-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RawnHfQyVL6/n2Cd97QXMLOH/uawhKiN/o3slYyzUojbpF45U2YhkIWwGIIPZnvW qcnu3lD7vaYmTL9V3ImOYw== 0000950147-98-000400.txt : 19980518 0000950147-98-000400.hdr.sgml : 19980518 ACCESSION NUMBER: 0000950147-98-000400 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARIZONA PUBLIC SERVICE CO CENTRAL INDEX KEY: 0000007286 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 860011170 STATE OF INCORPORATION: AZ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04473 FILM NUMBER: 98625968 BUSINESS ADDRESS: STREET 1: 400 N FIFTH ST STREET 2: P O BOX 53999 CITY: PHOENIX STATE: AZ ZIP: 85004 BUSINESS PHONE: 6022501000 10-Q 1 FORM 10-Q FORM 10-Q Securities and Exchange Commission Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 -------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------ ------------------ Commission file number 1-4473 -------------- ARIZONA PUBLIC SERVICE COMPANY ------------------------------------------------------ (Exact name of registrant as specified in its charter) Arizona 86-0011170 - ------------------------------ ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 400 North Fifth Street, P.O. Box 53999, Phoenix, Arizona 85072-3999 - -------------------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (602) 250-1000 -------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Number of shares of common stock, $2.50 par value, outstanding as of May 15, 1998: 71,264,947 Glossary -------- ACC - Arizona Corporation Commission ACC Staff - Staff of the Arizona Corporation Commission Cholla - Cholla Power Plant Company - Arizona Public Service Company EITF - Emerging Issues Task Force EITF 97-4 - Emerging Issues Task Force Issue No. 97-4, "Deregulation of the Pricing of Electricity --- Issues Related to the Applications of FASB Statements No. 71, Accounting for the Effects of Certain Types of Regulation, and No. 101, Regulated Enterprises --- Accounting for the Discontinuation of Application of FASB Statement No. 71" EPA - United States Environmental Protection Agency FERC - Federal Energy Regulatory Commission Four Corners - Four Corners Power Plant ITC - Investment tax credit 1997 10-K - Arizona Public Service Company Annual Report on Form 10-K for the fiscal year ended December 31, 1997 NGS - Navajo Generating Station Palo Verde - Palo Verde Nuclear Generating Station Pinnacle West - Pinnacle West Capital Corporation Power Coordination Agreement - 1955 agreement between the Company and Salt River Project that provides for certain electric system and power sales Rules - Rules adopted by the ACC for the introduction of retail electric competition in Arizona SFAS No. 71 - Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" SFAS No. 130 - Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" SFAS No. 131 - Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" SFAS No. 132 - Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" Salt River Project - Salt River Project Agricultural Improvement and Power District Territorial Agreement - 1955 agreement between the Company and Salt River Project that has provided exclusive retail service territories in Arizona as against each other -2- PART I - FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements - ---------------------------- ARIZONA PUBLIC SERVICE COMPANY CONDENSED STATEMENTS OF INCOME ------------------------------ (Unaudited) Three Months Ended March 31, ---------------------- 1998 1997 --------- --------- (Thousands of Dollars) ELECTRIC OPERATING REVENUES .......................... $ 380,423 $ 379,021 --------- --------- FUEL EXPENSES: Fuel for electric generation ....................... 50,328 51,122 Purchased power .................................... 23,589 34,347 --------- --------- Total ........................................... 73,917 85,469 --------- --------- OPERATING REVENUES LESS FUEL EXPENSES ................ 306,506 293,552 --------- --------- OTHER OPERATING EXPENSES: Operations and maintenance excluding fuel expenses . 96,416 88,016 Depreciation and amortization ...................... 92,147 92,015 Income taxes ....................................... 24,464 22,292 Other taxes ........................................ 29,938 29,790 --------- --------- Total ........................................... 242,965 232,113 --------- --------- OPERATING INCOME ..................................... 63,541 61,439 --------- --------- OTHER INCOME (DEDUCTIONS): Other - net ........................................ (2,396) (2,209) Income taxes ....................................... 4,455 4,340 --------- --------- Total ........................................... 2,059 2,131 --------- --------- INCOME BEFORE INTEREST DEDUCTIONS .................... 65,600 63,570 --------- --------- INTEREST DEDUCTIONS: Interest on long-term debt ......................... 35,183 34,429 Interest on short-term borrowings .................. 684 2,328 Debt discount, premium and expense ................. 1,949 2,002 Capitalized interest ............................... (4,151) (3,834) --------- --------- Total ........................................... 33,665 34,925 --------- --------- NET INCOME ........................................... 31,935 28,645 PREFERRED STOCK DIVIDEND REQUIREMENTS ................ 2,878 3,626 --------- --------- EARNINGS FOR COMMON STOCK ............................ $ 29,057 $ 25,019 ========= ========= See Notes to Condensed Financial Statements. -3- ARIZONA PUBLIC SERVICE COMPANY CONDENSED STATEMENTS OF INCOME ------------------------------ (Unaudited)
Twelve Months Ended March 31, -------------------------- 1998 1997 ----------- ----------- (Thousands of Dollars) ELECTRIC OPERATING REVENUES ........................ $ 1,879,955 $ 1,752,032 ----------- ----------- FUEL EXPENSES: Fuel for electric generation ..................... 200,547 239,181 Purchased power .................................. 224,528 115,539 ----------- ----------- Total ......................................... 425,075 354,720 ----------- ----------- OPERATING REVENUES LESS FUEL EXPENSES .............. 1,454,880 1,397,312 ----------- ----------- OTHER OPERATING EXPENSES: Operations and maintenance excluding fuel expenses 407,834 430,987 Depreciation and amortization .................... 365,803 330,839 Income taxes ..................................... 186,909 169,446 Other taxes ...................................... 120,407 116,915 ----------- ----------- Total ......................................... 1,080,953 1,048,187 ----------- ----------- OPERATING INCOME ................................... 373,927 349,125 ----------- ----------- OTHER INCOME (DEDUCTIONS): AFUDC - equity ................................... -- 3,534 Other - net ...................................... (10,014) (17,462) Income taxes ..................................... 31,528 44,242 ----------- ----------- Total ......................................... 21,514 30,314 ----------- ----------- INCOME BEFORE INTEREST DEDUCTIONS .................. 395,441 379,439 ----------- ----------- INTEREST DEDUCTIONS: Interest on long-term debt ....................... 141,685 144,695 Interest on short-term borrowings ................ 7,760 10,279 Debt discount, premium and expense ............... 7,738 8,061 Capitalized interest ............................. (16,525) (10,106) ----------- ----------- Total ......................................... 140,658 152,929 ----------- ----------- NET INCOME ......................................... 254,783 226,510 PREFERRED STOCK DIVIDEND REQUIREMENTS .............. 12,055 16,241 ----------- ----------- EARNINGS FOR COMMON STOCK .......................... $ 242,728 $ 210,269 =========== ===========
See Notes to Condensed Financial Statements. -4- ARIZONA PUBLIC SERVICE COMPANY CONDENSED BALANCE SHEETS ------------------------ ASSETS (Unaudited) March 31, December 31, 1998 1997 ----------- ------------ (Thousands of Dollars) UTILITY PLANT: Electric plant in service and held for future use $ 7,024,991 $ 7,009,059 Less accumulated depreciation and amortization ... 2,685,184 2,620,607 ----------- ----------- Net ........................................... 4,339,807 4,388,452 Construction work in progress .................... 270,147 237,492 Nuclear fuel, net of amortization ................ 58,737 51,624 ----------- ----------- Utility plant - net ........................... 4,668,691 4,677,568 ----------- ----------- INVESTMENTS AND OTHER ASSETS ..................... 167,243 164,906 ----------- ----------- CURRENT ASSETS: Cash and cash equivalents ........................ 8,936 12,552 Accounts receivable: Service customers ............................. 112,208 141,022 Other ......................................... 17,847 31,313 Allowance for doubtful accounts ............... (981) (1,338) Accrued utility revenues ......................... 49,531 58,559 Materials and supplies, at average cost .......... 72,902 70,634 Fossil fuel, at average cost ..................... 10,854 9,621 Deferred income taxes ............................ 3,496 3,496 Other ............................................ 27,013 24,529 ----------- ----------- Total current assets .......................... 301,806 350,388 ----------- ----------- DEFERRED DEBITS: Regulatory asset for income taxes ................ 444,887 458,369 Rate synchronization cost deferral ............... 345,068 358,871 Unamortized costs of reacquired debt ............. 61,592 63,501 Unamortized debt issue costs ..................... 15,576 15,303 Other ............................................ 236,254 242,236 ----------- ----------- Total deferred debits ......................... 1,103,377 1,138,280 ----------- ----------- TOTAL ......................................... $ 6,241,117 $ 6,331,142 =========== =========== See Notes to Condensed Financial Statements. -5- ARIZONA PUBLIC SERVICE COMPANY CONDENSED BALANCE SHEETS ------------------------ LIABILITIES (Unaudited)
March 31, December 31, 1998 1997 ------------ ------------ (Thousands of Dollars) CAPITALIZATION: Common stock ............................................... $ 178,162 $ 178,162 Premiums and expenses - net ................................ 1,142,499 1,142,364 Retained earnings .......................................... 472,853 528,798 ---------- ---------- Common stock equity ..................................... 1,793,514 1,849,324 Non-redeemable preferred stock ............................. 141,317 142,051 Redeemable preferred stock ................................. 19,110 29,110 Long-term debt less current maturities ..................... 2,019,248 1,953,162 ---------- ---------- Total capitalization .................................... 3,973,189 3,973,647 ---------- ---------- CURRENT LIABILITIES: Commercial paper ........................................... 81,000 130,750 Current maturities of long-term debt ....................... 4,068 104,068 Accounts payable ........................................... 72,467 107,423 Accrued taxes .............................................. 141,148 85,886 Accrued interest ........................................... 26,247 31,660 Common dividends payable ................................... 42,500 -- Customer deposits .......................................... 28,788 29,116 Other ...................................................... 29,094 19,588 ---------- ---------- Total current liabilities ............................... 425,312 508,491 ---------- ---------- DEFERRED CREDITS AND OTHER: Deferred income taxes ...................................... 1,337,255 1,345,177 Deferred investment tax credit ............................. 56,639 60,093 Unamortized gain - sale of utility plant ................... 81,219 82,363 Customer advances for construction ......................... 30,083 29,294 Other ...................................................... 337,420 332,077 ---------- ---------- Total deferred credits and other ........................ 1,842,616 1,849,004 ---------- ---------- COMMITMENTS AND CONTINGENCIES (Notes 5, 8, and 9) TOTAL ................................................... $6,241,117 $6,331,142 ========== ==========
See Notes to Condensed Financial Statements. -6- ARIZONA PUBLIC SERVICE COMPANY CONDENSED STATEMENTS OF CASH FLOWS ---------------------------------- (Unaudited) Three Months Ended March 31, ---------------------- 1998 1997 --------- --------- (Thousands of Dollars) Cash Flows from Operating Activities: Net income ......................................... $ 31,935 $ 28,645 Items not requiring cash: Depreciation and amortization .................... 92,147 92,015 Nuclear fuel amortization ........................ 8,417 7,523 Deferred income taxes - net ...................... (7,010) (8,948) Deferred investment tax credit - net ............. (3,454) (3,380) Changes in certain current assets and liabilities: Accounts receivable - net ........................ 41,923 24,589 Accrued utility revenues ......................... 9,028 6,244 Materials, supplies and fossil fuel .............. (3,501) 2,196 Other current assets ............................. (2,484) (2,024) Accounts payable ................................. (33,020) (48,355) Accrued taxes .................................... 55,262 47,992 Accrued interest ................................. (5,413) (14,482) Other current liabilities ........................ 7,528 4,313 Other - net ........................................ 13,730 28,385 --------- --------- Net cash flow provided by operating activities ....... 205,088 164,713 --------- --------- Cash Flows from Investing Activities: Capital expenditures ............................... (60,848) (77,129) Capitalized interest ............................... (4,151) (3,834) Other .............................................. (2,533) (4,046) --------- --------- Net cash flow used for investing activities .... (67,532) (85,009) --------- --------- Cash Flows from Financing Activities: Long-term debt ..................................... 99,375 -- Short-term borrowings - net ........................ (49,750) 199,400 Dividends paid on common stock ..................... (42,500) (42,500) Dividends paid on preferred stock .................. (2,964) (3,897) Repayment of preferred stock ....................... (10,599) (25,980) Repayment and reacquisition of long-term debt ...... (134,734) (193,056) --------- --------- Net cash flow used for financing activities .... (141,172) (66,033) --------- --------- Net increase (decrease) in cash and cash equivalents . (3,616) 13,671 Cash and cash equivalents at beginning of period ..... 12,552 12,521 --------- --------- Cash and cash equivalents at end of period ........... $ 8,936 $ 26,192 ========= ========= Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Interest (excluding capitalized interest) ........ $ 37,072 $ 48,051 Income taxes ..................................... $ 1,250 $ 9,814 See Notes to Condensed Financial Statements. -7- ARIZONA PUBLIC SERVICE COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS 1. In the opinion of the Company, the accompanying unaudited condensed financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position of the Company as of March 31, 1998, the results of operations for the three months and twelve months ended March 31, 1998 and 1997, and the cash flows for the three months ended March 31, 1998 and 1997. It is suggested that these condensed financial statements and notes to condensed financial statements be read in conjunction with the financial statements and notes to financial statements included in the 1997 10-K. 2. The Company's operations are subject to seasonal fluctuations, with variations in energy usage by customers occurring from season to season and from month to month within a season, primarily as a result of changing weather conditions. For this and other reasons, the results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. 3. All the outstanding shares of common stock of the Company are owned by Pinnacle West. 4. See "Liquidity and Capital Resources" in Part I, Item 2 of this report for changes in capitalization for the three months ended March 31, 1998. 5. Regulatory Matters --- Electric Industry Restructuring State ACC Rules. The ACC has been conducting an ongoing investigation into the restructuring of the Arizona electric industry. In December 1996, the ACC adopted rules that provide a framework for the introduction of retail electric competition. The ACC framework rules include the following major provisions: o The rules are intended to apply to virtually all of the Arizona electric utilities regulated by the ACC, including the Company. o Each affected utility would be required to make available at least 20% of its 1995 system retail peak demand for competitive generation supply to all customer classes not later than January 1, 1999; at least 50% not later than January 1, 2001; and all of its retail demand not later than January 1, 2003. o Electric service providers that obtain Certificates of Convenience and Necessity (CC&Ns) from the ACC would be allowed to supply, market, and/or broker specified electric services at retail. These services would include electric generation, but exclude electric transmission and distribution. -8- o On or before December 31, 1997, each affected utility was required to file with the ACC proposed tariffs for bundled service, if different than current tariffs, and unbundled service. Bundled service means electric service elements (i.e., generation, transmission, distribution, and ancillary services) provided as a package to consumers within an affected utility's current service area. Unbundled service means electric service elements provided and priced separately. o The rules indicate that the ACC will allow recovery of unmitigated stranded costs. Stranded costs are the costs of generating plants, other assets and contract commitments that were prudently incurred to serve power customers that could go unrecovered if these customers are allowed to use open access to move to another supplier. Each affected utility would be required to file with the ACC its estimates of unmitigated stranded costs. The ACC would then, after hearing and consideration of various factors, determine the magnitude of stranded costs and appropriate stranded cost recovery mechanisms and charges. The ACC ordered in the rules that numerous issues (including reliability; stranded cost measurement and recovery; the phase-in process, bundled, unbundled and metering services; legal issues; and independent system operator and spot market development) require additional consideration prior to implementation of retail electric competition. During 1997, the ACC conducted workshops to gather input from various constituencies with respect to those issues. In 1998, the ACC has continued conducting workshops on certain of the issues. In February 1998, the ACC completed a formal, generic hearing on stranded cost determination and recovery. Based on various assumptions, estimates and methodologies, the Company currently estimates that its stranded costs to be recovered (excluding regulatory assets which have already been addressed by the ACC) will be less than $500 million. The Company is seeking full recovery of stranded costs during a transition period proposed to go through 2006. On May 6, 1998, an ACC Hearing Officer issued a Recommended Decision in the above proceeding that, although recommending an opportunity for full recovery of the Company's stranded costs, would impose certain conditions and restrictions on stranded cost recovery. However, final decisions by the ACC have not yet been made with respect to this issue. The Company believes that certain provisions of the ACC framework rules are deficient. In February 1997, a lawsuit was filed by the Company to protect its legal rights regarding those rules. That lawsuit is pending but two related cases filed by other utilities have been partially decided in a manner adverse to those utilities' positions. Legislative Initiatives. An Arizona joint legislative committee studied electric utility industry restructuring issues in 1996 and 1997. In conjunction with that study, Arizona legislative counsel prepared memoranda in late 1997 related to the legal authority of -9- the ACC to deregulate the Arizona electric utility industry. The memoranda raise a question as to the degree to which the ACC may, under the Arizona Constitution, deregulate any portion of the electric utility industry and allow rates to be determined by market forces. This latter issue (the ability of the ACC to set rates based on the competitive market) was decided in favor of the ACC in the related lawsuits referenced in the preceding paragraph. In May 1998, the final version of a bill to facilitate implementation of retail electric competition in the state was approved by the House/Senate conference committee of the Arizona legislature. The bill includes the following major provisions: (a) requirements that Arizona's largest government-operated electric utility (Salt River Project) and, at their option, smaller city electric systems (i) open their service territories to electric service providers to implement retail electric generation competition for 20% of each utility's 1995 retail peak demand by December 31, 1998 and for all retail customers by December 31, 2000; (ii) decrease rates by at least 10% over a ten-year period beginning as early as January 1, 1991; (iii) implement procedures and public processes, including judicial review at the request of either an interested party or the Arizona Attorney General, for establishing the terms, conditions and pricing of electric services as well as certain other decisions affecting retail electric competition, which procedures and processes are comparable to those already applicable to public service corporations; (b) a description of the factors which form the basis of consideration by Salt River Project in determining stranded costs; and (c) a requirement, both for public power entities and public service corporations (including the Company), that billing, collection, metering and meter reading services be provided on a competitive basis during the first two years of competition only for customers having demands in excess of one megawatt (and that are eligible for competitive generation services), and thereafter for all customers receiving competitive electric generation. The legislature will also review and make recommendations for the 1999 Arizona legislature on certain issues, including: whether public power entities excluded from the current bill should be included; taxation issues associated with electric competition; regulation of public power entities outside their service territory; constitutional issues relating to facilitating electric competition; system priority, capacity, capability and reliability; antitrust issues; and public power entities compliance with the code of conduct and affiliate issues between competitive and noncompetitive service electricity providers. The bill now goes to the Arizona House and Senate for a final vote and, if passed, to the Governor for consideration. Federal The Energy Policy Act of 1992 and recent rulemakings by FERC have promoted increased competition in the wholesale electric power markets. The Company does not expect these rules to have a material impact on its financial statements. Several electric utility reform bills have been introduced during recent congressional sessions, which as currently written, would allow consumers to choose their electricity suppliers by 2000 or 2003. These bills, other bills that are expected to be introduced, -10- and ongoing discussions at the federal level suggest a wide range of opinion that will need to be narrowed before any substantial restructuring of the electric utility industry can occur. Regulatory Accounting The Company prepares its financial statements in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." SFAS No. 71 requires a cost-based, rate-regulated enterprise to reflect the impact of regulatory decisions in its financial statements. The Company's existing regulatory orders and current regulatory environment support its accounting practices related to regulatory assets, which amounted to approximately $0.9 billion at March 31, 1998. In accordance with the 1996 regulatory agreement, the ACC accelerated the amortization of substantially all of the Company's regulatory assets to an eight-year period that began July 1, 1996. During 1997, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB) issued EITF 97-4, which requires that SFAS No. 71 be discontinued no later than when legislation is passed or a rate order is issued that contains sufficient detail to determine its effect on the portion of the business being deregulated, which could result in write-downs or write-offs of physical and/or regulatory assets. Additionally, the EITF determined that regulatory assets should not be written off if they are to be recovered from a portion of the entity which continues to apply SFAS No. 71. Although the ACC has issued rules for transitioning generation services to competition, there are many unresolved issues. The Company continues to apply SFAS No. 71 to all of its operations. If rate recovery of regulatory assets is no longer probable, whether due to competition or regulatory action, the Company would be required to write off the remaining balance as an extraordinary charge to expense. General The Company believes that further ACC decisions, legislation at the Arizona and federal levels and perhaps amendments to the Arizona Constitution (which amendments would require a vote of the people) will ultimately be required before significant implementation of retail electric competition can lawfully occur in Arizona. Until the manner of implementation of competition, including addressing stranded costs, is determined, the Company cannot accurately predict the impact of full retail competition on its financial position, cash flows or results of operation. As competition in the electric industry continues to evolve, the Company will continue to evaluate strategies and alternatives that will position the Company to compete in the new regulatory environment. -11- 6. Regulatory Matters --- 1996 Regulatory Agreement In April 1996, the ACC approved a regulatory agreement between the Company and the ACC Staff. The major provisions of this agreement are: o An annual rate reduction of approximately $48.5 million ($29 million after income taxes), or 3.4% on average for all customers except certain contract customers, effective July 1, 1996. o Recovery of substantially all of the Company's present regulatory assets through accelerated amortization over an eight-year period that began July 1, 1996, increasing annual amortization by approximately $120 million ($72 million after income taxes). o A formula for sharing future cost savings between customers and shareholders (price reduction formula) referencing a return on equity (as defined) of 11.25%. o A moratorium on filing for permanent rate changes prior to July 2, 1999, except under the price reduction formula and under certain other limited circumstances. o Infusion of $200 million of common equity into the Company by Pinnacle West, in annual payments of $50 million starting in 1996. Pursuant to the price reduction formula, in May 1997, the ACC approved a retail price decrease of approximately $17.6 million ($10.5 million after income taxes), or 1.2%, effective July 1, 1997. In March 1998, the Company filed with the ACC its calculation of an annual price reduction of approximately $17 million ($10 million after income taxes), or 1.1%, to become effective July 1, 1998. The amount and timing of the price decrease are subject to ACC approval. 7. Agreement with Salt River Project On April 25, 1998, the Company and Salt River Project entered into a Memorandum of Agreement in anticipation of, and to facilitate, the opening of the Arizona electric industry. The Agreement contains the following major components (some of which are subject to approval of their respective Boards of Directors): o The Company and Salt River Project would amend the Territorial Agreement to remove any barriers to the provision of competitive electricity supply and non-distribution services. o The Company and Salt River Project would amend the Power Coordination Agreement to lower the price that the Company will pay Salt River Project for purchased power by approximately $17 million (pretax) in 1999 and by lesser annual amounts through 2006. -12- o The Company and Salt River Project agreed on certain legislative positions regarding electric utility restructuring at the state and federal level. An ACC docket has been established so that the ACC may review certain provisions of the Agreement. The ACC Staff has requested the ACC Hearing Devision to issue a procedural order to govern the proceedings before the ACC on this matter. In its request, the ACC Staff identified certain issues that it believes the ACC should consider, including whether (a) the Territorial Agreement remains in the public interest, (b) the Agreement is a restraint of trade, and (c) the Agreement will materially lessen the potential for retail electric competition in Arizona. The Company cannot predict what action, if any, will result from any ACC hearings that may be held with respect to the Agreement. The Antitrust Unit of the Arizona Attorney General's Office, which has been involved in the ongoing regulatory and legislative proceedings regarding the restructuring of the Arizona electric industry, has requested clarification of the operation of certain of the Agreement's provisions. The Company is currently engaged in discussions with the Arizona Attorney General's Office regarding this matter. 8. The Palo Verde participants have insurance for public liability payments resulting from nuclear energy hazards to the full limit of liability under federal law. This potential liability is covered by primary liability insurance provided by commercial insurance carriers in the amount of $200 million and the balance by an industry-wide retrospective assessment program. If losses at any nuclear power plant covered by the programs exceed the accumulated funds, the Company could be assessed retrospective premium adjustments. The maximum assessment per reactor under the program for each nuclear incident is approximately $79 million, subject to an annual limit of $10 million per incident. Based upon the Company's 29.1% interest in the three Palo Verde units, the Company's maximum potential assessment per incident is approximately $69 million, with an annual payment limitation of approximately $9 million. The Palo Verde participants maintain "all risk" (including nuclear hazards) insurance for property damage to, and decontamination of, property at Palo Verde in the aggregate amount of $2.75 billion, a substantial portion of which must first be applied to stabilization and decontamination. The Company has also secured insurance against portions of any increased cost of generation or purchased power and business interruption resulting from a sudden and unforeseen outage of any of the three units. The insurance coverage discussed in this and the previous paragraph is subject to certain policy conditions and exclusions. 9. The Company has encountered tube cracking in the Palo Verde steam generators and has taken, and will continue to take, remedial actions that it believes have slowed the rate of tube degradation. The projected service life of the steam generators is reassessed periodically and these analyses indicate that it will be economically desirable for the Company to replace the Unit 2 steam generators between 2003 and 2008. The Company -13- estimates that its share of the replacement costs (in 1998 dollars and including installation and replacement power costs) will be approximately $50 million, most of which will be incurred after the year 2000. During the fourth quarter of 1997, the Palo Verde participants, including the Company, entered into a contract for the fabrication of two replacement steam generators. The cost to the Company is estimated at approximately $26 million. These generators will be used as replacements if performance of existing generators deteriorates to less than acceptable levels. The generators are expected on site in 2002. The Company's share of installation costs is approximately $24 million. Based on the latest available data, the Company estimates that the Unit 1 and Unit 3 steam generators should operate for the license periods (until 2025 and 2027, respectively), although the Company will continue its normal periodic assessment of these steam generators. 