10-Q

Form 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2002

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                 

Commission file number 0-296

El Paso Electric Company

(Exact name of registrant as specified in its charter)

Texas	74-0607870
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
Stanton Tower, 100 North Stanton, El Paso, Texas	79901
(Address of principal executive offices)	(Zip Code)

(915) 543-5711

(Registrant’s telephone number, including area code)

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

As of May 3, 2002, there were 50,544,030 shares of the Company’s no par value common stock outstanding.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

INDEX TO FORM 10-Q

	Page No.
PART I.    FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets – March 31, 2002 and December 31, 2001	1
Consolidated Statements of Operations – Three Months and Twelve Months Ended March 31, 2002 and 2001	3
Consolidated Statements of Comprehensive Operations – Three Months and Twelve Months Ended March 31, 2002 and 2001	4
Consolidated Statements of Cash Flows – Three Months Ended March 31, 2002 and 2001	5
Notes to Consolidated Financial Statements	6
Independent Accountants’ Review Report	12
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.    Quantitative and Qualitative Disclosures About Market Risk	23
PART II.    OTHER INFORMATION
Item 1.    Legal Proceedings	24
Item 6.    Exhibits and Reports on Form 8-K	24

i

PART I.    FINANCIAL INFORMATION

Item 1.    Financial Statements

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

ASSETS

(In thousands)

	March 31, 2002 (Unaudited)		December 31, 2001
Utility plant:
Electric plant in service	$	1,713,125	$	1,708,908
Less accumulated depreciation and amortization		493,788		472,297
Net plant in service		1,219,337		1,236,611
Construction work in progress		98,451		86,802
Nuclear fuel; includes fuel in process of $4,212 and     $11,356, respectively		76,272		74,004
Less accumulated amortization		37,497		33,177
Net nuclear fuel		38,775		40,827
Net utility plant		1,356,563		1,364,240
Current assets:
Cash and temporary investments		24,903		27,994
Accounts receivable, principally trade, net of allowance for     doubtful accounts of $3,493 and $3,525, respectively		68,723		75,025
Accumulated deferred income taxes		42,504		39,299
Inventories, at cost		24,385		24,356
Undercollection of fuel revenues		21,367		26,797
Prepayments and other		6,054		9,741
Total current assets		187,936		203,212
Deferred charges and other assets:
Decommissioning trust funds		62,810		60,901
Other		16,084		16,086
Total deferred charges and other assets		78,894		76,987
Total assets	$	1,623,393	$	1,644,439

See accompanying notes to consolidated financial statements.

1

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS—(Continued)

CAPITALIZATION AND LIABILITIES (In thousands except for share data)
	March 31, 2002 (Unaudited)			December 31, 2001
Capitalization:
Common stock, stated value $1 per share, 100,000,000 shares     authorized, 62,144,098 and 61,982,963 shares issued,     and 230,984 and 267,334 restricted shares, respectively	$	62,375		$	62,250
Capital in excess of stated value		258,819			257,891
Unearned compensation – restricted stock awards		(1,823	)		(2,041	)
Retained earnings		271,626			265,775
Accumulated other comprehensive income, net of tax		1,043			752
		592,040			584,627
Treasury stock, 11,991,637 shares; at cost		(134,434	)		(134,434	)
Common stock equity		457,606			450,193
Long-term debt, net of current portion		518,537			590,925
Financing obligations, net of current portion		26,698			28,440
Total capitalization		1,002,841			1,069,558
Current liabilities:
Current portion of long-term debt and financing obligations		132,588			90,355
Accounts payable, principally trade		21,987			24,626
Taxes accrued other than federal income taxes		15,849			16,713
Interest accrued		14,992			16,860
Overcollection of fuel revenues		4,263			3,265
Other		15,706			15,942
Total current liabilities		205,385			167,761
Deferred credits and other liabilities:
Decommissioning liability		139,678			137,614
Accrued postretirement benefit liability		85,860			84,974
Accumulated deferred income taxes		121,716			116,850
Accrued pension liability		30,600			30,694
Other		37,313			36,988
Total deferred credits and other liabilities		415,167			407,120
Commitments and contingencies
Total capitalization and liabilities	$	1,623,393		$	1,644,439

See accompanying notes to consolidated financial statements.

2

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands except for share data)

	Three Months Ended March 31,						Twelve Months Ended March 31,
	2002			2001			2002			2001
Electric utility operating revenues	$	147,607		$	191,390		$	710,741		$	750,732
Energy expenses:
Fuel		27,157			49,452			163,154			181,889
Purchased and interchanged power		15,335			16,611			84,310			74,339
		42,492			66,063			247,464			256,228
Electric utility operating revenues net of energy expenses		105,115			125,327			463,277			494,504
Energy services operations:
Operating revenues		1,590			1,489			15,282			5,751
Operating expenses		1,719			1,893			15,762			7,377
		(129	)		(404	)		(480	)		(1,626	)
Other electric utility operating expenses:
Other operations		32,649			33,006			135,524			131,797
Maintenance		11,517			11,282			46,244			44,631
Depreciation and amortization		22,566			22,152			89,876			88,592
Taxes other than income taxes		11,187			10,727			44,240			42,920
		77,919			77,167			315,884			307,940
Operating income		27,067			47,756			146,913			184,938
Other income (deductions):
Investment income, net		463			901			2,015			3,602
Other, net		(348	)		(640	)		(1,284	)		(2,048	)
		115			261			731			1,554
Income before interest charges		27,182			48,017			147,644			186,492
Interest charges (credits):
Interest on long-term debt and financing obligations		14,157			16,669			60,390			67,346
Other interest		2,175			1,990			8,183			7,812
Interest capitalized		(1,374	)		(1,041	)		(5,056	)		(3,916	)
		14,958			17,618			63,517			71,242
Income before income taxes and extraordinary item		12,224			30,399			84,127			115,250
Income tax expense		4,349			11,801			28,972			45,048
Income before extraordinary item		7,875			18,598			55,155			70,202
Extraordinary loss on extinguishments of debt, net of income tax benefit		2,024			—			4,243			1,219
Net income	$	5,851		$	18,598		$	50,912		$	68,983
Basic earnings per share:
Income before extraordinary item	$	0.16		$	0.36		$	1.09		$	1.32
Extraordinary loss on extinguishments of debt, net of income tax benefit		0.04			—			0.08			0.02
Net income	$	0.12		$	0.36		$	1.01		$	1.30
Diluted earnings per share:
Income before extraordinary item	$	0.16		$	0.36		$	1.07		$	1.30
Extraordinary loss on extinguishments of debt, net of income tax benefit		0.04			—			0.08			0.02
Net income	$	0.12		$	0.36		$	0.99		$	1.28
Weighted average number of common shares outstanding		49,996,059			51,015,982			50,605,241			53,124,544
Weighted average number of common shares and dilutive potential common shares outstanding		50,631,542			51,989,157			51,422,028			54,044,220

See accompanying notes to consolidated financial statements.

3

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS

(Unaudited)

(In thousands)

	Three Months Ended March 31,						Twelve Months Ended March 31,
	2002			2001			2002			2001
Net income	$	5,851		$	18,598		$	50,912		$	68,983
Other comprehensive income (loss):
Minimum pension liability adjustment		—			—			(824	)		—
Net unrealized gains (losses) on marketable securities:
Net holding gains (losses) arising during period		132			(4,519	)		(960	)		(8,013	)
Reclassification adjustments for net losses included in net income		354			381			3,062			1,041
		486			(4,138	)		1,278			(6,972	)
Income tax benefit (expense) related to items of other comprehensive income (loss):
Minimum pension liability adjustment		—			—			289			—
Net unrealized gains (losses) on marketable securities		(195	)		1,448			(735	)		2,440
		(195	)		1,448			(446	)		2,440
Other comprehensive income (loss), net of tax		291			(2,690	)		832			(4,532	)
Comprehensive income	$	6,142		$	15,908		$	51,744		$	64,451

See accompanying notes to consolidated financial statements.

4

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Three Months Ended March 31,
	2002			2001
Cash flows from operating activities:
Net income	$	5,851		$	18,598
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of electric plant in service		22,566			22,152
Amortization of nuclear fuel		4,320			4,340
Deferred income taxes, net		2,593			10,870
Extraordinary loss on extinguishments of debt, net of income tax benefit		2,024			—
Amortization and accretion of interest costs		2,469			2,373
Other operating activities		1,043			514
Change in:
Accounts receivable		6,302			(5,900	)
Inventories		(29	)		267
Net under/overcollection of fuel revenues		6,428			1,153
Prepayments and other		3,687			7,172
Accounts payable		(2,639	)		(947	)
Taxes accrued other than federal income taxes		(864	)		(1,785	)
Interest accrued		(1,868	)		1,159
Other current liabilities		(236	)		1,079
Deferred charges and credits		750			2,196
Net cash provided by operating activities		52,397			63,241
Cash flows from investing activities:
Cash additions to utility property, plant and equipment		(15,702	)		(17,792	)
Cash additions to nuclear fuel		(2,176	)		(1,560	)
Interest capitalized:
Utility property, plant and equipment		(1,282	)		(884	)
Nuclear fuel		(92	)		(157	)
Investment in decommissioning trust fund		(1,591	)		(1,277	)
Other investing activities		463			(355	)
Net cash used for investing activities		(20,380	)		(22,025	)
Cash flows from financing activities:
Proceeds from exercise of stock options		881			1,330
Purchases of treasury stock		—			(8,285	)
Repurchases of and payments on long-term debt		(33,575	)		(24	)
Nuclear fuel financing obligations:
Proceeds		2,611			2,340
Payments		(3,981	)		(4,595	)
Other financing activities		(1,044	)		(451	)
Net cash used for financing activities		(35,108	)		(9,685	)
Net increase (decrease) in cash and temporary investments		(3,091	)		31,531
Cash and temporary investments at beginning of period		27,994			11,344
Cash and temporary investments at end of period	$	24,903		$	42,875

See accompanying notes to consolidated financial statements.

5

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A.    Principles of Preparation

These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto in the Annual Report of El Paso Electric Company on Form 10-K for the year ended December 31, 2001 (the “2001 Form 10-K”). Capitalized terms used in this report and not defined herein have the meaning ascribed for such terms in the 2001 Form 10-K. In the opinion of management of the Company, the accompanying consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company at March 31, 2002 and December 31, 2001; the results of its operations for the three and twelve months ended March 31, 2002 and 2001; and its cash flows for the three months ended March 31, 2002 and 2001. The results of operations and cash flows for the three months ended March 31, 2002 are not necessarily indicative of the results to be expected for the full calendar year.

Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), certain financial information has been condensed and certain footnote disclosures have been omitted. Such information and disclosures are normally included in financial statements prepared in accordance with generally accepted accounting principles. Certain prior period amounts have been reclassified to conform with the current period presentation.

At January 1, 2002, the Company adopted Statement of Financial Standards (“SFAS”) No. 141, “Business Combinations,” SFAS No. 142, “Goodwill and Other Intangible Assets” and SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.” The implementation of these standards did not have an impact on the Company’s financial position or results of operations.

Supplemental Cash Flow Disclosures (in thousands)

	Three Months Ended March 31,
	2002		2001
Cash paid for:
Interest on long-term debt and financing obligations	$	16,427	$	15,074
Other interest		5		6
Non-cash investing and financing activities:
Grants of restricted shares of common stock		402		757
Remeasurements of employee stock options		240		—

6

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Reconciliation of Basic and Diluted Earnings Per Share

The reconciliation of basic and diluted earnings per share before extraordinary item is presented below:

	Three Months Ended March 31,
	2002					2001
	Income		Shares	Per Share		Income		Shares	Per Share
	(In thousands)					(In thousands)
Basic earnings per share:
Income before extraordinary Item	$	7,875	49,996,059	$	0.16	$	18,598	51,015,982	$	0.36
Effect of dilutive securities:
Unvested restricted stock		—	43,300				—	24,851
Stock options		—	592,183				—	948,324
Diluted earnings per share:
Income before extraordinary Item	$	7,875	50,631,542	$	0.16	$	18,598	51,989,157	$	0.36

	Twelve Months Ended March 31,
	2002					2001
	Income		Shares	Per Share		Income		Shares	Per Share
	(In thousands)					(In thousands)
Basic earnings per share:
Income before extraordinary Item	$	55,155	50,605,241	$	1.09	$	70,202	53,124,544	$	1.32
Effect of dilutive securities:
Unvested restricted stock		—	71,038				—	57,016
Stock options		—	745,749				—	862,660
Diluted earnings per share:
Income before extraordinary Item	$	55,155	51,422,028	$	1.07	$	70,202	54,044,220	$	1.30

Options excluded from the computation of diluted earnings per share because the exercise price was greater than the average market price for the periods presented are as follows:

	Three Months Ended March 31,				Twelve Months Ended March 31,
	2002		2001		2002		2001
Options		152,219		155,048		252,219		155,048
Exercise price range	$	14.60-$15.99	$	12.60-$13.77	$	14.00-$15.99	$	12.60-$13.77

7

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

B.    Regulation

For a full discussion of the Company’s regulatory matters, see Note B of Notes to Consolidated Financial Statements in the 2001 Form 10-K.

Texas Regulatory Matters

Deregulation.    The Texas Restructuring Law requires most electric utilities to legally separate their power generation business from their transmission and distribution business by January 1, 2002. In January 2002, competition was instituted in most parts of Texas. Nonetheless, the Texas Restructuring Law specifically recognizes and preserves the substantial benefits the Company bargained for in its Texas Rate Stipulation and Texas Settlement Agreement, exempting the Company’s Texas service area from retail competition and preserving rates at their current levels until the end of the Freeze Period. At the end of the Freeze Period, the Company will generally be subject to the provisions of the law, including the institution of retail competition and at that time will be permitted to recover nuclear decommissioning costs in rates, but will have no further claim for recovery of stranded costs. Stated simply, stranded costs are the positive difference, if any, between the book value of electric generating assets, including long-term purchase power contracts, and the market value of those assets.

Fuel.    Although the Company’s base rates are frozen in Texas, pursuant to Texas Commission rules and the Texas Rate Stipulation, the Company can request adjustments to its fuel factor to more accurately reflect projected energy costs associated with the provision of electricity as well as seek recovery of past undercollections of fuel revenues.

In October 2001, the Texas Commission approved a unanimous settlement agreement (the “Texas Fuel Settlement”) between the Company and the parties which had intervened, including the City of El Paso, which increased the Texas fuel factor to $0.02494 per kWh. This factor was implemented on an interim basis in April 2001 and increased fuel revenue collections by $15.1 million for the twelve months ended March 31, 2002. The Texas Fuel Settlement also provides for the surcharge of underrecovered fuel costs as of December 31, 2000 of approximately $15 million plus interest over an 18-month period. The fuel surcharge was implemented on an interim basis beginning with the first billing cycle in June 2001 and the Company now anticipates its timely termination in November 2002 as provided for in the Texas Fuel Settlement. The interim fuel surcharge, as well as the Company’s other energy expenses through year-end 2001, will be subject to final review by the Texas Commission in the Company’s next fuel reconciliation proceeding, which is expected to be filed in June 2002. The Texas Commission staff, local regulatory authorities such as the City of El Paso, and customers are entitled to intervene in a fuel reconciliation proceeding and to challenge the prudence of fuel and purchased power expenses.

The Texas Fuel Settlement also provides for the final agreement between the parties for the non-recovery of certain purchased power contract costs as well as the favorable disposition of previously unrecognized Palo Verde performance rewards, including interest. These provisions taken together did not have a material effect on the Company’s consolidated results of operations and resulted in an $11.0 million increase in Net Undercollection of Fuel Revenues and a $10.5 million increase in Deferred

8

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Credits and Other Liabilities—Other, which were recorded in June 2001. The Company also agreed to a prospective change in the Palo Verde performance standards, which materially reduced the potential for future rewards and penalties on a symmetrical basis.

New Mexico Regulatory Matters

Deregulation.    In March 2001, the New Mexico Legislature amended the New Mexico Restructuring Law to postpone deregulation in New Mexico until January 1, 2007, and to prohibit the separation of a utility’s transmission and distribution activities from its existing generation activities prior to September 1, 2005. The amended New Mexico Restructuring Law permits utilities to form holding companies subject to New Mexico approval with conditions. It also allows the utility, until corporate separation occurs, to participate in unregulated generation activities if the generation is not intended to serve New Mexico retail customers.

The amended New Mexico Restructuring Law prohibiting the separation of the Company’s generation activities from its transmission and distribution activities prior to September 1, 2005 may conflict with the Texas Restructuring Law requiring separation of those activities after the expiration of the Freeze Period in August 2005. Accordingly, the Company is currently evaluating possible benefits, if any, of forming a holding company prior to 2005. The Company currently anticipates that it will seek New Mexico Commission approval to separate the Company’s generation activities from its transmission and distribution activities in either 2004 or 2005 to allow the Company to restructure at the earliest time allowable.

The New Mexico Restructuring Law allows the Company to recover reasonable, prudent and unmitigated costs that the Company would not have incurred but for its compliance with the New Mexico Restructuring Law. The March 2001 amendment to the New Mexico Restructuring Law did not address the recovery of transition costs spent to date. The Company cannot predict whether and to what extent the New Mexico Commission will allow the Company to recover these transition costs during the five year delay. Such costs, to the extent they are not capitalizable as fixed assets, are expensed as incurred.

Fuel.    The New Mexico Settlement Agreement entered into in October 1998 eliminated the then existing fuel factor of $0.01949 per kWh incorporating it into frozen base rates. Accordingly, the Company was required to absorb any increases in fuel and purchased power (“energy”) expenses related to its New Mexico retail customers until new rates were implemented subsequent to the end of the rate freeze on April 30, 2001. The average energy costs incurred for New Mexico jurisdictional customers exceeded this fuel factor by a substantial amount. Therefore, on April 23, 2001, the Company filed a petition with the New Mexico Commission proposing a settlement that would implement a new incremental fixed fuel factor, while leaving the existing $0.01949 fuel factor as part of the still frozen base rates, and reinstate for a two-year period a fuel adjustment clause in lieu of a base rate increase (the “New Mexico Fuel Factor Agreement”). The New Mexico Commission entered its final order on January 8, 2002, setting an incremental fixed fuel factor of $0.01501 per kWh.

9

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Due to the decrease in gas prices since mid-2001, on February 12, 2002, the Company filed a petition with the New Mexico Commission for an incremental fuel factor decrease to $0.00420 per kWh. The New Mexico Commission issued an order approving that decrease on February 19, 2002. This new incremental fuel factor was implemented as of March 6, 2002.

C.    Common Stock Repurchase Program

The Company’s Board of Directors has previously approved three stock repurchase programs allowing the Company to purchase up to fifteen million of its outstanding shares of common stock. As of March 31, 2002, the Company had repurchased 11,921,329 shares of common stock under these programs for approximately $133.9 million, including commissions. The Company expects to continue to make purchases primarily in the open market at prevailing prices and will also engage in private transactions, if appropriate. Any repurchased shares will be available for issuance under employee benefit and stock option plans, or may be retired.

D.    Commitments and Contingencies

For a full discussion of commitments and contingencies, including environmental matters related to the Company, see Note H of Notes to Consolidated Financial Statements in the 2001 Form 10-K. In addition, see Note C of Notes to Consolidated Financial Statements in the 2001 Form 10-K regarding matters related to Palo Verde, including decommissioning, spent fuel storage, disposal of low-level radioactive waste and liability and insurance matters.

Power Contracts

In addition to the contracts and power exchange agreements entered into prior to December 31, 2001 and discussed in the Company’s 2001 Form 10-K, the Company has since entered into the following agreements with various counterparties for forward firm purchases and sales of electricity:

Type of Contract	Quantity	Term
Purchase on-peak	50 MW	April 2002
Sale on-peak	25 MW	April 2002
Purchase on/off-peak	125 MW	May 2002
Sale on/off-peak	125 MW	May 2002
Sale off-peak	25 MW	July, August, September, November and December 2002

Environmental Matters

The Company is subject to regulation with respect to air, soil and water quality, solid waste disposal and other environmental matters by federal, state, tribal and local authorities. Those authorities govern current facility operations and exercise continuing jurisdiction over facility modifications. Environmental regulations can change rapidly and are difficult to predict. Substantial expenditures

10

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

may be required to comply with these regulations. The Company analyzes the costs of its obligations arising from environmental matters on an ongoing basis, and management believes it has made adequate provision in its financial statements to meet such obligations. Currently, the Company has provision for environmental remediation obligations of approximately $0.5 million. However, unforeseen expenses associated with compliance could have a material adverse effect on the future operations and financial condition of the Company.

The following are expenditures incurred by the Company for the three and twelve months ended March 31, 2002 and 2001 for complying with federal environmental statutes (in thousands):

	Three Months Ended March 31,				Twelve Months Ended March 31,
	2002		2001		2002		2001
Clean Air Act	$	330	$	69	$	979	$	802
Federal Clean Water Act		83		38		326		673

The Company is not under any environmental investigation by the Environmental Protection Agency, the Texas Natural Resources Conservation Commission or the New Mexico Environment Department. In addition, the Company has not been named as a Potentially Responsible Party pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980.

E.    Litigation

The Company is a party to various claims, legal actions and complaints. In many of these matters, the Company has excess casualty liability insurance that covers the various claims, actions and complaints. Based upon a review of these claims and applicable insurance coverage, the Company believes that none of these claims will have a material adverse effect on the financial position, results of operations and cash flows of the Company.

11

Independent Accountants’ Review Report

The Shareholders and the Board of Directors

El Paso Electric Company:

We have reviewed the accompanying condensed consolidated balance sheet of El Paso Electric Company and subsidiary (the Company) as of March 31, 2002, the related condensed consolidated statements of operations and comprehensive operations for the three months and twelve months ended March 31, 2002 and 2001, and the related condensed consolidated statements of cash flows for the three months ended March 31, 2002 and 2001. These condensed consolidated financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of El Paso Electric Company and subsidiary as of December 31, 2001, and the related consolidated statements of operations, comprehensive operations, changes in common stock equity and cash flows for the year then ended (not presented herein); and in our report dated March 11, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2001 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

KP MG LLP

El Paso, Texas

April 23, 2002

12

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information contained in this Item 2 updates, and should be read in conjunction with, the information set forth in Part II, Item 7 of the Company’s 2001 Form 10-K.

Statements in this document, other than statements of historical information, are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, as well as other oral and written forward-looking statements made by or on behalf of the Company from time to time, including statements contained in the Company’s filings with the Securities and Exchange Commission and its reports to shareholders, involve known and unknown risks and other factors which may cause the Company’s actual results in future periods to differ materially from those expressed in any forward-looking statements. Factors that could cause or contribute to such differences included, but are not limited to: (i) increased prices for fuel and purchased power; (ii) the possibility that regulators may not permit the Company to pass through all such increased costs to customers; (iii) fluctuations in wholesale margins due to uncertainty in the wholesale power market; (iv) unanticipated increased costs associated with scheduled and unscheduled outages; (v) the cost of replacing steam generators and other unexpected costs at Palo Verde and (vi) other factors discussed below under the headings “Summary of Critical Accounting Policies and Estimates,” “Overview” and “Liquidity and Capital Resources.” The Company’s filings are available from the Securities and Exchange Commission or may be obtained upon request from the Company. Any such forward-looking statement is qualified by reference to these risks and factors. The Company cautions that these risks and factors are not exclusive. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company except as required by law.

Summary of Critical Accounting Policies and Estimates

Note A to the Consolidated Financial Statements in the Company’s 2001 Form 10-K, contains a summary of the significant accounting policies that the Company uses. The preparation of those statements required management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes for the periods presented and actual results could differ from those estimates. Critical accounting estimates, which are both important to the portrayal of the Company’s financial condition and results of operations and which require complex, subjective judgments, include the following:

• Value of net utility plant in service

• Decommissioning costs

• Collection of fuel expense

• Future pension and other postretirement obligations

• Reserves for tax dispute

Value of Net Utility Plant in Service

In 1996, when it emerged from bankruptcy, the Company recast its financial statements by applying fresh-start reporting in accordance with Statement of Position 90-7 “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code.” In this process, the Company attributed value to its integrated utility system, including its generation assets, after it had established the value of its pro

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forma capital structure based on management’s estimates of future operating results. The Company valued its generation assets such that the depreciated value of its generation assets would be approximately equal to their estimated fair value at the end of the Freeze Period. This is important because at the beginning of retail competition in Texas and New Mexico, the Company will no longer be permitted to recover in rates any “stranded costs”, defined as the difference between the book value and the market value of its electric generation assets. If at any time the Company determines that estimated, undiscounted future net cash flows from the operations of the generation assets are not sufficient to recover their net book value, then it would be required to write down the value of these assets to their then fair values. Any such writedown would likely be charged to earnings. The Company currently believes that its rates are sufficient to fully collect before 2005 all costs that would otherwise be “stranded” under relevant laws in Texas and New Mexico and that future net cash flows after 2005 from the generating assets will be sufficient to recover their net book values.

