PWE, provided that: (i) APS assigns’ its entire interest in this Agreement; (ii) PWE assumes in writing all of the APS obligations under this Agreement; (iii) APS also assigns all of its rights and obligations under the Tolleson Agreement to PWE at the same time as its assignment of this Agreement; and (iv) such assignment shall not become effective until and unless PWE has become a party to the Arizona Nuclear Power Project Participation Agreement. No assignment or delegation under this Section 10.3.1 will release the assigning Party from its obligations under this Agreement unless the other Party consents to a release (such consent not to be unreasonably withheld, conditioned or delayed). Any subsequent assignee of PWE’s rights and obligations under this Agreement shall be subject to all terms and conditions of this Agreement, including, without limitation, the restrictions of this Section 10.3.1.

          10.3.2 Assignment to Others. With the prior written consent of the other Party (such consent not to be unreasonably withheld, conditioned or delayed), a Party may assign its rights or delegate its duties under this Agreement at any time to any other PVNGS Participant, provided that such Party assigns its entire interest in this Agreement and that its assignee assumes in writing all of such Party’s obligations under this Agreement. No assignment or delegation under this Section 10.3.2 will release the assigning Party from its obligations under this Agreement unless the other Party consents to a release (such consent not to be unreasonably withheld, conditioned or delayed). Any assignee to whom the rights and obligations of this Agreement are assigned pursuant to this Section 10.3.2 shall thereafter be subject to all terms and conditions of this Agreement, including, without limitation, the restrictions of this Section 10.3.2.

     10.4 Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the State of Arizona.

     10.5 Attorneys’ Fees. Each Party shall bear its own attorneys’ fees, costs, and expenses in case of a partition action or arbitration initiated under the provisions of Section 7.2. Should any Claim be brought by a Party against another Party arising out of this Agreement, including any action for declaratory or injunctive relief, the prevailing Party shall be entitled to reasonable. attorneys’ fees and costs and expenses of litigation and investigation, all as actually incurred, including attorneys’ fees, costs and expenses of litigation and investigation incurred in appellate proceedings or in any action or participation

11

in, or in connection with, any case or proceeding under the United States or other bankruptcy laws, and any judgment or decree rendered in any such action or proceedings shall include an award thereof.

     10.6 Counterparts. This Agreement may be executed by the Parties in any number of separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts shall together constitute one and the same agreement. All signatures need not be on the same counterpart.

     10.7 Relationship of the Parties. The execution of this Agreement shall not create or constitute a partnership, joint venture, entity or any form of business organization between the Parties.

     IN WITNESS WHEREOF, the Parties have executed this Agreement to be effective as of the Effective Date.

ARIZONA PUBLIC SERVICE COMPANY, an
Arizona corporation,
By	/s/ James M. Levine
	Its Exec. VP, Generation
Approved as to form:
By	/s/ Karilee S. Ramaley
SALT RIVER PROJECT AGRICULTURAL
IMPROVEMENT AND POWER DISTRICT, an
Arizona agricultural improvement district
By	/s/ William P. Schrader
	Its President
Approved as to form:
By	/s/ Richard N. Morrison

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EX-12.1

Exhibit 12.1

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

	Twelve Months Ended December 31,
	2004		2003		2002		2001		2000
Earnings:
Income from continuing Operations	$	235,218	$	225,803	$	236,563	$	327,367	$	302,332
Income Taxes		128,857		102,473		152,145		213,535		194,200
Fixed Charges		227,135		235,407		219,178		211,958		202,804
Total	$	591,210	$	563,683	$	607,886	$	752,860	$	699,336
Fixed Charges:
Interest Expense	$	195,859	$	204,339	$	187,039	$	175,822	$	166,447
Estimated Interest Portion of Annual Rents		31,276		31,068		32,139		36,136		36,357
Total Fixed Charges	$	227,135	$	235,407	$	219,178	$	211,958	$	202,804
Ratio of Earnings to Fixed Charges (rounded down)		2.60		2.39		2.77		3.55		3.44

EX-12.2

Exhibit 12.2

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

	Twelve Months Ended December 31,
	2004		2003		2002		2001		2000
Earnings:
Income from continuing operations	$	199,627	$	180,937	$	199,343	$	280,688	$	306,594
Income taxes		120,030		86,854		126,805		183,136		195,665
Fixed charges		181,372		181,793		168,985		166,939		179,381
Total earnings	$	501,029	$	449,584	$	495,133	$	630,763	$	681,640
Fixed Charges:
Interest charges	$	146,983	$	147,610	$	133,878	$	130,525	$	141,886
Amortization of debt discount		4,854		3,337		2,888		2,650		2,105
Estimated interest portion of annual rents		29,535		30,846		32,219		33,764		35,390
Total fixed charges	$	181,372	$	181,793	$	168,985	$	166,939	$	179,381
Ratio of Earnings to Fixed Charges (rounded down)		2.76		2.47		2.93		3.77		3.79

EX-21.1

Exhibit 21.1

SUBSIDIARIES OF THE COMPANY

Arizona Public Service Company

APS Foundation, Inc.

AXIOM Power Solutions, Inc.

Bixco, Inc.

Powertree Carbon Company, LLC

PWENewco, Inc.

APSES Holdings, Inc.

APS Energy L.P.

APS Energy Services Company, Inc.

Northwind Phoenix LLC

Tucson District Energy LLC

SunCor Development Company

SunCor Golf, Inc.

Westworld Golf Course LLC

Golden Heritage Homes, Inc.

Golden Heritage Construction, Inc.

Golden Heritage Construction Nevada, LLC

Heritage Financial Services, LLC

SCM, Inc.

SunCor Realty & Management Company

Palm Valley Golf Club, Inc.

Rancho Viejo de Santa Fe, Inc.

Ranchland Utility Company

Rancho Viejo Village Center, LLC

SunCor Idaho, LLC

Golf de Mexico, S.A. de C.V.

Type Two, Inc.

Stone Ridge- Prescott Valley LLC

Stone Ridge Golf Course LLC

StoneRidge Commercial, L.L.C.

Hayden Ferry Lakeside LLC

Lakeside Residential Communities, L.L.C.

Edgewater at Hayden Ferry Lakeside, L.L.C.

BV at Hayden Ferry Lakeside, L.L.C.