10. In the first quarter of 1998 the Company adopted SFAS No. 130, "Reporting Comprehensive Income." This standard changed the reporting of certain items previously reported in the common stock equity section of the balance sheet. The effects of adopting SFAS No. 130 were not material to the Company's financial statements. The Financial Accounting Standards Board issued SFAS No. 131 on "Disclosures about Segments of an Enterprise and Related Information" and SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," both of which are effective for fiscal years beginning after December 15, 1997. SFAS No. 131 requires that public companies report certain information about operating segments in their financial statements. It also establishes related disclosures about products and services, geographic areas, and major customers. The Company is currently evaluating what impact this standard will have on its disclosures. SFAS No. 132 standardizes the disclosure requirements for pensions and other postretirement benefits. It is not expected to have a material effect on the Company's financial statement disclosures. -14- ARIZONA PUBLIC SERVICE COMPANY Item 2. Management's Discussion and Analysis of Financial Condition and Results ------------------------------------------------------------------------ of Operations. - -------------- Operating Results - ----------------- The following table summarizes the Company's revenues and earnings for the three-month and twelve-month periods ended March 31, 1998 and 1997: Periods ended March 31 (Thousands of Dollars) Three Months Twelve Months ------------------------ ------------------------ 1998 1997 1998 1997 ------------------------ ------------------------ Operating Revenues $ 380,423 $ 379,021 $1,879,955 $1,752,032 Earnings for Common stock $ 29,057 $ 25,019 $ 242,728 $ 210,269 Operating Results - Three-month period ended March 31, 1998 compared ----------------------------------------------------------------------- with three-month period ended March 31, 1997 -------------------------------------------- Earnings increased $4 million in the three-month comparison primarily because of strong customer growth, partially offset by increased operations and maintenance expenses. Operating revenues increased $1 million because the effects of customer growth ($13 million) and weather ($3 million) offset a decrease in sales for resale ($10 million) and a price reduction ($4 million). See Note 6 of Notes to Condensed Financial Statements for information on the price reduction. Sales for resale are wholesale electricity sales to third parties who resell the electricity to their customers. The decrease in sales for resale was a result of changes in power marketing activity, which can vary from period to period without corresponding effects on earnings because of related fluctuations in purchased power costs. Operation and maintenance expenses increased $8 million as a result of growth and increased expenses due to impending competition, increased outages at coal plants and other miscellaneous factors, partially offset by savings resulting from a 1996 voluntary severance program. -15- Operating Results - Twelve-month period ended March 31, 1998 compared ----------------------------------------------------------------------- with twelve-month period ended March 31, 1997 --------------------------------------------- Earnings increased $32 million in the twelve-month comparison ended March 31, 1998 primarily because of customer growth; a $32 million pretax charge in 1996 for a voluntary severance program; two fuel-related settlements in the third quarter of 1997; and lower financing costs. These positive factors more than offset the effects of the 1996 regulatory agreement with the ACC, which, in the twelve-month comparison, resulted in $27 million of additional regulatory asset amortization and a $28 million revenue decrease caused by two retail price reductions. See Note 6 of Notes to Condensed Financial Statements for additional information about the regulatory agreement. In the period ended March 31, 1997, the Company also recognized $11 million of income tax benefits associated with capital loss carryforwards. Operating revenues increased $128 million primarily because of increases in sales for resale ($95 million); customer growth ($59 million) and weather effects ($12 million). As mentioned above, these positive factors were partially offset by the $28 million revenue decrease caused by retail price reductions and by various other factors ($10 million). Sales for resale are wholesale electricity sales to third parties who resell the electricity to their customers. The increase in sales for resale was a result of increased activity in competitive bulk power markets. The increase in sales for resale did not significantly affect earnings because it was substantially offset by higher power purchases. The two fuel-related settlements increased the Company's pretax earnings by approximately $21 million. The Company's income statement reflects these settlements as reductions in fuel expense and as other income. Operations and maintenance expenses were lower because of the charge for the voluntary severance program recorded in 1996 and related savings in 1997. These savings were partially offset by increased expenses as a result of growth and competition, and other miscellaneous factors. Financing costs decreased $10 million because of lower amounts of outstanding debt and preferred stock. Other Income ------------ As part of a 1994 rate settlement with the ACC, the Company accelerated amortization of substantially all deferred ITCs over a five-year period that ends on December 31, 1999. The amortization of ITCs is shown on the Company's income statement as Other Income --- Income Taxes and decreases annual income tax expense by approximately $28 million. -16- Liquidity and Capital Resources - ------------------------------- For the three months ended March 31, 1998, the Company incurred approximately $60 million in capital expenditures, which is approximately 19% of the most recently estimated 1998 capital expenditures. The Company's projected capital expenditures for the next three years are: 1998, $323 million; 1999, $313 million; and 2000, $306 million, respectively. These amounts include about $30 - $35 million each year for nuclear fuel expenditures. In addition, the Company is considering expanding certain of its businesses over the next several years, which may result in increased expenditures. The Company's long-term debt and preferred stock redemption requirements and payment obligations on a capitalized lease for the next three years are: 1998, $165 million; 1999, $174 million; and 2000, $109 million. During the three months ended March 31, 1998, the Company redeemed approximately $135 million of its long-term debt and approximately $11 million of its preferred stock with cash from operations and long-term and short-term debt. As a result of the 1996 regulatory agreement (see Note 6 of Notes to Condensed Financial Statements), Pinnacle West invested $50 million in the Company in 1996 and 1997 and will invest similar amounts annually in 1998 and 1999. During the three months ended March 31, 1998, the Company issued $100 million of its unsecured debt. Although provisions in the Company's bond indenture, articles of incorporation, and financing orders from the ACC establish maximum amounts of additional first mortgage bonds and preferred stock that the Company may issue, management does not expect any of these restrictions to limit the Company's ability to meet its capital requirements. Year 2000 Technology Issues - --------------------------- The Company has made, and will continue to make, certain modifications to its computer hardware and software systems and applications to ensure they are capable of handling dates in the year 2000 and thereafter. The Company's major computer systems have been updated and other systems are being analyzed for potential modifications. The financial impact on the Company is not anticipated to be material to its financial position, cash flows or results of operations. The Company is in the process of formal communications with its significant suppliers, business partners, and large customers to determine the extent to which it may be affected by these third parties' plans to remediate their own year 2000 issues in a timely manner. Competition and Electric Industry Restructuring - ----------------------------------------------- See Note 5 of Notes to Condensed Financial Statements in Part I, Item 1 of this report for discussions of competitive developments and regulatory accounting. See Note 7 of Notes to Condensed Financial Statements in Part I, Item 1 of this report for a -17- discussion of a proposed amendment to a Power Coordination Agreement with Salt River Project that the Company estimates would reduce its pretax costs for purchased power by approximately $17 million in 1999 and by lesser annual amounts through 2006. Rate Matters - ------------ See Note 6 of Notes to Condensed Financial Statements in Part I, Item 1 of this report for a discussion of a proposed price reduction. Forward-Looking Statements - -------------------------- The above discussion contains forward-looking statements that involve risks and uncertainties. Words such as "estimates," "expects," "anticipates," "plans," "believes," "projects," and similar expressions identify forward-looking statements. These risks and uncertainties include, but are not limited to, the ongoing restructuring of the electric industry; the outcome of the regulatory proceedings relating to the restructuring; regulatory, tax and environmental legislation; the ability of the Company to successfully compete outside its traditional regulated markets; regional economic conditions, which could affect customer growth; the cost of debt and equity capital; weather variations affecting customer usage; and technological developments in the electric industry. These factors and the other matters discussed above may cause future results to differ materially from historical results, or from results or outcomes currently expected or sought by the Company. -18- PART II - OTHER INFORMATION --------------------------- ITEM 5. Other Information - ------------------------------ Purported Navajo Environmental Regulation - ----------------------------------------- As previously reported, in February 1998, the EPA promulgated regulations specifying those provisions of the Clean Air Act for which it is appropriate to treat Indian tribes in the same manner as states, and the Company reviewed the regulations to determine what effect they may have on Four Corners and NGS. See "Environmental Matters --- Purported Navajo Environmental Regulation" in Part I, Item 1 of the 1997 10-K. On April 10, 1998, the Company filed a Petition for Review in the United States Court of Appeals for the District of Columbia. Arizona Public Service Company v. United States Environmental Protection Agency, No. 98-1196. Palo Verde Nuclear Generating Station ------------------------------------- See Note 9 of Notes to Condensed Financial Statements in Part I, Item 1 of this report for a discussion of issues regarding the Palo Verde steam generators. Construction and Financing Programs ----------------------------------- See "Liquidity and Capital Resources" in Part I, Item 2 of this report for a discussion of the Company's construction and financing programs. Competition and Electric Industry Restructuring ----------------------------------------------- See Note 5 of Notes to Condensed Financial Statements in Part I, Item 1 of this report for a discussion of competition and the Rules regarding the introduction of retail electric competition in Arizona. On February 28, 1997, a lawsuit was filed by the Company to protect its legal rights regarding the Rules and in its complaint the Company asked the Court for (i) a judgment vacating the retail electric competition rules, (ii) a declaratory judgment that the Rules are unlawful because, among other things, they were entered into without proper legal authorization, and (iii) a permanent injunction barring the ACC from enforcing or implementing the Rules and from promulgating any other regulations without lawful authority. ITEM 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibits Exhibit No. Description - ----------- ----------- 10.1 Territorial Agreement 10.2 Power Coordination Agreement 10.3 Memorandum of Agreement between the Company and Salt River Project 27.1 Financial Data Schedule -19- In addition to those Exhibits shown above, the Company hereby incorporates the following Exhibits pursuant to Exchange Act Rule 12b-32 and Regulation ss.229.10(d) by reference to the filings set forth below:
Exhibit No. Description Originally Filed as Exhibit: File No.(a) Date Effective - ----------- ----------- ---------------------------- --------- -------------- 3.1 Bylaws, amended as of 3.1 to 1995 Form 10-K 1-4473 3-29-96 February 20, 1996 Report 3.2 Resolution of Board of 3.2 to 1994 Form 10-K 1-4473 3-30-95 Directors temporarily Report suspending Bylaws in part 3.3 Articles of Incorporation, 4.2 to Form S-3 1-4473 9-29-93 restated as of May 25, 1988 Registration Nos. 33-33910 and 33-55248 by means of September 24, 1993 Form 8-K Report 3.4 Certificates pursuant to 4.3 to Form S-3 1-4473 9-29-93 Sections 10-152.01 and Registration Nos. 10-016, Arizona Revised 33-33910 and 33-55248 by Statutes, establishing Series A means of September 24, through V of the Company's 1993 Form 8-K Report Serial Preferred Stock 3.5 Certificate pursuant to 4.4 to Form S-3 1-4473 9-29-93 Section 10-016, Arizona Registration Nos. Revised Statutes, establishing 33-33910 and 33-55248 by Series W of the Company's means of September 24, Serial Preferred Stock 1993 Form 8-K Report
- --------------------------- (a)Reports filed under File No. 1-4473 were filed in the office of the Securities and Exchange Commission located in Washington, D.C. (b) Reports on Form 8-K During the quarter ended March 31, 1998, and the period from April 1 through May 15, 1998, the Company filed the following reports on Form 8-K: Report dated January 13, 1998 comprised of Exhibits to the Company's Registration Statements (Registration Nos. 333-15379 and 333-27551) relating to the Company's offering of $100 million of Notes. -20- SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ARIZONA PUBLIC SERVICE COMPANY (Registrant) Dated: May 15, 1998 By: George A. Schreiber, Jr. --------------------------------- George A. Schreiber, Jr. Executive Vice President and Chief Financial Officer (Principal Financial Officer and Officer Duly Authorized sign this Report) EX-10.1 2 AGREEMENT OF AUGUST 31, 1955 AGREEMENT of AUGUST 31, 1955 between SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT and ARIZONA PUBLIC SERVICE COMPANY TABLE OF CONTENTS Page RECITALS 1 ARTICLE I - DEFINITIONS 6 ARTICLE II - TERRITORIAL ALLOCATIONS 6 Section A - Mutual Agreements with Respect to Territory, Customers and Load 6 Section B - District's Territory, Customers and Load 11 Section C - Company's Territory, Customers and Load 23 Section D - Exceptions and Reservations 33 Section E - Transfer of Facilities 38 ARTICLE III - POWER CONTRACTS 40 Section A - Territory Equivalent Power Contracts 40 Section B - Additional Power Contract 48 Section C - General Terms and Conditions 49 Section D - Power Coordination Arrangements 51 Section E - Differences and Inconsistencies 51 Section F - Effect of Cancellation of Power Contracts 52 ARTICLE IV - CANCELLATION OF EXISTING AGREEMENTS 52 ARTICLE V - THIRD PARTIES NOT TO BENEFIT 52 ARTICLE VI - EXISTING CONTRACTS FOR SERVICE OF ELECTRICAL ENERGY 53 ARTICLE VII - INDEMNITY AGAINST CUSTOMERS' CLAIMS AND COOPERATION IN DEFENDING VALIDITY OF THIS AGREEMENT AND POWER CONTRACTS 54 ARTICLE VIII - STREET LIGHTING 54 ARTICLE IX - MISCELLANEOUS COVENANTS 55 ARTICLE X - TRANSFERS, MERGERS AND ASSIGNMENTS 56 ARTICLE XI - RESTRICTIONS ON TERMINATION OF AGREEMENT 58 ARTICLE XII - NOTICES 59 ARTICLE XIII - CAPTIONS AND HEADINGS 59 ARTICLE XIV - WAIVERS 59 ARTICLE XV - APPROVALS 60 AGREEMENT of AUGUST 31, 1955 between SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT and ARIZONA PUBLIC SERVICE COMPANY AGREEMENT --------- THIS AGREEMENT made and entered into as of the 31st day of August, 1955, by and between the SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, an Agricultural Improvement District, organized under the laws of the State of Arizona, hereinafter celled the "District", and the ARIZONA PUBLIC SERVICE COMPANY, a corporation, organized and existing under the laws of the State of Arizona, hereinafter called the "Company". WITNESSETH: That, WHEREAS, the District was organized in 1937 and now exists pursuant to the provisions of the Agricultural Improvement District Act of the State of Arizona, as amended, and the territory included within its boundaries is now included within the boundaries of the SALT RIVER PROJECT, as such Project is hereinafter defined; and WHEREAS, the District and the SALT RIVER VALLEY WATER USERS' ASSOCIATION, a corporation organized and existing under the laws of the Territory, now the State, of Arizona, hereinafter called the "Association", made and entered into an agreement on the 22nd day of March 1937, which agreement was amended on the 28th day of February 1944, and again amended on the 12th day of September 1949, and by the terms of said agreement as amended, the Association transferred to the District all its properties and facilities; including properties and facilities for the generation and distribution of electric energy; and WHEREAS, by the said agreement of March 22, 1937, as amended, the District among other things assumed the obligations and covenants of the Association under all contracts to which the Association was a party, and agreed to perform and carry out all of the duties, obligations and covenants of the Association under said contracts, included among which contracts were the contracts entered into between the Association and Central Arizona Light and Power Company, and between the Association and Arizona Edison Company, Inc., and the predecessor of said latter corporation, Arizona Edison Company, certain of which contracts are more specifically hereinafter referred to; and 1 WHEREAS, the Company is a public service corporation organized and existing under the laws of the State of Arizona, having been organized under the laws of this State on the 16th day of February 1920, under the name of Central Arizona Light and Power Company; and WHEREAS, Arizona Edison Company and its successor, Arizona Edison Company, Inc., were public service corporations organized under the laws of the State of Arizona; and WHEREAS, pursuant to an agreement of consolidation effective March 1, 1952, Arizona Edison Company, Inc., was merged and consolidated pursuant to the laws of the State of Arizona into Central Arizona Light and Power Company, and the name of Central Arizona Light and Power Company was concurrently changed to Arizona Public Service Company; and WHEREAS, by virtue of such merger and consolidation, the Company assumed all of the duties, obligations and liabilities, and acquired all the rights, assets and properties of Arizona Edison Company, Inc.; and WHEREAS, the Association directly and in its own name rendered electric service to its members and to the public in Maricopa, Gila and Pinal Counties of Arizona, from 1917 until 1937; and since 1937, the District has, pursuant to agreement between the District and the Association, above referred to, rendered such service in the said counties; and WHEREAS, the Company has been, since it commenced operations, engaged in rendering electric (and other) services in Maricopa and other counties of Arizona, and has rendered electric service in Pinal, Gila and other counties of Arizona since the merger or consolidation into it of Arizona Edison Company, Inc., in 1952; and WHEREAS, Arizona Edison Company, Inc., and its corporate predecessor, Arizona Edison Company, from September 5, 1925, until the merger and consolidation of Arizona Edison Company, inc., into the Company on March 1, 1952, rendered electric service in Pinal, Gila and other counties of Arizona; and 2 WHEREAS, in certain portions of Pinal and Gila Counties (such portions being hereinafter described and referred to as the "Eastern Area"), in conformity with certain existing territorial agreements hereinafter referred to, the Company now owns and operates distribution systems in the towns of Globe, Miami, Superior, Winkelman, and vicinity, and owns no transmission lines located in such area, and the District principally serves large mining, milling, smelting, and related loads, and owns various transmission lines in such area over which electricity is delivered at wholesale to the Company for distribution in Superior, Globe, Miami, and vicinity; and WHEREAS, in order to facilitate the rendition of electric service in the areas served by the Company and its predecessors and in the areas served by the District and the Association, and to permit and foster the coordination of the operations and the generating facilities of the combined electric systems, certain agreements have heretofore been entered into between the Company and the Association, and between Arizona Edison Company, Inc., or Arizona Edison Company and the Association, as hereinafter referred to, pursuant to which the Company is now purchasing from the District substantial amounts of electric power and energy at various delivery points in its system, and certain of these agreements contain various provisions as to allocations of territory, and other matters, all as in said agreements provided, the said agreements including the following: (a) Agreement dated October 23, 1922, between the Association and the Central Arizona Light and Power Company, which Agreement was from time to time thereafter amended, providing for the purchase and sale of electric energy and for certain allocations of territory, such Agreement and amendments thereto being hereinafter referred to as the "Agreement of 1922"; and (b) Agreement dated June 24, 1925, between the Association and Central Arizona Light and Power Company, providing for the construction of a power plant at Mormon Flat Dam, and for the purchase and sale of electric energy, such Agreement and its various amendments being hereinafter referred to as the "Agreement of 1925"; and 3 (c) Agreement dated February 8, 1928, between the Association and Central Arizona Light and Power Company providing for the construction of a hydro-electric plant on the Salt River at Stewart Mountain, and for the purchase and sale of electric energy from said hydro-electric plant, and for certain allocations of territory, such Agreement and its various amendments being hereinafter referred to as the "Agreement of 1928"; and (d) Agreement dated July 5, 1930, between Arizona Edison Company and the Association, providing for the purchase and sale of electric energy and for certain allocations of territory; and (e) Agreement dated April 5, 1937, between the Association and Arizona Edison Company, Inc., successor to Arizona Edison Company, supplementing and amending the Agreement of July 5, 1930; and (f) Agreement dated May 31, 1951, between Arizona Edison Company, Inc., and the District, supplementing and amending the Agreement of July 5, 1930; and WHEREAS, the District recognizes its obligation to carry out and perform the obligations of the Association and the District under the contracts, agreements and the amendments thereto hereinabove referred to; and WHEREAS, the Company recognizes its obligation to carry out and perform the obligations undertaken by Arizona Edison Company and and Arizona Edison Company, Inc., and by it under its former name of Central Arizona Light and Power Company, under the aforesaid agreements and amendments thereto; and WHEREAS, certain disputes and differences of opinion have arisen between the Company and the District as to the intent and meaning of certain portions of the above mentioned agreements, particularly with respect to territorial allocations therein, the existence of which disputes and differences would, if uncomposed, be detrimental to the efficient coordination of the two electric systems, and the existence of which would impede the furtherance and advancement of such coordination; and 4 WHEREAS, the parties hereto recognize the advantages, economies and increased efficiencies which can be realized from the coordination of the operations and the construction programs of the two electric systems and the resulting public benefit; and WHEREAS, the District is willing to sell substantial additional amounts of electric power to the Company, and the Company is willing to purchase such additional amounts of electric power only in the event the Company is assured of having the exclusive right insofar as the District is concerned to supply electric service in the territory and to the types of customers and load herein allocated to it; and WHEREAS, on the basis of the principles above set out, and since it is in the public interest that they do so, the parties hereto desire to compose, compromise and settle disputes and differences existing between them, to make revised allocations of territory, customers and load, to restate, clarify and revise certain of the provisions of the contracts and agreements above referred to, to modify the existing contractual rights and obligations existing between them thereunder, to enter into new agreements for the sale of electric power between them, and to merge and consolidate into this Agreement the revised and modified agreements as to territorial allocations and various other matters as hereinafter set out; and WHEREAS, the parties hereto deem the making of the power agreements, hereinafter more fully described, and the making of this Agreement to be desirable in the best interests of themselves, their members, electors, stockholders or shareholders, and of the consumers and the public, and to be necessary and appropriate in the public interest to foster and advance the regional coordination of the electric systems of the Company and the District, and the parties further deem the making of such agreements necessary to enable both the District and the Company to more efficiently and adequately meet the increasing demands of the public for electric power and energy, and to achieve the maximum efficiency of the overall electric operations of both the Company and the District; NOW, THEREFORE, in consideration of the mutual covenants hereof, IT IS AGREED: 5 Article I Article II Section A ARTICLE I - DEFINITIONS ----------------------- 1. The "Salt River Project" is a Federal Reclamation Project and, as such term is herein used with reference to territory, shall mean all territory lying within the boundaries of the Salt River Reservoir District now particularly described in Section 3 of Article IV of the Articles of Incorporation of the Salt River Valley Water Users' Association, filed February 9, 1903, as thereafter amended and now in effect. 2. The words "now" and "present" as herein used shall refer to the date of this Agreement hereinabove set forth. 3. The word "person" as herein used shall mean any individual, corporation, partnership, association, municipality, governmental agency, or political subdivision, of any type whatsoever. 4. "Customer" as herein used shall mean a person who receives or is expected to receive electric service from either the Company or the District. ARTICLE II ---------- TERRITORIAL ALLOCATIONS ----------------------- By this Article, it is the intent of the parties to permanently establish and agree upon the territories in which each may serve electric power and energy to the exclusion of the other, and furthermore as to certain territory hereinafter described to permanently establish and agree upon the types of customers and load to be served by each to the exclusion of the other. SECTION A - Mutual Agreements with Respect to --------------------------------- Territory, Customers and Load ----------------------------- 1. Of District. Inasmuch as the statutes of the United States of America prohibit any lease or sale of surplus power or power privileges which would or might impair the efficiency of irrigation projects created 6 Article II - Section A under the Reclamation Act of 1902, as amended, and if the Company should sell or distribute power within the territory allocated to District in Paragraph 1, Section B of this Article II, or to the particular type of customer or for the particular type of load allocated to the District within that certain territory described in Paragraph 2 (b), Section B of this Article II, such sale or distribution would or might impair the efficiency of the Salt River Project, a Federal Reclamation Project; therefore, it is agreed that neither the electric power and energy purchased under the power contract or contracts hereinafter referred to, nor any other electric power and energy purchased, produced, or otherwise acquired by the Company will be sold, donated or delivered except through the District for use within any of the territory allocated to District in said Paragraph 1, or to the particular type of customer or for the particular type of load allocated to the District within that certain territory described in said Paragraph 2 (b), and, therefore, in the event the Company shall, except through the District, so sell, donate or deliver such electric power and energy to any customer within the territory allocated to District in said Paragraph 1, or to such particular customers or for such particular types of load allocated to the District in Paragraph 2, Section B of this Article II, or so sell, donate or deliver such electric power and energy to others which shall be distributed and/or ultimately consumed within such territory, allocated to District in said Paragraph l, or to or by such particular customers or for such particular types of load allocated to the District in said Paragraph 2, such sale, donation or delivery shall be in violation of this Agreement. 2. Of Company. Inasmuch as the minimum payments to be provided for in the power contract or contracts hereinafter referred to and the commitments of the Company to take and/or pay for the electric power and energy to be furnished to the Company by the District are predicated on the Company's expectation of selling or distributing the full electric power and energy requirements of its customers within the territory allocated to Company in Paragraphs 1 and 2, Section C of this Article II, and within that certain territory described in Paragraph 2 (b), Section B of this Article II, of selling or distributing the full power and energy requirements of the customers or for the types 7 Article II - Section A of load which are allocated to the Company in Paragraph 3 of Section C of this Article II, and inasmuch as the Company could not reasonably commit itself to pay such minimum payments nor to take and/or pay for such electric power and energy from the District in the event the District should directly or indirectly supply such electric power and energy, except through the Company; therefore, it is agreed that except through the Company the District will not sell, donate or deliver any power and energy, purchased, produced, or otherwise acquired by the District, for use within the territory allocated to Company in said Paragraphs I and 2, Section C of this Article II, nor will it sell, donate or deliver such power and energy for sale or use to or by customers or for types of load allocated to the Company in said Paragraph 3; therefore, in the event the District shall, except through the Company, sell, donate or deliver such electric power and energy to any customer within the territory allocated to Company in Paragraphs 1 and 2 of Section C of this Article II, or within that certain territory described in Paragraph 2 (b), Section B of this Article II, to any customer or for any type of load allocated to the Company in said Paragraph 3, or sell, donate or deliver such electric power and energy to others which shall be distributed and/or ultimately consumed within such territory or to or by such customers or types of load, then such sale, donation or delivery shall be in violation of this Agreement. 3. Liability for Liquidated Damages. In the event either the Company or the District shall inadvertently, wilfully, or from any cause, including any order of the Arizona Corporation Commission, or other regulating body, or court of competent jurisdiction, sell, donate or deliver electric power and energy in violation of the provisions of this Agreement, then such party, so long as it continues so to do, shall pay to the other party liquidated damages for such sale, donation or delivery determined in the manner hereinafter provided. 