Decommissioning Costs

Pursuant to the ANPP Participation Agreement, and federal law, the Company must fund its share of the estimated costs to decommission Palo Verde Units 1, 2 and 3 and associated common areas. The Company and other Palo Verde Participants rely upon decommissioning cost studies and make interest rate, rate of return and inflation projections to determine funding requirements and estimate liabilities related to decommissioning. Every third year, outside engineers perform a study to estimate decommissioning costs associated with Palo Verde Units 1, 2 and 3 and associated common areas. The Company funds its share of those estimated costs through professionally managed investment trust accounts. Management must make assumptions about future investment returns and future cost escalations in order to determine the amounts with which to fund the trusts. If actual decommissioning costs exceed estimates, the Company would incur additional expenses related to decommissioning. Further, if the rates of return earned by the trusts fail to meet expectations, the Company will be required to increase its funding to the decommissioning trust accounts. Although the Company cannot predict the results of future studies, the Company believes that the liability it has recorded for its decommissioning costs will be adequate to provide for the Company’s share of the costs. The Company believes that its current annual funding levels of the decommissioning trust will adequately provide for the cash requirements associated with decommissioning. Historically, regulated utilities such as the Company have been permitted to collect in rates the costs of nuclear decommissioning. Under deregulation legislation in both Texas and New Mexico, the Company expects to continue to be able to collect from customers the costs of decommissioning.

Collection of Fuel Expense

As a regulated entity, the Company’s fuel and purchased power expenses are passed through directly to its regulated customers. These costs are then subject to a prudency review of its fuel and purchased power costs by the Texas and New Mexico Commissions. In general, if the Texas and New Mexico Commissions find that the fuel and purchased power expenses were reasonably incurred, the Company is allowed to recover those expenses from its customers. Until those periodic reviews are completed, however, management must rely upon its evaluations and judgments of the amount of fuel and purchased power expenses that will be found by the Commissions to be reasonably incurred in order to estimate fuel revenues. When actual prices exceed the fixed fuel factor approved by the regulators, the Company undercollects fuel and purchased power expenses from its customers. The Company must then petition its regulators to reconcile its actual costs to actual revenues received from customers. Historically, regulators have allowed the Company to recover most of its fuel and purchased power-related expenses. If energy costs were deemed unreasonably incurred and regulators were to disallow

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recovery of costs that management had considered reasonably incurred, the Company would incur a loss to the extent of the disallowance.

Future Pension and Other Postretirement Obligations

In accounting for its retirement plans and other postretirement benefits, the Company makes assumptions regarding the valuation of benefit obligations and the performance of plan assets. The accounting for retirement plans and other postretirement obligations allows for a smoothed recognition of changes in benefit obligations and plan performance over the service lives of the employees who benefit under the plans. The primary assumptions are discount rate, expected return on plan assets, rate of compensation increase and health care cost inflation. A change in any of these assumptions could have a significant impact on future costs, which may be reflected as an increase or decrease in net income in the period, or on the amount of related liabilities reflected on the Company’s consolidated balance sheets.

Reserves for Tax Dispute

The IRS has disputed whether the Company was entitled to deduct certain payments made in 1996 related to Palo Verde and its treatment of a litigation settlement in 1997 related to a terminated merger agreement. If the IRS prevails on the former issue, the Company would be required to include the previously deducted amounts in the tax basis of Palo Verde and deduct them over its useful life. This would not have a material adverse impact on reported net income but would have a significant negative effect on the Company’s near-term cash flow. An adverse resolution of the second issue would lead to the recognition of additional revenue in the Company’s tax return with no related tax benefits and could result in a material amount of additional tax. The Company has established, and periodically reviews and re-evaluates, an estimated contingent tax liability on its consolidated balance sheet to provide for the possibility of adverse outcomes in tax proceedings. Although the ultimate outcome cannot be predicted with certainty, and while the contingent tax reserve may not in fact be sufficient, the Company believes that the amount at March 31, 2002 adequately provides for any additional tax that may be due.

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Overview

El Paso Electric Company is an electric utility that serves retail customers in west Texas and southern New Mexico and wholesale customers in Texas, New Mexico, California and Mexico. The Company owns or has substantial ownership interests in six electrical generating facilities providing it with a total capacity of approximately 1,500 MW. The Company’s energy sources consist of nuclear fuel, natural gas, coal, purchased power and wind. The Company owns or has significant ownership interests in four major 345 kV transmission lines and three 500 kV lines to provide power from Palo Verde and Four Corners, and owns the distribution network within its retail service territory. The Company is subject to extensive regulation by the Texas and New Mexico Commissions and, with respect to wholesale power sales, transmission of electric power and the issuance of securities, by the FERC.

The Company faces a number of risks and challenges that could negatively impact its operations and financial results. The most significant of these risks and challenges arise from the deregulation of the electric utility industry, the possibility of increased costs, especially from Palo Verde, and the Company’s relatively high level of debt.

The electric utility industry in general and the Company in particular are facing significant challenges and increased competition as a result of changes in federal provisions relating to third-party transmission services and independent power production, as well as changes in state laws and regulatory provisions relating to wholesale and retail service. In 1999, both Texas and New Mexico passed industry deregulation legislation requiring the Company to separate its transmission and distribution functions, which will remain regulated, from its power generation and energy services businesses, which will operate in a competitive market in the future. New Mexico subsequently amended its deregulation law to delay the implementation date. While the Company is not subject to deregulation in Texas and New Mexico until 2005 and 2007, respectively, the potential effects of competition in the power generation and energy services markets remain important to the Company. There can be no assurance that the deregulation of the power generation market will not adversely affect the future operations, cash flows and financial condition of the Company.

The changing regulatory environment and the advent of unregulated power production have created a substantial risk that the Company will lose important customers. The Company’s wholesale and large retail customers already have, in varying degrees, additional alternate sources of economical power, including co-generation of electric power. Historically, the Company has lost certain large retail customers to self generation and/or co-generation and seen reductions in wholesale sales due to new sources of generation. Duke Energy has begun the initial phase of construction on a generation plant in Deming, New Mexico and has announced it is exploring the possibility of building a generation plant in Lordsburg, New Mexico. Public Service Company of New Mexico has begun the construction of a generation plant outside Las Cruces, New Mexico. If the Company loses a significant portion of its retail customer base or wholesale sales, the Company may not be able to replace such revenues through either the addition of new customers or an increase in rates to remaining customers.

Another risk to the Company is potential increased costs, including the risk of additional or unanticipated costs at Palo Verde resulting from (i) increases in operation and maintenance expenses; (ii) the replacement of steam generators; (iii) an extended outage of any of the Palo Verde units; (iv) increases in estimates of decommissioning costs; (v) the storage of radioactive waste, including spent nuclear fuel; (vi) insolvency of other Palo Verde Participants and (vii) compliance with the various

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requirements and regulations governing commercial nuclear generating stations. At the same time, the Company’s retail base rates in Texas are effectively capped through a rate freeze ending in August 2005. Additionally, upon initiation of competition, there will be competitive pressure on the Company’s power generation rates which could reduce its profitability. The Company also cannot assure that its revenues will be sufficient to recover any increased costs, including any increased costs in connection with Palo Verde or other operations, whether as a result of inflation, changes in tax laws or regulatory requirements, or other causes.

Liquidity and Capital Resources

The Company’s principal liquidity requirements in the near-term are expected to consist of interest and principal payments on the Company’s indebtedness and capital expenditures related to the Company’s generating facilities and transmission and distribution systems. The Company expects that cash flows from operations and remarketing of long-term debt will be sufficient for such purposes.

Long-term capital requirements of the Company will consist primarily of construction of electric utility plant and payment of interest on and retirement of debt. Utility construction expenditures will consist primarily of expanding and updating the transmission and distribution systems, possible addition of new generation and the cost of capital improvements and replacements at Palo Verde and other generating facilities, including the replacement of the Palo Verde steam generators.

During the twelve months ended March 31, 2002 and 2001, the Company utilized $106.0 million and $113.7 million, respectively, of federal tax loss carryforwards. The Company anticipates that existing federal tax loss carryforwards will be fully utilized in 2003 and after that date the Company’s cash flow requirements are expected to include greater amounts of cash for income taxes than has existed in recent years.

As of March 31, 2002, cash and temporary investments totaled $24.9 million, a decrease of $3.1 million from the December 31, 2001 balance of $28.0 million. The Company also has a $100 million revolving credit facility, which provides up to $70 million for nuclear fuel purchases. Any amounts not borrowed for nuclear fuel purchases may be borrowed by the Company for working capital needs. In January 2002, the revolving credit facility was renewed for a three-year term. At March 31, 2002, approximately $46.9 million had been drawn for nuclear fuel purchases. No amounts are currently outstanding on this facility for working capital needs.

The Company has a relatively high debt to capitalization ratio and significant debt service obligations. Due to the Texas Rate Stipulation, the Texas Settlement Agreement, and competitive pressures, the Company does not expect to be able to raise its base rates in Texas in the event of increases in non-fuel costs or loss of revenues. Accordingly, as described below, debt reduction continues to be a high priority for the Company in order to gain additional financial flexibility to address the evolving competitive market.

The Company has significantly reduced its long-term debt since its emergence from bankruptcy in 1996. From June 1, 1996 through May 3, 2002, the Company repurchased and repaid approximately $508.4 million of first mortgage bonds, including the repurchase of approximately $30.5 million of first mortgage bonds during the first quarter of 2002, with internally generated cash as part of a deleveraging program. The Company also anticipates redeeming the remaining $41.9 million of Series C First Mortgage Bonds at their maturity in February 2003 with internally generated cash. Common stock

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equity as a percentage of capitalization, including current portion of long-term debt and financing obligations, has increased from 19% at June 30, 1996 to 40% at March 31, 2002.

The Company continues to believe that the orderly reduction of debt with a goal of achieving a capital structure that is more typical in the electric utility industry is a significant component of long-term shareholder value creation. Accordingly, the Company will regularly evaluate market conditions and, when appropriate, use a portion of its available cash to reduce its fixed obligations through open market purchases of first mortgage bonds.

The degree to which the Company is leveraged could have important consequences on the Company’s liquidity, including (i) the Company’s ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate or other purposes could be limited in the future and (ii) the Company’s higher than average leverage may place the Company at a competitive disadvantage by limiting its financial flexibility to respond to the demands of the competitive market and make it more vulnerable to adverse economic or business changes.

The Company’s Board of Directors previously approved three stock repurchase programs allowing the Company to purchase up to fifteen million of its outstanding shares of common stock. As of May 3, 2002, the Company had repurchased 11,921,329 shares of common stock under these programs for approximately $133.9 million, including commissions. The Company expects to continue to make purchases primarily in the open market at prevailing prices and will also engage in private transactions, as appropriate. Any repurchased shares will be available for issuance under employee benefit and stock option plans, or may be retired.

Historical Results of Operations

	Three Months Ended March 31,				Twelve Months Ended March 31,
	2002		2001		2002		2001
Income before extraordinary item (in thousands)	$	7,875	$	18,598	$	55,155	$	70,202
Diluted earnings per share before extraordinary item		0.16		0.36		1.07		1.30

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Electric utility operating revenues net of energy expenses decreased $20.2 million and $31.2 million for the three and twelve months ended March 31, 2002, respectively, compared to the same periods last year, primarily due to changes in the following (in thousands):

	Three Months Ended			Twelve Months Ended
Decreased economy sales margins	$	(22,683	)	$	(32,292	)
Decreased margins on energy swaps		—			(2,987	)
Decreased retail kWh sales		(2,479	)		(2,537	)
Sales tax refund in 2000		—			(2,266	)(1)
Energy expenses not recovered in New Mexico service area prior to July 2001		3,488			3,631
Increased demand charge related to wholesale sales		2,700			2,700
Increased CFE kWh sales		—			2,558
Other		(1,238	)		(34	)
Total	$	(20,212	)	$	(31,227	)

(1) A sales tax refund totaling $1.8 million of which $1.1 million was received in the twelve months ended March 31, 2001. Based on a related negotiated settlement in the third quarter of 2001, $1.2 million was credited to the Texas jurisdictional customers through the fuel adjustment clause.

Comparisons of kWh sales and electric utility operating revenues are shown below (in thousands):

					Increase (Decrease)
Three Months Ended March 31:	2002		2001		Amount			Percent
Electric kWh sales:
Retail		1,387,187		1,442,647		(55,460	)	(3.8	)%(1)
Sales for resale		348,485		322,420		26,065		8.1	(2)
Economy sales		113,166		354,959		(241,793	)	(68.1	)(3)
Total		1,848,838		2,120,026		(271,188	)	(12.8	)
Electric utility operating revenues:
Retail	$	123,539	$	122,827	$	712		0.6	%(4)
Sales for resale		19,372		18,291		1,081		5.9	(5)
Economy sales		2,773		47,502		(44,729	)	(94.2	)(6)
Other (7)		1,923		2,770		(847	)	(30.6	)
Total	$	147,607	$	191,390	$	(43,783	)	(22.9	)

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					Increase (Decrease)
Twelve Months Ended March 31:	2002		2001		Amount			Percent
Electric kWh sales:
Retail		6,163,012		6,217,208		(54,196	)	(0.9	)%(1)
Sales for resale		1,486,448		1,333,230		153,218		11.5	(8)
Economy sales		688,121		1,463,365		(775,244	)	(53.0	)(3)
Total		8,337,581		9,013,803		(676,222	)	(7.5	)
Electric utility operating revenues:
Retail	$	566,759	$	545,198	$	21,561		4.0	%(9)
Sales for resale		87,524		75,542		11,982		15.9	(10)
Economy sales		47,723		117,651		(69,928	)	(59.4	)(6)
Other (7)		8,735		12,341		(3,606	)	(29.2	)(11)
Total	$	710,741	$	750,732	$	(39,991	)	(5.3	)

  (1) Primarily due to decreased kWh sales to commercial and industrial customers in Texas.

  (2) Primarily due to increased kWh sales to TNP partially offset by decreased kWh sales to IID.

  (3) Primarily due to a weaker power market in 2002 compared to last year.

  (4) Primarily due to energy expenses that are now passed through directly to New Mexico jurisdictional customers with no comparable pass through last year.

  (5) Primarily due to an increase in the demand charges to TNP partially offset by a decrease in the energy expenses passed through to certain wholesale customers.

  (6) Primarily due to a weaker power market in 2002 compared to last year and a decrease in average prices as a result of decreased energy expenses.

  (7) Represents revenues with no related kWh sales.

  (8) Primarily due to increased kWh sales to CFE and TNP.

  (9) Primarily due to increased energy expenses that are passed through directly to Texas and New Mexico jurisdictional customers.

(10) Primarily due to (i) increased sales to CFE; (ii) increased demand charges to TNP and (iii) increased energy expenses that are passed through directly to certain wholesale customers.

(11) Primarily due to margins on swaps entered into with a large power marketer in 2000 in order to lock in a fixed price on certain power purchases with no comparable amount in the current period.

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Other electric utility operations and maintenance expense remained relatively unchanged for the three months ended March 31, 2002, compared to the same period last year. Other electric utility operations and maintenance expense increased $5.3 million for the twelve months ended March 31, 2002, respectively, compared to the same period last year, as follows (in thousands):

Twelve Months Ended March 31:	2002		2001		Increase (Decrease)
Operations expense at generation plants	$	36,315	$	33,778	$	2,537	(1)
Claims and damages		3,602		2,268		1,334	(2)
Maintenance expense at generation plants		35,368		34,263		1,105	(3)
Property insurance		1,616		784		832	(4)
Outside services expense		5,128		7,379		(2,251	)(5)
Other		99,739		97,956		1,783
Total electric utility other operations and maintenance expense	$	181,768	$	176,428	$	5,340

(1) Primarily due to increased costs at Palo Verde.

(2) Primarily due to litigation settlements in 2001.

(3) Primarily due to scheduled maintenance outages.

(4) Primarily due to increased property insurance for local plants.

(5) Primarily due to decreased consulting fees and corporate restructuring expenses.

Depreciation and amortization expense did not change significantly for the three months ended March 31, 2002 compared to the same period last year. Depreciation and amortizaton expense increased $1.3 million for the twelve months ended March 31, 2002 compared to the same period last year primarily due to an increase in the depreciable plant balances.

Taxes other than income taxes remained relatively unchanged for the three months ended March 31, 2002, compared to the same period last year. Taxes other than income taxes increased $1.3 million for the twelve months ended March 31, 2002, compared to the same period last year primarily due to an increase in Texas revenue related taxes. These increases were partially offset by a decrease in Arizona property taxes as a result of Arizona House Bill 2324 phasing in a decrease in assessed values beginning in 2001.

Other income (deductions) did not change significantly for the three months ended March 31, 2002 compared to the same period last year. Other income (deductions) decreased $0.8 million for the twelve months ended March 31, 2002 compared to the same period last year primarily due to a decrease of $2.8 million in investment income related to the decommissioning trust fund, the IID contract receivable and cash investments. These decreases were partially offset by an increase of $1.3 million in interest income on the undercollection of Texas fuel revenues.

Interest charges decreased $2.7 million and $7.7 million for the three and twelve months ended March 31, 2002, respectively, compared to the same period last year primarily due to (i) a reduction in outstanding debt as a result of open market purchases of the Company’s first mortgage bonds; (ii) increased capitalized interest related to construction work in progress and (iii) decreased interest rates.

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Income tax expense, excluding the tax effect of the extraordinary item, decreased $7.5 million and $16.1 million for the three and twelve months ended March 31, 2002, respectively, compared to the same periods last year primarily due to changes in pretax income and for the twelve months ended March 31, 2002, certain permanent differences and adjustments including (i) a reduction to the Company’s estimate of contingent federal tax liability based upon discussions and agreed issues with taxing authorities related to the IRS examination of the Company’s 1996 through 1998 tax returns and (ii) deductions taken for abandoned transition costs.

Extraordinary loss on extinguishments of debt, net of income tax benefit, represents the payment of premiums on debt extinguishments and the recognition of unamortized issuance expenses on that debt.

The FASB has continued to issue additional guidance on SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities,” including providing revised guidance on FASB Derivatives Implementation Group (the “DIG”) Issue C15 “Scope Exceptions: Normal Purchases and Normal Sales Exception for Option-Type Contracts and Forward Contracts in Electricity” on December 28, 2001. The Company anticipates that the ultimate effects of this revised guidance, which became effective on April 1, 2002, will not have a significant impact on the Company’s consolidated financial statements.

In July 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS No. 143”). SFAS No. 143 provides accounting guidance for retirement obligations, for which there is a legal obligation to settle, associated with tangible long-lived assets. SFAS No. 143 requires that asset retirement costs be capitalized as part of the cost of the related long-lived asset and such costs should be allocated to expense by using a systematic and rational method. SFAS No. 143 requires the initial measurement of the asset retirement obligation liability to be recorded at fair value and the use of an allocation approach for subsequent changes in the measurement of the liability. Upon adoption of SFAS No. 143, an entity will use a cumulative-effect adjustment to recognize transition amounts for any existing asset retirement obligation liability, asset retirement costs and accumulated depreciation. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. Management has not yet quantified the impact of adopting SFAS No. 143 on the Company’s consolidated financial statements.

Additionally, in April 2002, the FASB issued SFAS No. 145 “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections”. SFAS No. 145 rescinds SFAS No. 4 “Reporting Gains and Losses from Extinguishment of Debt” which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effects. Upon adoption of SFAS No. 145, gains and losses from the extinguishment of debt will not be classified as an extraordinary item unless the debt extinguishment meets the unusual in nature and infrequent of occurrence criteria in APB Opinion No. 30 “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (“APB No. 30”). SFAS No. 145 will be effective for fiscal years beginning after May 15, 2002 with early adoption encouraged. Upon adoption, enterprises must reclassify prior period items that do not meet the extraordinary item classification criteria of APB No. 30. The Company has not yet decided whether to early adopt nor evaluated previously reported extraordinary items related to debt extinguishments to determine the amounts that will be reclassified upon adoption.

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Item 3.    Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risk due to changes in interest rates, equity prices and commodity prices. See the Company’s 2001 Form 10-K, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” for a complete discussion of the market risks faced by the Company and the Company’s market risk sensitive assets and liabilities. As of March 31, 2002, there have been no material changes in the market risks faced by the Company or the fair values of assets and liabilities disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in the Company’s 2001 Form 10-K.

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PART II.    OTHER INFORMATION

Item 1.    Legal Proceedings

The Company hereby incorporates by reference the information set forth in Part I of this report under Note E of Notes to Consolidated Financial Statements.

Item 6.    Exhibits and Reports on Form 8–K

(a) Exhibits: See Index to Exhibits incorporated herein by reference.

(b) Reports on Form 8–K:

None

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SIGNATURES

Pursuant to the requirements 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.

EL PASO ELECTRIC COMPANY
By:	/s/    Terry Bassham
	Terry Bassham Executive Vice President, Chief Financial and Administrative Officer (Duly Authorized Officer and Principal Financial Officer)

Dated: May 13, 2002

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EL PASO ELECTRIC COMPANY

INDEX TO EXHIBITS

Exhibit Number	Exhibit
†10.01	Form of Restricted Stock Award Agreement between the Company and certain key officers of the Company. (Identical in all material respects to Exhibit 99.04 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998)
††10.02	Form of Directors’ Restricted Stock Award Agreement between the Company and certain directors of the Company. (Identical in all material respects to Exhibit 10.07 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999)
10.03	Stock Option Agreements, dated as of January 1, 2002 and April 1, 2002, with Wilson Cadman. (Identical in all material respects to Exhibit 99.17 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997)
10.04	Stock Option Agreement, dated as of January 14, 2002, with Raul A. Carrillo, Jr. (Identical in all material respects to Exhibit 99.01 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998)
†††10.05	Form of Change in Control Agreement between the Company and certain key officers of the Company.
10.06	Shiprock-Four Corners Project 345kV Switchyard Interconnection Agreement, dated March 6, 2002. APS Contract No. 51999.
15	Letter re Unaudited Interim Financial Information
†	Eleven agreements, dated as of February 28, 2002, substantially identical in all material respects to this Exhibit, have been entered into with Terry D. Bassham; J. Frank Bates; Michael L. Blough; Gary R. Hedrick; Kathryn Hood; Helen Williams Knopp; Earnest A. Lehman; Kerry B. Lore; Robert C. McNiel; Hector R. Puente; and Guillermo Silva; officers of the Company.
††	In lieu of non-employee director compensation, six agreements, dated as of January 1, 2002 and April 1, 2002, substantially identical in all material respects to this Exhibit, have been entered into with Kenneth Heitz; Patricia Z. Holland-Branch; and Charles A. Yamarone; directors of the Company.
†††	Eleven agreements, dated as of February 7, 2002, substantially identical in all material respects to this Exhibit, have been entered into with Terry D. Bassham; J. Frank Bates; Michael L. Blough; Gary R. Hedrick; Kathryn Hood; Helen Williams Knopp; Earnest A. Lehman; Kerry B. Lore; Robert C. McNeil; Hector R. Puente; and Guillermo Silva; officers of the Company.

EX-10.05

                                                                 EXHIBIT 10.05

                            EL PASO ELECTRIC COMPANY
                           CHANGE OF CONTROL AGREEMENT
                             FOR EXECUTIVE OFFICERS

                  AGREEMENT by and between El Paso Electric Company, a Texas
corporation (the "Company"), and [Name] (the "Executive"), dated as of the 7th
day of February, 2002.

                               W I T N E S S E T H

                  WHEREAS, the Executive currently serves as a key employee of
the Company and his or her services and knowledge are valuable to the Company in
connection with the management of the Company; and

                  WHEREAS, the Board of Directors of the Company (the "Board")
has determined that it is in the best interests of the Company and its
stockholders to secure the Executive's continued services and to ensure the
Executive's continued dedication and objectivity in the event of any threat or
occurrence of, or negotiation or other action that could lead to, or create the
possibility of, a Change in Control (as defined in Attachment 1) of the Company,
without concern as to whether the Executive might be hindered or distracted by
personal uncertainties and risks created by any such possible Change in Control,
and to encourage the Executive's full attention and dedication to the Company,
the Board has authorized the Company to enter into this Agreement.

                  NOW, THEREFORE, for and in consideration of the premises and
the mutual covenants and agreements herein contained, the Company and the
Executive hereby agree as follows:

         1. Employment Period. (a) The Company hereby agrees to employ the
Executive and the Executive hereby agrees to accept employment with and remain
in the employment of the Company, subject to the terms and conditions of this
Agreement, for the period commencing upon the occurrence of a Change in Control
and ending on the second anniversary thereof, or such later date as may be
mutually agreed upon by the Company and the Executive. Notwithstanding the
foregoing, the Executive's employment hereunder may be earlier terminated,
subject to Section 4 of this Agreement. The period of time between the
commencement and the termination of the Executive's employment hereunder shall
be referred to herein as the "Employment Period."