Club West Golf Course LLC

Scottsdale Mountain LLP

SunRidge Canyon LLC

Sedona Golf Resort LLC

Kabuto/SunCor Joint Venture

Centrepoint Associates LLC

Hidden Hills of Scottsdale LLC

Talavi Associates LLC

Coral Canyon Town Center LLC

Coral Canyon HD, L.L.C.

Foothills Sewer Company, Inc.

Highland Water Company, Inc.

Palm Valley Professional Plaza, LLC

Riverside Distribution Center, LLC

SDC Prescott Valley LLC

SDC Prescott LLC

El Dorado Investment Company

Underground Imaging Technologies, LLC

NAC Holding Inc.

NAC International Inc.

Phoenix Suns Limited Partnership

AZ PB Partnership

El Dorado Ventures III

Phoenix Downtown Theater LLC

Nxt Phase Corporation

Acoustic Locating Services, LLC

Arizona Business Accelerator

PowerOneData, Inc.

Severon Corporation

Pinnacle West Energy Corporation

GenWest, LLC

APACS Holdings LLC

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

DELOITTE & TOUCHE LLP

Phoenix, Arizona
March 15, 2005

EX-23.2

Exhibit 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

DELOITTE & TOUCHE LLP

Phoenix, Arizona
March 15, 2005

EX-31.1

Exhibit 31.1

CERTIFICATION

I, William J. Post, certify that:

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

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

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

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

Date: March 16, 2005.

/s/ William J. Post

William J. Post

Chairman and Chief Executive Officer

2

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Donald E. Brandt, certify that:

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

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

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

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

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

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

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

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

Date: March 16, 2005.

/s/ Donald E. Brandt

Donald E. Brandt

Executive Vice President &

Chief Financial Officer

EX-31.3

Exhibit 31.3

CERTIFICATION

I, Jack E. Davis, certify that:

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

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

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

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

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

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

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

Date: March 16, 2005.

/s/ Jack E. Davis

Jack E. Davis

President and Chief Executive Officer

2

EX-31.4

Exhibit 31.4

CERTIFICATION

I, Donald E. Brandt, certify that:

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

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

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

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

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

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

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

Date: March 16, 2005.

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

EX-32.1

Exhibit 32.1

CERTIFICATION
OF
CHIEF EXECUTIVE OFFICER
AND
CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

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

Date: March 16, 2005.

/s/ William J. Post

William J. Post
Chairman and Chief Executive Officer

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

Date: March 16, 2005.

/s/ Donald E. Brandt

Donald E. Brandt

Executive Vice President and

Chief Financial Officer

EX-32.2

Exhibit 32.2

CERTIFICATION
OF
CHIEF EXECUTIVE OFFICER
AND
CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

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

Date: March 16, 2005.

/s/ Jack E. Davis

Jack E. Davis
President and Chief Executive Officer

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

Date: March 16, 2005.

/s/ Donald E. Brandt

Donald E. Brandt
Executive Vice President and

Chief Financial Officer

EX-99.31

EXHIBIT 99.31

PINNACLE WEST RISK FACTORS

(Report on Form 10-K for the fiscal year ended December 31, 2004)

     Set forth below and in other documents we file with the Securities and Exchange Commission are risks and uncertainties that could affect our financial results.

     We cannot predict the outcome of the general rate case of Arizona Public Service Company (“APS”), our principal subsidiary, pending before the Arizona Corporation Commission (the “ACC”).

     On June 27, 2003, APS filed a request with the ACC to increase its annual retail electricity revenues by approximately $175.1 million, or 9.8%, effective July 1, 2004. On August 18, 2004, a substantial majority of the parties to the rate case, including APS, the ACC staff, the Residential Utility Consumer Office, other customer groups, and merchant power plant intervenors entered into an agreement that proposes terms under which the rate case would be settled (the “2004 Settlement Agreement”). The 2004 Settlement Agreement is subject to ACC approval. Key financial components of the 2004 Settlement Agreement are as follows:

•   APS would receive an annual retail rate increase of approximately $75.5 million, or 4.21%. The increase would consist of an increase in base rates of approximately 3.77% and an increase of approximately 0.44% for recovery over five years of the past costs of APS’ compliance with the ACC’s retail electric competition rules (the “Rules”).

•   APS would acquire from Pinnacle West Energy Corporation (“Pinnacle West Energy”) Redhawk Combined Cycle Units 1 and 2, West Phoenix Combined Cycle Units 4 and 5, and Saguaro Combustion Turbine Unit 3 (collectively, the “Dedicated Assets”), with a net carrying value of approximately $850 million, and rate base the Dedicated Assets at a rate base value of $700 million, which would result in a regulatory rate base disallowance of $148 million. As a result, for financial reporting purposes, we would recognize a one-time, after-tax net plant write-off of approximately $88 million in the period when the plant transfer to APS is completed, and would reduce annual depreciation expense by approximately $5 million.

•   To bridge the time between the effective date of the rate increase and the actual date the Dedicated Assets transfer, APS and Pinnacle West Energy would enter into a cost-based purchase power agreement (the “Bridge PPA”), which would be based on the value of the Dedicated Assets described in the previous bullet point. The Bridge PPA would remain in effect until the Federal Energy Regulatory Commission (the “FERC”) approves the transfer of the Dedicated Assets to APS and the transfer is completed.

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

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

•   A power supply adjuster (“PSA”) would provide for the recovery of fuel and purchased power costs, subject to specified parameters and procedures.

•   APS would not restore and recover in rates the $234 million write-off recorded in 1999 as a result of a 1999 settlement agreement approved by the ACC related to the implementation of retail electric competition in Arizona (the “1999 Settlement Agreement”).

•   APS would adopt longer service lives than originally requested for certain depreciable assets.

     On February 28, 2005, the administrative law judge in the general rate case issued a recommended order. The recommended order proposes ACC approval of the 2004 Settlement Agreement with two changes related to the PSA. First, the amount of gas costs that APS could recover under the annual PSA would be limited to $500 million per year. Second, although the 2004 Settlement Agreement provides that the PSA would remain in effect for a minimum five-year period, under the recommended order the ACC would be able to eliminate the PSA at any time, if appropriate, if APS files a rate case before the expiration of the five-year period or APS does not comply with the terms of the PSA. If APS exceeds the gas costs that could be recoverable under the PSA or if the ACC eliminates the PSA, APS would retain the right to file a rate case to reset its base rates. We cannot predict the outcome of this matter.