4. Amount of Liquidated Damages. In the event any such sale, donation or delivery is made by either the Company or District to a customer in violation of this Agreement, then, for each such sale, donation or delivery made or continued after the tenth day after written notice has been given to cease such sale, donation or delivery, the 8 Article II - Section A party making such sale, donation or delivery shall pay to the other party hereto as liquidated damages for all electric power and energy so sold, donated or delivered, 35% of the charges applicable to such delivery or like deliveries under the rate schedule or contract of the party making such delivery, or 35% of the revenues which would have resulted from like delivery under the applicable rate for like delivery by the party whose rights hereunder have been infringed upon, if an applicable rate for like delivery has been established by such party prior to the initiation of such sale, donation or delivery by the other party, whichever is the greater; provided, however, that in the event that such infringement is involuntary (due to a final and binding order of a court or commission or governmental officer or agency having jurisdiction in the premises) either party, or if such infringement is voluntary, then the party whose rights hereunder have been infringed upon, may, upon written notification to the other party, require that the amount of the payment to be made hereunder, in lieu of the amount of payment above provided, shall be a different amount to be agreed upon by the parties as being equal to the revenue derived by the infringing party from such delivery, minus the operating revenue deductions attributable to such delivery. The items to be considered as operating revenue deductions for the purposes hereof shall be those included as operating revenue deductions in the Federal Power Commission's Uniform System of Accounts applicable to electric utilities, or such other system of accounts applicable to electric utilities as may then be in effect pursuant to regulations or order of the Federal Power Commission or such other federal commission or agency as may then have jurisdiction to adopt or approve accounting systems or procedures for electric utilities. Should the parties, within ninety (90) days after delivery of the notification above provided for, fail to agree upon the "different amount" above provided, such "different amount" shall be determined by arbitration, to be conducted in the manner provided in the power contract or contracts hereinafter referred to. Payment in the amount determined, as hereinabove provided, shall be made promptly after its determination and if additional amounts shall accrue thereafter from continuance of such violation, such amounts shall be paid at monthly intervals. 9 Article II - Section A 5. Other Remedies. In the event of any sale, donation or delivery of power and energy in violation of this Agreement, the party whose rights hereunder have thereby been infringed upon shall be entitled to the damages provided in Paragraph 4, Section A of this Article II and to injunctive relief, and shall not be entitled to any other remedies or relief at law or in equity unless such party has been unable to obtain either injunctive relief or the damages provided in the said Paragraph 4 after full utilization of the procedures set out in the said paragraph. In no event may this Agreement be terminated by one party hereto because of a voluntary sale, donation or delivery in violation of this agreement by the other party, unless (a) the existence of the violation has been established by a final decision, order or opinion of a court having jurisdiction in the premises, and (b) after the existence of the violation has been so established, notice has been given by the party whose rights have been infringed upon of intent to terminate unless within 90 days; (i) the damages provided in said paragraph 4 have been paid or a proffer of payment has been made, if the infringing party is lawfully able so to do, and (ii) the violation has ceased, if such cessation is requested by the party whose rights have been infringed upon, and (c) the infringing party has failed to comply with the provisions of items (i) and (ii) of subparagraph (b) above within such 90 day period, and within 30 days from the expiration of said 90 day period written notice of termination has been given by the party whose rights have been infringed upon. In no event may this Agreement be terminated by one party hereto because of an involuntary sale, donation or delivery in violation of this Agreement by the other party. 10 Article II - Section B Section B - District's Territory, Customers and Load ---------------------------------------- 1. Western Area. The District shall have the exclusive right, insofar as the Company is concerned, to provide electric service for all purposes in that territory within the following described boundaries, ave and except such territory lying within said boundaries as to which such right is allocated to the Company by Section C of this Article II: Beginning at the Southeast corner of Section 36, Township 3 South, Range 10 East, Gila and Salt River Base and Meridian, at the intersection of the South line of Township 3 South with the East line of Range 10 East, said point being designated as "A" on Exhibit 1; thence Northerly along the "A" said East line of Range 10 East to its intersection with the Maricopa-Pinal County line, said point being designated as "B" on Exhibit 1; thence Easterly along the said "B" Maricopa-Pinal County line to its intersection with the Gila County line, said point being designated as "C" on Exhibit 1; "C" thence Northwesterly along the Gila-Maricopa County line to its intersection with the North line of Township 2 north; thence Easterly along the said North line of Township 2 North to a point, designated as "D" on Exhibit 1, due South of the "D" Southeast corner of Section 4, Township 3 North, Range 14 East; thence North on a straight line to the said Southeast corner of Section 4; thence Northerly along the Eastline of said Section 4 and along the East lines of Sections 33 and 28, Township 4 North, Range 14 East; thence continuing due North on a straight line to the North line of Township 4 North; thence Easterly along the said North line of Township 4 North to the Southeast corner of Section 33, Township 5 North, Range 14 East; thence Northerly along the East line of said Section 33 and the East lines of Sections 28, 21, 16, 9 and 4, Township 5 North, Range 14 East, to the North line of Township 5 North, said point being designated as "E" on "E" Exhibit 1; thence Westerly along the said North line of Township 5 North to its intersection with the Maricopa County line, said point being designated as "F" on Exhibit 1; thence "F" in a general Northerly and Westerly direction along the Maricopa County line to its intersection with the East line of Range 5 East, said point 11 Article II - Section B being designated as "G" on Exhibit 1; thence Southerly along "G" the said East line of Range 5 East to the Southeast corner of Section 25, Township 3 North, Range 5 East, thence Westerly along the South line of said Section 25 and the South lines of Sections 26, 27, 28, 29 and 30, Township 3 North, Range 5 East, to the Southwest corner of said Section 30, said point being designated as "H" on Exhibit 1; thence Southerly along "H" the West line of Section 31, Township 3 North, Range 5 East, and along the West lines of Sections 6 and 7, Township 2 North, Range 5 East, to the intersection of the said West line of Section 7 with the North right-of-way line of the Arizona Canal as now located (see Note 1); thence Westerly along the said North right-of-way line of the Arizona canal to its intersection with the South line of Section 14, Township 2 North, Range 4 East, said point being designated as "J" on Exhibit 1; thence Westerly along the South line of "J" said Section 14 and the South line of Section 15, Township 2 North, Range 4 East, to the Southwest corner of said Section 15; thence Westerly along the South line of Section 16, Township 2 North, Range 4 East, to the Southwest corner of the Southeast quarter of the Southeast quarter of said Section 16; thence Northerly and parallel to the East line of said Section 16 for a distance of 660 feet; thence Westerly and parallel to the South line of said Section 16, more or less along the ridge of Camelback Mountain, for a distance of 1,980 feet; thence Northwesterly, more or less along said ridge, on a straight line to a point on the East-West mid-section line of Section 17, Township 2 North, Range 4 East, said point being 660 feet East of the center of said Section 17; thence Westerly along the East-West mid-section line of said Section 17 and along the East-West mid-section line of Section 18, Township 2 North, Range 4 East, to the center of said Section 18; thence Northerly along the North-South mid-section line of said Section 18 and the North-South mid-section line of Section 7, Township 2 North, Range 4 East, to the North line of said Section 7; thence Westerly along the North line of said Section 7 and along the North lines of Sections 12, 11 and 10, Township 2 North, Range 3 East, to the intersection of the North line of said Section 10 with the North right-of-way line of the Arizona Canal as now located (see Note 1); 12 Article II - Section B thence Northwesterly along the said North right-of-way line of the Arizona Canal to a point 660 feet East of the West line of Section 1, Township 3 North, Range 1 East; thence Northerly and parallel to the West line of said Section 1 to a point more or less in the center of Skunk Creek, said point being 800 feet South of the North line of said Section 1, and designated as "K" on Exhibit 1; thence in a Southwesterly "K" direction along the approximate center line of Skunk Creek, New River and the Agua Fria River to the approximate center of the Gila River, said line being more fully described as follows: Beginning at same said point "K" in the approximate "K" center of Skunk Creek 800 feet South of the North line of Section 1, Township 3 North, Range 1 East; thence Southwesterly on a straight line to a point on the West line of said Section 1, said point being 900 feet South of the Northwest corner of said Section 1; thence Southwesterly on a straight line to a point 660 feet West and 600 feet North of the East quarter corner of Section 2, Township 3 North, Range 1 East; thence Southwesterly on a straight line to a point 660 feet East and 200 feet South of the center of said Section 2; thence Southwesterly on a straight line to a point 800 feet West and 850 feet North of the South quarter corner of said Section 2; thence Westerly and parallel to the South line of said Section 2 to a point 1,000 feet East of the West line of said Section 2; thence Southwesterly on a straight line to a point on the South line of said Section 2, said point being 800 feet East of the Southwest corner of said Section 2; thence Southwesterly on a straight line to a point on the West line of Section 11, Township 3 North, Range 1 East, 660 feet South of the Northwest corner of said Section 11; thence Southwesterly on a straight line to a point 660 feet East and 350 feet North of the Southwest corner of Section 10, Township 3 North, Range 1 East; thence Southwesterly on a straight fine to a point 660 feet East and 660 feet North of the South quarter corner of Section 16, Township 3 North, Range 1 East; thence Southwesterly on a straight line to the center of Section 21, Township 3 North, Range 1 East; thence Southwesterly on a straight line to a point 660 feet East and 1,320 feet South of the Northwest 13 Article II - Section B corner of Section 28, Township 3 North, Range 1 East; thence Southwesterly on a straight line to the Southwest corner of said Section 28; thence Southwesterly on a straight line to a point on the East-West mid-section line of Section 32, Township 3 North, Range 1 East, 1,320 feet West of the East quarter corner of said Section 32; thence Southerly on a straight line to a point 1,320 feet West and 1,320 feet South of the Northeast corner of Section 5, Township 2 North, Range 1 East; thence Southwesterly on a straight line to the center of said Section 5; thence Southerly along the North-South mid-section line to the South quarter corner of said Section 5; thence Southwesterly on a straight line to a point on the North line of Section 18, Township 2 North, Range 1 East, 1,320 feet West of the Northeast corner of said Section 18; thence Southwesterly on a straight line to a point on the East-West mid-section line of said Section 18, said point being 1,320 feet East of the West quarter corner of said Section 18; thence Southwesterly on a straight line to the Southwest corner of said Section 18; thence Southwesterly on a straight line to the center of Section 24, Township 2 North, Range 1 West; thence Southerly along the North-South mid-section line of said Section 24 and the North-South mid-section line of Section 25, Township 2 North, Range 1 West, to the South quarter corner of said Section 25; thence Southwesterly on a straight line to a point 1,320 feet East and 1,320 feet North of the Southwest corner of Section 36, Township 2 North, Range 1 West; thence Southwesterly on a straight line to the Southwest corner of said Section 36; thence Westerly along the North line of Section 2, Township 1 North, Range 1 West, to the North quarter corner of said Section 2; thence Southwesterly on a straight line to a point on the East-West mid-section line of said Section 2, said point being 660 feet West of the center of said Section 2; thence Southeasterly on a straight line to the center of Section 11, Township 1 North, Range 1 West; thence Southerly along the North-South mid-section line of said Section 11 to the to the South quarter corner of said Section 11; thence Southwesterly on a straight line to the Southwest corner of Section 14, Township 1 North, 14 Article II - Section B Range 1 West; thence Southwesterly on a straight line to a point on the South line of Section 22, Township 1 North, Range 1 West, 660 feet West of the South quarter corner of said Section 22; thence Southwesterly on a straight line to the West quarter corner of Section 27, Township 1 North, Range 1 West; thence Southwesterly on a straight line to a point, designated as "L" on Exhibit 1, in the approximate "L" center of the Gila River; said point being on the North-South mid-section line of Section 33, Township 1 North, Range 1 West, 660 feet North of the center of said Section 33; thence in a general Southeasterly direction along the approximate center of the Gila River to the South line of Township 3 South; said line being more fully described as follows: Beginning at the same said point "L" on the "L" North-South mid-section line of Section 33, Township 1 North, Range 1 West, 660 feet North of the center of said Section 33; thence Southeastly on a straight line to the center of Section 34, Township 1 North, Range 1 West; thence Easterly along the East-West mid-section line of said Section 34 and the East-West mid-section line of Section 35, Township 1 North, Range 1 West, to the center of said Section 35; thence Southeasterly on a straight line to a point on the East line of said Section 35, said point being 1,320 feet North of the Southeast corner of said Section 35; thence Easterly on a straight line to a point on the East line of Section 36, Township 1 North, Range 1 West, 1,320 feet North of the Southeast corner of said Section 36; thence Southeasterly on a straight line to the East quarter corner of Section 6, Township 1 South, Range 1 East; thence Southerly along the East line of said Section 6 and the West line of Section 8, Township 1 South, Range 1 East, to the West quarter cornet of said Section 8; thence Southeasterly on a straight line to the center of Section 17, Township 1 South, Range 1 East; thence Southeasterly on a straight line to the center of Section 21, Township 1 South, Range 1 East; thence Easterly along the East-West mid-section line of said Section 21 and the East-West mid-section line of Section 22, Township 1 South, Range 1 East, to the center of said Section 22; thence Southeasterly on a straight line to the Northwest corner of Section 26, Township 1 South, Range 1 East; 15 Article II - Section B thence Easterly along the North line of said Section 26 to the Northeast corner of said Section 26; thence Southeasterly on a straight line to the Southeast corner of Section 25, Township 1 South, Range 1 East; thence Southeasterly on a straight line to the center of Section 31, Township 1 South, Range 2 East; thence Southerly along the North-South midsection line of said Section 31 to the South quarter corner of said Section 31; thence Southeasterly on a straight line to the center of Section 6, Township 2 South, Range 2 East; thence Southerly along the North-South mid-section line of said Section 6 and along the North-South mid-section line of Section 7, Township 2 South, Range 2 East, to the South quarter corner of said Section 7; thence Easterly along the South line of said Section 7 and along the North line of Section 17, Township 2 South, Range 2 East, to the North quarter corner of said Section 17; thence Southeasterly on a straight line to the center of Section 16, Township 2 South, Range 2 East; thence Southeasterly on a straight line to the North quarter corner of Section 22, Township 2 South, Range 2 East; thence Southeasterly on a straight line to the West quarter corner of Section 23, Township 2 South, Range 2 East; thence Southeasterly on a straight line to the North quarter corner of Section 26, Township 2 South, Range 2 East; thence Southeasterly on a straight line to the East quarter corner of Section 25, Township 2 South, Range 2 East; thence Southeasterly on a straight line to the South quarter corner of Section 30, Township 2 South, Range 3 East thence Southerly along the North-South mid-section line of Section 31, Township 2 South, Range 3 East, to the South quarter corner of said Section 31, said point being designated as "M" "M" on Exhibit 1; thence Southeasterly on a straight line to the center of Section 5, Township 3 South, Range 3 East; thence Southeasterly on a straight line to the North quarter corner of Section 9, Township 3 South, Range 3 East; thence Southeasterly on a straight line to the center of Section 10, Township 3 South, Range 3 East; thence Southeasterly on a straight line to the North quarter corner of Section 14, Township 3 South, Range 3 East; thence Southeasterly on a straight line to the center of Section 13, Township 3 South, Range 3 East; thence Southeasterly on a straight line to the Southeast corner of said Section 13; thence 16 Article II - Section B Southeasterly on a straight line to the East quarter corner of Section 19, Township 3 South, Range 4 East; thence Northeasterly on a straight line to the Northeast corner of Section 20, Township 3 South, Range 4 East; thence Northeasterly on a straight line to the East quarter corner of Section 16, Township 3 South, Range 4 East; thence Easterly along the East-West mid-section line of Section 15, Township 3 South, Range 4 East, to the East quarter corner of said Section 15; thence Easterly along the East-West mid-section line of Section 14, Township 3 South, Range 4 East, to the East quarter corner of said Section 14; thence Southeasterly on a straight line to the Southeast corner of Section 13, Township 3 South, Range 4 East; thence Southeasterly on a straight line to the East quarter corner of Section 19, Township 3 South, Range 5 East; thence Easterly along the East-West mid-section line of Section 20, Township 3 South, Range 5 East, to the East quarter corner of said Section 20; thence Easterly along the East-West mid-section line of Section 21, Township 3 South, Range 5 East, to the center of said Section 21; thence Southeasterly on a straight line to the East quarter corner of Section 28, Township 3 South, Range 5 East; thence Southeasterly on a straight line to the East quarter corner of Section 34, Township 3 South, Range 5 East; thence Southeasterly on a straight line to the Southeast corner of Section 35, Township 3 South, Range 5 East, said point being designated as "N" on "N" Exhibit 1; thence Easterly along the South line of Township 3 South to its intersection with the East line of Range 10 East, the point of beginning, same said point being designated as "A" on Exhibit 1; a map or plat of which is "A" attached hereto as Exhibit 1 and by reference made a part of this Agreement. (Note 1. Arizona Canal as now located is being surveyed and monumented, and upon the completion of such survey and its acceptance by the parties hereto such survey shall become a part hereof by reference.) 17 Article II - Section B 2. Eastern Area. (a) The District shall have the exclusive right, insofar as the Company is concerned, to provide the full electric power and energy requirements within the "Eastern Area", described in subparagraph (b) of this Paragraph 2, as follows: (1) District shall have the right to make direct sales to the customer for all mining, milling and smelting operations and related exploring operations not now served by the Company, it being understood that oil or gas drilling, pumping and production do not constitute mining, milling and smelting operations and related exploring operations. The electric power and energy furnished by the District to the customer under this subparagraph (1) shall be sold for use by the customer for such operations and auxiliary loads pertinent to these operations, including domestic and commercial uses by the employees, officials, tenants, licensees and agents of the customer and of any company and/or corporation controlled by such customer, if such auxiliary loads are supplied through the same delivery point or points as such mining, milling and smelting operations and related exploring operations. The District may permit electric power and energy so furnished to be resold by the customer only for such operations and auxiliary loads as are allocated to the District by subparagraphs (1) and (2) of this Paragraph 2 (a), provided, that in future contracts with customers in the Eastern area, exclusive of extensions and renewals of existing contracts, the District will not permit resale for domestic and commercial uses. 18 Article II - Section B (2) District shall have the right to make direct sales to the customer for all mineral or metal processing operations not now served by the Company, other than those included in subparagraph (1) of this Paragraph 2 (a). The electric power and energy furnished by the District to the customer under this subparagraph (2) shall be sold for use by the customer for such operations and auxiliary loads pertinent to these operations, including domestic and commercial uses by the employees, officials, tenants, licensees and agents of the customer and of any company and/or corporation controlled by such customer, if such auxiliary loads are supplied through the same delivery point or points as such mineral or metal processing operations. The District may permit electric power and energy so furnished to be resold by the customer only for such operations and auxiliary loads as are allocated to the District by subparagraphs (1) and (2) of this Paragraph 2 (a), but will not in any case permit resale for domestic or commercial purposes. The District's right to make the sales provided for by this subparagraph (2) shall be limited to the periods during which such mineral or metal processing operations are owned or controlled by the same exploring, mining, milling or smelting customer owning or controlling operations served by the District under the provisions of subparagraph (1) of this Paragraph 2 (a) and principally involve the use or processing of minerals or metals mined, milled, or smelted by such customer. (3) The District shall have the right to make sales to the Company for the Company's use and for resale by the Company to all customers and for all types of load not allocated to the District for direct sale in the preceding sub-paragraphs (1) and (2) of this paragraph 2 (a), subject, however, to the following exceptions: 19 Article II - Section B (i) At Globe and Miami, Arizona, Company shall have the right to use its generating facilities presently there located; (ii) If, in accordance with Paragraph 4, Section A of Article III, the District shall not supply certain power to the Company in the Eastern area, the Company shall have the right to utilize electric power and energy from sources other than the District, as provided for in said Paragraph 4; (iii) If, any or all of the power contracts agreed to be entered into in Paragraphs 1, 2, 3 and 4 of Section A of Article III are terminated, the Company shall have the right to utilize electric power and energy from sources other than the District for the power requirements provided for in any of the said contracts so terminated. The utilization by the Company of power from sources other than the District as provided for in exceptions (i), (ii) and (iii) of this subparagraph (3) shall not alter, amend or affect the District's exclusive right to serve the customers and the load allocated to it by this Paragraph 2 (a) other than as provided for in such exceptions. (b) The "Eastern area" as such phrase is herein used shall include all that territory within the following described boundaries: Beginning at the Southeast corner of Section 36, Township 3 South, Range 10 East, Gila and Salt River Base and Meridian, at the intersection of the South line of Township 3 South with the 20 Article II - Section B East line of Range 10 East, said point being designated as "A" on Exhibit 2; thence Easterly along the said South line "A" of Township 3 South to its intersection with the East line of Range 12 East, being the Northwest corner of Section 6, Township 4 South, Range 13 East; thence Southerly along the West line of said Section 6 for a distance of 1,980 feet; thence following more or less the course of the Gila River; more fully described as follows: Beginning at same said point on the West line of Section 6, Township 4 South, Range 13 East, 1,980 feet South of the Northwest corner of said Section 6; thence Easterly and parallel to the North line of said Section 6 and continuing Easterly and parallel to the North line of Section 5, Township 4 South, Range 13 East, to a point on the North-South mid-section line of said Section 5; thence Southeasterly on a straight line to a point on the East line of said Section 5, said point being 1,320 feet North of the Southeast corner of said Section 5; thence Easterly and parallel to the South line of Section 4, Township 4 South, Range 13 East, for a distance of 1,320 feet; thence Northeasterly on a straight line to the center of said Section 4; thence Southeasterly on a straight line to a point on the West line of Section 10, Township 4 South, Range 13 East, 1,320 feet South of the Northwest corner of said Section 10; thence Northeasterly on a straight line to a point on the North line of said Section 10, said point being 1,320 feet West of the Northeast corner of said Section 10; thence Southeasterly on a straight line to a point on the West line of Section 11, Township 4 South, Range 13 East, 900 feet South of the Northwest corner of said Section 11; thence Easterly and parallel to the North line of said Section 11 to the North-South mid-section line of said Section 11; thence Northeasterly on a straight line to a point on the West line of Section 1, Township 4 South, Range 13 East, 330 feet North of the Southwest corner of said Section 1; thence Southeasterly on a straight line to a point 1,320 feet West and 900 feet South of the Northeast corner of Section 12, Township 4 South, Range 13 East; thence Northeasterly on a straight line to the Northeast corner of said Section 12; thence Easterly along the South line of Section 6, Township 4 South, Range 14 East, to the 21 Article II - Section B South quarter corner of said Section 6; thence Southerly along the North-South mid-section line of Section 7, Township 4 South, Range 14 East, to the center of said Section 7; thence Southeasterly on a straight line to a point on the East line of Section 18, Township 4 South, Range 14 East, 660 feet South of the Northeast corner of said Section 18; thence Southeasterly on a straight line to a point on the South line of Section 17, Township 4 South, Range 14 East, 1,320 feet West of the Southeast corner of said Section 17; thence Southeasterly on a straight line to the South quarter corner of Section 21, Township 4 South, Range 14 East; thence Southerly along the North-South mid-section line of Section 28, Township 4 South, Range 14 East, and along the North-South mid-section line of Section 33, Township 4 South, Range 14 East, to a point 330 feet South of the North quarter corner of said Section 33, said point being designated as "H" "H" on Exhibit 2; thence Easterly on a straight line through said Section 33 and Section 34, Township 4 South, Range 14 East, to a point on the West line of Section 35, Township 4 South, Range 14 East, 330 feet South of the Northwest corner of said Section 35; thence Southeasterly on a straight line to a point on the South line of said Section 35, said point being 1,320 feet West of the Southeast corner of said Section 35; thence Southeasterly on a straight line to a point on the South line of Section 1, Township 5 South, Range 14 East, 330 feet East of the South quarter corner of said Section 1; thence Southeasterly on a straight line to the East quarter corner of Section 12, Township 5 South, Range 14 East; thence Easterly along the East-West midsection lines of Sections 7 and 8, Township 5 South, Range l5 East, to the center of said Section 8; thence Southeasterly on a straight line to a point on the South line of Section 9, Township 5 South, Range 15 East, 660 feet East of the Southwest corner of said Section 9; thence Southeasterly on a straight line to a point on the East line of Section 16, Township 5 South, Range 5 East, said point being 990 feet South of the East quarter corner of said Section 16; thence Southeasterly on a straight line through Sections 15 and 22, Township 5 South, Range 15 East, to the East quarter corner of said Section 22, said point being designated as "G" on Exhibit 2; thence Easterly along the East-West mid-sec "G" 22 Article II - Sections B & C tion line of Section 23, Township 5 South, Range 15 East, to the center of said Section 23; thence Northerly along the North-South mid-section line of said Section 23, to its intersection with the Gila-Pinal County line; thence Northeasterly following the Gila County line to its intersection with the center of Black River, said point being designated as "F" on Exhibit 2; thence Westerly along the "F" center of the Black River to its intersection with the center of the Salt River, said point being the confluence of the Black and White Rivers; thence Westerly along the said center of the Salt River to its intersection with a point due South of the Southeast corner of Section 4, Township 3 North, Range 14 East, said point being designated as "E" on Exhibit 2; thence due South on a straight line to the North line of "E" Township 2 North, said point being designated as "D" on Exhibit 2; thence Westerly along said North line of Township "D" 2 North to its intersection with the Gila-Maricopa County line; thence Southeasterly along the Gila-Maricopa County line to its intersection with the Maricopa-Pinal County line, said point being designated as "C" on Exhibit 2; thence Westerly along the Maricopa-Pinal County line to its "C" intersection with the East line of Range 10 East, said point being designated as "B" on Exhibit 2; thence Southerly along "B" the said East line of Range 10 East to its intersection with the South line of Township 3 South, the point of beginning, same said point being designated as "A" on Exhibit 2; a map "A" or plat of which is attached hereto as Exhibit 2 and by reference made a part of this Agreement. SECTION C - Company's Territory, Customers and Load --------------------------------------- 1. Cities, Towns and Miscellaneous Areas Within Salt River Project. The Company shall have the exclusive right, insofar as the District is concerned, to provide electric service for all purposes in the following described territory: (a) Phoenix. All that territory lying within the following described boundaries: 23 Article II - Section C Beginning at the Northwest corner of Section 26, Township 2 North, Range 2 East, Gila and Salt River Base and Meridian, said point being designated as "A" on Exhibit 3; "A" thence Southerly along the West lines of said Section 26 and Section 35, Township 2 North, Range 2 East, to the Southwest corner of said Section 35; thence Westerly along the North line of Section 3, Township 1 North, Range 2 East, to the North quarter corner of said Section 3; thence Southerly along the North-South mid-section line of said Section 3 to the North quarter corner of Section 10, Township 1 North, Range 2 East; thence Westerly along the North lines of said Section 10 and Section 9, Township 1 North, Range 2 East, to the Northwest corner of said Section 9, said point being designated as "B" on Exhibit 3; thence Southerly along the "B" West line of said Section 9 to the Southwest corner of said Section 9; thence Easterly along the South lines of said Sections 9 and 10 to the North quarter corner of Section 15, Township 1 North, Range 2 East; thence Southerly along the North-South mid-section lines of said Section 15 and Section 22, Township 1 North, Range 2 East, to a point 1,650 feet North of the South quarter corner of Said Section 22, said point being designated as "C" on Exhibit 3; thence Easterly "C" and parallel to the South line of said Section 22 for a distance of 1,980 feet; thence Northerly and parallel to the East line of said Section 22 for a distance of 660 feet; thence Easterly on a straight line to a point on the East line of said Section 22, said point being 2,310 feet North of the Southeast corner of said Section 22; thence Easterly on a straight line to a point on the North-South mid-section line of Section 23, Township 1 North, Range 2 East, 2,310 feet North of the South quarter corner of said Section 23; thence Northeasterly on a straight line to a point on the East line of said Section 23, said point being 