         (b) Prior to the occurrence of a Change in Control, the Executive's
employment by the Company shall be deemed at will (or shall be governed by any
current contract of

                                       1



employment), and this Agreement shall not confer upon the Executive any right to
continued employment by the Company in his or her current position or otherwise
nor affect in any manner the right of the Company to change the Executive's
duties and responsibilities in any manner, or to reduce Executive's compensation
or terminate the employment of the Executive at any time prior to the occurrence
of a Change in Control and in connection therewith to cancel this Agreement. In
particular, the Executive shall not have any rights under this Agreement for any
such change, reduction or termination of employment or of this Agreement "in
anticipation of " any "change of control" that shall occur prior to the
occurrence of a Change in Control.

         2.   Terms of Employment. (a) Position and Duties. (i) During the
Employment Period, (A) the Executive shall serve as [Business] of the Company or
his or her then current position at the time of a Change of Control (or the
equivalent position in the division, subsidiary or other portion of any
post-merger or post-acquisition successor that is operationally responsible for
the electric business conducted by the Company prior to the merger or
acquisition), with such authority, duties and responsibilities as are
commensurate with such position and as may be consistent with such position as
may be assigned to him or her by the Board and (B) the Executive's services
shall be performed at the Company's offices in El Paso, Texas. Notwithstanding
the foregoing, the Company and the Executive may mutually agree to such changes
in the Executive's position, reporting or location of employment as are in the
best interest of the Company without violating the provisions of this paragraph.

         (ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive agrees
to devote substantially all of his or her attention and time during normal
business hours to the business and affairs of the Company and, to the extent
necessary to discharge the responsibilities assigned to the Executive hereunder,
to use the Executive's best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period, it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements, or
teach at educational institutions, and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement.

         (b)  Compensation. (i) Base Salary. During the Employment Period, the
Executive shall receive an annual base salary ("Annual Base Salary"), payable
biweekly, at least equal to the annual base salary paid or payable, including
any base salary which has been earned but deferred, to the Executive by the
Company in respect of the twelve-month period immediately preceding the
occurrence of a Change in Control. During the Employment Period, the Annual Base
Salary shall be reviewed no more than 12 months after the last salary increase
awarded to the Executive prior to the occurrence of a Change in Control and
thereafter at least annually. Any increase in Annual Base Salary shall not

                                       2



serve to limit or reduce any other obligation to the Executive under this
Agreement. Annual Base Salary shall not be reduced after any such increase and
the term Annual Base Salary shall refer to Annual Base Salary as so increased.
As used in this Agreement, the term "affiliated companies" shall include any
company controlled by, controlling or under common control with the Company.

         (ii)  Annual Bonus. In addition to Annual Base Salary, for each fiscal
year ending during the Employment Period the Executive shall be eligible, based
upon the Executive's achievement of performance goals, and the Company's
achievement of financial and other operating goals, in each case set by the
Compensation Committee of the Board, in consultation with the Executive, at
levels substantially consistent with past practice, during such fiscal year, to
receive a bonus (the "Annual Bonus") at a target level of not less than 17% of
the Annual Base Salary (the "Target Bonus Amount") with the opportunity,
substantially consistent with past practice, to earn in excess of such amount
based upon the attainment of agreed upon performance goals. Each such Annual
Bonus shall be paid no later than the last business day of the third month of
the fiscal year next following the fiscal year for which the Annual Bonus is
awarded (the "Last Payment Date").

         (iii) Long-Term Incentive Compensation. During the Employment Period,
the Executive shall be entitled to participate in all long-term incentive plans,
practices, policies and programs applicable generally to other peer executives
of the Company.

         (iv)  Savings and Retirement Plans. During the Employment Period, the
Executive shall be entitled to participate in all savings and retirement plans,
practices, policies and programs on a basis no less favorable than that
generally applicable to peer executives of the Company.

         (v)   Welfare Benefit Plans. During the Employment Period, the
Executive and/or the Executive's dependents, as the case may be, shall be
eligible for participation in and shall receive all benefits under welfare
benefit plans, practices, policies and programs provided by the Company on a
basis no less favorable than that generally applicable to peer executives of the
Company.

         (vi)  Expenses. During the Employment Period, the Executive shall be
entitled to receive prompt reimbursement for all reasonable expenses incurred by
the Executive in accordance with the Company's policies.

         (vii) Vacation. During the Employment Period, the Executive shall be
entitled to paid vacation in accordance with the plans, policies, programs and
practices of the Company on a basis no less favorable than that generally
applicable to peer executives of the Company but, in any event, shall be
entitled to no less than four weeks of vacation per year during the Employment
Period.

                                       3



         3.  Termination of Employment. (a) Death or Disability. The Executive's
employment shall terminate automatically upon the Executive's death during the
Employment Period. If the Disability of the Executive occurs during the
Employment Period pursuant to the definition of Disability set forth below, the
Company may give the Executive written notice, in accordance with Section 10(b)
of this Agreement, of its intention to terminate the Executive's employment. In
such event, the Executive's employment with the Company shall terminate
effective on the 60th day after receipt of such notice by the Executive (the
"Disability Effective Date"); provided that, within the 60 days after such
receipt, the Executive shall not have returned to substantially full time
performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the performance of the
Executive's duties with the Company on a full time basis for an aggregate of 120
out of any 180 consecutive business days as a result of incapacity due to mental
or physical illness which is determined to be total and permanent by an
independent physician selected by the Company or its insurers and reasonably
acceptable to the Executive or the Executive's legal representative.

         (b) Cause. The Company may terminate the Executive's employment during
the Employment Period for Cause. For purposes of this Agreement, "Cause" shall
mean the willful and continued failure by the Executive to perform his or her
duties, or the engaging by the Executive in illegal conduct or misconduct which
is materially injurious to the Company. The cessation of employment of the
Executive shall not be deemed to be for Cause unless and until there shall have
been delivered to the Executive a copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters of the entire membership of the
Board at a meeting of the Board called and held for such purpose (after
reasonable notice is provided to the Executive and the Executive is given an
opportunity, together with counsel, to be heard before the Board) finding that,
in the good faith opinion of the Board, the Executive is guilty of the conduct
described above, and specifying the particulars thereof in detail.

         (c) Good Reason.  The  Executive's  employment  may be  terminated  by
the  Executive  for Good  Reason.  For purposes of this Agreement, "Good Reason"
shall mean:

         (i) the assignment to the Executive of any duties inconsistent with the
Executive's position (including status, offices, titles and reporting
requirements), authority, duties or responsibilities set forth in Section 2(a)
of this Agreement, or any other action by the Company which results in a
diminution in such position, authority, duties or responsibilities, excluding
for these purposes (A) assignment to a comparable position and duties in the
division, subsidiary or other portion of any post-merger or post-acquisition
successor that is operationally responsible for the electric business conducted
by the Company prior to the merger or acquisition, (B) an isolated and
insubstantial action not taken in bad faith and which is remedied by the Company
promptly after receipt of notice thereof given by the Executive, and (C) any
action to which the Executive has given his or her written consent;

                                       4



     (ii)  any failure by the Company to comply with any of the provisions of
Section 2(b) of this Agreement, other than an isolated and insubstantial failure
not occurring in bad faith and which is remedied by the Company promptly after
receipt of notice thereof given by the Executive;

     (iii) the Company's requiring the Executive without the Executive's written
consent to be based at any office or location located more than 100 miles from
the office or location provided in Section 2(a)(i)(B) hereof or the Company's
requiring the Executive to travel on Company business to a substantially greater
extent than required immediately prior to the Effective Date;

     (iv)  any failure by the Company to comply with and satisfy Section 9(c) of
this Agreement; or

     (v)   the Company's purported termination of Agreement other than in
accordance with its terms.

     (d)   Notice of Termination. Any termination by the Company for Cause, or
by the Executive for Good Reason, shall be communicated by Notice of Termination
to the other party hereto given in accordance with Section 10(b) of this
Agreement. In the case of a Good Reason termination, such Notice of Termination
shall be given within 90 days of the occurrence of the event that provides the
basis for the termination as a condition of such claim being treated as a Good
Reason termination hereunder. For purposes of this Agreement, a "Notice of
Termination" means a written notice which (i) indicates the specific termination
provision in this Agreement relied upon, (ii) to the extent applicable, sets
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment under the provision so
indicated and (iii) if the Date of Termination (as defined below) is other than
the date of receipt of such notice, specifies the termination date (which date
shall be not more than 30 days after the giving of such notice). The failure by
the Executive or the Company to set forth in the Notice of Termination any fact
or circumstance which contributes to a showing of Good Reason or Cause shall not
waive any right of the Executive or the Company, respectively, hereunder or
preclude the Executive or the Company, respectively, from asserting such fact or
circumstance in enforcing the Executive's or the Company's rights hereunder.

     (e)   Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive for any reason (including Good Reason), the date of receipt of the
Notice of Termination or any later date specified therein that is within 30 days
of such Notice, as the case may be, (ii) if the Executive's employment is
terminated by the Company other than for Cause or Disability, the Date of
Termination shall be the date on which the Company notifies the Executive of
such termination and (iii) if the Executive's employment is terminated by reason
of death or

                                       5



Disability, the Date of Termination shall be the date of death of the Executive
or the Disability Effective Date, as the case may be.

     4.   Obligations of the Company upon Termination. (a) Good Reason; Other
than for Cause, Death or Disability. If, during the Employment Period, the
Company shall terminate the Executive's employment other than for Cause or
Disability or the Executive shall terminate employment for Good Reason:

     (i)  the Company shall pay to the Executive in a lump sum in cash within 30
days after the Date of Termination the aggregate of the following amounts:

     A.   the sum of (1) the Executive's Annual Base Salary through the Date of
Termination to the extent not theretofore paid; (2) the product of (x) higher of
the bonus paid to the Executive for the most recent full year prior to the Date
of Termination or the average of the past 3 years' bonuses (the "Highest Annual
Bonus") and (y) a fraction, the numerator of which is the number of days in the
current year through the Date of Termination, and the denominator of which is
365; and (3) any accrued vacation pay to the extent not theretofore paid (the
sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter
referred to as the "Accrued Obligations");

     B.   the amount equal to the product of (1) 2.99 and (2) the sum of (x) the
Executive's Annual Base Salary and (y) the Highest Annual Bonus; and

     C.   the actuarial equivalent of the amounts by which the Executive's total
vested benefits under The El Paso Electric Company Retirement Plan (or any
successor plan put into effect prior to a Change in Control), computed as if
Executive had three additional years of benefit accrual service, exceed the
Executive's actual pension benefits. For this computation, the Executive's final
average salary shall be deemed to be the Executive's annual base compensation in
effect immediately prior to the time a Notice of Termination is given and the
benefit and accrual formulas and actuarial assumptions shall be no less
favorable than those in effect at such time; "base compensation" shall include
any amounts deducted by the Company for Executive's account under any agreement
with the Company or Section 125 and 401(k) of the Internal Revenue Code of 1986,
as amended (the "Code").

     (ii) for two years after the Executive's Date of Termination, or such
longer period as may be provided by the terms of the appropriate plan, program,
practice or policy, the Company shall continue the medical, long-term
disability, dental, accidental death and dismemberment and life insurance
benefits to the Executive and/or the Executive's dependents at least equal to
those which would have been provided to them in accordance with the plans,
programs, practices and policies in effect under Section 2(b)(v) of this
Agreement (the "Continuing Benefit Plans") as if the Executive's employment had
not been terminated (either by permitting the Executive and/or the Executive's
dependents to

                                       6



participate in the Continuing Benefit Plans, or by providing the Executive
and/or the Executive's dependents with equivalent benefits outside the
Continuing Benefit Plans, as the Company may elect, so long as the net after-tax
benefit to them is the same as if the Executive had remained an employee of the
Company participating in the Continuing Benefit Plans); provided, however, that
if the Executive becomes reemployed with another employer and is eligible to
receive medical, long-term disability, dental, accidental death and
dismemberment or life insurance benefits under another employer-provided plan,
the medical, long-term disability, dental, accidental death and dismemberment
and life insurance benefits described herein shall be secondary to those
provided under such other plan during such applicable period of eligibility. For
purposes of determining eligibility (but not the time of commencement of
benefits) of the Executive for retiree benefits pursuant to the Continuing
Benefit Plans and any other welfare benefit plans, practices, policies and
programs provided by the Company and its affiliated companies, the Executive
shall be considered to have remained employed until two years after the Date of
Termination and to have retired on the last day of such period;

     (iii) for one year after the Executive's Date of Termination, the Company
shall provide outplacement services for the Executive; and

     (iv)  to the extent not theretofore paid or provided, the Company shall
timely pay or provide to the Executive any other amounts or benefits required to
be paid or provided or which the Executive is eligible to receive under any
plan, program, policy or practice or contract or agreement of the Company, as of
the Date of Termination (such other amounts are benefits shall be thereinafter
referred to as the "Other Benefits").

     (b)   Death. If the Executive's employment is terminated by reason of the
Executive's death during the Employment Period, this Agreement shall terminate
without further obligation to the Executive's Legal Representatives under this
Agreement, other than for payment of Accrued Obligations and the timely payment
or provision of Other Benefits. Accrued Obligations shall be paid to the
Executive's estate or beneficiary, as applicable, in a lump sum in cash within
30 days of the Date of Termination. The term Other Benefits as utilized in this
Section 4(b) shall include death benefits as in effect on the date of the
Executive's death.

     (c)   Disability. If the Executive's employment is terminated by reason
of the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligation to the Executive, other than for payment of
Accrued Obligations and the timely payment or provision of Other Benefits.
Accrued Obligations shall be paid to the Executive in a lump sum in cash within
30 days of the Date of Termination.

     (d)   Cause; Other than for Good Reason. If the Executive's employment
shall be terminated for Cause or the Executive terminates his or her employment
without Good Reason during the Employment Period, this Agreement shall terminate
without further

                                        7



obligation to the Executive other than the obligation to pay to the Executive
(x) his or her Annual Base Salary through the Date of Termination and (y) Other
Benefits, in each case to the extent theretofore unpaid.

     5. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company or any of its affiliated companies
and for which the Executive may qualify, nor, subject to Section 10(f), shall
anything herein limit or otherwise affect such rights as the Executive may have
under any contract or agreement with the Company or any of its affiliated
Companies. Any rights that are vested and any benefits that the Executive is
otherwise entitled to receive under any plan, policy, practice or program of or
any contract or agreement with the Company or any of its affiliated companies at
or subsequent to the Date of Termination shall be payable in accordance with
such plan, policy, practice or program or contract or agreement except as
explicitly modified by this Agreement.

     6. Full Settlement. In no event shall the Executive be obligated to seek
other employment or take any other action by way of mitigation of the amounts
payable to the Executive under any of the provisions of this Agreement and,
except as provided in section 4(a)(ii) of this Agreement, such amounts shall not
be reduced whether or not the Executive obtains other employment. The Company
agrees to pay as incurred, to the full extent permitted by law, all legal fees
and expenses which the Executive may reasonably incur as a result of any contest
regardless of the outcome thereof by the Company, the Executive or others of the
validity or enforceability of, liability under, any provision of this Agreement
of any guarantee of performance thereof including as a result of any contest by
the Executive about the amount of any payment pursuant to this Agreement;
provided, however, that the foregoing shall not apply in connection with any
such contest in which the finder of fact determines that the contest is
frivolous or was brought by the Executive in bad faith.

     7. Gross-Up Provision. (a) If the payments provided by Section 4(a)(i)-(iv)
hereof (the "Agreement Payments") become subject to the tax (the "Excise Tax")
imposed by Section 4999 of the Code as in effect on the date of this Agreement
(or any similar tax), Executive will be responsible for the Excise Tax and the
Company will not pay Executive an additional amount (the "Gross-up Payment").
If, however, the "Agreement Payments" become subject to the Excise Tax (or any
similar tax) by virtue of changes in the Code which occur after the date of this
Agreement, the Company shall pay to Executive at the time specified in Section
7(b) below a "Gross-up Payment" such that the net amount retained by Executive,
after deduction of any Excise Tax on the Total Payments (as hereinafter
defined), and any federal, state and local income tax and Excise Tax upon the
Gross-up Payment provided for by this subsection (a) shall be equal to what the
Total Payments would have been had such changes in the Code not occurred.

                                       8



         For purposes of determining whether any of the Agreement Payments will
be subject to the Excise Tax and the amount of such Excise Tax, (i) any other
payments or benefits received or to be received by Executive in connection with
a Change in Control or Executive's termination of employment (under this
Agreement or any other agreement with the Company or any person whose actions
result in a Change of Control or any person affiliated with the Company) (which,
together with the Agreement Payments, shall constitute the "Total Payments")
shall be treated as "parachute payments" within the meaning of Section
280G(b)(2) of the Code, and all "excess parachute payments" within the meaning
of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax,
unless in the opinion of tax counsel selected by the Company's independent
auditors such other payments or benefits (in whole or in part) are not subject
to the Excise Tax, (ii) the amount of the Total Payments which shall be treated
as subject to the Excise Tax shall be equal to the lesser of (A) the Total
Payments or (B) the amount of excess parachute payments within the meaning of
Section 280G(b)(1) of the Code (after applying clause (i), above), and (iii) the
value of any non-cash benefits or any deferred payment or benefit shall be
determined by the Company's independent auditors in accordance with the
principles of Sections 280G(d)(3) and (4) of the Code.

         For purposes of determining the Gross-up Payment, Executive shall be
deemed to pay federal, state, and local income taxes at the highest applicable
marginal rate for the calendar year in which the Gross-up Payment is to be made
net of the maximum reduction in federal income taxes which could be obtained
from deduction of such state and local taxes. If the Excise Tax is finally
determined to be less than the amount taken into account at the time the
Gross-up Payment is made, Executive shall repay the portion attributable to such
reduction (plus the portion of the Gross-up Payment attributable to a reduction
in Excise Tax and/or a federal and state and local income tax deduction), plus
interest on the amount of such repayment at the rate provided in Section
1274(b)(2)(B)of the Code. If the Excise Tax is later determined to exceed the
amount taken into account at the time the Gross-up Payment is made, the Company
shall make an additional gross-up payment (plus any interest payable with
respect to such excess at the rate provided in Section 1274(b)(2)(B) of the
Code) when such excess is finally determined.

         (b) The Gross-up Payment or portion thereof provided for in subsection
(a) above shall be paid not later than the thirtieth day following payment of
any amounts under Section 4(a)(i); provided, however, that if the amount of such
Gross-up Payment or portion thereof cannot be finally determined on or before
such day, the Company shall pay to Executive on such day an estimate, as
determined in good faith by the Company, of the minimum amount of such payments
and shall pay the remainder of such payments (together with interest at the rate
provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can
be determined, but in no event later than the forty-fifth day after payment of
any amounts under Section 4(a)(i). If the amount of the estimated payments
exceeds the amount subsequently determined to have been due, such excess shall
constitute a loan by the Company to the Executive, payable on the fifth day
after demand

                                       9



by the Company (together with interest at the rate provided for in Section
1274(b)(2)(B) of the Code).

         (c) In the event it shall be determined by the Company's independent
auditors that the Agreement Payments would subject the Executive to the Excise
Tax, it shall also be determined whether a reduction in the Agreement Payments
would result in an after-tax amount with a greater net present value than would
occur without such reduction. If so, the Agreement Payments shall be reduced by
the minimum amount necessary to obtain such result.

         If such reduced payments incorrectly result in an overpayment or
underpayment to Executive, the underpayment shall be promptly paid to Executive
and, if an overpayment shall have occurred, it shall be treated for all purposes
as a loan to Executive by the Company which Executive shall repay on the fifth
day after demand by the Company, in each case together with interest at the
applicable rate provided for in Section 1274(b)(2)(B) of the Code.

         8. (a) Confidential Information. The Executive shall hold in a
fiduciary capacity for the benefit of the Company all secret or confidential
information, knowledge or data relating to the Company or any of its affiliated
companies, and their respective businesses, which shall have been obtained by
the Executive during the Executive's employment by the Company or any of its
affiliated companies and which shall not be or become public knowledge (other
than by acts by the Executive or representatives of the Executive in violation
of this Agreement). The Executive shall not, at any time during his or her
employment with the Company or at any time thereafter, for any reason, in any
fashion, form or manner, either directly or indirectly, communicate, divulge,
copy or permit to be copied (without the prior written consent of the Company or
as may otherwise be required by law or legal process or in order to enforce his
or her rights under this Agreement or as necessary to defend himself or herself
against a claim asserted directly or indirectly by the Company or any of its
affiliated companies) any secret or confidential information, knowledge or data
relating to the Company or any of its affiliated companies, and their respective
businesses, in any manner whatsoever, that is not otherwise publicly available
to, or for the benefit of, any person, firm, corporation or other entity, other
than the Company and those designated by it or in the course of his or her
employment with the Company and its affiliated companies. As used herein, the
term "all secret or confidential information, knowledge or data relating to the
Company or any of its affiliated companies, and their respective businesses"
shall include, without limitation, the Company's plans, strategies, proposals to
potential customers and/or partners, costs, prices, proprietary systems for
buying and selling, client and customer lists, identity of prospects,
proprietary computer programs, policy or procedure-manuals, proprietary training
and recruiting procedures, proprietary accounting procedures, and the status and
contents of the Company's contracts with its suppliers, clients, customers or
prospects. The Executive

                                       10



further agrees to maintain in confidence any confidential information of third
parties received as a result of his or her employment with the Company.

         (b) Enforcement. In the event of a breach or threatened breach of this
Section 8, the Executive agrees that the Company shall be entitled, in addition
to any other remedies available to it to specific performance and injunctive
relief in a court of appropriate jurisdiction to remedy any such breach or
threatened breach, and the Executive acknowledges that damages would be
inadequate and insufficient. In no event shall an asserted violation of the
provisions of this Section 8 constitute a basis for deferring or withholding any
amounts otherwise payable to the Executive under this Agreement.

         (c) Survival. Any termination of the Executive's employment or of this
Agreement shall have no effect on the continuing operation of this Section 8.

         9.  Successors.  (a) This  Agreement is personal to the Executive  and
without the prior written  consent of the Company shall not be assignable by the
Executive  otherwise than by will or the laws of descent and  distribution.
This Agreement shall inure to the benefit of and be enforceable by the
Executive's legal representatives.

         (b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.

         (c) The Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company to assume expressly and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
As used in this Agreement, "Company" shall mean the Company as hereinbefore
defined and any successor to its business and/or assets as aforesaid (whether or
not the Company ceases to exist) which assumes and agrees to perform this
Agreement by operation of law, or otherwise. In the event of any such
succession, "Board" shall mean the board of directors or similar managing body
of the successor to the Company.

         10. Miscellaneous. (a) This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas, without reference
to principles of conflict of laws. The captions of this Agreement are not part
of the provisions hereof and shall have no force or effect. This Agreement may
not be amended or modified otherwise than by a written agreement executed by the
parties hereto or their respective successors and legal representatives.

         (b) All notices and other communications hereunder shall be in writing
and shall be given by hand delivery to the other party or by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:

                                       11



            If to the Executive:

            [Name]
            [Home]


            If to the Company:

            El Paso Electric Company
            100 North Stanton
            El Paso, Texas 79901
            Attention: Board of Directors

or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.

     (c)  The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement.

     (d)  The Company may withhold from any amounts payable under this Agreement
such Federal, state, local or foreign taxes as shall be required to be withheld
pursuant to any applicable law or regulation.

     (e)  Subject to Section 3(d) of this Agreement, the Executive's or the
Company's failure to insist upon strict compliance with any provision of this
Agreement or the failure to assert any right the Executive or the Company may
have hereunder, including, without limitation, the right of the Executive to
terminate employment for Good Reason pursuant to Section 3(c)(i)-(v) of this
Agreement, shall not be deemed to be a waiver of such provision or right or any
other provision or right of this Agreement.

     (f)  This Agreement constitutes the entire agreement between the parties
and is intended to be an integration of all agreements between the parties with
respect to the Executive's employment by the Company on and after the occurrence
of a Change in Control, the terms and conditions of such employment or the
termination of such employment. Any and all prior agreements, understandings or
commitments between the Company and the Executive with respect to any such
matter are hereby superseded and revoked.

     (g)  The Company shall indemnify and hold the Executive and his or her
legal representatives harmless to the fullest extent permitted by applicable
law, from and against

                                       12



all judgments, fines, penalties, excise taxes, amounts paid in settlement,
losses, expenses, costs, liabilities and legal fees if the Executive is made, or
threatened to be made a party to any threatened or pending or completed action,
suit, proceeding, whether civil, criminal, administrative or investigative,
including an action by or in the right of the Company or any of its affiliated
companies to procure a judgment in its favor, by reasons of the fact that the
Executive is or was serving in any capacity at the request of the Company or any
of its affiliated companies for any other corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise. The right to
indemnification provided, in this paragraph (g) shall not be deemed exclusive
under any law or the charter or by-laws of the Company or any of its affiliated
companies or otherwise, both as to action in the Executive's official capacity
and as to action in another capacity while holding such office, and shall
continue after the Executive has ceased to be a director or officer and shall
inure to the benefit of the Executive's heirs, executors and administrators. Any
reimbursement obligation arising hereunder shall be satisfied on an as-incurred
basis. In addition, the Company agrees to continue to maintain customary and
appropriate directors and liability insurance during the Employment Period and
the Executive shall be entitled to the protection of any such insurance policies
on no less favorable a basis than is provided to any other officer or director
of the Company or any of its affiliated companies.

     IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.

                                           "EXECUTIVE"

                                           _____________________________________
                                           [Name]



                                           EL PASO ELECTRIC COMPANY

                                           _____________________________________
                                           Gary R. Hedrick
                                           President and Chief Executive Officer

                                       13



                                                                    Attachment 1

          "Change in Control" shall mean:

          (1)  the acquisition by any individual, entity or group (a "Person"),
including any "person" within the meaning of Section 13(d) (3) or 14(d) (2) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") of
beneficial ownership within the meaning of Rule 13d-3 promulgated under the
Exchange Act, of 30% more of either (i) the then outstanding shares of common
stock of the Company (the "Outstanding Company Common Stock") or (ii) the
                           --------------------------------
combined voting power of the then outstanding securities of the Company entitled
to vote generally in the election of directors (the "Outstanding Company Voting
                                                     --------------------------
Securities"); excluding, however, the following: (A) any acquisition directly
- ----------
from the Company (excluding any acquisition resulting from the exercise of an
exercise, conversion or exchange privilege unless the security being so
exercised, converted or exchanged was acquired directly from the Company), (B)
any acquisition by the Company, (C) any acquisition by an employee benefit plan
(or related trust) sponsored or maintained by the Company or any corporation
controlled by the Company, or (D) any acquisition by any corporation pursuant to
a transaction which complies with clauses (i), (ii) and (iii) of subsection (3)
of this definition;

          (2)  individuals who, as of March 6, 2002, constitute the Board of
Directors (the "Incumbent Board") cease for any reason to constitute at least a
                ---------------
majority of such Board; provided that any individual who becomes a director of
the Company subsequent to March 29, 2001 whose election, or nomination for
election by the Company's stockholders, was approved by the vote of at least a
majority of the directors then comprising the Incumbent Board shall be deemed a
member of the Incumbent Board; and provided further, that any individual who was
initially elected as a director of the Company as a result of an actual or
threatened election contest, as such terms are used in Rule 14a-11 of Regulation
14A promulgated under the Exchange Act, or any other actual or threatened
solicitation of proxies or consents by or on behalf of any Person other than the
Board shall not be deemed a member of the Incumbent Board;

          (3)  approval by the stockholders of the Company of a reorganization,
merger or consolidation or sale or other disposition of all or substantially all
of the assets of the Company (a "Corporate Transaction"); excluding, however, a
                                 ---------------------
Corporate Transaction pursuant to which (i) all or substantially all of the
individual or entities who are the beneficial owners, respectively, of the
Outstanding Company Common Stock and the Outstanding Company Voting Securities
immediately prior to such Corporate Transaction will beneficially own, directly
or indirectly, more than 60% of, respectively, the outstanding shares of common
stock, and the combined voting power of the outstanding securities of such
corporation entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such Corporate Transaction (including,
without limitation, a corporation which as a result of such transaction owns the
Company or all or substantially

                                       A-1



all of the Company's assets either directly or indirectly) in substantially the
same proportions relative to each other as their ownership, immediately prior to
such Corporate Transaction, of the Outstanding Company Common Stock and the
Outstanding Company Voting Securities, as the case may be, (ii) no Person (other
than: the Company; any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company; the
corporation resulting from such Corporate Transaction; and any Person which
beneficially owned, immediately prior to such Corporate Transaction, directly or
indirectly, 30% or more of the Outstanding Company Common Stock or the
Outstanding Company Voting Securities, as the case may be) will beneficially
own, directly or indirectly, 30% or more of, respectively, the outstanding
shares of common stock of the corporation resulting from such Corporate
Transaction or the combined voting power of the outstanding securities of such
corporation entitled to vote generally in the election of directors and (iii)
individuals who were members of the Incumbent Board will constitute at least a
majority of the members of the board of directors of the corporation resulting
from such Corporate Transaction; or

          (4)  approval by the stockholders of the Company of a plan of complete
liquidation or dissolution of the Company.

     Notwithstanding the foregoing, in no event shall a "Change of Control" be
deemed to have occurred as a result of the formation of a Holding Company. For
the purposes hereof, "Holding Company" shall mean an entity that becomes a
holding company for the Company or its businesses as a part of any
reorganization, merger, consolidation or other transaction, provided that the
outstanding shares of common stock of such entity and the combined voting power
of such entity entitled to vote generally in the election of directors is,
immediately after such reorganization, merger, consolidation or other
transaction, beneficially owned, directly or indirectly, by all or substantially
all of the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Company Voting Securities immediately prior to
such reorganization, merger, consolidation or other transaction in substantially
the same proportions as their ownership, immediately prior to such
reorganization, merger, consolidation or other transaction, of such Outstanding
Company Voting Securities.

                                       A-2

EX-10.06

                                                                   EXHIBIT 10.06

                      SHIPROCK - FOUR CORNERS PROJECT

                             345-kV SWITCHYARD

                         INTERCONNECTION AGREEMENT

                                  AMONG

                      ARIZONA PUBLIC SERVICE COMPANY

                         EL PASO ELECTRIC COMPANY

                  PUBLIC SERVICE COMPANY OF NEW MEXICO

    SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT

                    SOUTHERN CALIFORNIA EDISON COMPANY

                      TUCSON ELECTRIC POWER COMPANY

                                   AND

                    PUBLIC SERVICE COMPANY OF COLORADO

         TRI-STATE GENERATION AND TRANSMISSION ASSOCIATION, INC.

                     WESTERN AREA POWER ADMINISTRATION

                          APS CONTRACT NO. 51999

Execution Copy



                         SHIPROCK - FOUR CORNERS PROJECT
                                345-KV SWITCHYARD
                            INTERCONNECTION AGREEMENT

                                Table of Contents
                                -----------------



Section                               Title                                                              Page No.
- -------                               -----                                                              --------
                                                                                                          
1.      PARTIES.................................................................................................1
2.      RECITALS................................................................................................1
3.      ENTIRE AGREEMENT........................................................................................2
4.      SECTION HEADINGS AND DEFINITIONS........................................................................3
        4.1      230-kV Switchyard..............................................................................3
        4.2      230-kV Switchyard Agreement....................................................................3
        4.3      230-kV Switchyard Termination Facilities.......................................................3
        4.4      345-kV Switchyard..............................................................................4
        4.5      Accounting Practice............................................................................4
        4.6      Agreement......................................................................................4
        4.7      Apparatus .....................................................................................4
        4.8      Capital Improvements...........................................................................4
        4.9      Common Facilities..............................................................................4
        4.10     Common Facilities Use Fee......................................................................4
        4.11     Construction Budget ...........................................................................4
        4.12     Construction Costs ............................................................................4
        4.13     Construction Schedule .........................................................................5
        4.14     Construction Work..............................................................................5
        4.15     Co-Tenancy Agreement...........................................................................5
        4.16     Cost Responsibility Ratio ("CRR")..............................................................5
        4.17     Due Date.......................................................................................5
        4.18     E&O Committee..................................................................................5
        4.19     Enlarged Switchyard............................................................................5
        4.20     FERC...........................................................................................5
        4.21     Four Corners Participants......................................................................5
        4.22     Four Corners Project...........................................................................6
        4.23     Function(s)....................................................................................6
        4.24     Future Breaker Work............................................................................6

                                      i



                                                                                                  
        4.25     Good Utility Practice..........................................................................6
        4.26     In-Service Date................................................................................6
        4.27     Interconnection Facilities.....................................................................6
        4.28     Interconnection Participants...................................................................6
        4.29     ITCC...........................................................................................6
        4.30     Leased Lands...................................................................................6
        4.31     Operating Agent................................................................................6
        4.32     Operating Agreement............................................................................7
        4.33     Operating Emergency............................................................................7
        4.34     Operating Work.................................................................................7
        4.35     RUS............................................................................................7
        4.36     Shiprock-Four Corners Transmission Line........................................................7
        4.37     Shiprock Substation............................................................................7
        4.38     Switchyard Addition............................................................................7
        4.39     Willful Action.................................................................................8
        4.40     Work Liability.................................................................................8
5.      EFFECTIVE DATE AND TERMINATION..........................................................................9
        5.1      Effective Date.................................................................................9
        5.2      FERC Acceptance and RUS Approval Without Conditions or Modifications...........................9
        5.3      FERC Acceptance and RUS Approval With Conditions or Modifications..............................9
        5.4      Parties' Acceptance...........................................................................10
        5.5      Non-Acceptance by a Party.....................................................................10
        5.6      Termination Date..............................................................................10
        5.7      Notice........................................................................................10
6.      GRANT..................................................................................................11
7.      OWNERSHIP..............................................................................................11
        7.1      Interconnection Facilities....................................................................11
        7.2      345-kV Switchyard.............................................................................11
        7.3      Switchyard Addition...........................................................................11
        7.4      Designation of Ownership......................................................................11
8.      OPERATING AGENT........................................................................................11
        8.1      Operating Agent...............................................................................11
        8.2      Outage........................................................................................11
        8.3      Relocation....................................................................................12

        
                                      ii



                                                                                                      
        8.4      Performance...................................................................................12
9.      COORDINATION AND EXCHANGE OF INFORMATION...............................................................13
10.     DESIGN AND CONSTRUCTION................................................................................13
11.     PAYMENT FOR USE OF COMMON FACILITIES...................................................................15
12.     COST RESPONSIBILITY RATIO..............................................................................15
        12.1     Purpose.......................................................................................15
        12.2     Method........................................................................................15
13.     ALLOCATION OF COSTS....................................................................................15
        13.1     Costs of Construction Work....................................................................15
        13.2     Costs of Operating Work.......................................................................16
        13.3     Costs of Capital Improvements.................................................................16
        13.4     Common Facilities.............................................................................16
        13.5     Costs of Insurance............................................................................16
        13.6     Cost of Future Breaker Work...................................................................16
14.     PAYMENT................................................................................................16
        14.1     Budget Submittal..............................................................................16
        14.2     Budget Approval...............................................................................16
        14.3     Invoices......................................................................................17
        14.4     Late Payment..................................................................................18
        14.5     Disputed Charges..............................................................................18
15.     OPERATING PRINCIPLES...................................................................................18
        15.1     Entitlement...................................................................................18
        15.2     Curtailment...................................................................................19
        15.3     Reactive Power................................................................................19
16.     OPERATING EMERGENCY....................................................................................19
        16.1     345-kV Switchyard and Switchyard Addition.....................................................19
        16.2     Interconnection Facilities....................................................................20
        16.3     Notice........................................................................................20
        16.4     Duties........................................................................................20
        16.5     Restoration Without Agreement.................................................................21
        16.6     Report........................................................................................21
17.     REMOVAL OF 230-KV SWITCHYARD TERMINAL FACILITIES.......................................................21
18.     REMOVAL OF INTERCONNECTION FACILITIES..................................................................21
19.     SPINNING RESERVES......................................................................................22


                                      iii



                                                                                                         
20.     WESTERN SYSTEMS COORDINATING COUNCIL COMPLIANCE........................................................22
21.     SCHEDULING AND DISPATCHING.............................................................................22
        21.1     Procedures....................................................................................22
        21.2     Schedules.....................................................................................22
        21.3     230-kV Switchyard Delivery Points.............................................................22
22.     OTHER AGREEMENT........................................................................................23
23.     TAXES    ..............................................................................................23
        23.1     Assessments...................................................................................23
        23.2     Responsibility................................................................................23
        23.3     Taxes Other Than Income Taxes.................................................................23
        23.4     Income Taxes..................................................................................25
24.     INSURANCE..............................................................................................25
        24.1     Interconnection Facilities....................................................................25
        24.2     Insureds......................................................................................25
25.     LIABILITY..............................................................................................25
        25.1     Covenant Not to Execute.......................................................................25
        25.2     Insurance Proceeds............................................................................26
        25.3     Responsibility for Work Liability.............................................................26
        25.4     Willful Action................................................................................26
        25.5     Customer Claims...............................................................................27
        25.6     Limitation of Liability.......................................................................27
        25.7     No Relief of Insurer..........................................................................28
26.     UNCONTROLLABLE FORCES..................................................................................28
27.     RELATIONSHIP OF THE PARTIES............................................................................28
28.     SUCCESSORS AND ASSIGNS.................................................................................29
        28.1     Binding.......................................................................................29
        28.2     Notice........................................................................................29
        28.3     Conditions....................................................................................29
29.     AUDITS.................................................................................................29
        29.1     Right.........................................................................................29
        29.2     Conditions....................................................................................29
        29.3     Costs.........................................................................................30
        29.4     Record Retention Period.......................................................................30
        29.5     Notice........................................................................................30



                                      iv



                                                                                                          
30.     DEFAULTS...............................................................................................30
        30.1     Payment Default...............................................................................30
        30.2     Performance Default...........................................................................30
        30.3     Cure of Default...............................................................................31
        30.4     Default Remedy................................................................................31
31.     ARBITRATION............................................................................................32
32.     NONDEDICATION OF FACILITIES............................................................................33
33.     APPROVALS..............................................................................................33
        33.1     Approvals.....................................................................................33
        33.2     Fees..........................................................................................33
        33.3     Regulatory Filings............................................................................34
34.     GOVERNING LAW AND VENUE................................................................................34
35.     NOTICES................................................................................................34
36.     GENERAL PROVISIONS.....................................................................................37
        36.1     Severability..................................................................................37
        36.2     Third Party Rights............................................................................37
        36.3     Waiver........................................................................................37
        36.4     Survival of Obligations and Liabilities.......................................................37
        36.5     Amendments and Revisions to Exhibits..........................................................37
        36.6     Environmental Compliance......................................................................37
        36.7     Contingent Upon Appropriations................................................................37
        36.8     Equal Opportunity Employment Practices........................................................38
        36.9     Use of Convict Labor..........................................................................38
37.     EXECUTION..............................................................................................38
        37.1     Execution by Counterparts.....................................................................38
        37.2     Execution and Delivery........................................................................38
38.     SIGNATURE CLAUSE.......................................................................................39



                                      v



                                   APPENDICES

                                                                                                         
APPENDIX A - FERC ORDER AND RUS APPROVAL.......................................................................A-1



                                    EXHIBITS
                                    --------



                                                                                                        
EXHIBIT 1 - ENLARGED SWITCHYARD DIAGRAM........................................................................E1-1
EXHIBIT 2 - INTERCONNECTION FACILITIES.........................................................................E2-1
EXHIBIT 3 - COMMON FACILITIES COSTS............................................................................E3-1
EXHIBIT 4 - ALLOCATION OF COMMON FACILITIES COSTS..............................................................E4-1
EXHIBIT 5 - CALCULATION OF COMMON FACILITIES USE FEE...........................................................E5-1
EXHIBIT 6 - %-RESPONSIBILITY FOR COSTS.........................................................................E6-1
EXHIBIT 7 - COST RESPONSIBILITY RATIO (CRR)....................................................................E7-1
EXHIBIT 8 - METHOD OF DETERMINING INSURANCE EXPENSES
                  FOR COMMON FACILITIES........................................................................E8-1
EXHIBIT 9 - INTERCONNECTION FACILITIES CONSTRUCTION BUDGET.....................................................E9-1
EXHIBIT 10 - DETERMINATION OF ITCC COMPOSITE RATE.............................................................E10-1
EXHIBIT 11 - CONSTRUCTION COSTS...............................................................................E11-1
EXHIBIT 12 - CONSTRUCTION SCHEDULE............................................................................E12-1

                                      vi



                         SHIPROCK - FOUR CORNERS PROJECT
                                345-KV SWITCHYARD
                           INTERCONNECTION AGREEMENT

1.       PARTIES
         -------
         The Parties to this SHIPROCK - FOUR CORNERS PROJECT 345-KV SWITCHYARD
         INTERCONNECTION AGREEMENT are: ARIZONA PUBLIC SERVICE COMPANY ("APS"),
         an Arizona corporation; EL PASO ELECTRIC COMPANY ("EPE"), a Texas
         corporation; PUBLIC SERVICE COMPANY OF COLORADO ("PSCO"), a Colorado
         corporation; PUBLIC SERVICE COMPANY OF NEW MEXICO ("PNM"), a New Mexico
         corporation; SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER
         DISTRICT ("SRP"), an agricultural improvement district organized and
         existing under the laws of the State of Arizona; SOUTHERN CALIFORNIA
         EDISON COMPANY ("SCE"), a California corporation; TRI-STATE GENERATION
         AND TRANSMISSION ASSOCIATION, INC. ("Tri-State"), a Colorado
         cooperative corporation doing business in the states of Colorado,
         Nebraska, New Mexico, and Wyoming; TUCSON ELECTRIC POWER COMPANY
         ("TEP"), an Arizona corporation, formerly known as Tucson Gas &
         Electric Company; and THE UNITED STATES OF AMERICA acting by and
         through the Administrator, Western Area Power Administration,
         Department of Energy ("Western"), represented by the officer executing
         this Agreement or a duly appointed successor; individually referred to
         as "Party" and collectively as "Parties".

2.       RECITALS
         --------
         This Agreement is made with reference to the following facts, among
         others:
         2.1      The Four Corners Participants, as defined in Section 4.21, are
                  owners of the 345-kV Switchyard, located near Farmington, New
                  Mexico;
         2.2      The Interconnection Participants, as defined in Section 4.28,
                  have upgraded the Shiprock-Four Corners Transmission Line for
                  operation at 345-kV and desire to relocate said transmission
                  line termination from the 230-kV Switchyard to the 345-kV
                  Switchyard pursuant to this Agreement;
         2.3      By resolution dated February 15, 1995, the E&O Committee
                  recommended approval of the relocation of the Four Corners'
                  termination of Western's Shiprock-Four Corners Transmission
                  Line from the 230-kV Switchyard to the 345-kV Switchyard,
                  subject to: i) the conclusion of negotiations between the Four
                  Corners Participants and the Interconnection Participants on
                  the terms and conditions for such terminal relocation, and



                  ii) the execution of an interconnection agreement. In a
                  subsequent resolution dated August 18, 1999, the E&O Committee
                  reaffirmed its resolution of the relocation of Western's
                  Shiprock-Four Corners Transmission Line from the 230-kV
                  Switchyard to the 345-kV Switchyard at Four Corners Project.
         2.4      The Parties anticipate that the interconnection and operation
                  of the Shiprock-Four Corners Transmission Line at 345-kV will
                  provide mutual benefits, which may include: 1) improvements in
                  reliability, 2) increases in both scheduling and transfer
                  capability, 3) a means of furnishing emergency assistance and
                  4) opportunities for increases in market sales, purchases,
                  and/or exchanges of power and energy. Consequently, the Four
                  Corners Participants are willing to permit the relocation of
                  the Shiprock-Four Corners Transmission Line termination from
                  the 230-kV Switchyard to the 345-kV Switchyard in accordance
                  with the terms and conditions contained in this Agreement.
         2.5      APS acts on behalf of itself and as Operating Agent on behalf
                  of the Four Corners Participants under the Operating
                  Agreement. The Interconnection Participants desire that APS
                  design, construct, own, operate, and maintain the
                  Interconnection Facilities.
         2.6      The Parties understand that the Operating Agent may join an
                  independent system operator (ISO) or regional transmission
                  organization (RTO) under FERC jurisdiction. In the event the
                  Operating Agent either joins or is required to conform to
                  protocols of an ISO/RTO, the Parties agree that the Operating
                  Agent may propose contractual language changes necessary to
                  conform to the terms and conditions required by FERC's
                  approval of the ISO/RTO in the form of an amendment to this
                  agreement.
         2.7      This Agreement does not provide a right to transmit energy
                  other than across the Enlarged Switchyard buses except and
                  only to the extent that all necessary arrangements for
                  transmission rights and service are in place. Nothing in this
                  Agreement shall be deemed either expressly or implicitly to
                  obligate any Party to provide or make available to the
                  Interconnection Participants any transmission services,
                  control area services, distribution services, or ancillary
                  services for the transport of energy and the Four Corners
                  Participants make no representation in this Agreement
                  regarding the availability of such services. This Agreement
                  provides no obligation for any Party to purchase, sell,
                  transmit, or otherwise provide any rights other than the right
                  to interconnect.

3.       ENTIRE AGREEMENT
         ----------------
         This Agreement embodies the entire agreement between the Parties
         concerning the subject matter hereof and supersedes all prior
         proposals, representations, negotiations, or letters whether written

                                      2



         or oral with respect to the matters herein agreed to. The Parties shall
         not be bound by or be liable for any statement, representation,
         promise, inducement, or understanding of any kind relating to the
         subject matter hereof not set forth in this Agreement. This Agreement
         incorporates by reference all documents attached hereto and listed
         below or incorporated herein by reference. Included as appendices and
         exhibits to this Agreement and attached hereto are:

                  Appendix A - FERC ORDER AND RUS APPROVAL
                  Exhibit 1 - ENLARGED SWITCHYARD DIAGRAM
                  Exhibit 2 - INTERCONNECTION FACILITIES
                  Exhibit 3 - COMMON FACILITIES COSTS
                  Exhibit 4 - ALLOCATION OF COMMON FACILITIES COSTS
                  Exhibit 5 - CALCULATION OF COMMON FACILITIES USE FEE
                  Exhibit 6 - %-RESPONSIBILITY FOR COSTS
                  Exhibit 7 - COST RESPONSIBILITY RATIO (CRR)
                  Exhibit 8 - METHOD OF DETERMINING INSURANCE EXPENSES FOR
                              COMMON FACILITIES
                  Exhibit 9 - INTERCONNECTION FACILITIES CONSTRUCTION BUDGET
                  Exhibit 10 - DETERMINATION OF ITCC COMPOSITE RATE
                  Exhibit 11 - CONSTRUCTION COSTS
                  Exhibit 12 - CONSTRUCTION SCHEDULE

4.       SECTION HEADINGS AND DEFINITIONS
         --------------------------------
         Section headings in this Agreement are for convenience only and are not
         to be construed to define, limit, expand, interpret, or amplify the
         provisions of this Agreement. When initially capitalized in this
         Agreement or in amendments or exhibits hereto, the following words or
         phrases, whether in the singular or plural, shall have the meanings
         specified:
         4.1      230-kV Switchyard - The Four Corners 230-kV Switchyard and its
                  -----------------
                  related facilities located near Farmington, New Mexico, as
                  described in Exhibit B to the 230-kV Switchyard Agreement.
         4.2      230-kV Switchyard Agreement - The 230-kV Switchyard Agreement,
                  ---------------------------
                  between APS, PNM, and SRP; dated May 23, 1969, as amended from
                  time to time.
         4.3      230-kV Switchyard Termination Facilities - All related
                  ----------------------------------------
                  terminal facilities including circuit breakers, disconnect
                  switches, and appurtenances, excluding line relaying
                  equipment, for terminating the Shiprock-Four Corners
                  Transmission Line in the 230-kV Switchyard.