     The procurement of wholesale power by APS without the ability to adjust retail rates could have an adverse impact on our business and financial results.

     Although the Rules allow retail customers to have access to competitive providers of energy and energy services, under the Rules, APS is the “provider of last resort” for standard-offer, full-service customers under rates that have been approved by the ACC. In the event of shortfalls of electricity due to unforeseen increases in load demand or generation or transmission outages, APS may need to purchase additional supplemental power in the wholesale spot market. At various times, prices in the spot wholesale market have significantly exceeded the amount included in APS’ current retail rates. There can be no assurance that APS would be able to fully recover the costs of this power. Although the proposed settlement of APS’ general rate case would, among other things, allow APS to recover purchased power costs, there can be no assurance that the 2004 Settlement Agreement will be approved by the ACC as proposed.

     Deregulation or restructuring of the electric industry may result in increased competition, which could have a significant adverse impact on our business and our financial results.

     Retail competition could have a significant adverse financial impact on us due to an impairment of assets, a loss of retail customers, lower profit margins or increased costs of capital. Under the Rules, as modified by the 1999 Settlement Agreement, APS was required to transfer all of its competitive electric assets and services to an unaffiliated party or parties or to a separate corporate affiliate or affiliates no later than December 31, 2002. To satisfy this requirement, APS had planned to transfer its generation assets to Pinnacle West Energy. Pursuant to an ACC order dated September 10, 2002, the ACC unilaterally modified the 1999 Settlement Agreement and directed APS to cancel any plans to divest interests in any of its generating assets. The ACC further established a requirement that APS solicit bids for certain estimated amounts of capacity and energy for periods beginning July 1, 2003. Pinnacle West Energy bid on and entered into contracts to supply most of APS’ requirements in the summer months through September 2006. In addition, as discussed above, a proposed settlement of APS’ general rate case would result in Pinnacle West Energy transferring a significant amount of generation assets to APS. These regulatory developments and legal challenges to the Rules have raised considerable uncertainty about the status and pace of retail electric competition and of electric restructuring in Arizona. Although some very limited retail competition existed in APS’ service area in 1999 and 2000, there are currently no active retail competitors offering unbundled energy or other utility services to APS’ customers. As a result, we cannot predict when, and the extent to which, additional competitors will re-enter APS’ service territory.

     As a result of changes in federal law and regulatory policy, competition in the wholesale electricity market has greatly increased due to a greater participation by traditional electricity suppliers, non-utility generators, independent power producers, and wholesale power marketers and brokers. This increased competition could affect our load forecasts, plans for power supply and wholesale energy sales and related revenues. As a result of the changing regulatory environment and the relatively low barriers to entry, we expect wholesale competition to increase. As competition continues to increase, our financial position and results of operations could be adversely affected.

     We are subject to complex government regulation that may have a negative impact on our business and our results of operations.

     We are, directly and through our subsidiaries, subject to governmental regulation that may have a negative impact on our business and results of operations. We are a “holding company” within the meaning of the Public Utility Holding Company Act of 1935 (“PUHCA”); however, we are exempt from the provisions of PUHCA (except Section 9(a)(2) thereof) by virtue of our filing of an annual exemption statement with the Securities and Exchange Commission (the “SEC”).

     APS is subject to comprehensive regulation by several federal, state and local regulatory agencies, which significantly influence its operating environment and may affect its ability to recover costs from utility customers. APS is required to have numerous permits, approvals and certificates from the agencies that regulate APS’ business. The FERC, the Nuclear Regulatory Commission (“NRC”), the Environmental Protection Agency (“EPA”), and the ACC regulate many aspects of our utility operations, including siting and construction of facilities, customer service and the rates that APS can charge customers. We believe the necessary permits, approvals and certificates have been obtained for APS’ existing operations. However, changes in regulations or the imposition of additional regulations could have an adverse impact on our results of operations. We are also unable to predict the impact on our business and operating results from pending or future regulatory activities of any of these agencies.

     We are subject to numerous environmental laws and regulations that may increase our cost of operations, impact our business plans, or expose us to environmental liabilities.

     We are subject to numerous environmental laws and regulations affecting many aspects of our present and future operations, including air emissions, water quality, wastewater discharges, solid waste, and hazardous waste. These laws and regulations can result in increased capital, operating, and other costs, particularly with regard to enforcement efforts focused on power plant emissions obligations. These laws and regulations generally require us to obtain and comply with a wide variety of environmental licenses, permits, inspections and other approvals. Both public officials and private individuals may seek to enforce applicable environmental laws and regulations. We cannot predict the outcome (financial or operational) of any related litigation that may arise.

     In addition, we may be a responsible party for environmental clean up at sites identified by a regulatory body. We cannot predict with certainty the amount and timing of all future expenditures related to environmental matters because of the difficulty of estimating clean-up costs. There is also uncertainty in quantifying liabilities under environmental laws that impose joint and several liability on all potentially responsible parties.

     We cannot be sure that existing environmental regulations will not be revised or that new regulations seeking to protect the environment will not be adopted or become applicable to us. Revised or additional regulations that result in increased compliance costs or additional operating restrictions, particularly if those costs are not fully recoverable from APS’ customers, could have a material adverse effect on our results of operations.

     There are inherent risks in the operation of nuclear facilities, such as environmental, health and financial risks and the risk of terrorist attack.

     Through APS, we have an ownership interest in and operate, on behalf of a group of owners, the Palo Verde Nuclear Generating Station (“Palo Verde”), which is the largest nuclear electric generating facility in the United States. Palo Verde is subject to environmental, health and financial risks such as the ability to dispose of spent nuclear fuel, the ability to maintain adequate reserves for decommissioning, potential liabilities arising out of the operation of these facilities, and the costs of securing the facilities against possible terrorist attacks and unscheduled outages due to equipment and other problems. We maintain nuclear decommissioning trust funds and external insurance coverage to minimize our financial exposure to some of these risks; however, it is possible that damages could exceed the amount of insurance coverage.

     The NRC has broad authority under federal law to impose licensing and safety-related requirements for the operation of nuclear generation facilities. In the event of noncompliance, the NRC has the authority to impose fines or shut down a unit, or both, depending upon its assessment of the severity of the situation, until compliance is achieved. In addition, although we have no reason to anticipate a serious nuclear incident at Palo Verde, if an incident did occur, it could materially and adversely affect our results of operations or financial condition. A major incident at a nuclear facility anywhere in the world could cause the NRC to limit or prohibit the operation or licensing of any domestic nuclear unit.