330 feet North of the East quarter corner of said Section 23; thence Easterly and parallel to the East-West mid-section line of Section 24, Township 1 North, Range 2 East, for a distance of 660 feet; thence Northerly and parallel to the West line of said Section 24 a distance of 330 feet; thence Easterly and parallel to the East- 24 Article II - Section C West mid-section line of said Section 24, a distance of 3,300 feet; thence Southerly and parallel to the East line of said Section 24, a distance of 330 feet; thence Easterly on a straight line to a point on the East line of said Section 24, 330 feet North of the east quarter corner of said Section 24; thence Northeasterly on a straight line to a point on the North-South mid-section line of Section 19, Township I North, Range 3 East, 1,980 feet South of the North quarter corner of said Section 19; thence Easterly and parallel to the North line of said Section 19, a distance of 1,980 feet; thence Northerly and parallel to the East line of said Section 19 a distance of 330 feet; thence Easterly on a straight line to a point on the East line of Section 19, said point being 1,650 feet South of the Northeast corner of said Section 19, said point being designated as "D" on Exhibit 3; thence Northerly "D" along the East line of said Section 19 to a point 990 feet South of the Northeast corner of said Section 19; thence Northeasterly on a straight line to a point on the North-South mid-section line of Section 20, Township 1 North, Range 3 East, 660 feet South of the North quarter corner of said Section 20; thence Northeasterly to a straight line to the Northeast corner of said Section 20; thence Southeasterly on a straight line to a point on the East line of Section 21, Township 1 North, Range 3 East, 330 feet South of the Northeast corner of said Section 21; thence Southeasterly on a straight line to a point on the East line of Section 22, Township 1 North, Range 3 East, 990 feet South of the Northeast corner of said Section 22; thence Easterly on a straight line to a point on the East line of Section 23, Township 1 North, Range 3 East, 990 feet South of the Northeast corner of said Section 23, said point being designated as "E" on Exhibit 3; thence Northeasterly on a "E" straight line through Sections 24 and 13, Township 1 North, Range 3 East, to a point on the East line of said Section 13, said point being 330 feet South of the East quarter corner of said Section 13; thence Northeasterly on a straight line to a point on the North-South mid-section line of Section 18, Township 1 North, Range 4 East, 1,320 feet South of the North quarter corner of said 25 Article II - Section C Section 18; thence Easterly on a straight line to a point on the East line of said Section 18, said point being 1,320 feet South of the Northeast corner of said Section 18; thence Northeasterly on a straight line to a point on the North-South mid-section line of Section 17, Township 1 North, Range 4 East, 990 feet South of the North quarter corner of said Section 17; thence Northerly along North-South mid-section lines of said Section 17 and Sections 8 and 5, Township 1 North, Range 4 East, to center of said Section 5, said point being designated as "F" on Exhibit 3; thence "F" westerly along the East-West mid-section lines of said Section 5 and Section 6, Township North, Range 4 East, and Section 1, Township 1 North, Range 3 East, to the intersection of the said East-West mid-section line of Section 1 with the South right-of-way line of the Grand Canal as now located (see Note 2); thence Northwesterly along the said South right-of-way line of the Grand Canal through said Section 1 and Section 2, Township 1 North, Range 3 East, and Sections 35 and 34, Township 2 North, Range 3 East, to a point 660 feet West of the East line of said Section 34, said point being designated as "G" on Exhibit 3; thence Northerly "G" and parallel to the East line of said Section 34 and continuing Northerly and parallel to the East lines of Sections 27 and 22, Township 2 North, Range 3 East, to a point in said Section 22 which is 660 feet West of the East line of said Section 22 and 1,320 feet North of the South line of said Section 22; thence Westerly along a line parallel to and 1,320 feet North of the South line of said Section 22 to a point which is 660 feet East of the West line of said Section 22; thence Northerly and parallel to the West line of said Section 22 and continuing Northerly and parallel to the West lines of Sections 15 and 10, Township 2 North, Range 3 East, to a point where said line intersects the South right-of-way line of the Arizona Canal as now located (see Note 1), said point being designated as "H" on Exhibit 3; "H" thence Northwesterly along the said South right-of-way line of the Arizona Canal through said Section 10, and Sections 3 and 4, Township 2 North, Range 3 East, and Sections 33, 32, 29 and 30, Town- 26 Article II - Section C ship 3 North, Range 3 East, to a point on said South right-of-way line of the Arizona Canal which is 660 feet West of the East line of said Section 30, Township 3 North, Range 3 East, said point being designated as "J" on Exhibit 3; "J" thence Southerly on a line parallel to the East lines of said Section 30 and Section 31, Township 3 North, Range 3 East, and continuing Southerly on a line parallel to the East lines of Sections 6, 7, 18 and 19, Township 2 North, Range 3 East, to a point on the South right-of-way line of the Grand Canal as now located (see Note 2); thence Southwesterly along the said South right-of-way line of the Grand Canal through said Section 19, Township 2 North, Range 3 East, and Sections 24 and 25, Township 2 North, Range 2 East, to its intersection with the East line of Section 26, Township 2 North, Range 2 East; thence Northerly along the East line of said Section 26 to the Northeast corner of said Section 26; thence Westerly along the North line of said Section 26 to the Northwest corner of said Section 26, the point of beginning, same said point being designated as "A" on Exhibit 3; a map or plat of "A" which is attached hereto as Exhibit 3 and by reference made a part of this Agreement. (Note 1. Arizona Canal as now located is being surveyed and monumented, and upon the completion of such survey and its acceptance by the parties hereto such survey shall become a part hereof by reference.) (Note 2. Grand Canal as now located is being surveyed and monumented, and upon the completion of such survey and its acceptance by the parties hereto such survey shall become a part hereof by reference.) (b) Towns. Areas generally surrounding and including certain of the towns within the boundaries of the Salt River Project, as follows: 27 Article II - Section C (1) Chandler. All that territory lying within the the following described boundaries: Beginning at the Northwest corner of Section 28, Township 1 South, Range 5 East, Gila and Salt River Base and Meridian; thence Easterly along the North lines of said Section 28 and Section 27, Township 1 South, Range 5 East, to the Northeast corner of said Section 27; thence Southerly along the East lines of said Section 27 and Section 34, Township 1 South, Range 5 East, to the Southeast corner of said Section 34; thence Westerly along the South lines of said Section 34 and Section 33, Township 1 South, Range 5 East, to the Southwest corner of said Section 33; thence Northerly along the West lines of said Section 33 and said Section 28 to the Northwest corner of said Section 28, the point of beginning; a map or plat of which is attached hereto as Exhibit 4 and by reference made a part of this Agreement. (2) Gilbert. All that territory lying within the following described boundaries: Beginning at a point on the West line of Section 1, Township 1 South, Range 5 East, Gila and Salt River Base and Meridian, 1,320 feet North of the Southwest corner of said Section 1; thence Easterly and parallel to the South lines of said Section 1, and Section 6, Township 1 South, Range 6 East, to a point on the East line of said Section 6, said point being 1,320 feet North of the Southeast corner of said Section 6; thence Southerly along the East lines of said Section 6, Sections 7 and 18, Township 1 South, Range 6 East, to a point 1,320 feet North of the Southeast corner of said Section 18; thence Westerly and parallel to the South lines of said Section 18 and Section 13, Township 1 South, Range 5 East, to a point on the West line of 28 Article II - Section C Section 13, said point being 1,320 feet North of the Southwest corner of said Section 13; thence Northerly along the West lines of said Section 13, Section 12, and said Section 1, Township 1 South, Range 5 East, to a point 1,320 feet North of the Southwest corner of said Section 1, the point of beginning; a map or plat of which is attached hereto as Exhibit 5 and by reference made a part of this Agreement. (3) Glendale. All that territory lying within the following described boundaries: Beginning at a point on the North line of Section 6, Township 2 North, Range 2 East, Gila and Salt River Base and Meridian, 660 feet East of the Northwest corner of said Section 6; thence Easterly along the North lines of said Section 6 and Section 5, Township 2 North, Range 2 East, to the Northeast corner of said Section 5; thence Southerly along the East line of said Section 5 to a point 1,320 feet North of the Southeast corner of said Section 5; thence Easterly and parallel to the South line of Section 4, Township 2 North, Range 2 East, for a distance of 1,320 feet; thence Southerly and parallel to the West lines of said Section 4 and Section 9, Township 2 North, Range 2 East, to a point in the South line of Section 9, Township 2 North, Range 2 East, 1,320 feet East of the Southwest corner of said Section 9; thence Westerly along the South lines of said Section 9, and Sections 8 and 7, Township 2 North, Range 2 East, to a point 660 feet East of the Southwest corner of said Section 7; thence Northerly and parallel to the West lines of said Section 7 and said Section 6 to a point on the North line of said Section 6, said point being 660 feet East of the Northwest corner of said Section 6, the point of beginning; a map or plat of which is attached hereto as Exhibit 6 and by reference made a part of this Agreement. 29 Article - Section C (4) Peoria. All that territory lying within the following described boundaries: Beginning at the Northwest corner of Section 22, Township 3 North, Range 1 East, Gila and Salt River Base and Meridian; thence Easterly along the North lines of said Section 22 and Section 23, Township 3 North, Range 1 East, to the Northeast corner of said Section 23; thence Southerly along the East lines of said Section 23 and Section 26, Township 3 North, Range 1 East, to the Southeast corner of said Section 26; thence Westerly along the South lines of said Section 26 and Section 27, Township 3 North, Range 1 East, to the Southwest corner of said Section 27; thence Northerly along the West lines of said Section 27 and said Section 22 to the Northwest corner of said Section 22, the point of beginning; a map or plat of which is attached hereto as Exhibit 7 and by reference made a part of this Agreement. (5) Scottsdale. All that territory lying within the following described boundaries: Beginning at the Southwest corner of Section 27, Township 2 North, Range 4 East, Gila and Salt River Base and Meridian; thence Northerly along the West line of said Section 27 to the South right-of-way line of the Arizona Canal as now located (see Note 1); thence in a Northeasterly direction along said South right-of-way line of the Arizona Canal through said Section 27 and Sections 22 and 23, Township 2 North, Range 4 East, to its intersection with the North line of said Section 23; thence Easterly along the North line of said Section 23 to the Northeast corner of said Section 23; thence Southerly along the East lines of said Section 23 and Section 26, Township 2 North, Range 4 East, to the Southeast corner of said Section 30 Article II - Section C 26; thence Westerly along the South lines of said Section 26 and said Section 27 to the Southwest corner of said Section 27, the point of beginning; a map or plat of which is attached hereto as Exhibit 8 and by reference made a part of this Agreement. (Note 1. Arizona Canal as now located is being surveyed and monumented, and upon the completion of such survey and its acceptance by the parties hereto such survey shall become a part hereof by reference.) (6) Tempe. All that territory lying within the following described boundaries: Beginning at a point on the South line of Section 21, Township 1 North, Range 4 East, Gila and Salt River Base and Meridian, 1,320 feet East of the Southwest corner of said Section 21; thence Northerly and parallel to the West lines of said Section 21 and Sections 16 and 9, Township 1 North, Range 4 East, to a point 2,640 feet North of the South line of said Section 9; thence Easterly and parallel to the South lines of said Section 9 and Sections 10 and 11, Township 1 North, Range 4 East, to a point 2,640 feet East and 2,640 feet North of the Southwest corner of said Section 11; thence Southerly and parallel to the West lines of said Section 11 and Sections 14 and 23, Township 1 North, Range 4 East, to a point on the South line of said Section 23; thence Westerly along the South lines of said Section 23 and Sections 22 and 21, Township 1 North, Range 4 East, to a point 1,320 feet East of the Southwest corner of said Section 21, the point of beginning; EXCEPTING therefrom Block 67 of the original Townsite of Tempe a map or plat of 31 Article II - Section C which is attached hereto as Exhibit 9 and by reference made a part of this Agreement. (c) Miscellaneous. The following additional miscellaneous areas: (1) That area near Tempe, Arizona (commonly referred to as the Borden Plant Area), particularly described as follows: Beginning at a point on the North-South midsection line of Section 23, Township 1 North, Range 4 East, Gila and Salt River Base and Meridian, where said mid-section line intersects the North right-of-way line of the old Tempe-Mesa Highway; said point being North 0(degree)43' West 1733.35 feet from the center of said Section 23; thence North 0(degree) 43' West 44 feet; thence South 85(degree) 19' East 75 feet; thence North 88(degree) 29' East 100 feet; thence North 80(degree) 17' East 100 feet; thence North 71(degree) 47' East 100 feet; thence North 64(degree) 10' East 100 feet; thence North 57(degree) 52' East 135 feet; thence North 41(degree) 09' East 485 feet; thence South O(degree) 31' East 552.2 feet to a point on the North right-of-way line of the old Tempe-Mesa Highway; thence Westerly along said North right-of-way line to point of be ginning; a map or plat of which is attached hereto as Exhibit 10 and by reference made a part of this Agreement. (2) The following described area: That part of the Northwest quarter of Section 10, Township 1 South, Range 5 East, Gila and Salt River Base and Meridian, now being used for residential purposes, more fully described as follows: 32 Article II - Sections C & D Beginning at the center of said Northwest quarter of Section 10; thence East 900 feet; thence South 185 feet; thence West 900 feet; thence South 75 feet; thence West 336 feet; thence North 585 feet; thence East 336 feet; thence South 325 feet to said center of Northwest quarter of Section 10, the point of beginning; a map or plat of which is attached hereto as Exhibit 11 and by reference made a part of this Agreement. 2. Other Arizona Areas. The Company shall further have the exclusive right, insofar as the District is concerned, to provide electric service for all purposes in all other territory within the State of Arizona except the territory described in Paragraphs 1 and 2 (b) of Section B of this Article II. 3. Eastern Area. The Company shall have the exclusive right, insofar as the District is concerned, in the territory described in Paragraph 2 (b), Section B of this Article II, to supply electric service to all customers and types of load not allocated to the District in said territory, subject to the provisions of subparagraph (3) of Paragraph 2 (a), Section B of this Article II, with respect to the right of the District to supply to the Company its requirements of electric power and energy for use and for resale in said territory. SECTION D - Exceptions and Reservations --------------------------- Notwithstanding the allocation of territory, customers and types of load contained in this Agreement, the following exceptions and reservations are acknowledged and agreed to and service of electric power and energy under such exceptions and reservations may be made as hereinafter particularly provided, and such service shall not be in violation of this Agreement: 1. Own Facilities and Installations. Each party hereto may serve its own facilities and installations with electric power and energy, regardless of the location of such facilities and installations. By "facilities and installations", the parties hereto mean all power plants, substations, water pumps and pumping plants, office buildings, shops 33 Article II - Section D and related facilities owned and/or operated by or on behalf of the Company or the District, and used by the parties in performing their normal functions, except that any facilities and installations leased by one party to the other shall, for the purposes of this Section, be deemed to be facilities and installations of the lessee. 2. Salt River Valley Water Users' Association. The District may serve the facilities and installations of the Salt River Valley Water Users' Association with electric power and energy, regardless of the location of such facilities and installations. By "facilities and installations", the parties hereto mean all substations, water pumps and pumping plants, office buildings, shops and related facilities owned and/or operated by or on behalf of the Association and used by the Association in performing its normal functions. 3. Roosevelt Irrigation District. The District may serve electric power and energy to the Roosevelt Irrigation District for the purpose of pumping water within the boundaries of the Salt River Project pursuant to that certain contract between the Roosevelt Irrigation District and the Salt River Valley Water Users' Association, dated February 12, 1927, as amended. 4. Gila River Reservation Contract of 1907. In the event service is lawfully required under the terms of that certain agreement between the United States of America and the Salt River Valley Water Users' Association, executed by the Secretary of the Interior on behalf of the United States of America on the 3rd day of June 1907, the District may provide such service to the extent required by such contract. 5. Kennecott Copper Corporation. Notwithstanding the fact that Kennecott Copper Corporation may sell or deliver a portion of the electric power and energy purchased by it from District to Ray Electric and Telephone Company or its successors for resale in the towns of Ray, Hayden, Sonora and Kelvin, Arizona, such sale or delivery by District to Kennecott Copper Corporation shall not constitute a violation of this Agreement. 34 Article II - Section D 6. Indian Service Standby Agreement. In its letter dated July 2, 1954, the District has proposed a contract among the District, the Bureau of Indian Affairs of the United States of America and Kennecott Copper Corporation, covering mutual standby arrangements pursuant to which the only delivery of electric power and energy from District's system into territory allocated to the Company is to be the furnishing of standby service on a mutual basis for the protection of the service on the Bureau of Indian Affairs 69 kilovolt system through the Hayden interconnection point, together with any wheeling arrangements required to effectuate such emergency standby. Deliveries under such contract shall not constitute violation of this Agreement. 7. Existing Arrangements with Arizona Power Authority. (a) 30,000 kw Contract between Company and Arizona Power Authority. under the terms of a letter of intent dated April 30, 1953, the Company has agreed to sell up to 30,000 kw of power to the Arizona Power Authority. Deliveries of power and energy under the contract to be entered into between the Company and the Authority pursuant to said letter of intent shall not constitute a violation of this Agreement. (b) Standby Arrangements. Under the terms of the contract between the Arizona Power Authority and the Company dated April 30, 1953, the parties thereto agreed to provide for reciprocal emergency assistance or standby during outages of facilities of the parties to said contract. Deliveries of power and energy for such purposes under such contract shall not constitute a violation of this Agreement. 8. Off-Peak Energy Sales. Each of the parties hereto may sell off-peak energy to the Arizona Power Authority pursuant to the terms of the proposals of each party to the Arizona Power Authority by letters dated October 27, 1954, and the respective acceptances of Arizona Power Authority to each dated November 1, 1954, or in accordance with any formal written agreement, which from time to time may be made in 35 Article II - Section D conformity with the terms of such letter proposals and acceptances, regardless of where such energy is sold or ultimately consumed. 9. Future Sales to Public Agencies. Recognizing that under various circumstances it may neither be practicable nor be in the public interest for Arizona Power Authority and United States Department of Interior, Bureau of Reclamation, in purchasing power and energy from either of the parties hereto, to be subject to restrictions arising from this Agreement, it is agreed that each party hereto may hereafter enter into contracts with and make sales of power and energy to Arizona Power Authority and Bureau of Reclamation without limitations, insofar as the other party hereto is concerned, as to where such power and energy may be sold or where it may ultimately be consumed. 10. Boundary Customers. In the event that any single premises of a customer shall be situated partly in the territory allocated to the Company and partly in the territory allocated to the District, electric power and energy may be sold to such customer by either party at the option of the customer, provided that the delivery point is located on such premises and within the territory of the supplier, and provided further, that there be no consumption of any such power and energy other than by such customer on such premises. In such case, delivery of any such power and energy by one party which may be used by the customer within the territory of the other party shall not be deemed a violation of this Agreement. For the purposes of this provision, the term "premises" shall be defined as all buildings and/or grounds of a customer which are contiguous and which normally would be supplied from one delivery point, and the term "delivery point" shall mean the point at which the electric facilities of the supplier attach to those of the customer. Neither party will, upon the relocation of a delivery point into its territory, undertake service theretofore rendered by the other party 36 Article II - Section D under the foregoing conditions unless the relocation of the delivery point has become advisable, upon the basis of proper and usual engineering practices, due to a change in the amount of load, the location of load, or other engineering or operating factors relating to the electric consumption by the customer. Whether such relocation has so become advisable by reason of the foregoing factors shall be determined by the party to whose territory the delivery point is to be moved but such party shall not make such determination arbitrarily or capriciously and shall submit to the other party prior to the undertaking of service the facts and data upon which such determination was based. Whenever service is initiated by a party hereto to such a customer, and conditions thereafter shall change so that any of the requirements above set out, are no longer met, service to such premises and/or any new premises created by such change shall be rendered in conformity with the provisions of this Agreement including the provisions of this Paragraph 10 or shall constitute a violation of this Agreement. 11. Miscellaneous. It is recognized that there may be instances where it would be in the interests of the public and of the parties hereto to have electric power and energy delivered by one party for use or consumption in the territory or by customers or for a type of load allocated to the other party. Any such deliveries shall not be a violation of this Agreement if made by one party with the written consent and approval of a representative of the other party authorized by its Board of Directors to sign such consents and approvals. Such written consent and approval shall be given in cases where such other party is unable or unwilling to supply service but the giving of such consent and approval may be conditioned upon reasonable terms and conditions under which such other party may at some future time take over the supply of electric service to the customer or customers involved and acquire ownership of facilities installed for such services at their original cost less book depreciation. 37 Article II - Section E SECTION E - Transfer of Facilities ---------------------- It is recognized that by virtue of the terms of this Agreement and the reallocation of territory and customers between the parties, certain territory and customers now served by the District will be served in the future by the Company, and certain territory and customers now served by the Company will be served in the future by the District. 1. Upon written request by the District, the Company will discontinue providing electric service in areas presently served by the Company that are within the territory allocated to the District in Paragraph I of Section B of this Article II, and the District will thereupon provide the electric service so discontinued; and concurrently therewith Company will sell and District will buy facilities and installations within such areas that in Company's judgment are no longer needed by it. The parties have heretofore agreed upon and designated those of Com pany's facilities and installations which were in place within such areas as of November 30, 1954, and which are to be transferred to District hereunder. The price for the facilities of Company to be transferred to District hereunder shall be $67,063.15, plus the original cost installed of any other facilities finally transferred which shall have been installed after the 30th day of November, 1954, and prior to the date of transfer, and less the appraised value of any facilities of Company which were included in the amount above set out and which shall have been removed from said areas during such period. The amounts of such additions and subtractions shall be determined by a competent person selected by mutual agreement of the parties who shall determine said amounts from, available records and if advisable verify them by suitable field checks. The cost of such determination shall be paid by the Company and shall be included in the price for the facilities. 2. Upon written request by the Company, the District will discontinue providing electric service in areas and to customers presently served by the District that are hereby allocated to the Company, and the Company will thereupon provide the electric service so discontinued. Excepting the District's 115 KV transmission line extending from the vicinity of Florence Junction, Arizona, to the vicinity of Coolidge, Arizona, and the District's Blackwater Substation located in the vicinity of Coolidge, Arizona, the District, concurrently with the discontinuance of service, will 38 Article II - Section E sell and the Company will buy all District facilities and installations within territory allocated to the Company that in District's judgment are no longer needed by it. Similarly the District will sell and the Company will buy the facilities and installations in the Eastern area which in District's judgment are no longer needed by it and which were theretofore used sorely for serving customers to whom service is so discontinued. The parties have heretofore agreed upon and designated those of District's facilities and installations which were in place within such areas as of November 30, 1954, and which are to be transferred to Company hereunder. The price for the facilities of District to be transferred to Company hereunder shall be $1,304,926.27, plus the original cost installed of any other facilities finally transferred which shall have been installed after the 30th day of November, 1954, and prior to the date of transfer, and less the appraised value of any facilities of District which were included in the amount above set out and which shall have been removed from said areas during such period. The amounts of such additions and subtractions shall be determined by a competent person selected by mutual agreement of the parties who shall determine said amounts from available records and if advisable verify them by suitable field checks. The cost of such determination shall be paid by the District and shall be included in the price for the facilities. 3. Upon the sales of the facilities hereinabove referred to by the District or the Company, the seller shall execute and deliver appropriate bills of sale and/or deeds transferring to the other party the facilities and/or land so being sold, and shall, in addition, transfer by quit claim, deed or such other instrument or instruments as the parties may deem proper, such transferable licenses, leases, permits, easements or rights of way as the seller shall have for and in connection with such facilities so being sold, and shall give purchaser any necessary easements for such transferred facilities located on land owned by seller. 4. Upon the transfer of territory, customers or facilities, the parties will make reasonable arrangements covering refundable line advances, security deposits, accounts receivable, unbilled revenue, transfer of records, prepayments, cut-over schedules and other matters in connection with the territory facilities and customers being transferred. 39 Article III - Section A ARTICLE III ----------- POWER CONTRACTS --------------- This Agreement shall not become effective and binding until the execution by the parties hereto of the proposed power contract or contracts between the District and the Company referred to in Sections A and D of this Article III. The contracts referred to in this Article III, which may or may not be embodied in a single instrument, shall embody substantially the matters hereinafter set forth, and for the purpose of identification the power contracts herein agreed to be entered into shall, upon becoming effective, be attached to this Agreement. SECTION A - Territory Equivalent Power Contracts ------------------------------------ 1. Superior Area. The District will agree to sell and the Company will agree to buy the equivalent of all the electric power necessary for the present and future use and resale requirements of the Company in Superior, Arizona, and vicinity, delivered at the District's Superior Substation or such other point, or points, of delivery as may be agreed upon, with initial delivery to be made on the date specified in the power contract embodying these terms, and at a price to be mutually agreed upon and incorporated into the power contract. 2. Globe-Miami Area. The District will agree to sell and the Company will agree to buy the equivalent of all of the electric power necessary for the present and future use and resale requirements of the Company in the area of Globe and Miami, Arizona, and vicinity, in excess of any power output from Company's present generating units located in said area. The electric power herein referred to may initially be delivered at 25 cycles at Company's Miami Diesel Generating Station or such other delivery point or points as may be agreed upon, at a price, time and rate of delivery to be mutually agreed upon and incorporated into the power contract. In the event District shall in the future find it advisable in fulfilling its obligations in the area to reduce or discontinue delivery of 25 cycle power at the Globe-Miami delivery point, 40 Article III - Section A District may submit to Company a proposal under which it will substitute 60 cycle delivery, in which event the parties shall proceed to effect arrangements for such 60 cycle supply in accordance with the provisions of Paragraph 4 of this Section A. ln the event such 60 cycle supply shall substitute in whole for the 25 cycle supply provided for in this Paragraph 2, the power contract providing for such 25 cycle supply shall be of no further force and effect. 3. Winkelman Area. The District will agree to sell and the Company will agree to buy the equivalent of all the electric power necessary for the present and future use and resale requirements of the Company in Winkelman, Arizona, and vicinity, at a price, point, time and rate of delivery to be mutually agreed upon and incorporated into the power contract. 