                                      3



         4.4      345-kV Switchyard - The Four Corners Project 345-kV Switchyard
                  -----------------
                  and its related facilities located near Farmington, New
                  Mexico, as described in Exhibit 2 to the Co-Tenancy Agreement
                  and as shown in Exhibit 1, Enlarged Switchyard Diagram,
                  attached hereto. The 345-kV Switchyard does not include the
                  Interconnection Facilities or the Switchyard Addition.
         4.5      Accounting Practice - Generally accepted accounting
                  -------------------
                  principles, applicable to electric utility operations, in
                  accordance with FERC's "Uniform System of Accounts Prescribed
                  for Public Utilities and Licensees, Subject to the Provisions
                  of the Federal Power Act," in effect as of the date of this
                  Agreement, and as such system of accounts may be amended,
                  supplemented, or revised from time to time.
         4.6      Agreement - This document, as described in Section 3, Entire
                  ---------
                  Agreement, hereof, constitutes a contract among the Parties,
                  as it may be amended from time to time.
         4.7      Apparatus - Any and all equipment, machinery, material, tools,
                  ---------
                  spare parts, accessories, and supplies furnished as a part of
                  and necessary for Construction Work, together with all usual
                  and appropriate fittings, attachments, appurtenances,
                  appliances, and special tools necessary for erection and
                  installation of the Interconnection Facilities.
         4.8      Capital Improvements - Any unit of property which is added to
                  --------------------
                  the Interconnection Facilities after the In-Service Date, the
                  enlargement or betterment of any unit of property constituting
                  a part of the Interconnection Facilities and the replacement
                  of any unit of property constituting a part of the
                  Interconnection Facilities, irrespective of whether such
                  replacement constitutes an enlargement or betterment of that
                  which it replaces, which additions, betterments, enlargements
                  and replacements in accordance with Accounting Practice would
                  be capitalized; provided, however, that the term Capital
                  Improvements as used herein shall not include Future Breaker
                  Work.
         4.9      Common Facilities - Those certain facilities of the 345-kV
                  -----------------
                  Switchyard described in Exhibit 3, Common Facilities, attached
                  hereto.
         4.10     Common Facilities Use Fee - The one time payment by
                  -------------------------
                  Interconnection Participants for the non-exclusive use and
                  benefit of the Common Facilities owned by the Four Corners
                  Participants. The method for calculating such payment is set
                  forth in Exhibit 5, Calculation of Common Facilities Use Fee,
                  hereof.
         4.11     Construction Budget - The budget for the Construction Work
                  -------------------
                  attached hereto as Exhibit 9 or as such budget may be modified
                  from time to time, in accordance with the provisions of this
                  Agreement.
         4.12     Construction Costs - The costs to construct and install a
                  ------------------
                  345-kV terminus at the Enlarged

                                      4



                  Switchyard to accommodate the transmission line from the
                  Shiprock Substation, described in Exhibit 11 attached hereto.
         4.13     Construction Schedule - The time line for completing benchmark
                  ---------------------
                  events in the Construction Work as delineated in Exhibit 12,
                  as such time line may be modified from time to time, in
                  accordance with the provisions of this Agreement.
         4.14     Construction Work - All work performed pursuant to this
                  -----------------
                  Agreement, including without limitation, all engineering,
                  design, contract preparation, purchasing, construction,
                  supervision, negotiation, preparation and performance of
                  construction agreements, resolution of disputes, other than
                  disputes among Parties, pertaining to the construction of the
                  Interconnection Facilities, acquisition of land or land
                  rights, expediting, inspection, accounting, testing, and
                  start-up for each component of the Interconnection Facilities,
                  any actions of the Operating Agent pursuant to Section 10.3
                  herein, and preparation of operating and equipment manuals,
                  all reports required by regulatory authorities and the conduct
                  of hearings, conferences and other activities incidental to
                  obtaining requisite permits, licenses and certificates for the
                  construction and operation of each component of the
                  Interconnection Facilities or any modification of Enlarged
                  Switchyard facilities to accommodate the Interconnection
                  Facilities.
         4.15     Co-Tenancy Agreement - The Four Corners Project Co-Tenancy
                  --------------------
                  Agreement, between APS, EPE, PNM, SRP, SCE, and TEP; dated
                  July 19, 1966, as amended from time to time.
         4.16     Cost Responsibility Ratio ("CRR") - The ratio of
                  ---------------------------------
                  responsibility for costs allocated to the Interconnection
                  Participants as described in Section 12, Cost Responsibility
                  Ratio, hereof.
         4.17     Due Date - For billing invoices submitted by the Operating
                  --------
                  Agent with regard to this Agreement, payment shall be due by
                  the first day of the month in which such expenses and costs
                  are anticipated to be incurred, or forty-five (45) calendar
                  days after Operating Agent submits an invoice, whichever last
                  occurs.
         4.18     E&O Committee - The Engineering and Operating Committee,
                  -------------
                  established pursuant to the Operating Agreement, and having
                  the additional responsibilities set forth in this Agreement.
         4.19     Enlarged Switchyard - The 345-kV Switchyard, the
                  -------------------
                  Interconnection Facilities, and the Switchyard Addition as
                  shown in Exhibit 1, Enlarged Switchyard Diagram, attached
                  hereto, including any modifications, additions, or
                  interconnections thereto as may be made from time to time by
                  any of the Parties or any third parties.
         4.20     FERC - Federal Energy Regulatory Commission or any successor
                  ----
                  organization.
         4.21     Four Corners Participants - APS, EPE, PNM, SRP, SCE, and TEP.
                  -------------------------

                                      5



         4.22     Four Corners Project - As defined in Section 5.16 of the
                  --------------------
                  Co-Tenancy Agreement.
         4.23     Function(s) - Each 345-kV connection to the Enlarged
                  -----------
                  Switchyard buses through power circuit breakers, such as line
                  connections, generator connections, or transformer
                  connections.
         4.24     Future Breaker Work - Capital improvements to the 345-kV
                  -------------------
                  circuit breakers located in the Enlarged Switchyard,
                  including, without limitation, replacement of such breakers
                  and associated equipment, if it is determined by the Four
                  Corners Participants upon completion of studies approved by
                  the E&O Committee that one hundred percent (100%) of the
                  continuous current carrying or interrupting capabilities of
                  said breakers will be exceeded as a result of future
                  additions, modifications, or interconnections which affect the
                  Enlarged Switchyard; provided, however, that Future Breaker
                  Work shall not include any replacement of circuit breakers due
                  to obsolescence.
         4.25     Good Utility Practice - Any of the practices, methods, and
                  ---------------------
                  acts engaged in or approved by a significant portion of the
                  electric utility industry during the relevant time period, or
                  any of the practices, methods, and acts which, in the exercise
                  of reasonable judgment in light of the facts known at the time
                  the decision was made, could have been expected to accomplish
                  the desired result at a reasonable cost consistent with good
                  business practices, reliability, safety, and expedition. Good
                  Utility Practice is not intended to be limited to the optimum
                  practice, method, or act to the exclusion of all others, but
                  rather to be acceptable practices, methods, or acts generally
                  accepted in the region.
         4.26     In-Service Date - The date that the initial Interconnection
                  ---------------
                  Facilities are capable of being placed into continuous
                  operation as determined by Operating Agent and Interconnection
                  Participants.
         4.27     Interconnection Facilities - The equipment and facilities,
                  --------------------------
                  including any equipment and facilities located outside the
                  345-kV Switchyard and which are placed on the Leased Lands,
                  comprising the interconnection of the Shiprock-Four Corners
                  Transmission Line to the 345-kV Switchyard, as described in
                  Exhibit 2, Interconnection Facilities, attached hereto,
                  including any Capital Improvements as may be added thereto
                  from time to time.
         4.28     Interconnection Participants - PSCO, Tri-State, and Western.
                  ----------------------------
         4.29     ITCC - The income tax component of contribution (ITCC) as
                  ----
                  described in Section 23.4, Income Taxes.
         4.30     Leased Lands - As defined in Section 5.19 of the Co-Tenancy
                  ------------
                  Agreement.
         4.31     Operating Agent - The Party that is appointed pursuant to
                  ---------------
                  Section 8, Operating Agent, hereof.

                                      6



         4.32     Operating Agreement - The Four Corners Project Operating
                  -------------------
                  Agreement, between APS, EPE, PNM, SRP, SCE, and TEP; dated
                  March 1, 1967, as amended from time to time.
         4.33     Operating Emergency - An unplanned event or circumstance which
                  -------------------
                  reduces or may reduce the amount of power and energy that
                  could otherwise be scheduled by the Parties or any third party
                  interconnected at the Enlarged Switchyard.
         4.34     Operating Work - Labor and material necessary for the
                  --------------
                  operation and maintenance of the Enlarged Switchyard
                  including, but not limited to: engineering, contract
                  preparation, purchasing, repair, removal, disposition,
                  restoration, supervision, recruitment, expediting, inspection,
                  accounting, testing, protection, use, management, replacement,
                  retirement, reconstruction, material and supplies, inventory
                  purchases, emergency spare parts, training expenses,
                  operation, maintenance, and any maintenance work necessitated
                  by an Operating Emergency. Operating Work shall not include
                  the design and construction of capital improvements to the
                  Enlarged Switchyard.
         4.35     RUS - United States Department of Agriculture, Rural Utilities
                  ---
                  Service (formerly known as Rural Electrification
                  Administration, REA) or any successor organization. Under the
                  authority of the Rural Electrification Act of 1936, RUS
                  provides capital to electric utilities, through direct loans
                  and loan guarantees, to upgrade, expand, maintain, and replace
                  electric facilities to serve customers in rural areas. The
                  United States, through RUS, is a noteholder of Tri-State. RUS
                  Rules and Regulations and loan documents between RUS and
                  Tri-State provide authority for RUS to review and approve
                  certain Tri-State contracts. The terms of the Amended and
                  Consolidated Loan Contract between Tri-State and RUS, dated
                  November 13, 2001, requires submission by Tri-State of this
                  Agreement for RUS approval.
         4.36     Shiprock-Four Corners Transmission Line - The 345-kV
                  ---------------------------------------
                  transmission line, owned by Western, between the Shiprock
                  Substation, located at Shiprock, New Mexico, and Four Corners
                  Project as defined in Section 5.15 of the Co-Tenancy
                  Agreement. The transmission line is presently operated at
                  230-kV by Western and will be connected to the 345-kV
                  Switchyard pursuant to this Agreement and, thereafter, will be
                  operated at 345-kV.
         4.37     Shiprock Substation - A substation, owned and operated by
                  --------------------
                  Western, located near Shiprock, New Mexico.
         4.38     Switchyard Addition - An addition to the 345-kV Switchyard
                  -------------------
                  constructed, owned, operated, and maintained by APS, as shown
                  in Exhibit 1, Enlarged Switchyard Diagram, attached hereto.

                                      7



         4.39     Willful Action
                  --------------
                  4.39.1   Action taken or failed to be taken by a Party at the
                           direction of its directors, members of its governing
                           bodies, officers or employees having management or
                           administrative responsibility affecting its
                           performance under this Agreement, which action is
                           knowingly or intentionally taken or failed to be
                           taken with conscious indifference to the consequences
                           thereof or with intent that injury or damage would
                           result or would probably result therefrom.
                  4.39.2   Action taken or failed to be taken by a Party at the
                           direction of its directors, members of its governing
                           bodies, officers or employees having management or
                           administrative responsibility affecting its
                           performance under this Agreement, which action has
                           been determined by final arbitration award or final
                           judgment or judicial decree to be a material default
                           under this Agreement and which occurs or continues
                           beyond the time specified in such arbitration award
                           or judgment or judicial decree for curing such
                           default or, if no time to cure is specified therein,
                           occurs or continues thereafter beyond a reasonable
                           time to cure such default.
                  4.39.3   Action taken or failed to be taken by a Party at the
                           direction of its directors, members of its governing
                           bodies, officers, or employees having management or
                           administrative responsibility affecting its
                           performance under this Agreement, which action is
                           knowingly or intentionally taken or failed to be
                           taken with the knowledge that such action taken or
                           failed to be taken is a material default under this
                           Agreement.
                  4.39.4   The phrase "employees having management or
                           administrative responsibility" as used herein means
                           employees of a Party who are responsible for one or
                           more of the executive functions of planning,
                           organizing, coordinating, directing, controlling, and
                           supervising such Party's performance under this
                           Agreement; provided however, that with respect to
                           employees of the Operating Agent, such phrase shall
                           refer only to: i) the senior employee of the
                           Operating Agent who is responsible for the operation
                           of the Interconnection Facilities, and ii) anyone in
                           the organizational structure of the Operating Agent
                           between such senior employees and an officer of the
                           Operating Agent.
                  4.39.5   For purposes of this Section 4.39, the term "Party"
                           means each of the Parties to this Agreement,
                           including the Operating Agent, acting in such
                           capacity.
         4.40     Work Liability
                  --------------
                  Except as provided in Section 25.5, Customer Claims, hereof,
                  liability of one or more

                                      8



                  Parties for damages suffered by anyone other than a Party,
                  whether or not resulting from the negligence or Willful Action
                  of any Party, its directors, members of its governing bodies,
                  officers, employees, or any other person or entity whose
                  negligence or Willful Action could be imputed to such Party,
                  resulting from the:
                               i)     design, construction, use, maintenance, or
                                      ownership of the Interconnection
                                      Facilities; or,
                               ii)    performance or non-performance of
                                      Operating Work directly related to the
                                      Interconnection Facilities or the making
                                      of Capital Improvements.

5.       EFFECTIVE DATE AND TERMINATION
         ------------------------------
         5.1      Effective Date - Except for this Section 5.1, Effective Date,
                  --------------
                  through and including Section 5.6, Termination Date, and
                  Section 33, Approvals, hereof, which shall become effective
                  when this Agreement is duly executed by and delivered to all
                  Parties hereto, pursuant to Section 37.2, Execution And
                  Delivery, hereof; this Agreement shall become effective upon
                  RUS approval without modification or condition and acceptance
                  for filing by FERC without modification or condition.
         5.2      FERC Acceptance and RUS Approval Without Conditions or
                  ------------------------------------------------------
                  Modifications - This Agreement shall be subject to acceptance
                  -------------
                  for filing by FERC without conditions or modifications and
                  approval by RUS without conditions or modifications. If so
                  accepted by FERC, Operating Agent shall provide copies of such
                  notice of acceptance to the other Parties within fourteen (14)
                  calendar days after the date of the FERC order. If so approved
                  by RUS, Tri-State shall provide a copy of the letter or other
                  communication relating to such acceptance from RUS to the
                  other Parties within fourteen (14) calendar days after receipt
                  by Tri-State. Operating Agent shall set forth such FERC notice
                  and such RUS communication in Appendix A, FERC Order and RUS
                  Approval, attached hereto.
         5.3      FERC Acceptance and RUS Approval With Conditions or
                  ---------------------------------------------------
                  Modifications - If FERC orders a hearing to determine whether
                  -------------
                  this Agreement is just and reasonable and, after such hearing,
                  requires modifications of, or conditions to, any of the terms,
                  conditions, rates or charges, or if FERC accepts the Agreement
                  for filing but requires modifications of or conditions to any
                  of the terms, conditions, rates, or charges, Operating Agent
                  shall provide notice of such action by FERC to the other
                  Parties within seven (7) calendar days after the date of the
                  FERC order. If RUS requires modification of or conditions to
                  any of the terms, conditions, rates or charges, Tri-State
                  shall provide notice of such action by RUS to the other
                  Parties within seven (7) calendar days after the date of the
                  RUS notification.

                                      9



         5.4      Parties' Acceptance - If no Party takes exception to the FERC
                  -------------------
                  or RUS actions within fourteen (14) calendar days after the
                  postmark date of the notice provided pursuant to Section 5.3,
                  FERC Acceptance and RUS Approval With Conditions or
                  Modifications, hereof, this Agreement shall continue to be
                  effective and the FERC and/or RUS-ordered modifications and
                  conditions shall become a part of this Agreement. Operating
                  Agent shall attach the FERC order and the RUS communication as
                  Appendix A. The Parties shall amend the Agreement as necessary
                  to comply with the ordered modifications and the Operating
                  Agent shall re-file the amended Agreement with FERC and
                  Tri-State shall re-file the amended Agreement with RUS.
         5.5      Non-Acceptance by a Party - Any Party or Parties which takes
                  -------------------------
                  exception to the FERC and/or RUS modifications or conditions
                  shall, within fourteen (14) calendar days after the postmark
                  date of the notice provided pursuant to Section 5.3, FERC
                  Acceptance and RUS Approval With Conditions or Modifications,
                  hereof, give notice to all the other Parties of such
                  exception. In such event, the Parties shall promptly commence
                  good faith negotiations to amend this Agreement in a manner
                  acceptable to FERC and/or RUS and to provide similar benefits
                  as the initial, executed Agreement to the Parties; provided,
                  however, that if no such amendment is duly executed by all
                  Parties within sixty (60) calendar days after the postmark
                  date of the written notice of exception, or any extension
                  thereof as may be agreed to by the representatives of all the
                  Parties, this Agreement shall terminate upon the expiration of
                  such time period and become null and void except with respect
                  to Section 33.2, Fees, hereof, such fees shall survive the
                  termination of this Agreement until satisfied.
         5.6      Termination Date - This Agreement shall terminate upon the
                  ----------------
                  first of the following events to occur: i) termination of this
                  Agreement as provided in Section 5.5, Non-Acceptance by a
                  Party, hereof; ii) the termination of the Co-Tenancy Agreement
                  or of any successor agreement thereto; iii) failure of the
                  In-Service Date to occur within five (5) years after the
                  effective date of this Agreement or any extension of such five
                  (5) year period as may be agreed to by the representatives of
                  all the Parties; iv) written agreement of all Parties to
                  terminate this Agreement ; or v) termination pursuant to
                  Section 30.4.3 hereof, and upon acceptance of termination by
                  FERC.
         5.7      Notice - As soon as practicable, Operating Agent shall notify
                  ------
                  each Party of the effective date and, upon termination, the
                  termination date.

                                      10



6.       GRANT
         -----
         Subject to the terms and conditions of this Agreement, each Four
         Corners Participant, to the extent of its interest therein, hereby
         grants to each Interconnection Participant the non-exclusive right to:
         i)      Interconnect the Shiprock-Four Corners Transmission Line to the
                 Enlarged Switchyard.
         ii)     Situate the Interconnection Facilities within the Enlarged
                 Switchyard as may be required.
         ii)     Use and benefit from the Common Facilities.

7.       OWNERSHIP
         ---------
         7.1      Interconnection Facilities - The Interconnection Facilities
                  --------------------------
                  shall be owned by APS.
         7.2      345-kV Switchyard - The 345-kV Switchyard and any capital
                  -----------------
                  improvements thereto shall continue to be owned by and remain
                  the property of each Four Corners Participant to the extent of
                  its interest therein, and Interconnection Participants shall
                  have no ownership rights or interest therein except for the
                  use thereof as provided in and during the term of this
                  Agreement.
         7.3      Switchyard Addition - The Switchyard Addition shall continue
                  -------------------
                  to be owned by and remain the property of APS, and
                  Interconnection Participants shall have no ownership rights or
                  interest therein except for the use thereof as provided in and
                  during the term of this Agreement.
         7.4      Designation of Ownership - The designation of ownership of
                  ------------------------
                  facilities by APS, as owner of the Switchyard Addition and
                  Interconnection Facilities, as provided in this Agreement,
                  shall not be construed in any way to limit, interfere with, or
                  impair the respective rights of Four Corners Participants in
                  their sole discretion to interconnect with, operate, maintain,
                  expand, sell or otherwise dispose of the 345-kV Switchyard as
                  they may deem necessary or appropriate, or of APS as owner of
                  the Switchyard Addition, in its sole discretion, to operate,
                  maintain, expand, sell or otherwise dispose of the Switchyard
                  Addition as it may deem necessary or appropriate; provided,
                  however, that the disposition or removal of the
                  Interconnection Facilities will be subject to the terms and
                  conditions of this Agreement.

8.       OPERATING AGENT
         ---------------
         8.1      Operating Agent - Operating Agent for the Interconnection
                  ---------------
                  Facilities shall be the Operating Agent of the Four Corners
                  Project as designated pursuant to the Operating Agreement.
         8.2      Outage - The Operating Agent shall coordinate the duration and
                  ------
                  timing of any scheduled outage(s) of facilities required for
                  installation of the Interconnection Facilities with all

                                      11



                  affected entities at the Enlarged Switchyard. If requested by
                  the Interconnection Participants, Operating Agent will attempt
                  to vary or adjust the timing of the outage(s) to coincide with
                  Interconnection Participants' proposed Construction Schedule.
                  Interconnection Participants shall be responsible, however,
                  for additional costs, if any, excluding lost opportunity
                  costs, incurred by the Four Corners Participants as a direct
                  result of Interconnection Participants' variance request. As
                  part of Operating Agent's response to Interconnection
                  Participants request for a schedule variance, Operating Agent
                  shall provide Interconnection Participants a good faith
                  estimate of the additional costs incurred, if any.
         8.3      Relocation
                  ----------
                  8.3.1    At no cost to the Interconnection Participants in
                           such capacity and with the prior approval of the E&O
                           Committee, Operating Agent may relocate the
                           Interconnection Facilities as necessary to
                           accommodate a new interconnection to the Enlarged
                           Switchyard.
                  8.3.2    With the prior approval of the E&O Committee,
                           Operating Agent may relocate the Interconnection
                           Facilities as necessary to conform to future
                           modifications to the Enlarged Switchyard. If such
                           relocation results in costs for the Four Corners
                           Participants, the Interconnection Participants will
                           be responsible, along with the Four Corners
                           Participants, for their share of such costs based on
                           the CRR as outlined in Section 12 and Exhibit 7
                           hereto.
                  8.3.3    Any costs for relocation of the Shiprock-Four Corners
                           Transmission Line as a result of the relocation of
                           the Interconnection Facilities under this Section
                           8.3, shall be included in the costs of such
                           relocation.
                  8.3.4    In any such relocation, Operating Agent shall act to
                           minimize the duration of any scheduled outages which
                           may be required.
         8.4      Performance - Operating Agent shall perform its duties and
                  -----------
                  responsibilities in accordance with Good Utility Practice, and
                  pursuant to the terms and conditions of this Agreement and the
                  Operating Agreement. In the event any of the terms and
                  conditions of this Agreement conflict with the terms and
                  conditions of the Operating Agreement in regard to Operating
                  Agent's performance of such duties and responsibilities, the
                  terms and conditions of the Operating Agreement shall govern.

9.       COORDINATION AND EXCHANGE OF INFORMATION
         ----------------------------------------
         9.1      As a means of fostering the coordination and exchange of
                  information on a prompt and

                                      12



                  orderly basis, in connection with matters under this
                  Agreement, each Interconnection Participant shall be entitled
                  to have one non-voting representative attend only that portion
                  of the meetings of the E&O Committee relating to Enlarged
                  Switchyard issues. Each Interconnection Participant shall give
                  written notice to Operating Agent of its representative.
                  Operating Agent shall provide timely notification of such
                  E&O Committee meetings to Interconnection Participants'
                  representatives.
         9.2      Each Interconnection Participant shall be entitled to have a
                  non- voting representative attend the portion of any meeting
                  of the E&O Committee which deals with the 345-kV Switchyard,
                  unless the E&O Committee, acting in good faith, elects to go
                  into executive session for any reason. The Operating Agent
                  shall provide to the Interconnection Participants' E&O
                  Committee representatives a copy of the proposed E&O Committee
                  agenda at the same time such agenda is provided to the E&O
                  Committee members.
         9.3      The Operating Agent will act in good faith to keep the
                  Interconnection Participants fully and promptly advised of
                  significant developments in connection with progress,
                  performance, and completion of Construction Work. The
                  Operating Agent will also hold project status meetings,
                  scheduled at least quarterly, for the Interconnection
                  Participants throughout the development and construction of
                  the Interconnection Facilities. At such meetings, the
                  Operating Agent's status report shall include, but not be
                  limited to the following information: progress to date, the
                  delivery status of all equipment ordered, and any
                  determinations made by the Operating Agent regarding
                  recommended changes, if any, to be made to the Construction
                  Budget or Construction Schedule.
         9.4      The Interconnection Participants shall provide all the
                  information requested by the Operating Agent. The Parties will
                  act in good faith to communicate and coordinate information
                  required to ensure the proper design of the Interconnection
                  Facilities in order to assure proper overall system
                  integration.

10.      DESIGN AND CONSTRUCTION
         -----------------------
         10.1     The Operating Agent shall be the project manager for
                  developing and constructing the Interconnection Facilities and
                  shall have authority over Construction Work as provided
                  herein.
         10.2     The Operating Agent will act in good faith to design and
                  construct, or cause to be designed and constructed, the
                  Interconnection Facilities depicted in Exhibit 1 and listed in
                  Exhibit 2 hereto, in accordance with Good Utility Practice.
         10.3     The Operating Agent will act in good faith using Good Utility
                  Practice to:

                                      13



                  10.3.1   Purchase and procure such Apparatus and services as
                           it may deem necessary or useful for the performance
                           and completion of Construction Work, from any source
                           or sources it may select.
                  10.3.2   Negotiate, execute, perform and enforce all
                           construction and service agreements for the
                           Construction Work.
                  10.3.3   Comply with any and all laws applicable to the
                           performance of Construction Work, including without
                           limitation all applicable laws, rules, and
                           regulations for protection of the environment and all
                           applicable provisions of any worker's compensation
                           laws, and the terms and conditions of any contract,
                           permit or license relating to the Interconnection
                           Facilities.
                  10.3.4   Expend the funds advanced to the Operating Agent for
                           the purposes of Construction Work as provided herein.
                  10.3.5   Keep and maintain records of monies received and
                           expended, obligations incurred, credits accrued,
                           estimates of Construction Costs (excluding ad valorem
                           taxes or payments in lieu thereof and allowance for
                           funds used during construction) and contracts entered
                           into in the performance of Construction Work.
                  10.3.6   Obtain or cause to be obtained necessary construction
                           permits, temporary access rights and other licenses
                           and approvals requisite to performing and completing
                           Construction Work.
                  10.3.7   Effect the completion of Construction Work in
                           accordance with Section 8.2 hereof, Exhibit 9,
                           Interconnection Facilities Construction Budget, and
                           Exhibit 12, Construction Schedule, attached hereto.
                  10.3.8   Prepare and distribute a final completion report to
                           the Interconnection Participants as soon as
                           practicable but not later than twelve (12) months
                           after completing Construction Work, unless otherwise
                           agreed.
                  10.3.9   Conduct appropriate tests to verify that specified
                           characteristics of major equipment items have been
                           achieved and, if necessary, make or cause to be made
                           final equipment modifications to meet the specified
                           requirements hereof.
                  10.3.10  Not suffer any liens to remain in effect unsatisfied
                           against the Interconnection Facilities, (other than
                           liens permitted under the Operating Agreement, if
                           any, liens for taxes or assessments not yet
                           delinquent, liens for labor and material not yet
                           perfected, or undetermined charges or liens
                           incidental to the performance of Construction Work);
                           provided, however, that the Operating Agent shall not
                           be required to pay or discharge any such lien as long
                           as the Operating Agent in good

                                      14



                           faith, shall be contesting the same, which contest
                           shall operate during the pendency thereof to prevent
                           the collection or enforcement of such lien so
                           contested.