     The operation of Palo Verde requires licenses that need to be periodically renewed and/or extended. We do not anticipate any problems renewing these licenses. However, as a result of potential terrorist threats and increased public scrutiny of utilities, the licensing process could result in increased licensing or compliance costs that are difficult or impossible to predict.

     The uncertain outcome regarding the creation of regional transmission organizations, or RTOs, and implementation of the FERC’s standard market design may materially impact our operations, cash flows or financial position.

     In a December 1999 order, the FERC established characteristics and functions that must be met by utilities in forming and operating RTOs. The characteristics for an acceptable RTO include independence from market participants, operational control over a region large enough to support efficient and nondiscriminatory markets and exclusive authority to maintain short-term reliability. Additionally, in a pending notice of proposed rulemaking, the FERC is considering implementing a standard market design for wholesale markets. On October 16, 2001, APS and other owners of electric transmission lines in the southwestern U.S. filed with the FERC a request for a declaratory order confirming that their proposal to form WestConnect RTO, LLC would satisfy the FERC’s requirements for the formation of an RTO. On October 10, 2002, the FERC issued an order finding that the WestConnect proposal, if modified to address specified issues, could meet the FERC’s RTO requirements and provide the basic framework for a standard market design for the southwestern U.S. Since that time, APS has been evaluating a phased approach to RTO implementation in the desert Southwest. APS is currently participating with other entities in the southwestern U.S. in a cost/benefit analysis of implementing the WestConnect RTO, the results of which are expected to be completed in 2005.

     If APS ultimately joins an RTO, APS could incur increased transmission-related costs and receive reduced transmission service revenues; APS may be required to expand its transmission system according to decisions made by the RTO rather than its internal planning process; and APS may experience other impacts on its operations, cash flows or financial position that will not be quantifiable until the final tariffs and other material terms of the RTO are known.

     Recent events in the energy markets that are beyond our control may have negative impacts on our business.

     As a result of the energy crisis in California during the summer of 2001, the recent volatility of natural gas prices in North America, the filing of bankruptcy by the Enron Corporation, and investigations by governmental authorities into energy trading activities, companies generally in the regulated and unregulated utility businesses have been under an increased amount of public and regulatory scrutiny. The capital markets and rating agencies also have increased their level of scrutiny. We believe that we are in material compliance with all applicable laws, but it is difficult or impossible to predict or control what effect these or related issues may have on our business or our access to the capital markets.

     Our results of operations can be adversely affected by milder weather.

     Weather conditions directly influence the demand for electricity and affect the price of energy commodities. Electric power demand is generally a seasonal business. In Arizona, demand for power peaks during the hot summer months, with market prices also peaking at that time. As a result, our overall operating results fluctuate substantially on a seasonal basis. In addition, we have historically sold less power, and consequently earned less income, when weather conditions are milder. As a result, unusually mild weather could diminish our results of operations and harm our financial condition.

     Our cash flow largely depends on the performance of our subsidiaries.

     We conduct our operations primarily through subsidiaries. Substantially all of our consolidated assets are held by such subsidiaries. Accordingly, our cash flow is dependent upon the earnings and cash flows of these subsidiaries and their distributions to us. The subsidiaries are separate and distinct legal entities and have no obligation to make distributions to us.

     As part of the ACC’s approval of a $500 million financing arrangement between APS and Pinnacle West Energy, an ACC order requires APS to maintain a common equity ratio of at least 40% and does not allow APS to pay common dividends if the payment would reduce its common equity below that threshold. As defined in the ACC financing order approving the arrangement, common equity ratio is common equity divided by common equity plus long-term debt, including current maturities of long-term debt. At December 31, 2004, APS’ common equity ratio, as defined, was approximately 45%.

     Our debt securities will be structurally subordinated to the debt securities and other obligations of our subsidiaries.

     Because we are structured as a holding company, all existing and future debt and other liabilities of our subsidiaries will be effectively senior in right of payment to our debt securities. None of the indentures under which we or our subsidiaries may issue debt securities limits our ability or the ability of our subsidiaries to incur additional

debt in the future. The assets and cash flows of our subsidiaries will be available, in the first instance, to service their own debt and other obligations. Our ability to have the benefit of their assets and cash flows, particularly in the case of any insolvency or financial distress affecting our subsidiaries, would arise only through our equity ownership interests in our subsidiaries and only after their creditors have been satisfied.

     If we are not able to access capital at competitive rates, our ability to implement our financial strategy will be adversely affected.

     We rely on access to short-term money markets, longer-term capital markets and the bank markets as a significant source of liquidity and for capital requirements not satisfied by the cash flow from our operations. We believe that we will maintain sufficient access to these financial markets based upon current credit ratings. However, certain market disruptions or a downgrade of our credit ratings may increase our cost of borrowing or adversely affect our ability to access one or more financial markets. Such disruptions could include:

•   an economic downturn;

•   capital market conditions generally;

•   the bankruptcy of an unrelated energy company;

•   increased market prices for electricity and gas;

•   terrorist attacks or threatened attacks on our facilities or those of unrelated energy companies; or

•   the overall health of the utility industry.

     Changes in economic conditions could result in higher interest rates, which would increase our interest expense on our debt and reduce funds available to us for our current plans. Additionally, an increase in our leverage could adversely affect us by:

•   increasing the cost of future debt financing;

•   increasing our vulnerability to adverse economic and industry conditions;

•   requiring us to dedicate a substantial portion of our cash flow from operations to payments on our debt, which would reduce funds available to us for operations, future business opportunities or other purposes; and

•   placing us at a competitive disadvantage compared to our competitors that have less debt.

     A significant reduction in our credit ratings could materially and adversely affect our business, financial condition and results of operations.

     We cannot be sure that any of our current ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances in the future so warrant. Any downgrade could increase our borrowing costs, which would diminish our financial results. We would likely be required to pay a higher interest rate in future financings, and our potential pool of investors and funding sources could decrease. In addition, borrowing costs under certain of our existing credit facilities depend on our credit ratings. A downgrade could also require us to provide additional support in the form of letters of credit or cash or other collateral to various counterparties. If our short-term ratings were to be lowered, it could limit our access to the commercial paper market. We note that the ratings from rating agencies are not recommendations to buy, sell or hold our securities and that each rating should be evaluated independently of any other rating.