4. Other Power Requirements in the Eastern Area. The District will agree to sell and the Company will agree to buy the equivalent of all of the electric power and energy necessary for future use and resale requirements of the Company in portions of the Eastern area other than those described in Paragraphs 1, 2 and 3 of this Section A, and for requirements of Company in the Globe-Miami area in addition to or in lieu of the initial 25 cycle delivery for such area provided for in Paragraph 2 of this Section A, and in reference to such requirements the power contract shall, among other things, provide for the following matters: (a) Proper and reasonable notice of such requirements shall be given by Company to District. (b) District shall submit a proposal to Company within a reasonable time stating terms, conditions, method and price under which it will supply such requirements. (c) If such proposal is not acceptable to the Company and the method of supply shall be in dispute between the parties, such dispute as to method of supply shall be sub- 41 Article III - Section A mitted to arbitration and the decision of the arbitration board shall be binding upon the parties in subsequent negotiations relating to price, terms and conditions for the particular additional requirement then under consideration, subject to the provisions of paragraph (g) hereunder. (d) In determining the most economically sound method of supply for such additional requirements, the arbitration board shall give proper consideration, among other things, to District's responsibilities for supplying the current and future power requirements of the Eastern area and for providing a transmission system for such supply, and shall also give consideration to Company's responsibilities in the area and the adequacy and reliability of the method to be selected and the suitability of the selected method for future power supply to Company at the requested location or at other locations in the Eastern area. (e) A method of supply having been agreed upon by the parties or selected by the arbitration board, the parties shall then seek to agree upon a price and related conditions applicable to the method of supply so agreed upon or selected. (f) If the parties shall fail to agree on the price to be charged for the supply of such additional requirements by the agreed upon or selected method, either party may demand arbitration and the arbitration board will be asked to determine whether District's cost is less than Company's cost, and if so to determine a price for such supply which is midway between such costs of District and Company. As used in this Paragraph 4, "cost" shall include the elements normally used in arriving at cost in the utility industry which shall be particularly provided in the power contracts here agreed to be entered into. 42 Article III - Section A (g) The findings of the arbitration board or boards under subparagraphs (c) and (f) above shall be binding upon both parties, provided, however, that District shall not be bound to use the identical method agreed upon or selected by the arbitration board but may provide such supply by a method superior to the agreed upon or selected method. (h) If the arbitration board determines that no such price, meeting the criteria of subparagraph (f) of this Paragraph 4, is possible, it shall state Company's cost found under said subparagraph, and the parties shall then proceed as follows: (1) Resume negotiations in an effort to reach agreement. (2) If agreement is not reached within a reasonable time, District may, at its election, supply service by the agreed upon or selected method or a superior method, at Company's cost as found by the arbitration board, or if District does not so supply such service, then (3) Company shall have the right to obtain service at the requested location from any other sources then available to Company, provided, however, that Company shall not be released from its obligation to buy equivalent power, such equivalent power to be sold and purchased at established prices and points of delivery as provided for in the power contract or contracts or, if the parties should agree otherwise, at other prices, points, times and rates of delivery. 5. Marinette Area. The District will agree to sell and the Company will agree to buy the equivalent of all of the electric power necessary for present and future use and resale requirements of Company in an area herein referred to as the Marinette area of Maricopa County, Arizona, and presently served by the District, such area or territory being included within the following described boundaries: 43 Article III - Section A Beginning at the Northwest corner of Section 6, Township 4 North, Range 1 East, Gila and Salt River Base and Meridian; thence Easterly along the North line of Township 4 North to the Northeast corner of Section 1, Township 4 North, Range 1 East; thence Southerly along the East line of Range 1 East to its intersection with the North right-of-way line of the Arizona Canal as now located (see Note 1); thence Northwesterly along the said North right-of-way line of the Arizona Canal to a point 660 feet East of the West line of Section 1, Township 3 North, Range 1 East; thence Northerly and parallel to the West line of said Section 1 to a point more or less in the center of Skunk Creek, said point being 800 feet South of the North line of said Section 1; thence Southwesterly on a straight line to a point on the West line of said Section 1, said point being 900 feet South of the Northwest corner of said Section l; thence Southwesterly on a straight line to a point 660 feet West and 600 feet North of the East quarter corner of Section 2, Township 3 North, Range 1 East; thence Southwesterly on a straight line to a point 660 feet East and 200 feet South of the center of said Section 2; thence Southwesterly on a straight line to a point 800 feet West and 850 feet North of the South quarter corner of said Section 2; thence Westerly and parallel to the South line of said Section 2 to a point 1,000 feet East of the West line of said Section 2; thence Southwesterly on a straight line to a point on the South line of said Section 2, said point being 800 feet East of the Southwest corner of said Section 2; thence Southwesterly on a straight line to a point on the West line of Section 11, Township 3 North, Range 1 East, 660 feet South of the Northwest corner of said Section 11; thence Southwesterly on a straight line to a point 660 feet East and 350 feet North of the Southwest corner of Section 10, Township 3 North, Range 1 East; thence Southwesterly on a straight line to a point 660 feet East and 660 feet North of the South quarter corner of Section 16, Township 3 North, Range 1 East; thence Southwesterly on a straight line to the center of Section 21, Township 3 North, Range 1 East; thence Southwesterly on a straight line to a point 660 feet East and 1,320 feet South of the Northwest corner of Section 28, Township 3 North, 44 Article III - Section A Range 1 East; thence Southwesterly on a straight line to the Southwest corner of said Section 28; thence Southwesterly on a straight line to a point on the East-West mid-section line of Section 32, Township 3 North, Range 1 East, 1,320 feet West of the East quarter corner of said Section 32; thence Southerly on a straight line to a point 1,320 feet West and 1,320 feet South of the Northeast corner of Section 5, Township 2 North, Range 1 East; thence Southwesterly on a straight line to the center of said Section 5; thence Southerly along the North-South mid-section line to the South quarter corner of said Section 5; thence Southwesterly on a straight line to a point on the North line of Section 18, Township 2 North, Range 1 East, 1,320 feet West of the Northeast corner of said Section 18; thence Southwesterly on a straight line to a point on the East-West mid-section line of said Section 18, said point being 1,320 feet East of the West quarter corner of said Section 18; thence Southwesterly on a straight line to the Southwest corner of said Section 18; thence Northerly along the West line of Range 1 East to the Northwest corner of Section 6, Township 2 North, Range 1 East; thence Westerly along the South line of Township 3 North to the Southwest corner of Section 31, Township 3 North, Range 1 West; thence Northerly along the West line of Range 1 West to the Northwest corner of Section 6, Township 3 North, Range 1 West; thence Easterly along the North line of Township 3 North to the Southwest corner of Section 31, Township 4 North, Range 1 East; thence Northerly along the West line of Range l East, to the Northwest corner of Section 6, Township 4 North, Range 1 East, the point of beginning; a map or plat of which is attached hereto as Exhibit 12 and by reference made a part of this Agreement. (Note 1. Arizona Canal as now located is being surveyed and monumented, and upon the completion of such survey and its acceptance by the parties hereto such survey shall become apart hereof by reference.) 45 Article III - Section A Such electric power shall be sold and purchased at prices, points, times and rates of delivery to be mutually agreed upon and incorporated into the power contract. 6. Camelback Area (North of Camelback Mountain). The District will agree to sell and the Company will agree to buy the equivalent of all of the electric power necessary for the present and future use and resale requirements of Company in an area herein referred to as the Camelback area, located north of Camelback Mountain, and presently served by the District, such area or territory being included within the following boundaries: Beginning at the Northeast corner of Section 12, Township 2 North, Range 4 East, Gila and Salt River Base and Meridian; thence Southerly along the East line of said Section 12 to its intersection with the North right-of-way line of the Arizona Canal as now located (see Note 1); thence Westerly along the said North right-of-way line of the Arizona Canal to its intersection with the South line of Section 14, Township 2 North, Range 4 East; thence Westerly along the South line of said Section 14 and the South line of Section 15, Township 2 North, Range 4 East, to the Southwest corner of said Section 15; thence Westerly along the South line of Section 16, Township 2 North, Range 4 East, to the Southwest corner of the Southeast quarter of the Southeast quarter of said Section 16; thence Northerly and parallel to the East line of said Section 16 for a distance of 660 feet; thence Westerly and parallel to the South line of said Section 16, more or less along the ridge of Camelback Mountain, for a distance of 1,980 feet; thence Northwesterly, more or less along said ridge, on a straight line to a point on the East-West mid-section line of Section 17, Township 2 North, Range 4 East, said point being 660 feet East of the center of said Section 17; thence Westerly along the East-West mid-section line of said Section 17 and along the East-West mid-section line of Section 18, Township 2 North, Range 4 East, to the center of said Section 18; thence Northerly along the North-South mid-section line of said section 18 and the North-South mid- 46 Article III - Section A section line of Section 7, Township 2 North, Range 4 East, to the North line of said Section 7; thence Easterly along the North line of said Section 7 and continuing Easterly along the North lines of Sections 8, 9, 10, 11 and 12, Township 2 North, Range 4 East, to the Northeast corner of said Section 12, the point of beginning; a map or plat of which is attached hereto as Exhibit 13 and by reference made a part of this Agreement. (Note 1. Arizona Canal as now located is being surveyed and monumented, and upon the completion of such survey and its acceptance by the parties hereto such survey shall become a part hereof by reference.) Such electric power shall be sold and purchased at a price, points, times and rates of delivery to be mutually agreed upon and incorporated into the power contract. 7. Continuation of Sale of 12,000 KW. The parties hereto will enter into a contract incorporating therein the present sale of 12,000 kilowatts by the District to the Company, which said 12,000 kilowatts is sold to the Company under and by virtue of the provisions of the Agreement of 1922, the Agreement of 1925, and the Agreement of 1928, all as amended, and hereinbefore referred to. It is agreed that such power contract which will incorporate the provisions of this Paragraph 7 shall have for its purpose the continuation of a sale of 12,000 kilowatts of power by the District to the Company at a price which is the sum of (1) demand charge of $1,000 per month, and (2) an energy charge equal to the energy equivalent of 100% use of the contract demand of 12,000 kilowatts multiplied by 8 mills ($0.008) per kilowatt-hour, and under substantially the same conditions as are now in effect with respect to such sale, such sale to continue until June 1, 1961, at which time the power rate to be charged was to have been re-determined under provisions of the Agreement of 1928, as amended. Upon such expiration date of June 1, 1961, 12,000 kilowatts shall be added to the amount of power to be sold by District to Company as provided for in Section B 47 Article III - Sections A & B of this Article III, at the same power rate to be charged, and under the same terms and conditions as for the sale and purchase of the 50,000 kilowatts of power referred to in Section B of this Article III. In the event by reason of unforeseen circumstances such 50,000 kilowatt agreement is not finally consummated, the power contract covering the sale and purchase of such 12,000 kilowatts shall, instead of expiring on June 1, 1961, continue until June 1, 1978, and on June 1, 1961 and at 5 year intervals thereafter, either party may determine by written notice given to the other party not less than ninety (90) days prior thereto that the rate to be charged for such 12,000 kilowatts and accompanying energy shall be readjusted by mutual agreement or by arbitration as ma, be provided for in the power contract here agreed to be entered into, and the rate so determined shall be charged until and unless the rate is again readjusted in accordance with the terms of this Paragraph 7. SECTION B - Additional Power Contract ------------------------- 1. The District will agree to sell and the Company will agree to buy 50,000 kilowatts of power to aid Company in supplying its resale requirements in the territory herein allocated to the Company within the boundaries of the Salt River Project, at prices, points and rates of delivery to be mutually agreed upon and incorporated into the power contract. 2. The delivery of said 50,000 kilowatts of power to the Company shall commence on April 1, 1957, or on the date that the District's steam electric generating plant of a nominal capacity of 100,000 kilowatts, presently scheduled for completion in 1957, shall be placed in commercial operation, but not later than June 1, 1957, unless completion of said plant be delayed beyond June 1, 1957, due to causes beyond the District's control. The parties shall agree that from time to time the said 50,000 kilowatt contract rate of demand may be increased at prices, points and rates of delivery to be mutually agreed upon between the parties. 48 Article III - Section C SECTION C - General Terms and Conditions ---------------------------- 1. Each of the power contracts provided for in Sections A and B of this Article III shall, with the exception of the contract provided for in Paragraph 7 of said Section A, contain the following general provisions: (a) Escalator clauses relating to labor, materials, fuel, insurance, purchased power and taxes to the extent that such components are or may be a part of the cost of the power to be sold. Such escalation shall be up or down as changes shall occur. (b) Usual and ordinary clauses concerning reliability of power sold by District. (c) A provision that contracts shall be of permanent duration, subject only to District's right of cancellation upon three years' notice first having been given by District to Company. (d) A provision that any portion of the power purchased by the Company which is reduced or cancelled by the District shall not be recoverable by District except through consent of the Company. (e) A provision authorizing mutually agreeable changes in matters relating to points, times and rates of delivery of power. (f) A provision that if this Agreement should be terminated or cease to be effective due to circumstances or events beyond the control of the parties, the parties hereto agree to negotiate and to attempt to reach agreement as to such changes, if any, in the power contracts as are necessitated by such event, and that if this Agreement shall be terminated by the Company pursuant to Paragraph 5 of Section A of Article II hereof due to a voluntary violation by the District, the Company may terminate any or all the power contracts provided for in Paragraphs 1, 2, 3, 4, 5 and 6 of Section A of Article III hereto upon five years' advance notice. 49 Article III - Section C 2. Certain of the power contracts provided for in Sections A and B of this Article III shall contain additional provisions as follows: (a) A provision in the power contract or contracts provided for in Paragraphs 5, 6, and 7 of Section A and Paragraph 1 of Section B of this Article III that the District shall have the right to reduce the amount of power agreed to be sold thereunder upon three years' notice first having been given by District to Company; provided, that reduction of amounts of power to be sold to Company pursuant to the contracts provided for in said Paragraphs 5 and 6 shall not affect the District's obligation to sell and the Company's obligation to buy the total use and resale requirements of Company in the areas covered by such contracts, less the amount of any such reduction. (b) A provision that the prices for power and energy agreed upon in the power contract or contracts covering the deliveries provided for in Paragraphs 1, 2, 3, 5 and 6 of Section A and in Section B of this Article III, shall be in effect until June 1, 1987, subject to the escalation and adjustment provisions included in said contract or contracts. On June 1, 1987, and at thirty year intervals thereafter, the power contract or contracts referred to in this subparagraph (b) shall provide for reopening for review of prices, with the basis for such review being specifically set forth, but generally limited to bringing prices into line with changing conditions, power resources and power market prices. The parties shall agree to arbitration of such prices if mutual agreement cannot be reached during such review. (c) A provision that the prices for power and energy agreed upon in the power contract or contracts covering deliveries provided for in Paragraph 4 of Section A of this Article III, shall continue and be in effect as set out in the contracts covering such deliveries which are hereinafter entered into. 50 Article III - Sections C, D & E (d) A provision in the contract or contracts covering the Eastern area that power to be supplied by District to Company at any point of delivery in such area shall be for use and resale by the Company only at and in the vicinity of such delivery point. The term "Vicinity" as here used means an area within the Eastern area which is or can be served by the Company by means of an electric distribution system employing electric circuits of a voltage not higher than 38 kilovolts. SECTION D - Power Coordination Arrangements ------------------------------- In addition to the contract or contracts provided for in Sections A and B of this Article III, the parties will enter into contractual arrangements, on terms and conditions and for periods to be mutually agreed upon, with respect to the following matters: 1. Any needed wheeling arrangements relating to the use of transmission and distribution facilities of either party by the other party or for supply of electric service to customers of the other party. 2. Provisions for mutual standby and for reciprocal emergency assistance. 3. Provisions for economy energy interchange and interchange of spinning reserve capacity. 4. Provisions for interchange of power received by the respective parties from Parker Dam, to replace provisions of a similar character in an agreement dated March 31, 1939, between the parties which is to be cancelled as provided in Article IV hereof. SECTION E - Differences and Inconsistencies ------------------------------------------- In the event any differences or inconsistencies shall exist between the power contract or contracts as executed and the provisions of this Article III, the power contract or contracts shall govern. 51 Article III - Section F Article IV Article V SECTION F - Effect of Cancellation of Power Contracts ----------------------------------------- This Agreement shall continue and remain in force and effect notwithstanding any reduction of the power to be sold by the District and purchased by the Company, or the cancellation or termination, for any reason whatsoever, of any or all of the power contracts mace pursuant to this Article III. ARTICLE IV ---------- CANCELLATION OF EXISTING ------------------------ AGREEMENTS ---------- 1. Territorial Agreements. This Agreement, upon becoming effective, shall replace and effect a cancellation of all existing territorial agreements or understandings, whether formal or informal, between the parties hereto. 2. Power Contracts. When this Agreement and the power contracts herein referred to in Sections A and D of Article III have become binding and all conditions to which the effectiveness of this Agreement is subject have been satisfied, all previously existing power contracts between the parties hereto and their respective predecessors in interest shall be deemed cancelled. ARTICLE V --------- THIRD PARTIES NOT TO BENEFIT ---------------------------- Nothing contained in this Agreement shall be construed as authorizing or giving rise to any right or cause of action on the part of any person not a party hereto against either or both of the parties hereto. 52 Article VI ARTICLE VI ---------- EXISTING CONTRACTS FOR SERVICE OF --------------------------------- ELECTRICAL ENERGY ----------------- As of the date of transfer of facilities from one party hereto to the other, as provided in Section E of Article II, the transferring party shall, where lawfully possible, cancel any existing electric service contracts between it and customers served by such facilities and allocated to such other party by virtue of the provisions of this Agreement. In the event any of such contracts are not lawfully cancellable as of such date and the customer being served thereunder refuses to consent to such cancellation, it is agreed that such contract or contracts, where lawfully assignable, shall be deemed assigned to the party having the right by this Agreement to provide service to the particular customer. Nothing herein contained shall require the breach of any existing binding and irrevocable electric service contract between any party hereto and any other person or persons, and any such contract or contracts which are neither cancellable nor assignable shall continue to be performed, and service to the customer thereunder shall be rendered by the party having contracted to serve such customer without such service constituting a violation of this Agreement, until the expiration of such contract or contracts, subject, however, to the provisions of Paragraph 1 of Article VIII hereof; and provided that upon the expiration of such contract or contracts, or at the earliest date at which the said party hereto may cancel, annul or terminate said contract or contracts, the party which has been serving such customers, pursuant to such contract or contracts, shall declare such contract or contracts terminated and shall refrain from serving such customers with electric power and energy. 53 Article VII Article VIII ARTICLE VII ----------- INDEMNITY AGAINST CUSTOMERS' CLAIMS AND --------------------------------------- COOPERATION IN DEFENDING VALIDITY OF THIS ----------------------------------------- AGREEMENT AND POWER CONTRACTS ----------------------------- The party hereto, which, as a result of this Agreement, undertakes rendition of electric service to any particular customer formerly served by the other party, shall indemnify and hold the other party harmless against any loss, liability or damage resulting from such transfer of the electric service tendered to such customer. It is further agreed that in the event any third person shall seek to invalidate this Agreement or the power contracts herein agreed to be entered into, or shall seek to compel a sale, donation or delivery of electric power and energy by either party hereto which would constitute a violation of this Agreement, or if the validity of this Agreement or the power contracts then in effect shall in any manner be brought into issue in any litigation or proceeding, then and in such event, prompt notification of such event shall be given by the party first having knowledge of such event to the other party, and the parties hereto shall cooperate in defending against such action or proceeding and in upholding the validity of this Agreement and the said power contracts. ARTICLE VIII ------------ STREET LIGHTING --------------- 1. It is recognized that the Company has entered into an agreement to provide street lighting for the City of Phoenix, Arizona, and that certain of the streets within the City of Phoenix which require and will require street lights are within the territory allocated to the District. It is agreed that until such time as a street lighting contract is entered into between the District and the City of Phoenix in regard to streets lying within the District's territory, or until other arrange- 54 Article VIII Article IX ments are agreed upon by the parties hereto in regard to lighting such streets, such streets shall, upon City's request to the Company for lighting of such streets, be lighted by the District for the account of the Company at the same rate and under the same terms and conditions provided for in that certain contract dated August 21, 1951, between the City of Phoenix and the Central Arizona Light and Power Company relating to City of Phoenix street lighting. 2. Notwithstanding the provisions of Paragraph 10, Section D, Article II of this Agreement, relating to electric service on or near the territorial boundaries herein established, each of the parties hereto shall provide all street lighting service in their respective territories; provided, however, that where the territorial boundaries herein established are coincident with public streets or portions of public streets, electric service for street lighting shall be rendered by the party hereto whose territory lies on the North or East side of such street or portion thereof; and provided further, that if in unusual circumstances the foregoing provision does not provide a logical and economic division of such service, the parties shall agree as to which of them will render street lighting service along such street or portion thereof. ARTICLE IX ---------- MISCELLANEOUS COVENANTS ----------------------- 1. The parties hereto represent and covenant, the Company for and as to itself, and the District for and as to itself, that they are validly existing entities under the applicable laws of Arizona and that they have full authority under the laws of Arizona and of the United States to enter into this Agreement and the power contracts herein referred to, subject only to the satisfaction of the conditions set out in this Agreement and the said power contracts. 2. The Company covenants and represents that it is a corporation validly organized and existing under the laws of the State of Arizona, and that it will from time to time make all such filings and take 55 Article IX Article X all such steps as may be necessary under said laws to continue its corporate existence so long as it is obligated to fulfill the terms of this Agreement and the power contracts made pursuant thereto. 3. The District covenants and represents that it is an Agricultural Improvement District validly organized and existing under the laws of the State of Arizona, and that it will take such steps as may be necessary from time to time to continue its existence so long as it is obligated to fulfill the terms of this Agreement and the power contracts made pursuant thereto. 4. It is understood that both parties shall be entitled from time to time to apply for and receive any certificates, franchises or regulatory approvals or amendments thereof necessary or appropriate for the rendition of electric service not in conflict with the terms of this Agreement. ARTICLE X --------- TRANSFERS, MERGERS AND ASSIGNMENTS ---------------------------------- 1. Neither party shall, without the consent of the other party hereto, voluntarily donate, sell, lease, transfer or dispose of any operating part or unit of its electric generation, transmission or distribution system to a third person for use in the production, sale, transmission or distribution of electricity, except where use of the part or unit to be sold has been or is to be discontinued and it is to be removed from the location where it was used, unless such third person shall be or become bound to the other party hereto: (a) to observe and abide by the restrictions as to territory and sales of electric power and energy imposed by the provisions of this Agreement upon the party hereto effecting such assignment, transfer or disposition; (b) to pay liquidated damages and be subject to the same additional remedies which would be imposed by this Agreement 56 Article X on the party effecting such assignment, transfer or disposition, in the event of violation of such territorial and sales provisions; and (c) not to sell, lease, donate, transfer or dispose of such part or unit except upon compliance with the provisions of this Paragraph 1, and to bind its successors and assigns in turn to observe the terms, conditions and obligations hereof and to impose on their successors and assigns the obligation to comply with the provisions of this Paragraph 1. Nothing in this Paragraph 1 shall prevent either party from selling or transferring to the United States or the Arizona Power Authority any facilities which are now or may be installed to connect with the present transmission system of the Parker-Davis Project United States Department of Interior, Bureau of Reclamation - where: (a) Such facilities are of the type ordinarily owned by either the Bureau or the Authority, and (b) The selling party has previously financed them in whole or in part for the purpose of facilitating receipt of service, and (c) Such sale will in no way alter the service area of either party. Nothing herein contained shell prevent either party or any successor or assign thereof from transferring property to another as security pursuant to a mortgage or deed of trust. 2. The parties hereto further agree that neither the District nor the Company will voluntarily sell, lease, transfer or dispose of all or substantially all of their electric generating, transmission and distribution system to any third person or merge or consolidate with or into any third person, unless there is included in the instrument or instruments of conveyance, assignment, transfer or disposition, or into the the agreement or instrument of merger or consolidation, a provision binding such third person to perform, observe and carry out the coven- 57 Article X Article XI ants, provisions, terms and conditions of this Agreement and of the power contracts hereinabove referred to and then to effect, and binding all the successors and assigns of such third person in turn to observe the conditions hereof and to impose on such successors and assigns the obligations to comply with the provisions of this Paragraph 2. 3. If all or substantially all of the properties, facilities or business of either party hereto, its successors or assigns, shall be transferred or assigned to or vested in another person by operation of law or by any other means beyond the control of such party, the other party hereto shall have the option of cancelling and terminating this Agreement and the power contracts made pursuant hereto which are then in effect, unless within sixty (60) days after such transfer of properties, facilities or business an assignment or transfer of this Agreement to the transferee of such properties, facilities or business has been effected and such transferee has undertaken to perform, observe and carry out the terms and conditions of this Agreement and of the power contracts entered into as provided in this Agreement and then in effect and has undertaken to bind all its successors and assigns, in turn, to observe the conditions hereof and to impose on such successors and assigns the obligation to comply with the provisions of this Agreement. 4. Subject to the foregoing provisions and restrictions, this Agreement shall be binding upon, and inure to the benefit of the parties hereto and their respective successors and assigns. ARTICLE XI ---------- RESTRICTIONS ON TERMINATION OF AGREEMENT ---------------------------------------- Other than as provided to Paragraph 5, Section A of Article II, neither party shall declare or claim this contract terminated because of a violation thereof. 