11.      PAYMENT FOR USE OF COMMON FACILITIES
         ------------------------------------
         On or before the In-Service Date, the Interconnection Participants
         shall make the Common Facilities Use Fee payment to the Operating Agent
         for the accounts of the Four Corners Participants, in accordance with
         the Interconnection Participants' percentages as shown in Exhibit 6.

12.      COST RESPONSIBILITY RATIO
         -------------------------
         12.1     Purpose - The CRR shall be computed as set forth in Exhibit 7,
                  -------
                  Cost Responsibility Ratio, for the purpose of: (i) allocating
                  to the Interconnection Participants a portion of the costs set
                  forth in Section 13 below and the costs of any Work Liability,
                  and (ii) initially determining the Common Facilities Use Fee
                  payment pursuant to Section 11 hereof.
         12.2     Method - The CRR shall be recomputed by the Operating Agent in
                  ------
                  accordance with Exhibit 7, Cost Responsibility Ratio, attached
                  hereto, to reflect the installation of any additional
                  Function(s) in the Enlarged Switchyard and shall be effective
                  upon the date of firm operation thereof. Upon completion of
                  such recomputation, Operating Agent shall revise Exhibit 7
                  and, as soon thereafter as practicable, submit the revised
                  Exhibit 7 for approval pursuant to Section 36.5, Amendments
                  and Revisions to Exhibits, hereof. Within thirty (30) calendar
                  days after obtaining such approval, Operating Agent shall
                  provide copies of the approved Exhibit 7 to the Parties.

13.      ALLOCATION OF COSTS
         -------------------
         Operating Agent shall calculate the costs and expenses of Construction
         Work, operation, maintenance, Capital Improvements, insurance, taxes,
         and Future Breaker Work, including but not limited to overhead
         expenses, applicable labor loading charges, administrative and general
         overhead expenses, all in accordance with Accounting Practice and the
         applicable provisions of the Operating Agreement and exhibits thereto,
         and shall allocate and charge to each Interconnection Participant its
         proportionate share as set forth in Exhibit 6, % - Responsibility For
         Costs, attached hereto, of such costs and expenses as set forth below:
         13.1     Costs of Construction Work - All expenses charged for
                  --------------------------
                  Construction Work.

                                      15



         13.2     Costs of Operating Work
                  -----------------------
                  13.2.1   Operation - Interconnection Participants' CRR share
                           ---------
                           of all expenses charged for operation of the Enlarged
                           Switchyard.
                  13.2.2   Maintenance
                           -----------
                           i)    All expenses charged for maintenance of the
                                 Interconnection Facilities.
                           ii)   Interconnection Participants' CRR share of all
                                 expenses charged for maintenance of the Common
                                 Facilities.
         13.3     Costs of Capital Improvements - All costs charged for Capital
                  -----------------------------
                  Improvements.
         13.4     Common Facilities - Interconnection Participants' CRR share of
                  -----------------
                  all capital improvements to Common Facilities.
         13.5     Costs of Insurance
                  ------------------
                  13.5.1   All expenses of insurance for or allocable to the
                           Interconnection Facilities.
                  13.5.2   Interconnection Participants' CRR share of all
                           expenses of insurance for or allocable to the Common
                           Facilities.
                  13.5.3   Such insurance expenses shall be calculated in
                           accordance with Exhibit 8, Method of Determining
                           Insurance Expenses for Common Facilities.
         13.6     Cost of Future Breaker Work - All costs of Future Breaker Work
                  ---------------------------
                  for the Interconnection Facilities which are not recovered
                  from a third party.

14.      PAYMENT
         -------
         All costs set forth in this Agreement shall be paid as follows:
         14.1     Budget Submittal - Operating Agent shall prepare an initial
                  ----------------
                  budget for the period from the In-Service Date to the end of
                  Operating Agent's fiscal year in which the In-Service Date
                  occurs and an annual budget thereafter for the estimated
                  monthly expenses and costs allocated to Interconnection
                  Participants pursuant to Section 13, Allocation of Costs,
                  hereof, and for any other expenses and costs allocated to
                  Interconnection Participants under this Agreement. Operating
                  Agent shall submit such budgets to each Interconnection
                  Participant and to the E&O Committee concurrently with its
                  submittal of other budgets to the E&O Committee pursuant to
                  the Operating Agreement; except, that the initial budget shall
                  be submitted at least ninety (90) calendar days prior to the
                  anticipated In-Service Date.
         14.2     Budget Approval - The budget for the estimated expenses of
                  ---------------
                  Operating Work related to the Interconnection Facilities and
                  any other expenses and costs allocated to Interconnection
                  Participants under this Agreement shall be subject to the
                  approval of the E&O Committee.

                                      16



                  The budget for the estimated costs of Capital Improvements
                  shall be provided to the Interconnection Participants for
                  their review. Operating Agent shall not make any Capital
                  Improvements without prior review by the Interconnection
                  Participants, except: i) in the case of an Operating Emergency
                  pursuant to Section 16.1, 345-kV Switchyard and Switchyard
                  Addition, and Section 16.2, Interconnection Facilities,
                  hereof, or ii) if required by law, regulations or safety
                  concerns applicable to the Enlarged Switchyard. The submittal
                  of the budget to the Interconnection Participants for the
                  estimated expenses of Operating Work and any other expenses
                  and costs allocated to Interconnection Participants under
                  this Agreement shall be for informational purposes only.
         14.3     Invoices
                  --------
                  14.3.1   Not less than forty-five (45) calendar days prior to
                           the date payments are due hereunder to Operating
                           Agent, Operating Agent shall submit invoices to each
                           Interconnection Participant for the expenses and
                           costs allocated to Interconnection Participants
                           pursuant to this Agreement. The initial invoice will
                           cover the month of the In-Service Date plus the
                           following month. Each invoice shall indicate the
                           month in which such expenses and costs are
                           anticipated to be incurred. Payments shall be
                           considered made on the date, and to the extent, that
                           monies are actually received by Operating Agent.
                  14.3.2   As soon as practicable after incurring any costs
                           provided for in this Agreement, a Four Corners
                           Participant shall notify the Operating Agent of such
                           costs and Operating Agent shall submit invoices to
                           the Interconnection Participants as provided in
                           Section 14.3.1.
                  14.3.3   Each Interconnection Participant shall pay or cause
                           to be paid to Operating Agent its proportionate share
                           of amounts invoiced by Operating Agent under this
                           Agreement by the Due Date. Each Interconnection
                           Participant's share of expenses and costs hereunder
                           shall be determined in accordance with Exhibit 6, % -
                           Responsibility For Costs, attached hereto.
                  14.3.4   In the event that the monthly payments made, as
                           projected in the budget, are either less than or
                           greater than the amount of actual monthly costs
                           incurred, the deficiency or excess for that month
                           shall be debited or credited as appropriate, without
                           interest, in the next succeeding monthly invoice
                           after determination of the deficiency or excess;
                           provided, however, that if such adjustment would
                           occur after the termination of this Agreement, the
                           adjustment shall be made by payment to or from
                           Operating Agent, as appropriate.

                                      17



         14.4     Late Payment - Invoiced amounts not paid to Operating Agent on
                  ------------
                  or before the Due Date specified herein, shall bear interest,
                  prorated on a daily basis from the Due Date to the date of
                  payment in full, at a rate specified in 18 CFR
                  [sec].35.19(a)(2)iii.
         14.5     Disputed Charges
                  ----------------
                  14.5.1   If any Interconnection Participant disputes any
                           portion of any amount specified in an invoice, such
                           Interconnection Participant shall provide written
                           notice of such dispute and documentation of the
                           reason for disputing such amount to Operating Agent
                           and to each of the other Interconnection
                           Participants. Notwithstanding such dispute, such
                           Interconnection Participant shall timely pay or cause
                           to be paid its full share of the total payment
                           specified in said invoice.
                  14.5.2   Operating Agent and such disputing Interconnection
                           Participant shall audit the disputed amounts and, if
                           they concur that an underpayment or overpayment has
                           been made, such amount shall be debited or credited
                           without interest to each affected Interconnection
                           Participant in the next succeeding monthly invoice;
                           provided, however, that if such adjustment occurs
                           after the termination of this Agreement, the
                           adjustment shall be made by payment to or from
                           Operating Agent, as appropriate.
                  14.5.3   Disputes about charges not resolved by the audit
                           provided for in Section 14.5.2 above, or by
                           management representatives of the Operating Agent and
                           Interconnection Participants(s) shall be arbitrated
                           as provided in Section 31, Arbitration, hereof,
                           except for Western which is subject to the
                           Alternative Dispute Resolution Act, 5 U.S.C. 571-584.

15.      OPERATING PRINCIPLES
         --------------------
         15.1     Entitlement - Under normal operating conditions, each
                  -----------
                  Interconnection Participant shall have the right to deliver,
                  receive, and exchange power and energy with any Four Corners
                  Participant, or any third party who by agreement with any Four
                  Corners Participant possesses such rights in the Enlarged
                  Switchyard up to an amount equal to its share of the capacity
                  of the Shiprock-Four Corners Transmission Line; provided, that
                  such use shall not interfere with or impair: i) the rights or
                  entitlements of any Four Corners Participant as set forth in
                  Section 24, Capacity Allocation of Switchyard Facilities, of
                  the Operating Agreement, or of any Four Corners Participant in
                  the existing electric transmission lines and switchyard
                  facilities shown in Exhibit 1, Enlarged Switchyard Diagram,
                  attached hereto; or ii) any Four Corners Participant's use of
                  the facilities described in Section 24 of

                                      18



                  the Operating Agreement, or use of the existing electric
                  transmission lines and switchyard facilities connected thereto
                  as shown on Exhibit 1.
         15.2     Curtailment
                  -----------
                  15.2.1   If at any time the facilities described in Section 24
                           of the Operating Agreement, the Switchyard Addition,
                           or any electric transmission line or switchyard
                           facility connected thereto (all as shown on Exhibit
                           1, Enlarged Switchyard Diagram, attached hereto)
                           cannot accommodate the power and energy schedules
                           then existing due to adverse occurrences such as
                           unscheduled power flow, operating emergencies, or
                           abnormal operating conditions (collectively and
                           individually, "Overload Conditions"), Operating Agent
                           shall take whatever action it deems appropriate to
                           relieve such Overload Conditions consistent with Good
                           Utility Practice.
                  15.2.2   If actions taken by the Operating Agent pursuant to
                           Section 15.2.1 are not sufficient to relieve Overload
                           Conditions, then schedules of power and energy,
                           including those of Interconnection Participants,
                           which in the sole judgment of Operating Agent
                           contribute to such Overload Conditions, shall be
                           curtailed upon the request of Operating Agent until
                           such Overload Conditions no longer exist. The Parties
                           shall share the remaining transmission capacity in
                           proportion to each Party's entitlement in the
                           transmission path requiring curtailment. Operating
                           Agent shall limit the request for curtailment to an
                           amount sufficient to relieve the Overload Conditions.
         15.3     Reactive Power - Except as the Parties may otherwise agree,
                  --------------
                  none of the Parties shall be obligated to provide or exchange
                  reactive power with the other Parties. Each Party shall
                  cooperate with the other Parties to minimize the unintended
                  flow of reactive power between their electric utility systems.

16.      OPERATING EMERGENCY
         -------------------
         In the event of an Operating Emergency, the Operating Agent shall take
         any and all steps reasonably necessary and required to terminate the
         Operating Emergency, subject to the provisions of this Section 16.
         16.1     345-kV Switchyard and Switchyard Addition - In the event that
                  -----------------------------------------
                  the Operating Emergency results in the destruction of
                  or damage to the Interconnection Facilities and such
                  destruction or damage impairs the operation of the 345-kV
                  Switchyard and/or Switchyard Addition, Operating Agent shall
                  have the authority to expend, in its sole discretion,

                                      19



                  whatever funds are necessary to repair, restore or reconstruct
                  the damaged or destroyed Interconnection Facilities to the
                  extent necessary to restore the operation of the 345-kV
                  Switchyard and/or Switchyard Addition to substantially the
                  same general condition as existed prior to the Operating
                  Emergency. Each Interconnection Participant shall be obligated
                  to pay its proportionate share, as determined in accordance
                  with Exhibit 6, % - Responsibility For Costs, attached hereto,
                  of the costs of such repair, restoration or reconstruction as
                  soon as practicable but not later than set forth in Section
                  14.3, Invoices, hereof.
         16.2     Interconnection Facilities - In the event that the Operating
                  --------------------------
                  Emergency results in the destruction of or damage to the
                  Interconnection Facilities and such destruction of or damage
                  to the Interconnection Facilities does not impair the
                  operation of the 345-kV Switchyard and/or Switchyard Addition,
                  Operating Agent shall have the authority to expend, in its
                  sole discretion, up to twenty-five thousand dollars ($25,000)
                  to terminate such Operating Emergency. Each Interconnection
                  Participant shall be obligated to pay its proportionate share,
                  as determined in accordance with Exhibit 6, % - Responsibility
                  for Costs, attached hereto, of the costs of such repair,
                  restoration or reconstruction as soon as practicable but not
                  later than set forth in Section 14.3, Invoices, hereof.
         16.3     Notice - After it is determined that an Operating Emergency
                  ------
                  exists, the Operating Agent shall promptly advise the Parties
                  of the occurrence of the Operating Emergency, its nature, the
                  steps taken or to be taken to terminate the Operating
                  Emergency, and a preliminary estimate of the expenditures
                  required to terminate the Operating Emergency.
         16.4     Duties - In the event the Operating Agent determines that the
                  ------
                  estimated amount required to terminate an Operating Emergency
                  which affects the Interconnection Facilities and does not
                  affect the 345-kV Switchyard or Switchyard Addition exceeds
                  the amount which it is authorized to expend, the Operating
                  Agent shall promptly notify the Interconnection Participants
                  and shall call a meeting of the Interconnection Participants
                  to be held not later than five (5) working days following such
                  determination. At such meeting the Operating Agent shall
                  submit the following information:
                  16.4.1   The estimated date when the Operating Emergency which
                           affects the Interconnection Facilities can be
                           terminated.
                  16.4.2   An estimate, prepared in accordance with Accounting
                           Practice, of the costs to terminate the Operating
                           Emergency.
                  16.4.3   The amount of overtime, if any, which would be paid
                           in order to expedite the termination of such
                           Operating Emergency.

                                      20



                  16.4.4   Such other information as may be necessary and
                           required to determine the manner in which such
                           Operating Emergency is to be terminated.
         16.5     Restoration Without Agreement - In the event the
                  -----------------------------
                  Interconnection Participants and Operating Agent are unable to
                  agree on the manner of repair, restoration or reconstruction
                  of the Interconnection Facilities damaged or destroyed as a
                  result of an Operating Emergency, Operating Agent, pending the
                  resolution of such disagreement, shall be authorized to
                  proceed, in its discretion, with any such repair, restoration
                  or reconstruction in accordance with Good Utility Practice.
         16.6     Report - Following the termination of the Operating Emergency,
                  ------
                  the Operating Agent shall submit to the Parties a report
                  containing a summary of the costs incurred and expenditures
                  made in connection with the repair, restoration or
                  reconstruction and such other information as may be required
                  by the Parties.

17.      REMOVAL OF 230-KV SWITCHYARD TERMINATION FACILITIES
         ---------------------------------------------------
         At the time the Shiprock-Four Corners Transmission Line is removed from
         the terminal in the 230-kV Four Corners Switchyard, the Operating Agent
         may elect to remove or cause to be removed, the 230-kV Switchyard
         Termination Facilities. If the Operating Agent elects to remove said
         facilities and the cost of removing such facilities is greater than
         their salvage value, the Interconnection Participants will pay the
         removal costs less the salvage value. If the cost of removing the
         facilities is less than the salvage value, the Interconnection
         Participants will incur no expense whatsoever. If the Operating Agent
         elects not to remove the 230-kV Switchyard Termination Facilities, the
         Interconnection Participants will incur no expense then or in the
         future.

18.      REMOVAL OF INTERCONNECTION FACILITIES
         -------------------------------------
         No later than one-hundred and twenty (120) days after termination of
         this Agreement, unless otherwise mutually agreed, Operating Agent shall
         remove or cause to be removed the Interconnection Facilities, except
         for breaker No. 2036, deliver or cause to be delivered the salvageable
         material and equipment of the Interconnection Facilities to Western on
         behalf of the Interconnection Participants, and restore or cause to be
         restored the site to a clean and neat condition; provided, however,
         that Operating Agent shall repair or cause to be repaired any damage to
         the Enlarged Switchyard caused by such removal. In the event Operating
         Agent removes the Interconnection Facilities pursuant to this Section
         18, each Interconnection Participant shall reimburse, or cause to be
         reimbursed, the Operating Agent for such Interconnection Participant's
         proportionate share (which share shall be determined in accordance

                                      21



         with Exhibit 6, % - Responsibility For Costs, attached hereto) of the
         costs of such removal, disposition, repair, and restoration, except for
         damages caused by Willful Action. Such reimbursement shall be paid to
         Operating Agent on the basis of invoices submitted by Operating Agent
         to each Interconnection Participant pursuant to Section 14.3, Invoices,
         hereof. Costs associated with the disposition of breaker No. 2036 shall
         be negotiated between the Interconnection Participants and APS in its
         capacity as owner of the Switchyard Addition.

19.      SPINNING RESERVES
         -----------------
         Each Interconnection Participant shall provide or cause to be provided,
         maintain or cause to be maintained, or make arrangements for the
         maintenance of, spinning reserves in accordance with the requirements
         of either: i) the Principles of Interconnected Operation for Four
         Corners Project Interconnection Agreement, dated May 12, 1969, as it
         may be subsequently revised (as such is attached to a letter, dated May
         14, 1969, signed by an authorized representative of each Four Corners
         Participant); or ii) the Minimum Operating Reliability Criteria
         approved on March 8, 1994, by the Western Systems Coordinating Council,
         as such may be revised and approved from time to time.

20.      WESTERN SYSTEMS COORDINATING COUNCIL COMPLIANCE
         -----------------------------------------------
         The Parties to this Agreement are members of the Western Systems
         Coordinating Council, or its successor, ("WSCC") and agree to comply by
         the terms and conditions of the WSCC Reliability Criteria Agreement and
         the WSCC Reliability Management Systems Agreement dated June 18, 1999,
         as may be revised and approved from time to time.

21.      SCHEDULING AND DISPATCHING
         --------------------------
         21.1     Procedures - Sixty (60) days prior to the In-Service Date, the
                  ----------
                  Parties shall establish mutually agreeable operating
                  procedures that are in conformance with this Agreement and
                  Good Utility Practice with respect to, among other things,
                  curtailments, transmission losses, scheduling, and dispatching
                  for transactions to be conducted by the Parties at the
                  Enlarged Switchyard and at the Shiprock Substation.
         21.2     Schedules - Each Interconnection Participant desiring to
                  ---------
                  schedule power and energy at the Enlarged Switchyard shall
                  submit or make arrangements to submit hourly schedules and any
                  changes thereto in accordance with procedures to be
                  established pursuant to Section 21.1, Procedures, hereof.
         21.3     230-kV Switchyard Delivery Points - The Parties to any
                  ---------------------------------
                  arrangements which provide for

                                      22



                  power and energy exchanges at the present termination point of
                  the Shiprock-Four Corners Transmission Line in the 230-kV
                  Switchyard or for exchanges between such termination point and
                  the 345-kV Switchyard shall pursue, as expeditiously as
                  possible, revisions appropriate to such arrangements to
                  provide for similar exchanges at the new termination point of
                  the Shiprock-Four Corners Transmission Line in the Enlarged
                  Switchyard as well as for exchanges between such termination
                  point and points in the 230-kV Switchyard.

22.      OTHER AGREEMENT
         ---------------
         Except as otherwise set forth herein, should a conflict affecting only
         Four Corners Participants arise out of an inconsistency between the
         terms and conditions of this Agreement and the terms and conditions of
         the Operating Agreement, the terms and conditions of the Operating
         Agreement shall govern.

23.      TAXES
         -----
         23.1     Assessments - Each Interconnection Participant shall use its
                  -----------
                  best efforts to have any taxing authority imposing any
                  property taxes or other taxes (excluding any sales or use
                  taxes) or assessments on the Interconnection Facilities,
                  impose such taxes or assessments directly upon each
                  Interconnection Participant on the basis of its respective
                  responsibility for such costs as set forth in Exhibit 6,
                  %-Responsibility for Costs.
         23.2     Responsibility - Except as otherwise provided in this Section
                  --------------
                  23, all taxes and assessments (or contributions in lieu
                  thereof) levied against the property interest of any Party
                  shall be the sole responsibility of the Party upon whom said
                  taxes and assessments are levied, unless such taxes and
                  assessments are levied directly upon an individual Party on
                  behalf of any or all of the other Parties, in which case such
                  taxes and assessments shall be the responsibility of such
                  Parties.
         23.3     Taxes Other Than Income Taxes - Each Interconnection
                  -----------------------------
                  Participant shall pay its CRR share of the amount of any
                  federal, state, or local excise, transaction privilege, sales,
                  business activity, gross receipts or similar tax, Navajo
                  Nation taxes, or taxes imposed by any other entity with
                  authority to impose such taxes ("Other Taxes"), incurred by
                  the Four Corners Participants as a result of any payment made
                  by the Interconnection Participants to the Four Corners
                  Participants.
                  23.3.1   If, and in the event that, the New Mexico Taxation
                           and Revenue Department, New Mexico cities or towns,
                           Federal or other governmental units, or the Navajo
                           Nation ("Taxing Entity") issues an assessment or
                           notice of intent to assess (collectively,

                                      23



                           the "Assessment") to any Four Corners Participant for
                           such Other Taxes and any associated interest and
                           penalties:
                               i)     Such assessed Four Corners Participant
                                      shall notify the Operating Agent of such
                                      tax and Operating Agent shall invoice the
                                      Interconnection Participants pursuant to
                                      Section 14.3, Invoices. Each
                                      Interconnection Participant agrees to pay
                                      the same to the Operating Agent and the
                                      assessed Four Corners Participant will
                                      make such payments to the Taxing Entity on
                                      behalf of the Interconnection Participants
                                      and the assessed Four Corners Participant.
                                      The assessed Four Corners Participant
                                      shall have the discretion to make such
                                      payment under protest if requested by the
                                      Interconnection Participant.
                               ii)    Each Interconnection Participant shall
                                      pursue its legal remedies to the extent it
                                      desires, at its own cost and expense and
                                      with counsel and other personnel of its
                                      own choosing. In so doing, the assessed
                                      Four Corners Participant will cooperate
                                      with such Interconnection Participant to
                                      take such action or actions in the
                                      assessed Four Corners Participant's name
                                      whenever the same is required by law or
                                      otherwise appropriate in the
                                      circumstances; provided, however, that no
                                      Interconnection Participant shall take a
                                      position in said action that it knows to
                                      be inconsistent with the interests of the
                                      assessed Four Corners Participant without
                                      the express permission of such Four
                                      Corners Participant. The assessed Four
                                      Corners Participant may, at any time,
                                      withdraw this permission and notify the
                                      Interconnection Participant, applicable
                                      regulatory agency, or court that it has
                                      done so and its reasons for so doing.
                               iii)   Each Interconnection Participant hereby
                                      agrees to reimburse fully the assessed
                                      Four Corners Participant for any tax,
                                      interest, penalty or other cost that may
                                      be found to be due and owing by the
                                      assessed Four Corners Participant as the
                                      result of, or arising out of, the assessed
                                      Four Corners Participant's receipt of its
                                      proportionate share of payment made by
                                      such Interconnection Participant pursuant
                                      to this Section 23.
                               iv)    If any payment of Other Taxes made to a
                                      Four Corners Participant is found to be
                                      excessive or illegal by the appropriate
                                      jurisdictional authority, such excessive
                                      or illegal payment shall be refunded to
                                      the Interconnection Participant upon
                                      notice.

                                      24



         23.4     Income Taxes
                  ------------
                  23.4.1   The Interconnection Participants shall be solely
                           responsible for any income taxes imposed upon any of
                           the Four Corners Participants with respect to the
                           Interconnection Facilities costs and the Common
                           Facilities Use Fees allocated to the Interconnection
                           Participants herein (the "ITCC"). The ITCC
                           percentages are shown on Exhibit 10.
                  23.4.2   The total ITCC, as a component of Interconnection
                           Facilities costs and Common Facilities Use Fees,
                           shall be paid by the Interconnection Participants to
                           the Operating Agent in accordance with Section 14,
                           Payment, herein, and be disbursed to the Four Corners
                           Participants on an annual basis.
                  23.4.3   If an Interconnection Participant believes that all
                           or any portion of any ITCC amount which it pays
                           pursuant to this Agreement is not taxable due to any
                           clarification of or change in law subsequent to the
                           Section 5.1, Effective Date, such Interconnection
                           Participant may notify the Operating Agent and all of
                           the Four Corners Participants of such clarification
                           or change and the basis therefor, and the Parties
                           will act in good faith, including all necessary
                           communication and cooperation, to determine whether
                           such a clarification or change has occurred.