     The use of derivative contracts in the normal course of our business and changing interest rates and market conditions could result in financial losses that negatively impact our results of operations.

     Our operations include managing market risks related to commodity prices and, subject to specified risk parameters, engaging in marketing and trading activities intended to profit from market price movements. We are exposed to the impact of market fluctuations in the price and transportation costs of electricity, natural gas, coal, and emissions allowances and credits. We have established procedures to manage risks associated with these market fluctuations by utilizing various commodity derivatives, including exchange-traded futures and options and over-

the-counter forwards, options, and swaps. As part of our overall risk management program, we enter into derivative transactions to hedge purchases and sales of electricity, fuels, and emissions allowances and credits. The changes in market value of such contracts have a high correlation to price changes in the hedged commodity.

     We are exposed to losses in the event of nonperformance or nonpayment by counterparties. We use a risk management process to assess and monitor the financial exposure of all counterparties. Despite the fact that the majority of trading counterparties are rated as investment grade by the rating agencies, there is still a possibility that one or more of these companies could default, resulting in a material adverse impact on our earnings for a given period.

     Changing interest rates will affect interest paid on variable-rate debt and interest earned by our pension plan and nuclear decommissioning trust funds. Our policy is to manage interest rates through the use of a combination of fixed-rate and floating-rate debt. The pension plan is also impacted by the discount rate, which is the interest rate used to discount future pension obligations. Continuation of recent decreases in the discount rate would result in increases in pension costs, cash contributions, and charges to other comprehensive income. The pension plan and nuclear decommissioning trust funds also have risks associated with changing market values of equity investments. A significant portion of the pension costs and all of the nuclear decommissioning costs are recovered in regulated electricity prices.

     Actual results could differ from estimates used to prepare our financial statements.

     In preparing our financial statements in accordance with accounting principles generally accepted in the United States of America, management must often make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period. Some of those judgments can be subjective and complex, and actual results could differ from those estimates. We consider the following accounting policies to be our most critical because of the uncertainties, judgments and complexities of the underlying accounting standards and operations involved.

•   Regulatory Accounting - Regulatory accounting allows for the actions of regulators, such as the ACC and the FERC, to be reflected in our financial statements. Their actions may cause us to capitalize costs that would otherwise be included as an expense in the current period by unregulated companies. If future recovery of costs ceases to be probable, the assets would be written off as a charge in current period earnings. We had $135 million of regulatory assets on the Consolidated Balance Sheets at December 31, 2004. A component of the 2004 Settlement Agreement, which is subject to ACC approval, would allow APS to acquire the Dedicated Assets from Pinnacle West Energy, with a net carrying value of approximately $850 million, and rate base the Dedicated Assets at a rate base value of $700 million. This would result in a mandatory rate base disallowance of approximately $150 million. As a result, for financial reporting purposes, APS would recognize a one-time, after-tax net plant write-off of approximately $90 million in the period when the plant transfer to APS is completed and would reduce annual depreciation expense by approximately $5 million.

•   Pensions and Other Postretirement Benefit Accounting - Changes in our actuarial assumptions used in calculating our pension and other postretirement benefit liability and expense can have a significant impact on our earnings and financial position. The most relevant actuarial assumptions are the discount rate used to measure our liability and net periodic cost, the expected long-term rate of return on plan assets used to estimate earnings on invested funds over the long-term, and the assumed healthcare cost trend rates. We review these assumptions on an annual basis and adjust them as necessary.

•   Derivative Accounting - Derivative accounting requires evaluation of rules that are complex and subject to varying interpretations. Our evaluation of these rules, as they apply to our contracts, will determine whether we use accrual accounting (for contracts designated as normal) or fair value (mark-to-market) accounting. Mark-to-market accounting requires that changes in the fair value are recognized periodically in income unless certain hedge criteria are met. For fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item associated with the hedged risk are recognized in earnings. For cash flow hedges, changes in the fair value of the derivative are recognized in common stock equity (as a component of other comprehensive income (loss)). The fair value of our derivative contracts is not always readily determinable. In some cases, we use models and other valuation techniques to determine fair value. The use of these models and valuation techniques sometimes requires subjective and complex judgement. Actual results could differ from the results estimated through application of these methods. Our marketing and trading portfolio consists of structured activities hedged with a portfolio of forward purchases that protects the economic value of the sales transactions.

     The market price of our common stock may be volatile.

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

•   variations in our quarterly operating results;

•   operating results that vary from the expectations of management, securities analysts and investors;

•   changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;

•   developments generally affecting industries in which we operate, particularly the energy distribution and energy generation industries;

•   announcements by us or our competitors of significant contracts, acquisitions, joint marketing relationships, joint ventures or capital commitments;

•   announcements by third parties of significant claims or proceedings against us;

•   favorable or adverse regulatory developments;

•   our dividend policy;

•   future sales of our equity or equity-linked securities; and

•   general domestic and international economic conditions.

     In addition, the stock market in general has experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the market price of our common stock.

     Our common stock price could be affected because a substantial number of our shares could be available for sale in the future.

     Sales in the public market of a substantial number of shares of common stock could depress the market price of the common stock and could impair our ability to raise capital through the sale of additional equity securities. Because of the number of shares of our common stock that we are authorized to issue under our articles of incorporation, a substantial number of shares of our common stock could be available for future sale.

     We may enter into credit and other agreements from time to time that restrict our ability to pay dividends.

     Payment of dividends on our common stock may be restricted by credit and other agreements entered into by us from time to time. At December 31, 2004, there were no material restrictions on our ability to pay dividends under any such agreement.

     Certain provisions of our articles of incorporation and bylaws and of Arizona law make it more difficult for shareholders to change the composition of our board and may discourage takeover attempts that could be beneficial to us and our shareholders.