58 Article XII Article XIII Article XIV ARTICLE XII ----------- NOTICES ------- Unless the party addressed shall otherwise consent thereto in writing, each notice or change of address given pursuant to this Agreement shall be in writing sent by registered mail, postage prepaid and addressed: (a) if to the Company, to "The Secretary, Arizona Public Service Company, Post Office Box 2591, Phoenix, Arizona", or at such other address as Company shall have last furnished to the District for that purpose; or (b) if to District, to "The Secretary, Salt River Project Agricultural Improvement and Power District, Post Office Box 1980, Phoenix, Arizona", or at such other address as District shall have last furnished in writing to Company for that purpose. ARTICLE XIII ------------ CAPTIONS AND HEADINGS --------------------- The captions or headings set out in this Agreement have been inserted merely to facilitate reference and shall have no bearing upon the interpretation of the provisions of this Agreement. ARTICLE XIV ----------- WAIVERS ------- Any waiver by a party of its rights with respect to a violation of this Agreement, or with respect to any other matter arising in connection with this Agreement, shall not be deemed to be a waiver with respect to any subsequent violation or matter. No delay, short of the statutory period of limitations, in asserting or enforcing any right hereunder shall be deemed a waiver of such right. 59 ARTICLE XV ---------- APPROVALS --------- This Agreement shall not become effective unless, within 180 days after this Agreement and the power contracts referred to in Sections A and D of Article III have been executed, the following approvals have been obtained and the following conditions have been fully complied with: 1. Secretary of Interior. The unqualified written approval of this Agreement and said power contracts shall have been obtained from the Secretary of the Interior of the United States of America. 2. Federal Power Commission. An order shall have been obtained from the Federal Power Commission approving without qualification any feature of this Agreement as to which such approval is required; and further, within such 180 days the power contracts referred to in Section D of Article III have been duly filed and have become effective under the rules and regulations of the Federal Power Commission. 3. Arizona Corporation Commission. An order approving this Agreement without qualification shall have been obtained from the Arizona Corporation Commission. IN WITNESS WHEREOF, the respective parties hereto have caused this instrument to be executed on their behalf by their duly authorized officers and their Corporate Seals to be hereunto affixed, all as of the day and year first above written, SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT By VICTOR I. CORBELL ---------------------------------- ATTEST: President A.L. MONETTE - ----------------------------- Secretary 60 A P P R O V E D : Jennings, Strouss, Salmon & Trask By J.A. RIGGINS, JR. --------------------------------- Legal Counsel Salt River Project Agricultural Improvement and Power District ARIZONA PUBLIC SERVICE COMPANY By WALTER T. LUCKING ---------------------------------- President ATTEST: [ILLEGIBLE] - ----------------------------------- Secretary A P P R O V E D : Snell & Wilmer By NICHOLAS H. POWELL --------------------------------- Legal Counsel Arizona Public Service Company 61 STATE OF ARIZONA ) ) ss. County of Maricopa ) On this the 20th day of September, 1955, before me, Ina McWilliam, the undersigned officer, personally appeared Victor I. Corbell, who acknowledged himself to be the President of the Salt River Project Agricultural Improvement and Power District, a political subdivision of the State of Arizona, and that he, as such President being authorized so to do, executed the foregoing instrument for the purposes therein contained, by signing the name of the Salt River Project Agricultural Improvement and Power District by himself as President. IN WITNESS WHEREOF, I hereunto set my hand and official seal. INA MCWILLIAM --------------------------------------- Notary Public My commission expires: August 21, 1959. STATE OF ARIZONA ) ) ss. County of Maricopa ) On this the 20th day of September, 1995, before me, Mabel L. Spencer, undersigned officer, personally appeared Walter T. Lucking, who acknowledged himself to be the President of Arizona Public Service Company, a corporation, and that he as such President being authorized so to do, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by himself as President. IN WITNESS WHEREOF, I hereunto set my hand and official seal. MABEL L. SPENCER --------------------------------------- Notary Public My commission expires: June 29, 1959. 62 CERTIFICATE ----------- The undersigned, A. L. Monette, Secretary of the Salt River Project Agricultural Improvement and Power District thereinafter referred to as the "District"), hereby certifies that the following is a true and correct copy of a resolution duly adopted at a special meeting of the Board of Directors of the District duly held on September 12, 1955, in the office of the District at Phoenix, Arizona: WHEREAS, copies of the proposed Agreement, dated August 31, 1955, between Arizona Public Service Company (hereinafter referred to as the "Company") and the Salt River Project Agricultural Improvement and Power District (hereinafter referred to as the "District") have been submitted to this meeting, and WHEREAS, the Board of Directors of the District deem it to be in the best interest of the District that it enter into and perform the said Agreement, NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors of the District hereby approves the proposed Agreement, dated August 31, 1955, between the District and Arizona Public Service Company, and BE IT FURTHER RESOLVED, that the President and the Secretary of the District are hereby authorized and directed for and on behalf of the District to make, execute and deliver the said Agreement in the form submitted to and approved by the Board of Directors of the District at this meeting, subject only to such changes therein not affecting the substance thereof as the President and Secretary of the District may approve, their execution of the Agreement to be conclusive evidence of their approval of any such changes. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed the seal of the District this 20th day of September, 1955. A.L. MONETTE ---------------------------------------- A. L. Monette, Secretary Salt River Project Agricultural Improvement and Power District 63 SUPPLEMENTAL AGREEMENT ---------------------- THIS SUPPLEMENTAL AGREEMENT, made by and between ARIZONA PUBLIC SERVICE COMPANY (APS), and SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT (SRP); W I T N E S S E T H: - - - - - - - - - - WHEREAS, the parties hereto heretofore entered into an Agreement of August 31, 1955, providing certain restrictions in regard to areas, customers and types of electric load to be served by each, including certain sales at wholesale; WHEREAS, heretofore in a number of situations involving sales or deliveries at wholesale of electric power and energy, consents have been given by one party to the other in regard to such wholesale sales; WHEREAS, it is deemed advisable to adopt this SUPPLEMENTAL AGREEMENT to eliminate any need for such consents in the future, NOW, THEREFORE, BE IT AGREED: No sale, donation or delivery of electric power and energy at wholesale by either party shall be deemed to be a violation of the Agreement of August 31, 1955. IN WITNESS WHEREOF, the respective parties have caused this Supplemental Agreement to be executed on their behalf this 1st day of December, 1972. ARIZONA PUBLIC SERVICE COMPANY By W. P. REILLY ---------------------------- President ATTEST: WM. T. QUINSLER - ---------------------------------- Secretary SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT By: KARL F. ABEL --------------------------- President ATTEST: - ---------------------------------- Secretary STATE OF ARIZONA ) ) ss County of Maricopa ) On this, the 1st day of December, 1972, before me, the undersigned officer, personally appeared W. P. REILLY, who acknowledged himself to be the President of ARIZONA PUBLIC SERVICE COMPANY, a corporation, and that he as such President, being authorized so to do, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by himself as President. IN WITNESS WHEREOF, I hereunto set my hand and official seal. MARILYN K. HENDLEY ---------------------------- Notary Public My commission expires: My Commission Expires June 14, 1975 - ----------------------------------- STATE OF ARIZONA ) ) ss County of Maricopa ) On this, the 1st day of December, 1972, before me, the undersigned officer, personally appeared KARL F. ABEL, who acknowledged himself to be the President of SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, a political subdivision of the State of Arizona, and that he, as such President, being authorized so to do, executed the foregoing instrument for the purposes therein contained by signing the name of the SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT by himself as President. IN WITNESS WHEREOF, I hereunto set my hand and official seal. DON E. SMITH ---------------------------- Notary Public My commission expires: My Commission Expires May 3, 1975 - --------------------------------- -2- CERTIFIED COPY OF RESOLUTION ---------------------------- I, WM. T. QUINSLER, Secretary and Assistant Treasurer of ARIZONA PUBLIC SERVICE COMPANY, an Arizona corporation, HEREBY CERTIFY that, at a meeting of the Board of Directors of said Company, duly convened and held on November 21, 1972, at which a quorum was present and acting throughout, the following resolution was adopted and is now in full force and effect: WHEREAS, Arizona Public Service Company (Company) and Salt River Project Agricultural Improvement and Power District (Salt River) have heretofore entered into an Agreement of August 31, 1955, which contains certain restrictions on wholesale sales, donations or deliveries of electric power and energy by either; and WHEREAS, it is deemed advisable at this time that an appropriate supplemental agreement or amendment be entered into between the Company and Salt River so as to remove any such restrictions; NOW, THEREFORE, BE IT RESOLVED that the Company enter into an appropriate Supplemental Agreement amending the Agreement of August 31, 1955 between the Company and the Sale River Project Agricultural Improvement and Power District so as to remove all restrictions on sales, donations or deliveries of electric power and energy at wholesale by either; and FURTHER RESOLVED, that the President of the Company, William P. Reilly, be and he hereby is authorized and directed, for and on behalf of the Company, to sign, execute and deliver such written agreement, supplement or other document or instrument and to make such filings or take such steps as may be deemed by him to be appropriate to effectuate the purposes of this resolution. IN WITNESS WHEREOF, I have hereunto set my hand and the seal of said corporation this 28th day of November, 1972. WM. T. QUINSLER -------------------------------------- Secretary and Assistant Treasurer AGREEMENT --------- IT IS HEREBY AGREED between ARIZONA PUBLIC SERVICE COMPANY and the SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT that the Agreement of August 31, 1955 between them, and the Power Coordination Agreement of September 15, 1955 between them, became effective on March 13, 1956, on which date the Arizona Corporation Commission issued an order which satisfied the requirements of paragraph 3 of Article XV of the Agreement of August 31, 1955, the requirements of paragraphs 1 and 2 of said Article XV, relating to the Secretary of the Interior and the Federal Power Commission, respectively, having theretofore been satisfied. Dated: May 15th, 1957. ARIZONA PUBLIC SERVICE COMPANY By ---------------------------- Vice President ATTEST: - ---------------------------- Assistant Secretary SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT By ---------------------------- President ATTEST: - ---------------------------- Secretary Exhibit 1 In accordance with Item 304 of Regulation S-T of the Securities Exchange Act of 1934, Exhibit 1 to Exhibit 10.1 contained in the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998 is a map interpreting metes and bounds description of territorial boundary set forth in Article II, Section B, Paragraph 1, in contract dated ________ 1955 between the Salt River Project Agricultural Improvement and Power District and the Arizona Public Service Company. Exhibit 2 In accordance with Item 304 of Regulation S-T of the Securities Exchange Act of 1934, Exhibit 2 to Exhibit 10.1 contained in the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998 is a map interpreting metes and bounds description of territorial boundary set forth in Article II, Section B, Paragraph ____, in contract dated ________ 1955 between the Salt River Project Agricultural Improvement and Power District and the Arizona Public Service Company. Exhibit 3 In accordance with Item 304 of Regulation S-T of the Securities Exchange Act of 1934, Exhibit 3 to Exhibit 10.1 contained in the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998 is a map interpreting metes and bounds description of territorial boundary set forth in Article II, Section C, Paragraph 1(a) (Phoenix, Arizona area), in contract dated August 31, 1955 between the Salt River Project Agricultural Improvement and Power District and the Arizona Public Service Company. Exhibit 4 In accordance with Item 304 of Regulation S-T of the Securities Exchange Act of 1934, Exhibit 4 to Exhibit 10.1 contained in the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998 is a map interpreting metes and bounds description of territorial boundary set forth in Article II, Section C, Paragraph 1(b)(1) (Chandler area), in contract dated August 31, 1955 between the Salt River Project Agricultural Improvement and Power District and the Arizona Public Service Company. Exhibit 5 In accordance with Item 304 of Regulation S-T of the Securities Exchange Act of 1934, Exhibit 5 to Exhibit 10.1 contained in the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998 is a map interpreting metes and bounds description of territorial boundary set forth in Article II, Section C, Paragraph 1(b)(2) (Gilbert area), in contract dated August 31, 1955 between the Salt River Project Agricultural Improvement and Power District and the Arizona Public Service Company. Exhibit 6 In accordance with Item 304 of Regulation S-T of the Securities Exchange Act of 1934, Exhibit 6 to Exhibit 10.1 contained in the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998 is a map interpreting metes and bounds description of territorial boundary set forth in Article II, Section C, Paragraph 1(b)(3) (Glendale area), in contract dated August 31, 1955 between the Salt River Project Agricultural Improvement and Power District and the Arizona Public Service Company. Exhibit 7 In accordance with Item 304 of Regulation S-T of the Securities Exchange Act of 1934, Exhibit 7 to Exhibit 10.1 contained in the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998 is a map interpreting metes and bounds description of territorial boundary set forth in Article II, Section C, Paragraph 1(b)(4) (Peoria area), in contract dated August 31, 1955 between the Salt River Project Agricultural Improvement and Power District and the Arizona Public Service Company. Exhibit 8 In accordance with Item 304 of Regulation S-T of the Securities Exchange Act of 1934, Exhibit 8 to Exhibit 10.1 contained in the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998 is a map interpreting metes and bounds description of territorial boundary set forth in Article II, Section C, Paragraph 1(b)(5) (Scottsdale area), in contract dated August 31, 1955 between the Salt River Project Agricultural Improvement and Power District and the Arizona Public Service Company. Exhibit 9 In accordance with Item 304 of Regulation S-T of the Securities Exchange Act of 1934, Exhibit 9 to Exhibit 10.1 contained in the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998 is a map interpreting metes and bounds description of territorial boundary set forth in Article II, Section C, Paragraph 1(b)(6) (Tempe area), in contract dated August 31, 1955 between the Salt River Project Agricultural Improvement and Power District and the Arizona Public Service Company. Exhibit 10 In accordance with Item 304 of Regulation S-T of the Securities Exchange Act of 1934, Exhibit 10 to Exhibit 10.1 contained in the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998 is a map interpreting metes and bounds description of territorial boundary set forth in Article II, Section C, Paragraph 1(c)(1) (Borden Plant area), in contract dated August 31, 1955 between the Salt River Project Agricultural Improvement and Power District and the Arizona Public Service Company. Exhibit 11 In accordance with Item 304 of Regulation S-T of the Securities Exchange Act of 1934, Exhibit 11 to Exhibit 10.1 contained in the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998 is a map interpreting metes and bounds description of territorial boundary set forth in Article II, Section C, Paragraph 1(c)(2), in contract dated August 31, 1955 between the Salt River Project Agricultural Improvement and Power District and the Arizona Public Service Company. Exhibit 12 In accordance with Item 304 of Regulation S-T of the Securities Exchange Act of 1934, Exhibit 12 to Exhibit 10.1 contained in the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998 is a map interpreting metes and bounds description of territorial boundary set forth in Article III, Section A, Paragraph 5, in contract dated August 31, 1955 between the Salt River Project Agricultural Improvement and Power District and the Arizona Public Service Company. Exhibit 13 In accordance with Item 304 of Regulation S-T of the Securities Exchange Act of 1934, Exhibit 13 to Exhibit 10.1 contained in the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998 is a map interpreting metes and bounds description of territorial boundary set forth in Article III, Section A, Paragraph 6 (Camelback area, north of Camelback Mountain), in contract dated August 31, 1955 between the Salt River Project Agricultural Improvement and Power District and the Arizona Public Service Company. EX-10.2 3 POWER COORDINATION AGREEMENT POWER COORDINATION AGREEMENT of SEPTEMBER 15, 1955 between SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT and ARIZONA PUBLIC SERVICE COMPANY POWER COORDINATION AGREEMENT TABLE OF CONTENTS Page Explanatory Recitals 1 ARTICLE I - Cooperation in Development and Operation 2 ARTICLE II - Additions to System Facilities 3 ARTICLE III - Sale of Power 4 ARTICLE IV - Reciprocal Services 5 ARTICLE V - Committees 5 ARTICLE VI - Conditions Of Interconnected Operation 7 ARTICLE VII - Metering 12 ARTICLE VIII - Settlements 13 ARTICLE IX - Arbitration 13 ARTICLE X - Miscellaneous Provisions 15 ARTICLE XI - Term 17 POWER COORDINATION AGREEMENT ---------------------------- 0.1 THIS POWER COORDINATION AGREEMENT, entered into as of the 15th day of September, 1955, between SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, an Agricultural Improvement District, organized under the laws of the State of Arizona (here after in this Agreement and in the Schedules attached hereto called "District") and ARIZONA PUBLIC SERVICE COMPANY, an Arizona corporation (hereafter in this Agreement and in the Schedules attached hereto called "Company"), WITNESSETH: 0.2 WHEREAS, District owns and operates an electric system supplying electric service in the central portion of the State of Arizona, and Company owns and operates an electric system supplying electric service in the central portion of the State of Arizona and elsewhere in the State; and 0.3 WHEREAS, the electric systems of District and of Company in central Arizona have long been interconnected at various points at which power has been sold and interchanged between the systems, and a substantial degree of coordination has been established and maintained between the two systems for purposes of improving the quality, reliability, and economy of electric service in the respective territories served; and 0.4 WHEREAS, an agreement hereinafter referred to as the "Agreement of August 31, 1955" was entered into between District and Company providing, among other things, (i) for clear delimitation of the respective service territories and types of load of District and of Company, thereby facilitating orderly and economical development and expansion of the facilities of each system, (ii) for superseding and cancelling various existing agreements between District and Company, the terms of such agreements being no longer adequate and appropriate hr operating and economic conditions now obtaining and foreseen in the development of the territories served, and (iii) for entering into a 1 new agreement to provide for sales and interchange of power between District and Company in larger amounts and on the basis of more extensive coordination in operation and development of the electric systems of District and Company; and 0.5 WHEREAS, the parties believe that further coordination on an assured and continuing basis will yield important benefits to consumers and to the economic growth of the territories served and to each of the systems, and that among such benefits will be the following: (a) The combined power loads of the two systems can be supplied, with adequate reserve capacity by less aggregate installed generating capacity with consequent net savings in investment and expenses, (b) Emergency conditions in either system can be met with less likelihood of curtailment or impairment of electric service, (c) New installations of generating facilities to supply increasing power requirements can be made on a more economical basis as to timing, unit sizes, location, and ownership, (d) Fuller utilization can be made of more efficient and economical generating facilities and of interconnections with other power systems, and (e) When and as additional hydro power may become available from new developments on the Colorado River, such hydro power can be more widely and economically distributed to consumers and better utilization can be realized for available secondary hydro energy; 0.6 NOW, THEREFORE, in consideration of the premises and of the mutual benefits from the covenants hereinafter set forth, IT IS AGREED: ARTICLE I -- COOPERATION IN DEVELOPMENT AND OPERATION ----------------------------------------------------- 1.1 The provisions of this agreement, as hereinafter set forth, relate to cooperation in the development and operation of the respective electric 2 systems of District and of Company and to sale and interchange of power and to mutual assistance between the two systems. Each party will comply with said provisions and assume and fulfill the responsibilities assigned to it therein. 1.2 The parties, through authorized representatives, will regularly consult with each other and cooperate as to planning for immediate and subsequent steps in the development of their respective electric systems and as to maintaining coordination in operation of said systems and realizing the benefits attainable therefrom. ARTICLE II -- ADDITIONS TO SYSTEM FACILITIES -------------------------------------------- 2.1 As an initial stage in coordination of system development, the parties will do those things set forth in Sections 2.2, 2.3, ant 2.4 following. 2.2 New District Generating Station -- District will proceed with construction of a new steam-electric generating station, hereinafter called "Agua Fria Generating Station," to be located between the cities of Glendale and Peoria, northwest of the city of Phoenix, which generating station shall contain two generating units with a nominal capacity of 100,000 kilowatts each with provision in its design and construction for installation of additional generating units. Said generating station shall include transformers connecting it to a 69 kilovolt bus which shall be adequately connected District's electrical system. District will make available to Company suitable space adjacent to said 69 kilovolt bus for the installation by Company of a 69 kilovolt bus and terminal facilities for at least five 69 kilovolt circuits and will grant to Company, without charge therefor, appropriate easements on its Agua Fria site for said bus and terminal facilities and for Company's 69 kilovolt circuits connecting thereto. District will arrange the construction schedules for said Agua Fria Generating Station on the basis of nominal dates for beginning commercial operation of the first generating unit on April 1, 1957, of the second generating unit on April 1, 1958, and District will in any event complete construction ready for commercial operation of the first generating unit by June 1, 1957, and of the second generating unit by June 1, 1958, 3 unless completion at such times be prevented by uncontrollable forces. 2.3 Company Transmission Connections -- Company will provide 69 kilovolt transmission feeders and associated facilities to connect its electric system to the 69 kilovolt bus of said Agua Fria Generating Station, which feeders shall be of adequate capacity to carry from said generating station into Company's electric system all of the power, as set forth in Service Schedule A and Service Schedule C hereof, which is to be delivered by District to Company from time to time at the delivery point located at said generating station. Company will provide, ready for service when said generating units are ready for service, such of said 69 kilovolt feeders as are needed at those times, unless provisions at such times be prevented by uncontrollable forces. 2.4 Deferral of Company Generating Station -- Company will defer its arrangements heretofore made for constructing a similar new generating station at a location east of the City of Phoenix which had been scheduled for initial operation in the early part of 1957. ARTICLE III -- SALE OF POWER ---------------------------- 3.1 District will sell initially a substantial amount of power to Company hereunder, and it is contemplated by the parties that they will from time to time arrange for other sales of power from one to the other in such amounts and for such periods as will be consistent with orderly development of their respective systems and assurance of adequate power supply to the territories served. It is contemplated that arrangements for such inter-system power sales will be incorporated in service schedules which, upon their execution by authorized representatives of the parties, shall be parts of this agreement for the periods which they respectively cover. 3.2 The following service schedules providing for sale and purchase of power are hereby made a part of this agreement: Service Schedule A -- Long-term Sale of Power by District to Company. Service Schedule B -- Sale of 12,000 Kilowatts by District to Com- 4 pany (continuing until June 1, 1961). Service Schedule C -- Sale of 40,000 Kilowatts by District to Company (continuing from early 1958 to early 1960). ARTICLE IV - RECIPROCAL SERVICES -------------------------------- 4.1 It is contemplated by the parties that they will from time to time put into effect specific arrangements for reciprocal services and other measures for coordination of the operation of their respective electric systems for the purpose of achieving economies in cost and improvements in quality and reliability of power supply to the territories served. It is contemplated that such arrangements will be incorporated in service schedules which, upon their execution, shall be parts of this agreement for the respective periods which they cover. 4.2 The following service schedules providing for reciprocal services are hereby made a part of this agreement: Service Schedule D -- Energy Interchange and Spinning Reserve Interchange. Service Schedule E -- Capacity Equalization ant Reciprocal Emergency Assistance. Service Schedule F -- Transfer of Power to Fringe-Area Customer Service Service Schedule G -- Parker Power Interchange. Service Schedule H -- Coordination of Interconnecting Transmission Circuits. ARTICLE V -- COMMITTEES ----------------------- 5.1 As a means of securing effective cooperation in the planning of system development and of dealing on a prompt and orderly basis with various technical and operating problems which arise in connection with system coordination under changing conditions, the parties will establish a "Coordination Committee" and an "Operating Committee", each charged with certain responsibilities hereunder. 5.2 Coordination Committee-- The Coordination Committee shall consist of two representatives, one designated by each party, and each such representative shall be authorized by the party by whom he is 5 designated to act on its behalf with respect to those matters herein provided to be responsibilities of the Coordination Committee. The functions and responsibilities of the Coordination Committee shall be (i) to establish general policies to be followed in coordination of the operation of the electric systems of the parties, consistent with the provisions of this agreement, (ii) to review periodically the prospective aggregate power requirements of the two systems, to arrange for investigations with respect to time, nature, location and ownership of additional generating capacity and related transmission facilities, and with respect to possible power purchases from external sources, which will provide for such aggregate power requirements in a manner consistent with overall effectiveness and economy, and to present recommendations as to such matters to the parties, (iii) to make recommendations concerning changes in principal network delivery points and to make arrangement for any such changes approved by the parties, (iv) to exercise general supervision and guidance over the Operating Committee, (v) to consider and act upon matters referred to the Coordination Committee by the Operating Committee, and (vi) to do such other things as are provided herein and as may be provided for from time to time by the parties to this agreement; provided that the Coordination Committee shall have no authority to modify any of the provisions of this agreement (including any service schedules effective hereunder) except as to items where modification is specified to be within the scope of the Coordination Committee's responsibility. Any decision or agreement by the Coordination Committee shall be effective when signed by both members of the Committee. Each party will notify the other party promptly of the designation of its representative on the Coordination Committee and of any subsequent change in such designation. Either party may designate an alternate or substitute to act as its representative on the Coordination Committee on specified occasions or with respect to specified matters. 5.3 Operating Committee -- The Operating Committee shall consist of four representatives, two designated by each party, and each such representative shall be authorized by the party by whom he is designated to act on its behalf with respect to those matters herein provided to be responsibilities of the Operating Committee. The functions and responsibilities of the Operating Committee shall be (i) to establish procedures and standard practices, consistent with the provisions hereof, for the guidance of load dispatchers and other operating employees in the respective systems as to matters affecting interconnected op- 6 rations of the respective systems, delivery of power, interchange of energy and spinning reserve, reciprocal emergency assistance, and other similar operating matters, (ii) to establish procedures and standard practices as to determinations of costs and expenses and of energy losses in connection with energy interchanges and other intersystem transactions hereunder, (iii) to establish detailed metering arrangements required in connection with transactions hereunder, (iv) to bring to the attention of the Coordination Committee matters needing its attention, and (v) to do such other things as are provided for herein; provided that the Operating Committee shall have no authority to modify any of the provisions of this agreement (including any service schedules effective hereunder) except as to items where modification is specified to be within the scope of the Operating Committee's responsibility. The establishment of any procedure or practice and any other action or determination by the Operating Committee, within the scope of the Operating Committee's responsibility, shall be effective when signed by at least one designated representative of each of the parties. Each party will notify the other party promptly of the designations of its representatives on the Operating Committee and of any subsequent changes in such designations. 