24.      INSURANCE
         ---------
         24.1     Interconnection Facilities - Operating Agent shall procure and
                  --------------------------
                  maintain in force, or cause to be procured and maintained in
                  force, so as to be effective as of the In-Service Date,
                  appropriate insurance coverage on the Interconnection
                  Facilities for liability, property, and surety exposures. Such
                  insurance will be incorporated in or added to the coverages
                  cited under Section 21, Operating Insurance, of the Operating
                  Agreement, and if incorporated or added, Interconnection
                  Participants shall be named as additional insureds to the
                  extent permitted, and entitled to the coverages thereof.
         24.2     Insureds - Interconnection Participants shall be additional
                  --------
                  insureds to the extent permitted under the insurance coverage
                  provided by Operating Agent pursuant to Section 24.1,
                  Interconnection Facilities, hereof.

25.      LIABILITY
         ---------
         25.1     Covenant Not to Execute - Except for any debt resulting from
                  -----------------------
                  any award or judgment rendered pursuant to a disputed charge
                  as provided for in Section 14.5 and including any award or
                  judgment obtained by arbitration under Section 31 and except
                  for any judgment

                                      25



                  debt for damage resulting from Willful Action and except to
                  the extent any judgment debt is collectible from valid
                  insurance provided hereunder and subject to the provisions of
                  Sections 25.2, 25.3, 25.4, 25.5, and 25.6, each Party hereby
                  extends to all other Parties, their directors, members of
                  their governing bodies, officers, and employees its covenant
                  not to execute, levy or otherwise enforce a judgment obtained
                  against any of them, including recording or effecting a
                  judgment lien, for any direct, indirect or consequential loss,
                  damage, claim, cost, charge or expense, whether or not
                  resulting from the negligence of such Party, its directors,
                  members of its governing bodies, officers, employees, or any
                  other person or entity whose negligence would be imputed to
                  such Party from: i) the performance or nonperformance of the
                  obligations of a Party under this Agreement, other than the
                  obligation to pay any monies which have become due under the
                  terms of this Agreement, ii) Operating Work and Construction
                  Work directly related to the Interconnection Facilities, or
                  iii) the making of Capital Improvements.
         25.2     Insurance Proceeds - In the event any insurer providing
                  ------------------
                  insurance in accordance with Section 24, Insurance, hereof,
                  refuses to pay any judgment obtained by a Party against
                  another Party, its directors, members of its governing bodies,
                  officers, or employees, on account of liability referred to in
                  Section 25.1, the Party, its directors, members of its
                  governing bodies, officers, or employees against whom the
                  judgment is obtained shall, at the request of the prevailing
                  Party and in consideration of the covenant given in Section
                  25.1, execute such documents as may be necessary to effect an
                  assignment of its contractual rights against the nonpaying
                  insurer and thereby give the prevailing Party the opportunity
                  to enforce its judgment directly against such insurer. In no
                  event when a judgment debt is collectible from valid insurance
                  provided in accordance with Section 24, Insurance, hereof,
                  shall the prevailing Party execute, levy or otherwise enforce
                  the judgment (including recording or effecting a judgment
                  lien) against the Party, its directors, members of its
                  governing bodies, officers, or employees, against whom the
                  judgment was obtained.
         25.3     Responsibility for Work Liability - Except as provided in
                  ---------------------------------
                  Sections 25.4, 25.5 and 25.6, each Interconnection Participant
                  shall pay its proportionate share, determined in accordance
                  with Exhibit 6, % - Responsibility for Costs, attached hereto,
                  of the costs and expenses, including but not limited to
                  reasonable attorneys' fees, of discharging all Work Liability
                  imposed upon one or more of the Parties for which payment is
                  not made by the insurance provided hereunder.
         25.4     Willful Action - Each Party shall be responsible for any
                  --------------
                  damage, loss, claim, cost, charge

                                      26



                  or expense that is not covered and paid by the insurance
                  provided in accordance with Section 24, Insurance, hereof,
                  and results from its own Willful Action as defined in Section
                  4.39 and such Party shall indemnify and hold harmless the
                  other Parties, their directors, members of their governing
                  bodies, officers and employees from any such damage, loss,
                  claim, cost, charge or expense resulting from such Willful
                  Action.
         25.5     Customer Claims - Except for liability resulting from Willful
                  ---------------
                  Action, which shall be the responsibility of the willfully
                  acting Party, and subject to Section 25.6, any Party whose
                  electric customer shall have a claim or bring an action
                  against any other Party for any death, injury, loss or damage
                  arising out of or in connection with electric service to such
                  customer and caused by the operation or failure of operation
                  of the Enlarged Switchyard or any portion thereof, shall
                  indemnify and hold harmless such other Party, its directors,
                  members of its governing bodies, officers and employees from
                  and against any liability for such death, injury, loss or
                  damage.
         25.6     Limitation of Liability - Except for Willful Action as defined
                  -----------------------
                  in Section 4.39 hereof, and except with respect to claims made
                  by any Four Corners Participant against another Four Corners
                  Participant for which the liability limits set forth below
                  shall not apply hereunder or under the Operating Agreement,
                  the aggregate liability of any Party to all other Parties for
                  its Willful Action not covered by insurance provided in
                  accordance with Section 24, Insurance, hereof, shall be
                  determined as follows:
                  25.6.1   All such liability for damages, losses, claims,
                           costs, charges or expenses of the Operating Agent
                           shall not exceed $10,000,000 per occurrence.
                           Interconnection Participants extend to the Operating
                           Agent, its directors, members of its governing body,
                           officers, and employees, a covenant not to execute,
                           levy or otherwise enforce a judgment against the
                           Operating Agent for any such aggregate liability in
                           excess of $10,000,000 per occurrence.
                  25.6.2   Any claim based on Willful Action must be perfected
                           by filing suit in a court of competent jurisdiction
                           or settled or agreement reached within three years
                           after the Willful Action occurs and is known or
                           should reasonably be known by the claimant. All
                           claims made after such three-year period relating to
                           the same Willful Action shall be barred by this
                           Section 25.6.2. The award to each Interconnection
                           Participant from the Operating Agent shall be
                           determined as follows:  Any Interconnection
                           Participant who successfully files suit and obtains a
                           judgment or settlement for remuneration, shall
                           receive the lesser of (a) its final judgment awarded
                           (or settlement made) or (b) its pro rata share of the
                           $10,000,000

                                      27



                           maximum recovery established in Section
                           25.6.1 hereof, based upon the ratio of the
                           unsatisfied portion of such Interconnection
                           Participant's judgment or settlement to the total
                           unsatisfied portion of all such related judgments
                           and settlements.
         25.7     No Relief of Insurer - The provisions of this Section 25 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 any valid and collectible
                  insurance policies provided in accordance with Section 24,
                  Insurance, hereof.

26.      UNCONTROLLABLE FORCES
         ---------------------
         No Party shall be considered to be in default in the performance of its
         obligations hereunder (other than the obligation of said Party to make
         payment of invoices rendered hereunder) when a delay in or failure of
         performance shall be due to an Uncontrollable Force. The term
         "Uncontrollable Force" shall mean any cause beyond the reasonable
         control of a Party, including but not restricted to failure of or
         threat of failure of facilities, flood, earthquake, storm, fire,
         lightning, epidemic, war, riot, civil disturbance or disobedience,
         labor dispute, labor shortage, fuel shortage, transportation shortage,
         material shortage, sabotage, terrorist acts, regulation or restriction
         imposed by governmental or lawfully established authority, restraint by
         court order or public authority, which by exercise of due diligence
         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 a Party to settle
         any strike or labor dispute in which it may be involved. Any Party
         rendered unable to fulfill any of its obligations hereunder by reason
         of an Uncontrollable Force shall give prompt written notice of such
         fact to the other Parties and shall exercise due diligence to remove
         such inability with all reasonable dispatch.

27.      RELATIONSHIP OF THE PARTIES
         ---------------------------
         The covenants, obligations and liabilities of the Parties are intended
         to be several and not joint or collective and nothing contained herein
         shall ever be construed to create an association, joint venture, trust,
         or partnership, or to impose an association, joint venture, trust or
         partnership covenant, obligation, or liability on or with regard to any
         one or more of the Parties. Each Party shall be individually
         responsible for its own covenants, obligations, and liabilities as
         herein provided. No Party or group of Parties shall be under the
         control of nor shall be deemed to control any other Party or the
         Parties as a group. No Party shall be the agent of nor have a right or
         power to bind any other Party without its express written consent,
         except as expressly provided in this

                                      28



         Agreement.

28.      SUCCESSORS AND ASSIGNS
         ----------------------
         28.1     Binding - This Agreement shall be binding upon and inure to
                  -------
                  the benefit of the Parties and their respective successors and
                  assigns, or purchasers of any interests of the Parties in the
                  Enlarged Switchyard.
         28.2     Notice - In the event any Party makes an assignment of its
                  ------
                  interest in this Agreement, such Party shall provide written
                  notice of the assignment to each of the other Parties in
                  accordance with Section 35, Notices, within thirty (30) days
                  after such assignment becomes effective.
         28.3     Conditions - No assignment of this Agreement or of any
                  ----------
                  interest hereunder by an Interconnection Participant shall
                  relieve the assigning or transferring Interconnection
                  Participant from full liability and financial responsibility
                  for performance under this Agreement unless and until: i) all
                  Four Corners Participants consent in writing thereto, which
                  consent shall not be unreasonably withheld or delayed, and ii)
                  the assignee or transferee agrees in writing and demonstrates
                  financial ability (which may include providing a reasonable
                  form of security consistent with commercial practices) to
                  assume all obligations and duties hereunder of the assigning
                  or transferring Interconnection Participant. The assignee or
                  transferee shall take and acquire such interest subject to all
                  the terms and conditions of this Agreement.

29.      AUDITS
         ------
         29.1     Right - Subject to Section 29.2, Conditions, hereof, each
                  -----
                  Party shall have the right: i) to audit the Operating Agent's
                  records with regard to any costs, payments, settlements, or
                  other supporting information pertaining to this Agreement; and
                  ii) to designate its own representatives to perform such
                  audit. Prior to requesting an audit, the requesting Party
                  shall provide notice to the other Parties of its intent to
                  audit, giving each non-requesting Party a reasonable amount of
                  time to join in such audit. The Parties agree to fully
                  cooperate with any such audit(s).
         29.2     Conditions - Any audit undertaken by a Party or Parties or by
                  ----------
                  the representatives thereof shall: i) be conducted only during
                  Operating Agent's normal business hours; ii) be performed in
                  conformance with generally accepted auditing standards; and
                  iii) be initiated within and be limited to the three (3) year
                  period following the end of the calendar year in which the
                  costs being audited were invoiced. In no event, however, shall
                  Operating Agent

                                      29



                  be audited, pursuant to the provisions of this Agreement,
                  more than once in a calendar year.
         29.3     Costs - All costs and expenses of the auditing Party's or
                  -----
                  Parties' representatives, shall be the sole responsibility of
                  the auditing Party or Parties.
         29.4     Record Retention Period - Operating Agent shall retain all
                  -----------------------
                  necessary records and documents for the three (3) year audit
                  period specified in Section 29.2, Conditions, hereof, or until
                  any audit in progress is completed or until any dispute
                  arising from such audit is resolved, whichever condition
                  requires the longer retention.
         29.5     Notice - Upon completion of any audit conducted hereunder, the
                  ------
                  auditing Party shall promptly make such audit results
                  available to Operating Agent and each Party, and shall notify
                  Operating Agent and each Party in writing of any exception
                  taken as a result of an audit. If Operating Agent and such
                  auditing Party determine that an exception reflects an error
                  in billing, Operating Agent, in the next succeeding monthly
                  invoice(s), shall credit or bill each Party for the amount of
                  such exception, without interest.

30.      DEFAULTS
         --------
         Each Party shall perform all of its duties, obligations, and cost
         responsibilities pursuant to this Agreement. Any payment not made when
         due or any failure to perform any duty or obligation agreed to herein
         shall constitute a default under this Agreement.
         30.1     Payment Default - Upon a failure by any Party to pay any
                  ---------------
                  obligation(s) when due under this Agreement and upon a failure
                  by any Party to make such payment within five (5) business
                  days after receiving written notice from the Operating Agent
                  of such failure to pay, Operating Agent shall, as soon as
                  practicable, give written notice of such payment default to
                  each Party and to each member of the E&O Committee. Upon cure
                  of the default, Operating Agent shall notify each Party and
                  each member of the E&O Committee of such cure.
         30.2     Performance Default - Upon the failure by any Party to perform
                  -------------------
                  any of its duties and obligations under this Agreement, other
                  than a failure to make payment as provided in Section 30.1
                  herein, and upon the failure by any Party to perform such duty
                  or obligation within thirty (30) calendar days after receiving
                  written notice that such performance is due, Operating Agent,
                  as soon as practicable, shall give written notice of such
                  performance default to each Party and to each member of the
                  E&O Committee. If the Operating Agent is in default, any other
                  Party not in default, as soon as practicable, shall give
                  written notice of such performance default to Operating Agent,
                  to each Party, and to each member of the

                                      30



                  E&O Committee. Upon cure of the default, the Party issuing
                  such notice shall notify each Party and each member of the E&O
                  Committee of such cure.
         30.3     Cure of Default - In the event of a default by any Party in
                  ---------------
                  any of the terms and conditions of this Agreement, the
                  defaulting Party shall take all steps necessary to cure such
                  default promptly and completely.
         30.4     Default Remedy
                  --------------
                  30.4.1   If within five (5) business days after receiving
                           written notice of default pursuant to Section 30.1,
                           Payment Default, hereof, or within thirty (30)
                           calendar days after receiving written notice of
                           default of Section 30.2, Performance Default, hereof,
                           the defaulting Interconnection Participant does not
                           cure the default, the non-defaulting Interconnection
                           Participants shall remedy such default either by
                           advancing the necessary funds and/or rendering the
                           necessary service, with each non-defaulting
                           Interconnection Participant contributing to such
                           remedy an equal share of the payment due and owing,
                           or, as otherwise agreed, to cover the default.
                  30.4.2   The defaulting Interconnection Participant shall pay
                           promptly upon demand to each non-defaulting
                           Interconnection Participant the total amount of money
                           and/or the reasonable equivalent in money of
                           non-monetary performance, if any, made by such
                           non-defaulting Interconnection Participant to cure
                           any default by the defaulting Interconnection
                           Participant together with interest on such money
                           and/or the costs of non-monetary performance at the
                           rate of ten percent (10 %) per annum or the maximum
                           rate of interest legally chargeable, whichever is the
                           lesser, from the date of the expenditure of such
                           money and/or the date of completion of such
                           non-monetary performance by each such non-defaulting
                           Interconnection Participant to the date of such
                           reimbursement by the defaulting Interconnection
                           Participant.
                  30.4.3   In the event that one or more Interconnection
                           Participants are in default under this Agreement and
                           the Operating Agent is not reimbursed as provided for
                           in Section 30.4.1 herein, the Operating Agent shall,
                           unless otherwise directed by the E&O Committee: i)
                           discontinue any of the services provided or made
                           available hereunder to such defaulting
                           Interconnection Participant; ii) suspend any right
                           granted to such Interconnected Participant pursuant
                           to Section 15, Operating Principles, hereof;  iii)
                           refuse to resume any such discontinued service and to
                           restore any such suspended right until such default
                           is cured; and iv) the Operating Agent may, as
                           directed by the E&O Committee and upon notice to the

                                      31



                           Interconnection Participants, file a notice of
                           termination with FERC. Such discontinuance of
                           service or suspension of rights shall not relieve
                           such Interconnection Participant of any of its duties
                           or obligations under this Agreement.
                  30.4.4   Any default of the Operating Agent or a Four Corners
                           Participant to perform any obligation or duty owed
                           hereunder shall be deemed to be a default under the
                           Operating Agreement. If such default involves an
                           Interconnection Participant, such Interconnection
                           Participant shall have the right to give written
                           notice of such default to Operating Agent, to each
                           Party, and to each member of the E&O Committee. Such
                           notice of default given to Operating Agent by any
                           Party pursuant to Section 30.2, Performance Default,
                           hereof shall include a statement of the reasons, in
                           such Party's view, that the Operating Agent or Four
                           Corners Participant is in breach of this Agreement
                           and such notice shall be deemed a notice given under
                           Article 28 of the Operating Agreement.

31.      ARBITRATION
         -----------
         The Parties shall make best efforts to settle all disputes arising
         under this Agreement in the normal course of business and without
         recourse to either arbitration or litigation. However, should the
         Parties involved in a dispute agree that the dispute be submitted to
         arbitration, the following shall apply.
         31.1     Any arbitration initiated under this Agreement shall be
                  conducted before a single neutral arbitrator appointed by the
                  Parties. If the Parties fail to agree upon a single arbitrator
                  within ten (10) days of the referral of the dispute to
                  arbitration, each side of the dispute shall choose one
                  arbitrator who shall sit on a three-member arbitration panel.
                  The arbitrators so chosen shall within twenty (20) days select
                  a third arbitrator to chair the arbitration panel. The
                  arbitrators selected shall be knowledgeable in electric
                  utility matters including electric transmission and bulk power
                  issues, WSCC planning and operating criteria and policies, and
                  have no current or past substantial business or financial
                  relationships with any Party to the arbitration, except prior
                  arbitration. Any arbitration shall commence within ninety (90)
                  days of the demand for submission to arbitration.
         31.2     The arbitrator(s) shall have the discretion to establish a
                  discovery and hearing schedule and procedures for arbitration,
                  provided, that the arbitrator(s) adhere, as much as possible,
                  to the rules and practices of the American Arbitration
                  Association. The arbitrator(s) may conduct the arbitration
                  based solely upon the written submittal from the Party(ies) on
                  each

                                      32



                  side of the dispute, which submittals may include a statement
                  of position, an accounting of costs incurred in attempting to
                  remedy an alleged default, and a proposed remedy or action.
                  Within five (5) calendar days after the conclusion of the
                  arbitration hearing, both sides to a dispute shall submit a
                  final proposed arbitration award and the arbitrator(s) shall
                  adopt in full one of the two proposed awards.
         31.3     Unless otherwise agreed, the arbitrator(s) shall render a
                  decision within forty- five (45) days of concluding the
                  arbitration hearing and shall notify the Parties in writing of
                  such decision and the reasons therefor. The arbitrator(s)
                  shall be authorized to interpret and apply the terms of this
                  Agreement but shall have no power to modify or change any of
                  the terms. The decision of the arbitrator(s) shall be final
                  and binding upon the Parties, and judgment on the award may be
                  entered in any court having jurisdiction. The decision of the
                  arbitrator(s) may be appealed solely on the grounds that the
                  conduct of the arbitrator(s), or the decision itself, violated
                  the standards set forth in the Federal Arbitration Act and/or
                  the Administrative Dispute Resolution Act.
         31.4     Each Party to the dispute shall be responsible for its own
                  costs incurred during the arbitration process and for the
                  following costs if applicable: i) the cost of the arbitrator
                  chosen to sit on the three-member panel and one-half of the
                  cost of the third arbitrator chosen; or ii) one half the cost
                  of the single arbitrator jointly chosen by the Parties to the
                  dispute.

32.      NONDEDICATION OF FACILITIES
         ---------------------------
         The Parties do not intend to dedicate and nothing in this Agreement
         shall be construed as constituting a dedication by any Party of its
         properties or facilities, or any part thereof, to any other Party or to
         the customers of any Party.

33.      APPROVALS
         ---------
         33.1     Approvals - Each Party agrees to cooperate to obtain any state
                  ---------
                  or federal approvals necessary for the full participation of
                  any Party in the rights and obligations of this Agreement.
                  Each Party hereto covenants that it shall support the terms
                  and conditions of this Agreement in any hearings before FERC
                  or any other competent body to whose jurisdiction this
                  Agreement may be subject.
         33.2     Fees - As soon as practicable after filing this Agreement with
                  ----
                  FERC, and from time to time thereafter, if required, Operating
                  Agent shall submit a written invoice to each Interconnection
                  Participant for its pro-rata share, determined in accordance
                  with Exhibit 6,

                                      33



                  % - Responsibility For Costs, attached hereto, for all costs,
                  including but not limited to all filing fees and regulatory
                  charges and, attorney and other fees or other costs incurred
                  by the Operating Agent as a result of this Agreement. Each
                  Interconnection Participant shall pay or cause to be paid such
                  amount to Operating Agent within sixty (60) days after its
                  receipt of such invoice.
         33.3     Regulatory Filings
                  ------------------
                  33.3.1   Nothing contained in this Agreement shall be
                           construed as affecting in any way the right of a
                           Party to unilaterally make application to FERC for a
                           change in rates, charges, terms, conditions,
                           classification of service, or any rule, regulation or
                           agreement related thereto, under Section 205 of the
                           Federal Power Act or any successor statute and
                           pursuant to FERC rules and regulations promulgated
                           thereunder.
                  33.3.2   Nothing contained in this Agreement shall be
                           construed as affecting in any way the ability of any
                           Party receiving service hereunder to exercise its
                           rights under the Federal Power Act or any successor
                           statute and pursuant to FERC rules and regulations
                           promulgated thereunder.

34.      GOVERNING LAW AND VENUE
         -----------------------
         This Agreement shall be interpreted in accordance with the substantive
         laws of the State of New Mexico and procedural laws of the State of New
         Mexico or the United States, whichever is applicable. Any action at law
         or judicial proceeding instituted by any Party relating to this
         Agreement shall be instituted only in the state or federal courts of
         the State of New Mexico, unless otherwise agreed to by all of the
         Parties involved in such action.

35.      NOTICES
         -------
         35.1     Recipients - Except as set forth in Section 35.2, any legal
                  ----------
                  notice or communication required by this Agreement shall be in
                  writing, and shall be served, given, made, or delivered in
                  person or sent by facsimile, overnight courier, registered or
                  certified mail, postage prepaid or e-mail notification with
                  either e-mail or telephonic confirmation, to the persons
                  specified below:

                                      34



                  Arizona Public Service Company
                  Attn: Secretary
                  Mail Station 9046
                  P. O. Box 53999
                  Phoenix, Arizona 85072-3999

                  El Paso Electric Company
                  Attn: Secretary
                  P.O. Box 982
                  El Paso, Texas  79960-0982

                  Public Service Company of Colorado
                  Attn: Manager Transmission Operations West
                  P.O. Box 1078
                  Golden, CO 80402-1078

                  Public Service Company of New Mexico
                  Attn:  Secretary
                  Alvarado Square
                  Albuquerque, New Mexico  87158

                  Salt River Project Agricultural Improvement
                    and Power District
                  Attn:  Secretary
                  P.O. Box 52025
                  Phoenix, Arizona  85072-2025

                                      35



                  Southern California Edison Company
                  Attn:  Secretary
                  P.O. Box 800
                  Rosemead, California  91770

                  Tri-State Generation and Transmission Association, Inc.
                  Attn: Executive Vice President and General Manager
                  P.O. Box 33695
                  Denver, Colorado  80233

                  Tucson Electric Power Company
                  Attn:  Secretary
                  P.O. Box 711
                  Tucson, Arizona  85702

                  The United States of America
                  Western Area Power Administration
                  Colorado River Storage Project Management Center
                  Attn: CRSP Manager
                  P.O. Box 11606
                  Salt Lake City, Utah  84147

         35.2     Routine Communication - Communications of a routine nature
                  ---------------------
                  involving requests for funds and related matters shall be
                  given in a manner consistent with the arrangements as
                  established by the E&O Committee.
         35.3     Change of Designation - Any Party may, at any time, by written
                  ---------------------
                  notice to all other Parties, designate different or additional
                  persons or different addresses for the giving of notices
                  hereunder.