     Certain provisions of our articles of incorporation and bylaws and of Arizona law make it more difficult for shareholders to change the composition of our board and may discourage unsolicited attempts to acquire us, which could preclude our shareholders from receiving a change of control premium. These provisions include the following:

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

•   anti-greenmail provisions of Arizona law and our bylaws that prohibit us from purchasing shares of our voting stock from beneficial owners of more than 5% of our outstanding shares unless specified conditions are satisfied;

•   provisions of our bylaws and Arizona law that provide that shareholder action may be taken only at an annual or special meeting or by unanimous written consent, and provisions of our bylaws that provide that a special meeting of shareholders may only be called by a majority of our Board of Directors, the Chairman of our Board of Directors, or our President;

•   advance notice procedures for nominating candidates to our Board of Directors or presenting matters at shareholder meetings;

•   provisions of our articles and bylaws that provide for a staggered Board of Directors;

•   provisions of our bylaws that provide that shareholders may only remove a director with or without cause if the votes cast in favor of such removal exceed the votes cast against such removal (with special requirements, based on cumulative voting rights, if less than the entire board is to be removed); and

•   the ability of our Board of Directors to issue additional shares of common stock and shares of preferred stock and to determine the price and, with respect to preferred stock, the other terms, including preferences and voting rights, of those shares without shareholder approval.

     In addition, we have adopted a shareholder rights plan that may have the effect of discouraging unsolicited takeover proposals, including takeover proposals that could result in a premium over the market price of our common stock.

     While these provisions have the effect of encouraging persons seeking to acquire control of us to negotiate with our Board of Directors, they could enable the board to hinder or frustrate a transaction that some, or a majority, of our shareholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors.

EX-99.32

EXHIBIT 99.32

APS RISK FACTORS

(Report on Form 10-K for the fiscal year ended December 31, 2004)

     Set forth below and in other documents we file with the Securities and Exchange Commission are risks and uncertainties that could affect our financial results.

     We cannot predict the outcome of our general rate case pending before the Arizona Corporation Commission (the “ACC”).

     On June 27, 2003, we filed a request with the ACC to increase annual retail electricity revenues by approximately $175.1 million, or 9.8%, effective July 1, 2004. On August 18, 2004, a substantial majority of the parties to the rate case, including us, the ACC staff, the Residential Utility Consumer Office, other customer groups, and merchant power plant intervenors entered into an agreement that proposes terms under which the rate case would be settled (the “2004 Settlement Agreement”). The 2004 Settlement Agreement is subject to ACC approval. Key financial components of the 2004 Settlement Agreement are as follows:

•   We would receive an annual retail rate increase of approximately $75.5 million, or 4.21%. The increase would consist of an increase in base rates of approximately 3.77% and an increase of approximately 0.44% for recovery over five years of the past costs of our compliance with the ACC’s retail electric competition rules (the “Rules”).

•   We would acquire from Pinnacle West Energy Corporation (“Pinnacle West Energy”) Redhawk Combined Cycle Units 1 and 2, West Phoenix Combined Cycle Units 4 and 5, and Saguaro Combustion Turbine Unit 3 (collectively, the “Dedicated Assets”), with a net carrying value of approximately $850 million, and rate base the Dedicated Assets at a rate base value of $700 million, which would result in a regulatory rate base disallowance of $148 million. As a result, for financial reporting purposes, we would recognize a one-time, after-tax net plant write-off of approximately $88 million in the period when the plant transfer to us is completed, and would reduce annual depreciation expense by approximately $5 million.

•   To bridge the time between the effective date of the rate increase and the actual date the Dedicated Assets transfer, we and Pinnacle West Energy would enter into a cost-based purchase power agreement (the “Bridge PPA”), which would be based on the value of the Dedicated Assets described in the previous bullet point. The Bridge PPA would remain in effect until the Federal Energy Regulatory Commission (the “FERC”) approves the transfer of the Dedicated Assets to us and the transfer is completed.

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

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

•   A power supply adjuster (“PSA”) would provide for the recovery of fuel and purchased power costs, subject to specified parameters and procedures.

•   We would not restore and recover in rates the $234 million write-off recorded in 1999 as a result of a 1999 settlement agreement approved by the ACC related to the implementation of retail electric competition in Arizona (the “1999 Settlement Agreement”).

•   We would adopt longer service lives than originally requested for certain depreciable assets.

     On February 28, 2005, the administrative law judge in the general rate case issued a recommended order. The recommended order proposes ACC approval of the 2004 Settlement Agreement with two changes related to the

PSA. First, the amount of gas costs that we could recover under the annual PSA would be limited to $500 million per year. Second, although the 2004 Settlement Agreement provides that the PSA would remain in effect for a minimum five-year period, under the recommended order the ACC would be able to eliminate the PSA at any time, if appropriate, if we file a rate case before the expiration of the five-year period or if we do not comply with the terms of the PSA. If we exceed the gas costs that could be recoverable under the PSA or if the ACC eliminates the PSA, we would retain the right to file a rate case to reset our base rates. We cannot predict the outcome of this matter.

     The procurement of wholesale power by us without the ability to adjust retail rates could have an adverse impact on our business and financial results.

     Although the Rules allow retail customers to have access to competitive providers of energy and energy services, under the Rules, we are the “provider of last resort” for standard-offer, full-service customers under rates that have been approved by the ACC. In the event of shortfalls of electricity due to unforeseen increases in load demand or generation or transmission outages, we may need to purchase additional supplemental power in the wholesale spot market. At various times, prices in the spot wholesale market have significantly exceeded the amount included in our current retail rates. There can be no assurance that we would be able to fully recover the costs of this power. Although the proposed settlement of our general rate case would, among other things, allow us to recover purchased power costs, there can be no assurance that the 2004 Settlement Agreement will be approved by the ACC as proposed.

     Deregulation or restructuring of the electric industry may result in increased competition, which could have a significant adverse impact on our business and our financial results.

     Retail competition could have a significant adverse financial impact on us due to an impairment of assets, a loss of retail customers, lower profit margins or increased costs of capital. Under the Rules, as modified by the 1999 Settlement Agreement, we were required to transfer all of our competitive electric assets and services to an unaffiliated party or parties or to a separate corporate affiliate or affiliates no later than December 31, 2002. To satisfy this requirement, we had planned to transfer our generation assets to Pinnacle West Energy. Pursuant to an ACC order dated September 10, 2002, the ACC unilaterally modified the 1999 Settlement Agreement and directed us to cancel any plans to divest interests in any of our generating assets. The ACC further established a requirement that we solicit bids for certain estimated amounts of capacity and energy for periods beginning July 1, 2003. Pinnacle West Energy bid on and entered into contracts to supply most of our requirements in the summer months through September 2006. In addition, as discussed above, a proposed settlement of our general rate case would result in Pinnacle West Energy transferring a significant amount of generation assets to us. These regulatory developments and legal challenges to the Rules have raised considerable uncertainty about the status and pace of retail electric competition and of electric restructuring in Arizona. Although some very limited retail competition existed in our service area in 1999 and 2000, there are currently no active retail competitors offering unbundled energy or other utility services to our customers. As a result, we cannot predict when, and the extent to which, additional competitors will re-enter our service territory.