5.4 Disagreements -- If the Operating Committee shall disagree as to any action to be taken or decision to be made, or as to the need for taking any action or making any decision, or as to whether any matter is within the scope of the Operating Committee's responsibilities hereunder, the question or questions at issue shall be referred to the Coordination Committee for its action or instructions. If the Coordination Committee be unable to reach agreement with respect to any matter referred to it by the Operating Committee, or with respect to any other matter within the scope of its responsibilities hereunder, the Coordination Committee may at its discretion request that the matter be referred to arbitration in the manner provided in Article IX hereof. Reference to arbitration shall be mandatory only in respect of those matters which are specifically made subject to arbitration by the provisions of this agreement. ARTICLE VI - CONDITIONS OP INTERCONNECTED OPERATION --------------------------------------------------- 6.1 Interconnection Points - For purposes hereof the following terms shall have the meanings indicated: 7 (a) A "major interconnection point" means a point of interconnection between the electrical networks of the parties into which the transmission or transformer facilities of the respective systems are able to deliver or to receive large amounts of power and the location of which in relation to the respective systems is such that power being sold or interchanged can be effectively and satisfactorily delivered and utilized. The following major interconnection points are established hereunder: (i) At a location west of the City of Phoenix adjoining Company's Phoenix Generating Station and the Phoenix Terminal Substation of the Bureau of Reclamation, where the systems can be interconnected at 69 kilovolts or at 12 kilovolts or at both voltages, (ii) At or adjoining District's Agua Fria Generating Station at 69 kilovolts, when the first unit of said generating station shall be completed and ready for operation, (iii) At or adjoining Mesa Substation of The Bureau of Reclamation at 69 kilovolts. Establishment of additional major interconnection points from time to time and the ownership and physical arrangements at such points shall be as recommended by the Operating Committee and approved by the Coordination Committee. Existing major interconnection points, except a principal network delivery point under a service schedule, may from time to time be discontinued upon recommendation of the Operating Committee and approval of the Coordination Committee. Responsibilities of the parties for operation and maintenance at the major interconnection points shall be as established by the Operating Committee and shall be evidenced by operating memoranda covering such matters. (b) A "minor interconnection point" means a point of interconnection between the electrical facilities of the parties, either at substations or at points on transmission or distribution feeders, where power can be both delivered and received between the systems in relatively small amounts as compared to major interconnection points. The location of and arrangements for minor interconnection points, for regular use and for emergency use, 8 shall be such as may from time to time be recommended by the Operating Committee and approved by the Coordination Committee. (c) An "indirect interconnection point" means a point of interconnection between the electrical system of one party hereto and the electrical system of a third party, which third party's electrical system is also interconnected at another point to the electrical system of the other party hereto. 6.2 Parallel Operation -- The electrical systems of the parties shall normally be operated in parallel (i) at all major interconnection points, (ii) at such minor interconnection points as the Operating Committee shall from time to time designate for normal closed circuit operation, and (iii) at indirect interconnection points where third party arrangements require such parallel operation, or where third party arrangements permit such parallel operation and the Operating Committee shall determine that such parallel operation is a desirable practice from the aspect of coordination between the electrical systems of the parties hereto. Temporary emergency interconnections at other points may be arranged from time to time by the Operating Committee, as circumstances may require. It is the intent of the parties that their network systems shall normally be operated as fully interconnected as may be necessary or convenient to protect quality and reliability of service to consumers without involving undue complications and expense for intersystem metering and energy accounting. Deviations from normal parallel operation may be made as directed by the Operating Committee, or as provided for in standard practice adopted by the Operating Committee, or as may under special temporary conditions be arranged between the respective load dispatchers. 6.3 Outage Schedules -- The parties will cooperate in scheduling the times and durations of removal from service of major generating units and important transmission circuits for inspection, maintenance or repair, to the end that hazard to or interference with service to consumers will be minimized. The arranging of such outage coordination schedules shall be a responsibility of the Operating Committee. 6.4 Electrical Disturbances -- Each party will insofar as practicable to construct, operate and maintain its system and facilities as to avoid or minimize the likelihood of a disturbance originating from its system which might cause impairment of service in the system of the other 9 party or in any third-party system interconnected with the system of the other party. 6.5 Frequency -- Power supplied by either party to the other in accordance with service schedules hereunder shall be at a nominal frequency of 60 cycles per second, except as in any service schedule specifically provided otherwise. Insofar as interconnected system frequency is within the control of the parties, it shall be a responsibility of the Operating Committee to establish operating arrangements for maintaining frequency within limits satisfactory for the types of power loads served by the two systems. 6.6 Tie Line Load Control -- The respective responsibilities of the parties with respect to tie line load control at interconnection points and the types of control equipment installed for such purpose shall be in accordance with standard practices established from time to time by the Operating Committee. 6.7 Relays -- The types and settings of relay equipment installed for control of circuits connected to interconnection points shall be in accordance with standard practices established from time to time by the Operating Committee. 6.8 Voltage -- Variations and fluctuations in voltage at interconnection points, and at other delivery points for power supplied by one party to the other, shall be kept within limits which will minimize adverse effects upon operation of the electrical system of either party or upon service supplied by either system. The respective responsibilities of the parties with respect to voltage control at such points shall be in accordance with standard practices established from time to time by the Operating Committee. 6.9 Reactive Kilovolt-Amperes -- Except as may be specifically provided in a service schedule hereunder or as may be arranged in specific cases by the Operating Committee, neither party shall be entitled to receive kilovars from the other party or obligated to supply kilovars to the other party. Each party will cooperate with the other party to minimize unintended flow of kilovars between the systems. It shall be within the responsibility of the Operating Committee to adopt standard practices, including appropriate charges, if any, for 10 scheduling flow of kilovars between the systems under conditions when there may be a mutual advantage from such flow and for controlling or limiting unscheduled kilovar flow. In the event of any disagreement in connection with the supply of kilovars either party shall have the right to have the matter submitted to arbitration. 6.10 Scheduling of Power Deliveries -- The Operating Committee shall arrange for all power transactions hereunder to be accounted for on the basis of amounts scheduled between the respective load dispatchers. Arrangements made therefor by the Operating Committee shall provide that the respective load dispatchers will maintain in duplicate a running record of cumulative deviations from aggregate schedules, and that such cumulative deviations will be compensated for by opposite deviations made as promptly as practicable, provided that such compensatory deviations are to be made under generally similar load and resource conditions or to be subject to adjustment factors to take account of differences in load and resource conditions between time when initial deviations occur and time when compensatory deviations are made. 6.11 Temporary Interchange Arrangements -- In cases where, from time to time, there may be a mutual advantage from sale or interchange of power between the parties upon a basis not provided for in any service schedule then in effect and the circumstances are such that arrangements must be made promptly in order to realize such advantage, or in cases of emergency or of temporary and unusual operating conditions, temporary arrangements for individual transactions or classes of transactions may be made by the Operating Committee; provided, however, that no continuing commitment involved in any arrangement so made at any time by the Operating Committee, under its responsibilities hereunder, shall extend for a longer period than 30 days. 6.12 Operating Data -- Each party will make available to the other party operating data with respect to effective capacities of generating units and transmission circuits, incremental costs of power sources, current and estimated future power loads of its electric system and sections thereof, and similar matters, to the extent that such data are needed by the Coordination Committee and the Operating Committee in the discharge of their responsibilities hereunder and are needed in 11 connection with load dispatching and energy accounting for transactions hereunder. It shall be a responsibility of the Operating Committee to arrange for reasonable opportunity for each party to review the supporting data for the information so supplied by the other party. ARTICLE VII -- METERING ----------------------- 7.1 Metering Facilities -- Arrangements with respect to location, type and ownership of metering facilities required for purposes of control of or settlements for power transactions hereunder shall be in accordance with the provisions of the service schedules covering such power transactions. The owner of a metering installation, the registrations of which are important in connection with settlements for transactions hereunder, upon request of the other party, will make available suitable space and facilities for installation of check metering. 7.2 Testing and Reading of Meters -- Metering equipment, the registrations of which are involved in settlements for transactions hereunder, shall be inspected and tested by the owner at annual intervals or at such shorter intervals as may be directed by the Operating Committee, and any inaccuracy disclosed by such tests shall be promptly corrected by the owner. Additional inspections and tests at particular installations shall be made by the owner upon request of the other party. Representatives of the other party shall be afforded opportunity to be present at all such inspections and tests. If at any test a meter shall be found to be inaccurate by more than 1%, fast or slow, an adjustment shall be made in settlements hereunder between the parties to compensate for the effect of such inaccuracy over a preceding period extending to the second preceding meter reading or over such shorter period as the inaccuracy may be determined to have existed. If at any time a meter should fail to register or its registration should be so erratic as to be meaningless, the estimated correct registration for billing purposes shall be based upon records of check meters, if available, or otherwise upon the best obtainable data. Kilowatthour meters involved in settlements hereunder shall be read monthly by the owner, and representative of the other party shall be afforded opportunity to be present at such readings. Arrangements with respect to reading of meters belonging to third parties, the registrations 12 of which are involved in settlements for transactions hereunder, shall be a responsibility of the Operating Committee. ARTICLE VIII -- SETTLEMENTS --------------------------- 8.1 Accounting Period -- Accounting period for transactions hereunder shall be one month. Such one-month period shall be a calendar month unless the Coordination Committee shall specify a one-month period ending a designated number of days before the end of each calendar month. 8.2 Billing and Payment -- Bills for amounts payable for any month by each party to the other hereunder shall be rendered on or before the 14th day of the succeeding month and shall be due on the 19th day of such succeeding month or on the 5th day after receipt of bill, whichever be later, provided, however, that in the event that any amount which has become due District for power and energy transactions hereunder is not received by District prior to the due date of District's fuel bills for such month and any such bill for fuel owed to Company shall have been paid on or before the due date, then the energy charge portion of the amount so due District for such month shall be increased by 0.635%. Payment shall be made at such office of the party to which payment is due as that party shall designate by written notice. Amounts not paid on or before the due date shall be payable with interest accrued at the rate of 1/2 percent compounded monthly computed from the due date to the date of payment. 8.3 Disputed Bills -- In case any portion of any bill be in dispute, the undisputed amount shall be paid when due, and the remainder, if any, upon determination of the correct amount, shall be paid promptly after such determination with interest accrued at the rate of 1/2 percent compounded monthly computed from the original due date. ARTICLE IX -- ARBITRATION ------------------------- 9.l In the event the parties be unable to reach agreement with respect to a matter herein specified to be subject to arbitration, or in the event the Coordination Committee shall request that an issue shall be submitted to arbitration, the procedure with respect to such arbitration 13 shall be as set forth in Sections 9.2 through 9.6 hereof. 9.2 Either party by written notice to the other party may call for appointment of a three-person board of arbitration, designating in such notice one person appointed by it to serve as a member of such three-person arbitration board. The other party thereupon shall similarly appoint a second person and the two persons so appointed shall endeavor to agree upon and secure the services of a third person to complete such three-person arbitration board. 9.3 If, within twenty days after the appointment of the first member of said arbitration board by one party, the other party shall have failed to appoint a second member, or if within fifteen days after the appointment of a second member, no third member shall have been agreed upon and secured, either party, with written notice to the other party, may call upon the person who is the senior Judge of the United States District Court in and for the District of Arizona to appoint a second and a third member, or a third member, as the case may be. If the person so called upon shall fail for ten (10) days to act, then either party with written notice to the other party may call successively upon (i) any other person who is a Judge of the United States District Court in and for the District of Arizona, or (ii) persons who are then members of the Supreme Court of Arizona in the order of their seniority in office, to make such appointment. 9.4 The board of arbitration appointed as provided in Section 9.2 or 9.3, shall hear the evidence submitted by the parties, and may call for additional information. The decision, submitted in writing, by a majority of the arbitration board, shall be conclusive as to the disagreement submitted for arbitration and shall be binding upon the parties. 9.5 Each party shall bear the fee and personal expenses of the member of the arbitration board appointed by or for it, and all other costs and expenses of the arbitration shall be borne in equal parts by the parties, unless the decision of a majority of the arbitration board shall specify a different apportionment of such costs and expenses. 9.6 Except as otherwise provided in this Article and in cases where the 14 parties may otherwise agree, the procedure for hearings in any arbitration proceeding conducted hereunder shall follow to the extent practical the procedure set forth in Rules V and Vl of the Commercial Arbitration Rules of the American Arbitration Association, as amended and in effect January 1, 1952. 9.7 The foregoing provisions set out in Sections 9.2 through 9.6 hereof are agreed to by the parties as the arbitration procedures to be followed, rather than the procedures set out in Article 3, Chapter 27, Arizona Code Annotated, 1939. In the event the following of such procedures should for any reason be or become invalid under Arizona law, or if the decision of the arbitration board thereunder should be unenforceable under the Arizona law, then the parties agree, as an alternative to the said procedures set out in Sections 9.2 through 9.6, to follow the procedures for arbitration then provided for by or permitted under Arizona law, and to take such steps as are necessary to follow such procedures. ARTICLE X -- MISCELLANEOUS PROVISIONS ------------------------------------- 10.1 Uncontrollable Forces -- Neither party shall be considered to be in default in performance of any obligation hereunder or under the service schedules attached hereto if failure of performance shall be due to uncontrollable forces, the term "uncontrollable forces" meaning any cause beyond the control of the party affected, including, but not limited to, failure of facilities, flood, earthquake, storm, fire, lightning, epidemic, war, riot, civil disturbance, labor disturbance, sabotage, and restraint by court or public authority, which by exercise of due foresight such party could not reasonably have been expected to avoid, and which by exercise of due diligence it shall be unable to overcome. Neither party shall, however, be relieved of liability for failure of performance if such failure be due to causes arising out of its own negligence or to removable or remediable causes which it fails to remove or remedy with reasonable dispatch. Nothing contained herein, however, shall be construed to require either party to prevent or settle a strike against its will. 10.2 Restriction on Use of Irrigation Water -- Without limiting the obligation of District to supply and/or deliver power to Company, nothing in this agreement nor in any service schedules now or hereafter attached shall require the District in furnishing power to Company to 15 waste water required for irrigation within the boundaries of the Salt River Reservoir District, as such boundaries are particularly described in Section 3 of Article IV of the Articles of Incorporation of the Salt River Valley Water Users' Association, filed February 9, 1903. 10.3 Waiver -- Any waiver by a parry of its rights with respect to a default under this agreement, or with respect to any other matter arising in connection with this agreement, shall not be deemed to be a waiver with respect to any subsequent default or matter. No delay, short of the statutory period of limitations, in asserting or enforcing any right hereunder shall be deemed a waiver to such right. 10.4 Amendments -- Neither this agreement nor any of the service schedules attached, or to be attached, shall be deemed to be amended unless such amendments shall be formally executed on behalf of each party and the execution thereof be authorized, ratified, or approved by the respective Boards of Directors of the parties. 10.5 Notices -- (a) Any notice, demand, or request provided for in this agreement or given or made in connection with this agreement to or upon District shall be deemed to be properly given or made if delivered or sent by registered mail to the Secretary, Salt River Project Agricultural Improvement and Power District, P. O. Box 1980, Phoenix, Arizona. (b) Any notice, demand, or request provided for in this agreement to or upon Company shall be deemed to be properly given or made if delivered or sent by registered mail to the Secretary, Arizona Public Service Company, P. O. Box 2591, Phoenix, Arizona. (c) The designation or the address of any person specified in this paragraph 10.5 may be changed at any time by written notice. (d) Notices and requests of a routine character in connection with delivery or receipt of power or in connection with operation of facilities shall be given in such manner as the Operating Committee from time to time shall arrange. 10.6 Regulatory Authorities -- This agreement is subject to valid laws, and to valid orders, rules, and regulations of duly constituted regulatory authorities having jurisdiction. 16 10.7 Successors and Assigns -- Neither party, without the written consent and approval of the other party hereto, shall assign this agreement or any of the service schedules now or hereafter attached hereto except as a part of any transaction or transactions effected in compliance with Article X of the Agreement of August 31, 1955, relating to "TRANSFERS, MERGERS AND ASSIGNMENTS." Subject to the foregoing provisions and restrictions herein set forth and referred to, this agreement and the attached service schedules shall be binding upon, and inure to the benefits of the parties hereto and their respective successors and assigns. 10.8 Captions and Headings -- The captions and headings appearing in this agreement and in service schedules hereunder are inserted merely to facilitate reference and shall have no bearing upon the interpretation of the provisions. 10.9 Article, Section and Paragraph References -- References by number to articles, sections and paragraphs in this agreement and in service schedules attached or to be attached are to articles, sections and paragraphs of the particular document in which the references appear, except as such references are specifically to other documents, and any reference to service schedules shall refer to service schedules attached to this Power Coordination Agreement. 10.10 Conditions and Provisions of Agreement of August 31, 1955 -- This agreement and attached service schedules fulfill all conditions and provisions of Article III of the "Agreement of August 31, 1955." ARTICLE XI -- TERM ------------------ 11.1 Effective Date -- This agreement shall become effective as of the time when the conditions and approvals required by Article XV of the Agreement of August 31, 1955, shall have been fulfilled and obtained. 11.2 Duration -- This agreement shall continue in effect indefinitely unless and until terminated as provided in paragraphs (a) or (b) of this section. (a) District may terminate this agreement by giving written notice to Company three (3) years in advance of the date of termination designated in such notice, and such termination shall concurrently terminate all service schedules. 17 (b) In the event, at any time, (i) that all service schedules theretofore in effect hereunder have been cancelled or terminated in accordance with the provisions thereof or valid written notices have been given cancelling or terminating all such service schedules in accordance with the provisions thereof, and (ii) that no new service schedules have been approved by the parties to become effective at a future date, and (iii) that no new service schedules shall be the subject of bona fide negotiation between the parties, then in such event this agreement may be terminated as of any date later than the expiration of all service schedules by written notice given by either party to the other party one year in advance of the date of termination designated in such notice. IN WITNESS WHEREOF, the respective parties hereto have caused this instrument to be executed on their behalf by their duly authorized officers and their corporate seals to be hereunto affixed, all as of the date and year first above written. SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT By VICTOR I. CORBELL ----------------------- President ATTEST: A. L. MONETTE - ------------------------------- Secretary 18 APPROVED: Jennings, Strouss, Salmon & Trask By: J. A. RIGGINS, JR. ----------------------------- Legal Counsel Salt River Project Agricultural Improvement and Power District ARIZONA PUBLIC SERVICE COMPANY By: WALTER T. LUCKING ---------------------------- President ATTEST: [Illegible] - --------------------------------- Secretary APPROVED: Snell & Wilmer By NICHOLAS H. POWELL ------------------------------- Legal Counsel Arizona Public Service Company 19 APPROVAL -------- The foregoing "Power Coordination Agreement of September 15,1955", between Salt River Project Agricultural Improvement and Power District and Arizona Public Service Company, and the following designated service schedules, to-wit: Service Schedule A -- Long-Term Sale of Power by District to Company, and Supplement No. 1 to Service Schedule A. Service Schedule B -- Sale of 12,000 Kilowatts by District to Company. Service Schedule C -- Sale of 40,000 Kilowatts by District to Company. Service Schedule D -- Energy Interchange and Spinning Reserve Interchange. Service Schedule E -- Capacity Equalization and Reciprocal Emergency Assistance. Service Schedule F -- Transfer of Power to Fringe-Area Customers. Service Schedule G -- Parker Power Interchange. Service Schedule H -- Coordination of Interconnecting Transmission Circuits. are approved this 29th day of February, 1956. [Illegible] ---------------------------------- Secretary of the Interior of the United States of America EX-10.3 4 MEMORANDUM OF AGREEMENT Memorandum of Agreement This Memorandum of Agreement is made with an Effective Date of April 25, 1998, between Arizona Public Service Company (hereinafter referred to as APS) and Salt River Project Agricultural Improvement and Power District (hereinafter referred to as SRP). By signing this Memorandum of Agreement, it is the intent of the parties to bind themselves to certain obligations and to recommend certain items to their respective governing boards for approval. The parties further understand that apart from those provisions of this Memorandum of Agreement which impose bilateral obligations that can be uniquely addressed by contract, the remaining provisions relating to legislation and regulatory policies only affect the positions that each party will assert before these legislative and regulatory bodies. They do not and can not prescribe any particular outcome to be reached by said bodies; indeed, in reaching this Memorandum of Agreement, each party acknowledges the risk that any such legislative and/or regulatory decision may differ significantly from one or more of the positions outlined herein. RECITALS These facts form the basis of this Memorandum of Agreement: 1. APS is an Arizona corporation engaged in the electric utility business in the State of Arizona. One hundred percent of the common stock of APS is owned by Pinnacle West Capital Corporation (hereinafter "Pinnacle West"). 2. SRP is an agricultural improvement and power district of the State of Arizona and is engaged in the electric utility business in the State of Arizona. 3. APS and SRP have characteristics in common but have also differed on a number of issues outlined below. 4. In 1955 APS and SRP entered into two agreements known as the Territorial Agreement (dated August 31, 1955) and the Power Coordination Agreement (dated September 15, 1955). Among other things, the Territorial Agreement provides for exclusive retail electric service territories as between SRP and APS under the policy of the State of Arizona regarding the provision of electricity. The Power Coordination Agreement provides for certain electric system coordination and power sales. 5. APS and SRP also are participants in several jointly-owned electric generating facilities, some of which are operated by APS and some of which are operated by SRP. 6. Many states in the United States, including Arizona, are enacting rules and legislation which will require electric utilities to open their service territories to competition in the retail sale of electric power supply and other non-distribution services. 7. The parties wish to amend the Territorial Agreement to eliminate it as a barrier to competition in order to permit full and unfettered competition between APS and SRP in the sale of electric power supply and other non-distribution services as authorized or permitted by law, according to such time schedules and terms that are applicable to other electricity suppliers. 8. Disputes have arisen between the parties regarding the future enforceability of the power purchase obligations of the Power Coordination Agreement, which the parties wish to resolve by an amendment to the Power Coordination Agreement. The price set by the agreement is currently above market price. APS has argued, inter alia, that it may terminate the power purchase obligations on the start of retail competition arguing that the power purchase obligations are tied to the exclusive right to serve certain territories. SRP has argued, inter alia, that the wording and intent of the agreement is that the power purchase obligation will continue. The parties wish to resolve this dispute by adjusting the terms of the Power Coordination Agreement. 9. The parties have identified certain operational opportunities which would give a net benefit to both parties, and that they wish to address through the framework of this Memorandum of Agreement. 10. Other disputes have arisen between the parties which result from the transition to a competitive electricity market, and which the parties wish to settle by this Memorandum of Agreement. 11. The parties wish to permit vigorous and full competition between them under the terms and conditions of applicable laws. 12. The parties wish to resolve the other issues identified herein so as to permit such competition to take place in a fair and equitable manner and at the earliest practical date. Page 2 AGREEMENT Now, therefore, the parties agree as follows: 1. Amendment of Territorial Agreement SRP and APS agree to present to their governing boards at the first reasonable opportunity, and to recommend that their governing boards approve, a second amendment to the Territorial Agreement in the form attached hereto as Exhibit One. It is the intent of this amendment to change the terms of the territorial agreement only to the extent necessary to permit full and unfettered competition between APS and SRP, on the same terms as may be applicable to other retail electricity suppliers who sell into the distribution territory of APS or SRP. With this amendment, the parties reaffirm the Territorial Agreement. In the event that the amendment set forth as Exhibit One is not approved by the SRP or APS governing board, then the parties shall renegotiate in good faith the terms of this entire Memorandum of Agreement, with the objective of reaching a substitute agreement acceptable to the governing boards of each party. If the parties are unable to reach an agreement in such event, this Memorandum of Agreement may be terminated by either party by written notice to the other. 2. Amendment of the Power Coordination Agreement SRP and APS agree to present to their governing boards at the first reasonable opportunity, and to recommend that their governing boards approve, an amendment to Service Schedule A of the Power Coordination Agreement in the form attached hereto as Exhibit Two. With this amendment, the parties reaffirm the Power Coordination Agreement. In the event that the amendment set forth as Exhibit Two is not approved by the SRP or APS governing board, then the parties shall renegotiate in good faith the terms of this entire Memorandum of Agreement, with the objective of reaching a substitute agreement acceptable to the governing boards of each party. If the parties are unable to reach an agreement in such event, this Memorandum of Agreement may be terminated by either party by written notice to the other. 3. Identification of Future Savings The parties agree to use their best efforts to execute an agreement or agreements by October 15, 1998, providing for the implementation of various measures that will provide APS and SRP each with net cost savings of at least $15 million in net present value (calculated at an 8.7% discount rate) between January 1, 1999 and December 31, 2006. Such measures may include, but shall not be limited to , joint generation operation, fuel procurement activity, spinning reserves, scheduling of the APA load/Hoover generation, the use of additional delivery points for transmission, future joint ventures, trenching cable replacement programs, and other beneficial generation, distribution, and transmission activities. The appropriate senior executives from APS and SRP shall personally Page 3 participate in the efforts to reach such an agreement, shall meet at least weekly, and shall devote such resources as are necessary for successful completion of the task. 4. Dispute Resolution With respect to all future substantive disputes which reasonably relate to the subject matter of this Memorandum of Agreement, and which are not covered by any other agreement between APS and SRP, the parties will, where lawful and reasonably feasible, meet and confer and attempt in good faith to resolve any such matters, before taking a public position on the matter. 