                                      36



36.      GENERAL PROVISIONS
         ------------------
         36.1     Severability - In the event that any term, covenant or
                  ------------
                  condition of this Agreement, or the application of any such
                  term, covenant or condition, shall be held invalid as to any
                  person or circumstance by any court, agency, or entity having
                  jurisdiction in the premises, the Parties agree that the same
                  shall not affect the validity of this Agreement as a whole, or
                  any part of the Agreement other than the term, covenant, or
                  condition held invalid, and the Parties agree to substitute
                  for the invalid term, covenant, or condition a valid term,
                  covenant, or condition which most closely approximates the
                  economic effect and intent of the invalid term, covenant, or
                  condition.
         36.2     Third Party Rights - Except as otherwise specifically provided
                  ------------------
                  in this Agreement, the Parties do not intend to create rights
                  in or to grant remedies to any third party as a beneficiary of
                  this Agreement or of any duty, covenant, obligation or
                  undertaking established herein.
         36.3     Waiver - No delay in exercising any right or remedy shall
                  ------
                  constitute a waiver unless such right or remedy is waived in
                  writing signed by the waiving Party. Any waiver at any time by
                  any Party of its rights with respect to a default or any other
                  matter arising in connection with this Agreement shall not be
                  construed or deemed a waiver with respect to any other right
                  or remedy or any subsequent default or matter whether of a
                  similar or different nature.
         36.4     Survival of Obligations and Liabilities - The termination of
                  ---------------------------------------
                  this Agreement shall not relieve any Party of its obligations,
                  duties, requirements, or rights under this Agreement incurred,
                  or vested prior to termination of this Agreement or which,
                  pursuant to the terms hereof, must be fulfilled after the date
                  of termination of this Agreement.
         36.5     Amendments and Revisions to Exhibits - This Agreement shall
                  ------------------------------------
                  only be modified by an amendment signed by all Parties. The
                  exhibits may be revised by the Operating Agent as provided in
                  this Agreement; subject, however, to the approval of the E&O
                  Committee and Interconnection Participants, which approval
                  shall not be unreasonably withheld.
         36.6     Environmental Compliance - Facilities installed under this
                  ------------------------
                  Agreement by Operating Agent shall be constructed, operated,
                  maintained, replaced, and removed subject to compliance with
                  applicable laws, executive orders, and regulations including
                  without limitation, the National Environmental Policy Act of
                  1969, as amended, 36 CFR 800, and the Archeological Resources
                  Protection Act of 1979.
         36.7     Contingent Upon Appropriations - Where activities provided for
                  ------------------------------
                  in this Agreement extend beyond the current fiscal year,
                  continued expenditures by Western are contingent upon

                                      37



                  Congress making the necessary appropriations required for the
                  continued performance of Western's obligations under this
                  Agreement. In case such appropriation is not made, the other
                  Parties hereby release Western from its contractual monetary
                  obligations and from all liability due to the failure of
                  Congress to make such appropriation; provided, that PSCO and
                  Tri-State shall assume the obligations and responsibilities of
                  Western under this Agreement and will be entitled to Western's
                  beneficial interests under this Agreement to the extent and
                  for as long as Western does not receive such appropriations,
                  provided further that PSCO and Tri-State agree to permit
                  Western the continued use of the Interconnected Facilities to
                  meet Western's contractual obligations at the Enlarged
                  Switchyard subject to an appropriate facility use charge.
         36.8     Equal Opportunity Employment Practices - Except as provided in
                  --------------------------------------
                  Title 42 U.S.C. [sec].2000e-2(i) and in keeping with any
                  obligation undertaken by any of the non-Federal Participant
                  who may be acting as the Operating Agent, or their assigns,
                  pursuant to the terms of said Title 42 U.S.C. [sec].2000e-2(i)
                  to give preference for employment to qualified Indians for
                  work on or near an Indian Reservation, during the performance
                  of this Agreement, the Operating Agent agrees to abide by
                  Section 202 of Executive Order No. 11246, 43 Fed. Reg. 46501
                  (1978), which is incorporated into this Agreement by this
                  reference, which provides, among other things that Operating
                  Agent will not discriminate against any employee or applicant
                  for employment because of race, color, religion, sex, national
                  origin, age, or disability.
         36.9     Use of Convict Labor - Operating Agent agrees not to employ
                  --------------------
                  any person undergoing sentence of imprisonment in performing
                  the contract except as provided by 18 U.S.C. 4082(c)(2) and
                  Executive Order 11755, December 29, 1973.

37.      EXECUTION
         ---------
         37.1     Execution by Counterparts - This Agreement may be executed in
                  -------------------------
                  any number of counterparts, and upon execution of this
                  Agreement by all Parties, the executed counterparts together
                  shall have the same force and effect as an original instrument
                  and as if all Parties had signed the same instrument. Any
                  signature page of this Agreement may be detached from any
                  counterpart hereof without impairing the legal effect of any
                  signature thereon, and may be attached to another counterpart
                  of this Agreement identical in form hereto but having attached
                  to it one or more signature pages.
         37.2     Execution and Delivery - As soon as practical after all of the
                  ----------------------
                  Parties have reached agreement as to the terms and conditions
                  of this Agreement, Operating Agent shall

                                      38



                  distribute a copy of this Agreement with a full set of
                  signature pages to each Party. Within a reasonable period of
                  time after receipt, each Party shall execute each of its
                  signature pages and promptly return same to Operating Agent.
                  Immediately upon receipt of all signature pages from all the
                  other Parties, Operating Agent shall: i) execute its signature
                  pages and fill in the effective date in Section 5.1, Effective
                  Date, hereof, with the date on which Operating Agent executes
                  such signature pages, and ii) send to each Party a) by
                  telecopy, a complete set of signature pages, b) by express
                  mail, a copy of the Agreement, including a full set of
                  original signature pages, and iii) file this Agreement with
                  FERC pursuant to Section 5.1. Immediately upon receipt of a
                  copy of the executed Agreement, Tri-State shall, at its own
                  expense, submit this Agreement for RUS approval.

38.      SIGNATURE CLAUSE
         ----------------
         The signatories hereto represent that they have been appropriately
         authorized to enter into this Agreement on behalf of the Party for whom
         they sign.

                                ARIZONA PUBLIC SERVICE COMPANY

                                SIGNATURE _______________________________

                                NAME ____________________________________

                                TITLE ___________________________________

                                DATE SIGNED _____________________________
                                                       "APS"

                                EL PASO ELECTRIC COMPANY

                                SIGNATURE _______________________________

                                NAME ____________________________________

                                TITLE ___________________________________

                                DATE SIGNED _____________________________
                                                       "EPE"

                                      39



                                PUBLIC SERVICE COMPANY OF COLORADO

                                SIGNATURE _______________________________

                                NAME ____________________________________

                                TITLE ___________________________________

                                DATE SIGNED _____________________________
                                                      "PSCO"

                                PUBLIC SERVICE COMPANY OF NEW MEXICO

                                SIGNATURE _______________________________

                                NAME ____________________________________

                                TITLE ___________________________________

                                DATE SIGNED _____________________________
                                                       "PNM"

                                SALT RIVER PROJECT AGRICULTURAL
                                IMPROVEMENT AND POWER DISTRICT

                                SIGNATURE _______________________________

                                NAME ____________________________________

                                TITLE ___________________________________

                                DATE SIGNED _____________________________
                                                       "SRP"

                                SOUTHERN CALIFORNIA EDISON COMPANY

                                SIGNATURE _______________________________

                                NAME ____________________________________

                                TITLE ___________________________________

                                DATE SIGNED _____________________________
                                                       "SCE"

                                      40



                                TRI-STATE GENERATION AND
                                TRANSMISSION ASSOCIATION, INC.

                                SIGNATURE _______________________________

                                NAME ____________________________________

                                TITLE ___________________________________

                                DATE SIGNED _____________________________
                                                    "TRI-STATE"

                                TUCSON ELECTRIC POWER COMPANY

                                SIGNATURE _______________________________

                                NAME ____________________________________

                                TITLE ___________________________________

                                DATE SIGNED _____________________________
                                                       "TEP"

                                THE UNITED STATES OF AMERICA
                                WESTERN AREA POWER ADMINISTRATION

                                SIGNATURE _______________________________

                                NAME ____________________________________
                                     CRSP Manager
                                     CRSP Management Center

                                DATE SIGNED _____________________________
                                                     "WESTERN"

                                      41



                                   APPENDIX A

                          FERC ORDER AND RUS APPROVAL

                                      FOR

                        SHIPROCK - FOUR CORNERS PROJECT
                               345-KV SWITCHYARD
                           INTERCONNECTION AGREEMENT

                                      A-1



                                   EXHIBIT 1

                                                          APS Contract No. 51999

                          ENLARGED SWITCHYARD DIAGRAM

                         Shiprock-Four Corners Project
                                345kV Switchyard
                           Interconnection Agreement

PacifiCorp / Pinto

                                                                                   
                                           230/345kV         230/345kV                        345/500kV
                                          Transformer       Transformer     Unit 4           Transformer

                                                POS 1              POS 3             POS 5           POS 7




                                                                                                      Enlarged
                                                                                                     Switchyard



                       Breaker No. 2036


                           Interconnection
                              Facilities
                          (Ownership - APS
                               100%)


                                                                                                       345kV
                                                                                                     Switchyard




                                                POS 2              POS 4             POS 6           POS 8

                                            APS / Cholla        APS / Cholla    PNM / West Mesa  PNM / San Juan

                   Switchyard Addition                                                         Ownership
                                                                                               ---------
Western / Shiprock     Ownership -        - Existing Breakers                   APS        40.23%      PNM       22.62%
                        APS 100%                                                SCE        12.00%      SRP       10.00%
                                                                                EPE        10.50%      TEP        4.65%



                                      E1-1



                                    EXHIBIT 2

                           INTERCONNECTION FACILITIES
                           --------------------------

The Interconnection Facilities shall be comprised of the items described below:

1.     Dead end structures, poles, and associated equipment.

2.     One (1) new 345-kV circuit breaker, one-half (1/2) of existing breaker
       2036, two (2) 345-kV disconnect switches, one (1) set of three (3)
       current transformers, and one (1) set of three (3) metering quality phase
       coupling voltage transformers.

3.     Insulators, bus jumpers, conductors, and associated hardware.

4.     Protective equipment, metering, and control, monitoring and communication
       equipment.

5.     Site preparation which consists of foundations, trenches, conduit and
       grounding.

6.     345-kV conductors from their points of attachment on Western's dead end
       structure to the take-off structure in the 345-kV Switchyard.

7.     Any Capital Improvements as may be added to the foregoing from time to
       time.

                                      E2-1



                                  EXHIBIT 3

                           COMMON FACILITIES COSTS
                           -----------------------



                                             ORIGINAL SWITCHYARD                         SWITCHYARD ADDITION
                                           COMMON FACILITIES PAID                     COMMON FACILITIES PAID
                                               FOR AND OWNED BY                           FOR AND OWNED BY
                                           FOUR CORNERS PARTICIPANTS                   ARIZONA PUBLIC SERVICE
                                               INSTALLED - 1995                           INSTALLED - 1995
                                           -------------------------                  ------------------------

                                                                                                  
COLUMN                                              (1)                                          (2)

COMMON FACILITIES
- -----------------

LAND                                             LEASED                                      LEASED
YARD LIGHTING                                    $     9,869                                 $   14,900
SITE & YARD WORK                                 $    46,683                                 $  100,765
FENCES & GATES                                   $     6,802                                 $    5,863
CONTROL HOUSE                                    $    58,147                                 $        0
MAIN TRANSF & STRUCTURE                          $   786,565                                 $        0
BUS CONDUCTOR                                    $    89,441                                 $   25,749
DISCONNECT SWITCHES                              $   335,399                                 $        0
BATTERY                                          $    95,829                                 $        0
CONTROL & RELAYS                                 $   441,173                                 $        0
CONNECTION & SUPPORT                             $   548,131                                 $  157,805
CARRIER CURRENT & PW PROTECT                     $   365,409                                 $        0
COMMUNICATION EQUIPMENT                          $   425,270                                 $  143,178

                                                                                                            TOTAL

DIRECT COST (A)                                  $ 3,208,718                                 $  448,260     $ 3,656,978 (3)


NOTES:
- ------

1.  Direct costs for column (1) facilities are actual and taken from APS' final
      cost report dated July 1994, plus subsequent project work orders.

2.  Direct costs for column (2) facilities are actual and taken from APS' final
      cost project work orders from the years 1981 through 1994.

3.  Does not include AFUDC

                                      E3-1



                                    EXHIBIT 4

                      ALLOCATION OF COMMON FACILITIES COSTS
                      -------------------------------------

            ALLOCATION OF ENLARGED SWITCHYARD COMMON FACILITIES COSTS



- --------------------------------------------------------------------------------------------------------------------------
Entity:                                 APS          SCE          EPE           PNM          SRP          TEP
- --------------------------------------------------------------------------------------------------------------------------
                                                                                                
1.  Original 345-kV Switchyard
    --------------------------

Responsibility for Costs - %              40.23 %      12.00 %      10.50 %     22.62 %     10.00 %        4.65 %    (1)

Direct Cost = (1) x (A1, Exhibit 3)     $1,290,867   $ 385,046    $336,915   $ 725,812    $ 320,872     $ 149,205    (2)

AFUDC $           (2) x 0.02 =          $  25,817    $   7,701    $  6,738   $  14,516    $   6,417     $   2,984    (3)

                  Subtotals             $1,316,684   $ 392,747    $ 343,653  $ 740,328    $ 327,289     $ 152,189    (4)

2.  Switchyard Addition
    -------------------

Responsibility for Costs - %                 100 %         0 %          0 %        0 %          0 %           0 %    (5)

Direct Cost = (5) x (A2, Exhibit 3)     $ 448,260    $     0      $     0    $     0      $     0       $     0      (6)

AFUDC $           (6) x 0.0163 =        $   7,307    $     0      $     0    $     0      $     0       $     0      (7)

                  Subtotals             $ 455,567    $     0      $     0    $     0      $     0       $     0

                                                                                                                     Total (8)
Total Cost of
Common Facilities
= (2) + (3) + ( 6) + ( 7)               $1,772,251   $ 392,747    $ 343,653  $ 740,328    $ 327,289     $ 152,189   $3,728,457


Notes
- -----

(1) - from Section 7.2, Co-tenancy Agreement

(3) - AFUDC Estimated at 2 %

(7) - 1.63 % AFUDC Based on APS' Records

(8) - Total Common Facilities Costs to be allocated to the Interconnection
      Participants (See Exhibit 5)

                                      E4-1



                                    EXHIBIT 5

                    CALCULATION OF COMMON FACILITIES USE FEE
                    ----------------------------------------

1.   Total Common Facility Costs                                $ 3,728,457

2.   Common Facilities
     Cost Allocated
     to Interconnection   (1) X (CRR)                           $   372,846



- ----------------------------------------------------------------------------------------------------------------------
Interconnection Participant                           Western                   PSCO                  Tri-State
- ----------------------------------------------------------------------------------------------------------------------
                                                                                              
3.   Responsibility                                      50 %                     25 %                    25 %

4.   Capital Charge
             (2) X (3)                                $ 186,423                $  93,211               $  93,211

5.   Gross Receipts Tax
              @ 5.75% of (4)                          $  10,719                $   5,360               $   5,360

6.   One Time Charges
             (4) + (5)                                $ 197,142                $  98,571               $  98,571
                                                      ---------                ---------               ---------

                                                     Total (SIGMA) (6) =       $ 394,284


NOTES:

        CRR = 10 % (See Exhibit 7)

        (1) = Total Cost from Exhibit 4

        (5) = Gross Receipts Tax may change from time to time

                                      E5-1



                                    EXHIBIT 6

                           %-RESPONSIBILITY FOR COSTS
                           --------------------------

Each Interconnection Participant's percent responsibility for costs and expenses
that are allocable, reasonable and allowable and allocated to it under this
Agreement shall be as follows: Western 50%, PSCO 25%, and Tri-State 25%.

Notes
- -----
The following definitions are applicable to the costs as described above.
1.      Allowable:
        ---------
        A cost is allowable if it is determined to be reasonable, allocable, or
        allowable under this Agreement and the FERC Accounts and is pursuant to
        Standard Accounting Principles.

2.      Reasonable:
        ----------
        A cost is reasonable if, in its nature and amount, it does not exceed
        that which would be incurred by a prudent person in the conduct of
        business.

3.      Allocable:
        ----------
        A cost is allocable if it is assignable or chargeable to one or more
        costs objectives on the basis of relative benefits received or other
        equitable relationship. A cost is allocable if it is incurred
        specifically by the Operating Agent for the purpose of performing
        Operating Work under this Agreement. A cost may also be allocable if it
        benefits both the Agreement and other work, and can be distributed to
        them in reasonable proportion to the benefits received by them. A cost
        is also allocable if it is necessary to the overall operation of the
        Four Corners Switchyard as it relates to the Common Facilities or the
        Interconnection Facilities.

                                      E6-1



                                    EXHIBIT 7

                         COST RESPONSIBILITY RATIO (CRR)
                         -------------------------------

The 1997 plan for the Enlarged Switchyard, as shown on Exhibit 1, provides for
ten (10) Functions: six (6) transmission lines, three (3) power transformer
banks, and one (1) power generating unit. A total of nine (9) Functions
currently exist in the Enlarged Switchyard and one (1) Function will be
installed hereunder for the use of the Interconnection Participants. The initial
computation of the Interconnection Participants' Cost Responsibility Ratio under
the aforementioned plan is as follows:

                                                  Y
               Cost Responsibility Ratio =   -----------
                                              X + Y + Z

      X =     Number of Functions for the Four Corners Participants
      Y =     Number of Functions for Interconnection Participants
      Z =     Number of Functions for Third Parties. (Presently, there are no
              Functions for third parties.)

    Then: Cost Responsibility Ratio = 1/(9+1+0) = 1/10 = 10.0%

                                      E7-1



                                  EXHIBIT 8

                            METHOD OF DETERMINING
                   INSURANCE EXPENSES FOR COMMON FACILITIES
                   ----------------------------------------

                                                                           
 1)     Total Plant - APS' Share                   $ 148,552,413                     From 1999 FERC Form No. 1, Pg. 403,   Line 16

 2)     Land and Plant Right - APS' Share          $      18,099                     From 1999 FERC Form No. 1. Pg.403,    Line 13

 3)     Plant (Less Land and Land Rights)
        APS' Share = (1) - (2)                     $ 148,534,314

 4)     APS' Share =                                    15 %                         From Section 6.2.1, Co-tenancy Agreement

 5)     Plant (Less Land and Land Rights) - Estimated
        Participants' Share = (3) [divide] (4)            $ 990,228,760              (Estimated Value)  15% used in (4) does not
                                                                                     apply to common facilities, switchyard
                                                                                     facilities, etc.

 6)     Annual Insurance Expenses - Participants
        All-risk Property                                    $        209,037
        Boiler and Machinery                                 $        138,409
        Liability                                            $         73,721
        Broker/Loss Fees                                     $         43,583
                                                                      -------
           Total                                             $        467,750        1999 Expenses

 7)     Insurance Expenses/plant Cost - %
        = (6) [divide] (5)                                             0.047 %

 8)     Enlarged Switchyard Common Facilities                $       3,728,457       Total Cost from Exhibit 4

 9)     Enlarged Switchyard Common Facilities
        Insurance Expenses = (8) X (7)                       $           1,752

 10)    Interconnection Participants' Share                             10.0 %       CRR from Exhibit 7

 11)    Interconnection Participants' CRR Share
        Common Facilities Insurance Expenses = (10) X (9)    $             175

 12)    Interconnection Facilities Estimated Cost            $       1,096,038       From Exhibit 9

 13)    Interconnection Participants' CRR                              100.0 %

 14)    Interconnection Participants'
        Interconnection Facilities
        Insurance Expenses = (12) X (13) X (7)               $           515

 15)    Interconnection Participants' Total
        Annual Insurance Expenses = (11)+ (14)               $            690

 

                                      E8-1



                                  EXHIBIT 9

                 INTERCONNECTION FACILITIES CONSTRUCTION BUDGET
                 ----------------------------------------------



                    Cost Type                                                           Amount
                    ---------                                                           ------

                                                                                   
 1.  Engineering and Design and Project Management                                    $   142,150

 2.  Construction                                                                         252,888

 3.  Material                                                                             561,000

 4.  Site Preparation (Foundation, Grounding, Trench, and Conduit)                         90,000

 5.  Protective Relays                                                                     50,000
                                                                                      -----------
           Total                                                                      $ 1,096,038


                                      E9-1



                                   EXHIBIT 10

                      DETERMINATION OF ITCC COMPOSITE RATE
                      ------------------------------------

                               ITCC COMPOSITE RATE
                                COMMON FACILITIES
                                -----------------



Company                  Ownership (%)             ITCC (%)               Composite (%)
- -------                  -------------             --------             ----------------
                             (1)                      (2)                (3) = (1) x (2)

                                                                      
 APS                         40.23                    31                       12.47
 EPE                         10.50                    35                       3.68
 PNM                         22.62                    33                       7.46
 SCE                         12.0                     34                       4.08
 SRP                         10.0                     0                           0
 TEP                         4.65                     40                       1.86


                        Composite Rate (%) = (SIGMA) (3) =                29.55

                               ITCC COMPOSITE RATE
                           INTERCONNECTION FACILITIES
                           --------------------------

Company             Ownership (%)            ITCC (%)            Composite (%)
- -------             -------------            --------            -------------

 APS                     100                    31                    31

                                      E10-1



                                                                     Exhibit 11
                                                                    Page 1 of 2

                                   EXHIBIT 11

                               CONSTRUCTION COSTS
                               ------------------

Construction Costs shall consist of all payments made and all costs, expenses,
or obligations incurred for or in connection with Construction Work. Such costs
shall include, but not be limited to the following:

1.    All of the Operating Agent's internal costs of labor, services and
      studies performed as a part of Construction Work.
2.    Payroll and other expenses of Operating Agent's employees performing
      Construction Work, including without limitation properly allocated labor
      loading charges, such as department overhead, time-off allowance,
      payroll taxes, worker's compensation insurance, retirement and death
      benefits and other employee benefits; provided, however, that the
      Operating Agent, acting in good faith, may allocate to the Construction
      Costs a reasonable percentage of the payroll and other expenses of any
      employee who, in accordance with the Operating Agent's standard operating
      procedures, does not keep time sheets.
3.    All costs for components of Construction Work, including without
      limitation overhead costs associated with Construction Work (including
      properly allocated department overheads), as set forth in the Electric
      Plant Instructions of the FERC System of Accounts.
4.    All costs, including those of outside consultants and attorneys incurred
      by the Operating Agent or the Four Corners Participants with respect to
      the preparation of agreements relating to the Interconnection Facilities
      or Construction Work, excluding this Agreement.
5.    All costs of Apparatus, including rental charges, and construction power
      for Construction Work.
6.    All costs of insurance, including any amounts deductible from insured
      claims.
7.    All Federal, state or local taxes of any character imposed upon the
      Interconnection Facilities, Construction Work or upon contributions made
      by the Interconnection Participants toward the Construction Costs
      (i.e., ITCC).
8.    All costs of relocating existing facilities including without limitation
      demolition and reconstruction, acquisition or lands and permits, and any
      upgrades or modifications required by law or otherwise caused by
      Construction Work.

                                      E11-1



                                                                     Exhibit 11
                                                                    Page 2 of 2

9.    All costs of enforcing or attempting to enforce the provisions of
      insurance policies, payment and performance bonds, contracts executed by
      the Operating Agent for Construction Work, and warranties obtained by the
      Operating Agent and which are extended to the facilities to be provided
      hereunder.
10.   Any other costs listed or described in Exhibit 9 hereto.
11.   An allowance for the Operating Agent's administrative and general
      expenses, to cover the costs of services rendered by it in the performance
      of Construction Work.

                                      E11-2



                                   EXHIBIT 12

                              CONSTRUCTION SCHEDULE
                              ---------------------



             ACTIVITY                                                          DATE
             --------                                                          ----
                                                                   
1.     Engineering Start                                                 2nd Week January 2001
2.     One-line Diagram Complete                                         1st Week February 2001
3.     Order Circuit Breakers and Switches                               3rd Week August 2002
4.     Receive Relay Information from Western                            1st Week September 2002
5.     Order Steel                                                       3rd Week September 2002
6.     Order Conductor                                                   1st Week November 2002
7.     Control Engineering Complete                                      3rd Week November 2002
8.     Order CCVT and CT's                                               4th Week November 2002
9.     Control Design Start                                              1st Week December 2002
10.    Order Control Cable                                               2nd Week December 2002
11.    Order Trenching                                                   3rd Week December 2002
12.    Receive Relays from Western                                       1st Week January 2003
13.    Order Hardware                                                    1st Week January 2003
14.    Shop Panel Wiring Start                                           4th Week January 2003
15.    Control Design Complete                                           1st Week February 2003
16.    Site Preparation Design Complete                                  3rd Week February 2003
17.    Site Preparation Start                                            4th Week February 2003
18.    Electrical Equipment Design Complete                              4th Week March 2003
19.    Site Preparation Complete                                         4th Week March 2003
20.    Control - Field Work Start                                        1st Week April 2003
21.    Construction Start                                                1st Week April 2003
22.    Construction Complete                                             3rd Week June 2003
23.    In Service                                                        4th Week June 2003


                                     E12-1

EX-15

                                                                      Exhibit 15


El Paso Electric Company
El Paso, Texas

Ladies and Gentlemen:

Registration Statement Nos. 333-17971 and 333-82129

With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report dated April 23, 2002 related to our
review of interim financial information.

Pursuant to Rule 436(c) under the Securities Act of 1933, such a report is not
considered part of the registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of sections 7 and 11 of the Act.

                                            Very truly yours,

                                            KPMG LLP


El Paso, Texas
May 10, 2002