     As a result of changes in federal law and regulatory policy, competition in the wholesale electricity market has greatly increased due to a greater participation by traditional electricity suppliers, non-utility generators, independent power producers, and wholesale power marketers and brokers. This increased competition could affect our load forecasts, plans for power supply and wholesale energy sales and related revenues. As a result of the changing regulatory environment and the relatively low barriers to entry, we expect wholesale competition to increase. As competition continues to increase, our financial position and results of operations could be adversely affected.

     We are subject to complex government regulation that may have a negative impact on our business and our results of operations.

     We are subject to governmental regulation that may have a negative impact on our business and results of operations. We are a “subsidiary company” of a “holding company” within the meaning of the Public Utility Holding Company Act of 1935 (“PUHCA”); however, we are exempt from the provisions of PUHCA (except Section 9(a)(2) thereof) by virtue of the filing of an annual exemption statement with the Securities and Exchange Commission (the “SEC”) by our parent company, Pinnacle West Capital Corporation (“Pinnacle West”).

     We are subject to comprehensive regulation by several federal, state and local regulatory agencies, which significantly influence our operating environment and may affect our ability to recover costs from utility customers. We are required to have numerous permits, approvals and certificates from the agencies that regulate our business.

The FERC, the Nuclear Regulatory Commission (“NRC”), the Environmental Protection Agency (“EPA”), and the ACC regulate many aspects of our utility operations, including siting and construction of facilities, customer service and the rates that we can charge customers. We believe the necessary permits, approvals and certificates have been obtained for our existing operations. However, changes in regulations or the imposition of additional regulations could have an adverse impact on our results of operations. We are also unable to predict the impact on our business and operating results from pending or future regulatory activities of any of these agencies.

     We are subject to numerous environmental laws and regulations that may increase our cost of operations, impact our business plans, or expose us to environmental liabilities.

     We are subject to numerous environmental laws and regulations affecting many aspects of our present and future operations, including air emissions, water quality, wastewater discharges, solid waste, and hazardous waste. These laws and regulations can result in increased capital, operating, and other costs, particularly with regard to enforcement efforts focused on power plant emissions obligations. These laws and regulations generally require us to obtain and comply with a wide variety of environmental licenses, permits, inspections and other approvals. Both public officials and private individuals may seek to enforce applicable environmental laws and regulations. We cannot predict the outcome (financial or operational) of any related litigation that may arise.

     In addition, we may be a responsible party for environmental clean up at sites identified by a regulatory body. We cannot predict with certainty the amount and timing of all future expenditures related to environmental matters because of the difficulty of estimating clean-up costs. There is also uncertainty in quantifying liabilities under environmental laws that impose joint and several liability on all potentially responsible parties.

     We cannot be sure that existing environmental regulations will not be revised or that new regulations seeking to protect the environment will not be adopted or become applicable to us. Revised or additional regulations that result in increased compliance costs or additional operating restrictions, particularly if those costs are not fully recoverable from our customers, could have a material adverse effect on our results of operations.

     There are inherent risks in the operation of nuclear facilities, such as environmental, health and financial risks and the risk of terrorist attack.

     We have an ownership interest in and operate, on behalf of a group of owners, the Palo Verde Nuclear Generating Station (“Palo Verde”), which is the largest nuclear electric generating facility in the United States. Palo Verde is subject to environmental, health and financial risks such as the ability to dispose of spent nuclear fuel, the ability to maintain adequate reserves for decommissioning, potential liabilities arising out of the operation of these facilities, and the costs of securing the facilities against possible terrorist attacks and unscheduled outages due to equipment and other problems. We maintain nuclear decommissioning trust funds and external insurance coverage to minimize our financial exposure to some of these risks; however, it is possible that damages could exceed the amount of insurance coverage.

     The NRC has broad authority under federal law to impose licensing and safety-related requirements for the operation of nuclear generation facilities. In the event of noncompliance, the NRC has the authority to impose fines or shut down a unit, or both, depending upon its assessment of the severity of the situation, until compliance is achieved. In addition, although we have no reason to anticipate a serious nuclear incident at Palo Verde, if an incident did occur, it could materially and adversely affect our results of operations or financial condition. A major incident at a nuclear facility anywhere in the world could cause the NRC to limit or prohibit the operation or licensing of any domestic nuclear unit.

     The operation of Palo Verde requires licenses that need to be periodically renewed and/or extended. We do not anticipate any problems renewing these licenses. However, as a result of potential terrorist threats and increased public scrutiny of utilities, the licensing process could result in increased licensing or compliance costs that are difficult or impossible to predict.

     The uncertain outcome regarding the creation of regional transmission organizations, or RTOs, and implementation of the FERC’s standard market design may materially impact our operations, cash flows or financial position.

     In a December 1999 order, the FERC established characteristics and functions that must be met by utilities in forming and operating RTOs. The characteristics for an acceptable RTO include independence from market participants, operational control over a region large enough to support efficient and nondiscriminatory markets and exclusive authority to maintain short-term reliability. Additionally, in a pending notice of proposed rulemaking, the

FERC is considering implementing a standard market design for wholesale markets. On October 16, 2001, we and other owners of electric transmission lines in the southwestern U.S. filed with the FERC a request for a declaratory order confirming that our proposal to form WestConnect RTO, LLC would satisfy the FERC’s requirements for the formation of an RTO. On October 10, 2002, the FERC issued an order finding that the WestConnect proposal, if modified to address specified issues, could meet the FERC’s RTO requirements and provide the basic framework for a standard market design for the southwestern U.S. Since that time, we have been evaluating a phased approach to RTO implementation in the desert Southwest. We are currently participating with other entities in the southwestern U.S. in a cost/benefit analysis of implementing the WestConnect RTO, the results of which are expected to be completed in 2005.

     If we ultimately join an RTO, we could incur increased transmission-related costs and receive reduced transmission service revenues; we may be required to expand our transmission system according to decisions made by the RTO rather than our internal planning process; and we may experience other impacts on our operations, cash flows or financial position that will not be quantifiable until the final tariffs and other material terms of the RTO are known.

     Recent events in the energy markets that are beyond our control may have negative impacts on our business.

     As a result of the energy crisis in California during the summer of 2001, the recent volatility of natural gas prices in North America, the filing of bankruptcy by the Enron Corporation, and investigations by governmental authorities into energy trading activities, companies generally in the regulated and unregulated utility businesses have been under an increased amount of public and regulatory scrutiny. The capital markets and rating agencies also have increased their level of scrutiny. We believe that we are in material compliance with all applicable laws, but it is difficult or impossible to predict or control what effect these or related issues may have on our business or our access to the capital markets.

Our results of operations can be adversely affected by milder weather.

     Weather conditions directly influence the demand for electricity and affect the price of energy commodities. Electric power demand is generally a seasonal business. In Arizona, demand for power peaks during the hot summer months, with market prices also peaking at that time. As a result, our overall operating results fluctuate substantially on a seasonal basis. In addition, we have historically sold less power, and consequently earned less income, when weather conditions are milder. As a result, unusually mild weather could diminish our results of operations and harm our financial condition.

     If we are not able to access capital at competitive rates, our ability to implement our financial strategy will be adversely affected.

     We rely on access to short-term money markets, longer-term capital markets and the bank markets as a significant source of liquidity and for capital requirements not satisfied by the cash flow from our operations. We believe that we will maintain sufficient access to these financial markets based upon current credit ratings. However, certain market disruptions or a downgrade of our credit ratings may increase our cost of borrowing or adversely affect our ability to access one or more financial markets. Such disruptions could include:

•   an economic downturn;

•   capital market conditions generally;

•   the bankruptcy of an unrelated energy company;

•   increased market prices for electricity and gas;

•   terrorist attacks or threatened attacks on our facilities or those of unrelated energy companies; or

•   the overall health of the utility industry.

     Changes in economic conditions could result in higher interest rates, which would increase our interest expense on our debt and reduce funds available to us for our current plans. Additionally, an increase in our leverage could adversely affect us by:

•   increasing the cost of future debt financing;

•   increasing our vulnerability to adverse economic and industry conditions;

•   requiring us to dedicate a substantial portion of our cash flow from operations to payments on our debt, which would reduce funds available to us for operations, future business opportunities or other purposes; and

•   placing us at a competitive disadvantage compared to our competitors that have less debt.

     A significant reduction in our credit ratings could materially and adversely affect our business, financial condition and results of operations.

     We cannot be sure that any of our current ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances in the future so warrant. Any downgrade could increase our borrowing costs, which would diminish our financial results. We would likely be required to pay a higher interest rate in future financings, and our potential pool of investors and funding sources could decrease. In addition, borrowing costs under certain of our existing credit facilities depend on our credit ratings. A downgrade could also require us to provide additional support in the form of letters of credit or cash or other collateral to various counterparties. If our short-term ratings were to be lowered, it could limit our access to the commercial paper market. We note that the ratings from rating agencies are not recommendations to buy, sell or hold our securities and that each rating should be evaluated independently of any other rating.

     The use of derivative contracts in the normal course of our business and changing interest rates and market conditions could result in financial losses that negatively impact our results of operations.

     Our operations include managing market risks related to commodity prices and, subject to specified risk parameters, engaging in marketing and trading activities intended to profit from market price movements. We are exposed to the impact of market fluctuations in the price and transportation costs of electricity, natural gas, coal, and emissions allowances and credits. We have established procedures to manage risks associated with these market fluctuations by utilizing various commodity derivatives, including exchange-traded futures and options and over-the-counter forwards, options, and swaps. As part of our overall risk management program, we enter into derivative transactions to hedge purchases and sales of electricity, fuels, and emissions allowances and credits. The changes in market value of such contracts have a high correlation to price changes in the hedged commodity.

     We are exposed to losses in the event of nonperformance or nonpayment by counterparties. We use a risk management process to assess and monitor the financial exposure of all counterparties. Despite the fact that the majority of trading counterparties are rated as investment grade by the rating agencies, there is still a possibility that one or more of these companies could default, resulting in a material adverse impact on our earnings for a given period.

     Changing interest rates will affect interest paid on variable-rate debt and interest earned by our pension plan and nuclear decommissioning trust funds. Our policy is to manage interest rates through the use of a combination of fixed-rate and floating-rate debt. The pension plan is also impacted by the discount rate, which is the interest rate used to discount future pension obligations. Continuation of recent decreases in the discount rate would result in increases in pension costs, cash contributions, and charges to other comprehensive income. The pension plan and nuclear decommissioning trust funds also have risks associated with changing market values of equity investments. A significant portion of the pension costs and all of the nuclear decommissioning costs are recovered in regulated electricity prices.

     Actual results could differ from estimates used to prepare our financial statements.

     In preparing our financial statements in accordance with accounting principles generally accepted in the United States of America, management must often make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period. Some of those judgments can be subjective and complex, and actual results could differ from those estimates. We consider the following accounting policies to be our most critical because of the uncertainties, judgments and complexities of the underlying accounting standards and operations involved.

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

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

•   Pensions and Other Postretirement Benefit Accounting - Changes in our actuarial assumptions used in calculating our pension and other postretirement benefit liability and expense can have a significant impact on our earnings and financial position. The most relevant actuarial assumptions are the discount rate used to measure our liability and net periodic cost, the expected long-term rate of return on plan assets used to estimate earnings on invested funds over the long-term, and the assumed healthcare cost trend rates. We review these assumptions on an annual basis and adjust them as necessary.

•   Derivative Accounting - Derivative accounting requires evaluation of rules that are complex and subject to varying interpretations. Our evaluation of these rules, as they apply to our contracts, will determine whether we use accrual accounting (for contracts designated as normal) or fair value (mark-to-market) accounting. Mark-to-market accounting requires that changes in the fair value are recognized periodically in income unless certain hedge criteria are met. For fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item associated with the hedged risk are recognized in earnings. For cash flow hedges, changes in the fair value of the derivative are recognized in common stock equity (as a component of other comprehensive income (loss)).

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