5. State Political Issues With respect to state issues relating to competition between public power and investor owned utilities, at this time the parties have reached these specific agreements: a. The parties will jointly support an amendment of HB 2663 on the Senate floor or otherwise, as has been previously agreed to by the parties and will support passage of HB 2663 as so amended. The amendment is attached as Exhibit Three. The parties agree to reasonably cooperate with each other in the event of political difficulty in advancing part or all of the amendment. If HB 2663 as so amended is not enacted into law, the parties agree to jointly support passage of such legislation in the future. b. SRP will not take a position on additional amendments to HB 2663 which may be proposed by APS, as have been previously disclosed to SRP, relating to Title 40 waivers and electric and irrigation districts. c. APS will support the development of an intergovernmental agreement between the Corporation Commission and SRP which will primarily coordinate the activities of the Commission and SRP in opening SRP's service territory and the service territory of APS and other public service corporations to electricity competition. d. Upon request APS shall provide SRP with an estimated amount of APS's remaining total stranded cost compiled using assumptions and methods both parties find reasonably acceptable, the amount of APS's then unrecovered regulatory assets pursuant to ACC decision number 59601, and information regarding the implementation of any stranded cost recovery mechanism approved by the ACC. APS further agrees that while such regulatory assets are being recovered as part of its customers' bills, said bills shall disclose that regulatory asset recovery is contained therein. Page 4 e. APS and SRP will support constitutional and legislative amendments that eliminate unnecessary regulation of competitive electric services, but still provide for effective state certification of retail electricity suppliers. f. SRP will propose and continue to support before its Board of Directors, and APS will continue to propose and support before the Arizona Corporation Commission, the stranded cost methodology described in Exhibit 4. The parties understand that the ultimate decisions will be made by the SRP governing board and the Arizona Corporation Commission. g Neither APS nor Pinnacle West will knowingly participate, financially or otherwise, with any splinter group or organization which is designed for the overriding purpose of taking a position adverse to the generally known or understood interests of SRP at the state or local level. SRP will not knowingly participate, financially or otherwise, with any splinter group or organization which is designed for the overriding purpose of taking a position adverse to the generally known or understood interests of APS at the state or local level. The requirements of this Section 5(g) shall begin on the Effective Date of this Memorandum of Agreement and shall end on December 31, 2006. h. APS will not take a position before the Arizona Corporation Commission on efforts by SRP or its affiliate New West Energy to compete in the current markets of public service corporations, nor will APS challenge the right of SRP and New West Energy to compete in the current markets of public service corporations or public power entities. SRP will not challenge the right of APS (or its affiliates) to compete in the current markets of public service corporations or public power entities. However, nothing in this section shall preclude either party from raising issues regarding the terms and conditions of competitive entry which are generally applicable to electricity suppliers, or the other party's compliance with laws generally applicable to electricity suppliers. i. Neither APS nor SRP shall take any public position on state issues contrary to the specific terms or the manifest spirit of this Memorandum of Agreement, or attempt to change the fundamental structure or powers of the other, as existing on the Effective Date. The requirements of this Section 5(i) shall begin on the Effective Date of this Memorandum of Agreement and shall end on December 31, 2006. 6. Federal Political Issues With respect to federal issues relating to competition between public power and investor owned utilities, at this time the parties have reached these specific agreements: Page 5 a. In a timely manner upon execution of this Memorandum of Agreement, APS will prepare a letter to Senator Frank Murkowski satisfactorily indicating that SRP and APS have resolved differences related to capital cost issues, and indicating that APS will not oppose those private use regulations currently pending before IRS. b. In a timely manner upon execution of this Memorandum of Agreement, APS and SRP will jointly communicate, and make joint personal visits where appropriate, with trade association(s) and federal policy makers to be reasonably identified by SRP. APS will convey the messages set forth in point (a) above. c. Beginning on the Effective Date of this Memorandum of Agreement, APS and SRP will affirmatively support the right of public power and investor-owned utilities to seek tax-exempt pollution control bonds to the same degree in the future, as that issue may arise at the federal level during deliberations on electric industry deregulation. d. APS and SRP will work together to facilitate the formation of an interim organization for purposes of auditing system operations and resolving system constraints on the Arizona transmission system. The employees of this organization would report to a subset of the Southwest Regional Transmission Association until Desert Star or some other independent system operator mechanism is satisfactorily defined and in operation. The parties will financially support the formation of said organization and will propose that the costs of organizing and operating the transition organization will be shared by all Arizona market participants. e. Neither APS nor Pinnacle West will knowingly participate, financially or otherwise, with any splinter group or organization which is designed for the overriding purpose of taking a position adverse to the generally known or understood interests of SRP at the federal level. SRP will not knowingly participate, financially or otherwise, with any splinter group or organization which is designed for the overriding purpose of taking a position adverse to the generally known or understood interests of APS at the federal level. The requirements of this Section 6(e) shall begin on the Effective Date of this Memorandum of Agreement and shall end on December 31, 2006. f. APS will limit its comments to the Federal Energy Regulatory Commission in regard to SRP's safe harbor filing to concerns related to code of conduct issues, and will otherwise indicate that it takes no exception in that proceeding to the economic issues therein. g. Neither APS nor SRP shall take any public position on federal issues contrary to the specific terms or the manifest spirit of this Memorandum of Page 6 Agreement, or attempt to change the fundamental structure or powers of the other, as existing on the Effective Date. The requirements of this Section 6(g) shall begin on the Effective Date of this Memorandum of Agreement and shall end on December 31, 2006. 7. Transmission and Distribution Prices and Terms To the extent not contrary to future state or federal regulatory requirements (1) SRP and APS shall allow access to their respective electric power transmission and distribution facilities under rates and terms and conditions of service that are nondiscriminatory, cost based, just and reasonable, and comparable to those charged by themselves respectively for their own use of the same facilities, (2) in determining rates and terms of transmission and distribution service, SRP shall follow the procedures set forth in Exhibit Three, and (3) SRP shall propose and advocate pricing for transmission services that utilizes pricing procedures and methodologies that conform to the Federal Power Act and the Federal Energy Regulatory Commission's applicable published decisions, policies and regulations, to the extent legally possible. SRP's proposed rates and terms and conditions for distribution and transmission service shall be filed in sufficient time for their adoption by January 1, 1999, or by the start of competition in both the APS and SRP service territories, whichever is later. APS shall not object to the inclusion in transmission or distribution rates of costs necessary to support SRP's water delivery operations in amounts consistent with historic practices. APS shall propose distribution and transmission rates and terms and conditions of service consistent with the above principles. However, both parties recognize that such rates and terms and conditions are subject to regulation by the Arizona Corporation Commission and the Federal Energy Regulatory Commission. 8. Obligation to Meet and Confer In the event of a claimed breach of the provisions of Sections 3, 5, or 6 of this Memorandum of Agreement, the parties, on demand of either party, shall timely meet and attempt, in good faith to resolve the dispute in a timely manner before instituting litigation. 9. Remedies Upon Breach of This Memorandum of Agreement a. Remedies for breach of the obligations set forth in Section 1 of this Memorandum of Agreement: The only obligation under Section 1 of this Memorandum of Agreement is for the management of APS and SRP to present the amendment to their respective governing boards. In the event that the amendment is not approved by both governing boards, the parties shall attempt to renegotiate this entire Memorandum of Agreement, as provided in Section 1. b. Remedies for breach of the obligations set forth in Section 2 of this Memorandum of Agreement: The only obligation under Section 2 of this Page 7 Memorandum of Agreement is for the management of APS and SRP to present the amendment to their respective governing boards. In the event that the amendment is not approved by both governing boards, the parties shall attempt to renegotiate this entire Memorandum of Agreement, as provided in Section 2. c. Remedies for breach of the obligations set forth in Sections 3, 4 and 8 of this Memorandum of Agreement: Remedies shall be limited to specific enforcement of the obligation or injunctive relief. d. Remedies for breach of the obligations set forth in Sections 5 and 6 of this Memorandum of Agreement: i. Breach by APS - In the case of a material breach by APS or any action by Pinnacle West which, if performed by APS would constitute a material breach of the obligations set forth in Sections 5 and 6 of this Memorandum of Agreement, the changes to Schedule A of the Power Coordination Agreement, as set forth in Exhibit Two, shall terminate after APS has been given notice and has failed to cure the material breach after a reasonable opportunity to do so. In the event that APS disputes the breach, then SRP shall continue to comply with the changes to Service Section A of the Power Coordination Agreement as set forth in Exhibit Two. until a final judgment or resolution determining a material breach. Upon final judgment or resolution determining a material breach, SRP will be owed damages from APS in the amount of the difference between the Exhibit Two prices, and the contract without Exhibit Two, from the date of material breach until the final judgment or determination. SRP shall otherwise have no remedy at law or equity for such breach. ii. Breach by SRP - In the case of a material breach by SRP of the obligations set forth in Section 5 and 6 of this Memorandum of Agreement, APS shall have a thirty day option to terminate Schedule A of the Power Coordination Agreement, after SRP has been given notice and has failed to cure the material breach after a reasonable opportunity to do so. In the event that SRP disputes the breach, then APS shall continue to comply with Schedule A until a final judgment or resolution determining a material breach. Upon final judgment or resolution determining a material breach, APS will be owed damages from SRP in the amount of the difference between the market prices, and the contract price, from the date of breach until the final judgment or determination. APS shall otherwise have no remedy at law or equity for such material breach. e. SRP or APS may bring a judicial action to enforce Section 7 of this Memorandum of Agreement and shall have such remedies as provided by law and equity. Page 8 10. Miscellaneous Provisions a. The provisions hereof shall extend to and bind the successors and assigns of the parties hereto, and those subsidiaries of each substantially engaged in the generation, transmission, distribution or sale of electricity. b. The failure by SRP or APS at any time or times hereafter to require strict performance by the other of any of the undertakings, agreements or covenants contained in this Memorandum of Agreement shall not waive, affect or diminish any right of SRP or APS hereunder to demand strict compliance and performance therewith. None of the undertakings, agreements or covenants of SRP and APS under this Memorandum of Agreement shall be deemed to have been waived unless such waiver is evidenced by an instrument in writing signed by the party to be charged specifying such waiver. c. All notices shall be in writing and deemed properly given or made upon receipt if delivered by registered or certified mail, postage prepaid to the following addresses: If to APS to: Arizona Public Service Company 400 North Fifth Street Phoenix, Arizona 85004 Attn. Corporate Counsel Telecopy Number (602) 250-3002 Telephone Number (602) 250-3252 If to SRP to: Salt River Project Agricultural Improvement and Power District P.O. Box 52025 Phoenix, Arizona 85072 Attn: Corporate Secretary Telecopy Number (602) 236-2188 Telephone Number (602) 236-5005 Page 9 AGREED TO AS OF THE EFFECTIVE DATE: APS ARIZONA PUBLIC SERVICE COMPANY By RICHARD SNELL ------------------------------ Richard Snell Chairman of the Board Date 4/25/98 ---------------------------- By WILLIAM J. POST ------------------------------ William J. Post Chief Executive Officer Date 4/25/98 ---------------------------- SRP SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT By RICHARD H. SILVERMAN ------------------------------ Richard H. Silverman General Manager Date April 25, 1998 ---------------------------- Page 10 Exhibit One SECOND SUPPLEMENTAL AGREEMENT ----------------------------- THIS SECOND SUPPLEMENTAL AGREEMENT, made by and between ARIZONA PUBLIC SERVICE COMPANY ("APS"), and SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT ("SRP"); WITNESSETH: WHEREAS, the parties hereto heretofore entered into an Agreement of August 31, 1955, providing, inter alia, certain restrictions in regard to areas, customers and types of electric load to be served by each; WHEREAS, the parties executed a Supplemental Agreement, dated December 1, 1972, removing any restrictions regarding sales, donation or delivery of electric power and energy at wholesale; WHEREAS, the parties desire to further amend the Agreement of August 31, 1955, and the December 1, 1972 Supplemental Agreement (hereinafter collectively referred to as the "Agreement"); NOW, THEREFORE, in consideration of the premises, and for other valuable consideration, the sufficiency of which is hereby acknowledged by each party hereto, the parties hereby agree as follows: AGREEMENT: 1. Notwithstanding any other provision of the Agreement to the contrary, nothing in the Agreement shall prohibit either party from providing any electric supply or other non-distribution service to the extent authorized or permitted by law. For purposes of this Amendment, the term "distribution services" shall have the definition given the term "local distribution" and "local distribution ancillary services" under Federal Energy Regulatory Commission order number 888 [Order No. 888, 61 Fed. Reg. 21,540 (May 10, 1996)]. 2. The provisions of Article X of the Agreement shall not apply to any electric generation, transmission or other non-distribution systems, facilities or assets. 3. The provisions of this Second Supplemental Agreement will become effective as of January 1, 1999. 4. Except as expressly provided in this Second Supplemental Agreement, the Agreement will remain unchanged and in full force and effect. Page 11 IN WITNESS WHEREOF, the respective Parties have caused this Second Supplemental Agreement to be executed on their behalf this ____day of ____________, 1998. ARIZONA PUBLIC SERVICE COMPANY By _________________________________ President ATTEST: - ---------------------------------- Secretary SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT By _________________________________ President ATTEST AND COUNTERSIGN: - ----------------------------------- Secretary Page 12 Exhibit Two Supplement No. 4 to Service Schedule A of the Power Coordination Agreement of September 15, 1955 This Supplement Number 4 is agreed upon as a part of Service Schedule A of the Power Coordination Agreement between Salt River Project Agricultural Improvement and Power District and Arizona Public Service Company, dated September 15, 1955, as previously supplemented. In consideration of the resolution of disputes between the parties as to the effect of the institution of competition in the electric industry on the territory and contingent power purchase obligations under the Power Coordination Agreement pursuant to the Memorandum of Agreement dated April 25, 1998, the parties agree as follows: 1. The Effective Date of this Supplement No. 4 shall be the later of January 1, 1999, or the first day of the next month following the Start of Competition, which is defined as the date upon which both APS and SRP have opened any part of their retail load to competition in the sale of electricity. 2. The parties confirm the power purchase obligations and pricing formulas set forth in Service Schedule A, subject only to the demand charges and the revised methodology of calculating territorial equivalent power capacity set forth in Attachment One to this Supplement No. 4. Beginning on the Effective Date, and ending on December 31, 2006, demand charges shall be calculated as provided in Attachment One to this Supplement No. 4. The parties further agree, beginning on the Effective Date, to calculate territorial equivalent power capacity as provided in Attachment One to this Supplement No. 4. 3. If control of APS or Pinnacle West, or any successor to such control pursuant to this section, changes by merger, purchase, acquisition of voting securities by one or more affiliated persons or entities, or other event or series of coordinated events, the successor or affiliated successors to such control will, within ten days after acquiring such control, deliver to SRP a written agreement, reasonably satisfactory to SRP, to be bound by all of the provisions of the Memorandum of Agreement, failing which the demand prices agreed to in this Supplement No. 4 shall thereafter revert back to the level that would have been in effect absent this Supplement No. 4 to Service Schedule A of the Power Coordination Agreement. For this purpose, "control" means possession of the power, however exercised and without regard to shareholder meeting requirements, staggered terms of director office or similar considerations, to elect a majority of the directors of the corporation in question (APS, Pinnacle West or successor). Page 13 4. Beginning on December 31, 2006, APS shall have an option to terminate the territory and contingent power purchase obligations upon five years written notice. 5. SRP may not exercise its existing three year option to terminate the territory and contingent power purchase agreement until after December 31, 2003 (which would result in the earliest possible termination date of December 31, 2006). 6. Except as provided herein, Service Schedule A, as previously supplemented, shall remain in full force and effect. 7. This Supplement No. 4 and Schedule A are subject to termination as provided in the Memorandum of Agreement between APS and SRP dated April 25, 1998. ARIZONA PUBLIC SERVICE COMPANY By _________________________________ President ATTEST: - ---------------------------------- Secretary SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT By _________________________________ President ATTEST AND COUNTERSIGN: - ----------------------------------- Secretary Page 14 Attachment One to Supplement Number 4 Service Schedule A Power Coordination Agreement Future Capacity Requirements and Estimated Demand Charges --------------------------------------------------------- - -------------------------------------------------------------------------------- Calendar Jan-May Jan-May June-Dec June-Dec Year Demand MWs Demand $/kW-Mo Demand MWs Demand $/kW-Mo - -------------------------------------------------------------------------------- 1999 316 0.79 322 0.87 2000 322 1.46 329 1.54 2001 329 2.13 336 2.21 2002 336 2.81 343 2.87 2003 343 3.45 350 3.50 2004 350 4.10 357 4.14 2005 357 4.48 364 4.52 2006 364 4.84 372 4.88 - -------------------------------------------------------------------------------- 1. This chart is an estimate of future demand prices. The estimate is based on an assumed $5.23 base on January 1, 1999, and an assumed 4.1% annual escalation rate thereafter. 2. Actual prices will be adjusted based on the actual escalation rates pursuant to Schedule A, Section 8 of the Power Coordination Agreement. 3. The territorial equivalent power capacity will be 254 MW beginning with the 6/1/98 - 5/31/99 contract year and will escalate at 2.5% thereafter, including during the periods after December 31, 2006. 4. Until the first of the next month following the Start of Competition, demand rates will be calculated according to Schedule A, Section 8 of the Power Coordination Agreement. The APS demand charge for the revised billing period will be paid monthly. The demand payment will be equal to the territorial demand plus the contingent demand, multiplied by a per kW -month demand charge calculated as specified above. 5. The demand charges after December 31, 2006 will be calculated according to Schedule A, Section 8 of the Power Coordination Agreement. 6. Energy charges are not changed by this Supplement No. 4. Page 15 Exhibit Three APS/SRP AMENDMENT TO HB 2663 ELECTRIC POWER COMPETITION Page 4 Line 5 after the period insert "NOTWITHSTANDING SECTION 30-803(A), A PUBLIC POWER ENTITY MAY COORDINATE THE OPENING OF ITS SERVICE TERRITORY TO COMPETITION WITH THE SCHEDULE SET BY THE COMMISSION FOR PUBLIC SERVICE CORPORATIONS." Between lines 5 and 6 insert "B. WHEN DETERMINING TERMS AND CONDITIONS FOR CUSTOMER SELECTION, COMPLAINT RESOLUTION, CONSUMER PROTECTION, STRANDED COST, DISTRIBUTION SERVICE RATES AND CHARGES, SYSTEM BENEFIT CHARGES, AND OTHER RELATED MATTERS AS DETERMINED IN THE REASONABLE DISCRETION OF THE GOVERNING BODY OF THE PUBLIC POWER ENTITY, THE GOVERNING BODY OF THE PUBLIC POWER ENTITY SHALL, AT A MINIMUM: 1. PROVIDE PUBLIC NOTICE OF PROPOSED TERMS AND CONDITIONS STATING: a. THAT THE POWER ENTITY IS ADOPTING TERMS AND CONDITIONS FOR COMPETITION IN THE RETAIL SALE OF ELECTRIC GENERATION SERVICE. b. THAT THE INFORMATION IN SUBSECTION 2 OF THIS SECTION IS AVAILABLE FOR INSPECTION. c. THAT THE GOVERNING BODY OF THE PUBLIC POWER ENTITY WILL HOLD A SPECIAL MEETING AS REQUIRED BY SUBSECTION 3 OF THIS SECTION AND STATING THE DATE, TIME AND PLACE OF THE MEETING. 2. PROVIDE THAT FOR A PERIOD BEGINNING WITH THE PUBLIC NOTICE AND UNTIL TEN DAYS AFTER THE CLOSE OF THE MEETING PRESCRIBED IN SUBSECTION 3 OF THIS SECTION, THE PUBLIC POWER ENTITY SHALL MAKE AVAILABLE TO INTERESTED PERSONS, AT ITS MAIN OFFICE, PERTINENT INFORMATION, INCLUDING: a. MANAGEMENT'S RECOMMENDATION FOR PROPOSED TERMS AND CONDITIONS. b. RELEVANT FINANCIAL AND OTHER INFORMATION AS MAY BE PERTINENT AND UPON WHICH THE MANAGEMENT PROPOSAL IS BASED. THE PUBLIC POWER ENTITY SHALL TIMELY SUPPLEMENT SUCH INFORMATION AS MAY BE REASONABLY REQUESTED BY ANY INTERESTED PERSON AND Page 16 WILL ANSWER REASONABLE QUESTIONS POSED BY ANY INTERESTED PERSON. c. CURRENT TERMS AND CONDITIONS, IF ANY. d. REPORTS OF CONSULTANTS, IF ANY. 3. PROVIDE THAT INTERESTED PERSONS MAY FILE WRITTEN COMMENTS WITH THE PUBLIC POWER ENTITY AT ANY TIME DURING THE PERIOD PRESCRIBED IN SUBSECTION 2 OF THIS SECTION. A MEETING OF THE GOVERNING BODY OF THE PUBLIC POWER ENTITY SHALL BE HELD NO SOONER THAN THIRTY DAYS AND NO LATER THAN NINETY DAYS AFTER THE PUBLIC NOTICE REFERRED TO IN SUBSECTION 1 OF THIS SECTION. AT THE MEETING, THE GOVERNING BODY OF THE PUBLIC POWER ENTITY SHALL: a. AFFORD REPRESENTATIVES OF MANAGEMENT OF THE PUBLIC POWER ENTITY AN OPPORTUNITY TO EXPLAIN THE PROPOSED TERMS AND CONDITIONS, THE CRITERIA FOR SUCH TERMS AND CONDITIONS AND ANSWER QUESTIONS. b. AFFORD ANY CONSULTANTS RETAINED BY THE PUBLIC POWER ENTITY AN OPPORTUNITY TO COMMENT UPON THE PROPOSED TERMS AND CONDITIONS. c. AFFORD INTERESTED PERSONS A REASONABLE OPPORTUNITY TO SUBMIT WRITTEN COMMENTS AND QUESTIONS OR MAKE ORAL PRESENTATION OF VIEWS, QUESTIONS AND COMMENTS. 4. FOLLOWING REVIEW OF THE INFORMATION AND COMMENTS GATHERED IN THE COURSE OF THE PROCEDURES DESCRIBED IN SUBSECTION 3 OF THIS SECTION THE GOVERNING BODY OF THE PUBLIC POWER ENTITY SHALL MAKE ITS DECISION ON THE PROPOSED TERMS AND CONDITIONS. C. ALL FINAL DECISIONS OF THE GOVERNING BODY OF THE PUBLIC POWER ENTITY REGARDING TERMS AND CONDITIONS FOR CUSTOMER SELECTION, COMPLAINT RESOLUTION, CONSUMER PROTECTION, STRANDED COST, DISTRIBUTION SERVICE RATES AND CHARGES, SYSTEM BENEFIT CHARGES, AND OTHER RELATED MATTERS AS DETERMINED IN THE REASONABLE DISCRETION OF THE GOVERNING BODY OF THE PUBLIC POWER ENTITY SHALL: 1. BE IN WRITING 2. STATE THE FACTUAL AND LEGAL BASIS FOR THE DECISION, AND 3. STATE THE EFFECTIVE DATE OF THE DECISION, IF ANY. Line 12 before the period insert ", TO ELECTRICITY SUPPLIERS CERTIFICATED BY THE COMMISSION PURSUANT TO SECTION 40-207" Line 13 strike "EXISTING", before "SERVICE" insert "EXCLUSIVE DISTRIBUTION" Line 17 after "CONTINUE" insert "TO HAVE THE EXCLUSIVE RIGHT" Page 17 After line 19 insert "D. PUBLIC POWER ENTITIES SHALL PERMIT THE AGGREGATION OF LOADS OF MULTIPLE CUSTOMERS." Strike lines 20 through 22 Page 5 Line 11 strike "A PEAK DEMAND OF TWENTY KILOWATTS"; after "WITH" insert "AN ANNUAL USAGE OF ONE HUNDRED THOUSAND KILOWATT HOURS" Line 20 after "PRACTICES" insert "OF PUBLIC POWER ENTITIES" Page 6 Line 21 strike "PEAK DEMAND IS TWENTY" Line 22 strike "KILOWATTS" and insert "ANNUAL USAGE IS ONE HUNDRED THOUSAND KILOWATT HOURS" Line 28 strike "AGGREGATED PEAK LOAD IS TWENTY KILOWATTS" and insert "ANNUAL USAGE IS ONE HUNDRED THOUSAND KILOWATT HOURS" Line 37 after "FAILURE" insert "OF A PUBLIC POWER ENTITY" Page 7 Line 40 strike "AN"; after "GIVE" insert "A MATERIAL" Page 8 Line 2 after the period insert "DETERMINATIONS MADE BY PUBLIC POWER ENTITIES UNDER THIS SECTION MAY BE CHALLENGED THROUGH THE PROCEDURES PROVIDED IN SECTION 39-121.02." Between lines 2 and 3 insert three new sections: Section ___. Section 30-810, Arizona Revised Statutes is inserted: 30-810 Application for rehearing; effect; decision A. AFTER ANY FINAL DECISION IS MADE BY THE GOVERNING BODY OF THE PUBLIC POWER ENTITY REGARDING TERMS AND CONDITIONS FOR CUSTOMER SELECTION, COMPLAINT RESOLUTION, CONSUMER PROTECTION STRANDED COSTS, DISTRIBUTION SERVICE RATES AND CHARGES, SYSTEM BENEFIT CHARGES, AND OTHER RELATED MATTERS AS DETERMINED IN THE REASONABLE DISCRETION OF THE GOVERNING BODY OF THE PUBLIC POWER ENTITY, OR REGARDING COMPLIANCE WITH AN INTERGOVERNMENTAL AGREEMENT MADE UNDER THE PROVISION OF THIS CHAPTER, ANY PARTY TO THE ACTION OR PROCEEDING OR THE ATTORNEY GENERAL ON BEHALF OF THE STATE MAY APPLY FOR A REHEARING OF ANY MATTER DETERMINED IN THE ACTION OR PROCEEDING AND SPECIFIED IN THE APPLICATION FOR REHEARING WITHIN TWENTY DAYS OF ENTRY OF THE DECISION. UNLESS OTHERWISE ORDERED, THE FILING OF SUCH AN APPLICATION DOES NOT STAY THE Page 18 DECISION OF THE GOVERNING BODY OF THE PUBLIC POWER ENTITY. IF THE GOVERNING BODY OF THE PUBLIC POWER ENTITY DOES NOT GRANT THE APPLICATION WITHIN TWENTY DAYS, IT IS DEEMED DENIED. IF THE GOVERNING BODY OF THE PUBLIC POWER ENTITY GRANTS THE APPLICATION, THE GOVERNING BODY OF THE PUBLIC POWER ENTITY SHALL PROMPTLY HEAR THE MATTER AND DETERMINE IT WITHIN TWENTY DAYS AFTER THE FINAL SUBMISSION. B. NO CLAIM ARISING FROM ANY DECISION OF THE GOVERNING BODY OF THE PUBLIC POWER ENTITY REGARDING TERMS AND CONDITIONS FOR CUSTOMER SELECTION, COMPLAINT RESOLUTION, CONSUMER PROTECTION, STRANDED COSTS, DISTRIBUTION SERVICE RATES AND CHARGES, SYSTEM BENEFIT CHARGES, AND OTHER RELATED MATTERS AS DETERMINED IN THE REASONABLE DISCRETION OF THE GOVERNING BODY OF THE PUBLIC POWER ENTITY, OR REGARDING COMPLIANCE WITH AN INTERGOVERNMENTAL AGREEMENT MADE UNDER THE PROVISION OF THIS CHAPTER SHALL ACCRUE IN ANY COURT TO ANY PARTY, OR THE STATE, UNLESS THE PARTY, OR THE STATE, MAKES, BEFORE THE EFFECTIVE DATE OF THE DECISION, APPLICATION TO THE GOVERNING BODY OF THE PUBLIC POWER ENTITY FOR REHEARING. C. THE APPLICATION SHALL SET FORTH SPECIFICALLY THE GROUNDS ON WHICH IT IS BASED, AND NO PERSON, NOR THE STATE, SHALL IN ANY COURT URGE OR RELY ON ANY GROUND NOT SET FORTH IN THE APPLICATION. D. AN APPLICATION FOR REHEARING SHALL NOT EXCUSE ANY PERSON FROM COMPLYING WITH AND OBEYING ANY DECISION, OR ANY REQUIREMENTS OF ANY DECISION OF THE GOVERNING BODY OF THE PUBLIC POWER ENTITY THERTOFORE MADE, OR OPERATE IN ANY MANNER TO STAY OR POSTPONE THE ENFORCEMENT THEREOF, EXCEPT IN SUCH CASES AND UPON SUCH TERMS AS THE GOVERNING BODY OF THE PUBLIC POWER ENTITY DIRECTS. E. IF, AFTER A REHEARING AND A CONSIDERATION OF ALL THE FACTS, INCLUDING THOSE ARISING SINCE THE MAKING OF THE DECISION, THE GOVERNING BODY OF THE PUBLIC POWER ENTITY FINDS THAT THE ORIGINAL DECISION OR ANY PART THEREOF IS IN ANY RESPECT UNJUST OR UNWARRANTED, OR SHOULD BE CHANGED, THE GOVERNING BODY OF THE PUBLIC POWER ENTITY MAY ABROGATE, CHANGE, OR MODIFY THE DECISION, AND SUCH DECISION HAS THE SAME FORCE AND EFFECT AS AN ORIGINAL DECISION, BUT SHALL NOT AFFECT ANY RIGHT OR THE ENFORCEMENT OF ANY RIGHT ARISING FROM OR BY VIRTUE OF THE ORIGINAL DECISION, UNLESS SO DECIDED BY THE GOVERNING BODY OF THE PUBLIC POWER ENTITY. Page 19 Section ___. Section 30-811, Arizona Revised Statutes is inserted: 30-811 Action to set aside or modify certain decisions of public power entities; filing; limitation; superior court A. ANY PARTY IN INTEREST, OR THE ATTORNEY GENERAL ON BEHALF OF THE STATE, BEING DISSATISFIED WITH A FINAL DECISION BY THE GOVERNING BODY OF THE PUBLIC POWER ENTITY REGARDING TERMS AND CONDITIONS FOR CUSTOMER SELECTION, COMPLAINT RESOLUTION, CONSUMER PROTECTION, STRANDED COSTS, DISTRIBUTION SERVICE RATES AND CHARGES, SYSTEM BENEFIT CHARGES, AND OTHER RELATED MATTERS AS DETERMINED IN THE REASONABLE DISCRETION OF THE GOVERNING BODY OF THE PUBLIC POWER ENTITY, OR REGARDING COMPLIANCE WITH AN INTERGOVERNMENTAL AGREEMENT MADE UNDER THE PROVISIONS OF THIS CHAPTER, MAY WITHIN THIRTY DAYS AFTER A REHEARING IS DENIED OR GRANTED, AND NOT AFTERWARDS, COMMENCE AN ACTION IN THE SUPERIOR COURT IN THE COUNTY IN WHICH THE GOVERNING BODY OF THE PUBLIC POWER ENTITY HAS ITS OFFICE, AGAINST THE GOVERNING BODY OF THE PUBLIC POWER ENTITY AS A DEFENDANT, TO VACATE, SET ASIDE, AFFIRM IN PART, REVERSE IN PART OR REMAND WITH INSTRUCTIONS TO THE GOVERNING BODY OF THE PUBLIC POWER ENTITY SUCH DECISION ON THE GROUND THAT THE VALUATION, RATE, JOINT RATE, TOLL, FARE, CHARGE OR FINDING, RULE, CLASSIFICATION OR SCHEDULE, PRACTICE, DEMAND, REQUIREMENT, ACT OR SERVICE PROVIDED IN THE DECISION IS UNLAWFUL, OR THAT ANY RULE, PRACTICE, ACT OR SERVICE PROVIDED IN THE DECISION IS UNREASONABLE. THE ANSWER OF THE GOVERNING BODY OF THE PUBLIC POWER ENTITY SHALL BE SERVED AND FILED WITHIN TWENTY DAYS AFTER SERVICE OF THE COMPLAINT, WHEREUPON THE ACTION SHALL BE AT ISSUE AND READY FOR TRIAL UPON TEN DAYS' NOTICE TO EITHER PARTY. THE ACTION SHALL BE TRIED AND DETERMINED AS OTHER CIVIL ACTIONS EXCEPT AS PROVIDED IN THIS SECTION. B. IF THE GOVERNING BODY OF THE PUBLIC POWER ENTITY RESCINDS THE DECISION COMPLAINED OF, THE ACTION SHALL BE DISMISSED, AND IF THE GOVERNING BODY OF THE PUBLIC POWER ENTITY ALTERS, MODIFIES OR AMENDS THE DECISION, THE ALTERED, MODIFIED OR AMENDED DECISION SHALL REPLACE THE ORIGINAL DECISION COMPLAINED OF, AND JUDGMENT SHALL BE GIVEN THEREON AS THOUGH MADE BY THE GOVERNING BODY OF THE PUBLIC POWER ENTITY IN THE FIRST INSTANCE. C. THE TRIAL SHALL CONFORM, AS NEARLY AS POSSIBLE, AND EXCEPT AS OTHERWISE PRESCRIBED BY THIS SECTION, TO OTHER TRIALS IN CIVIL ACTIONS. JUDGMENT SHALL BE GIVEN AFFIRMING, Page 20 MODIFYING OR SETTING ASIDE THE ORIGINAL OR AMENDED DECISION. D. EITHER PARTY TO THE ACTION WITHIN THIRTY DAYS AFTER THE JUDGMENT OF THE SUPERIOR COURT IS GIVEN, MAY APPEAL TO THE COURT OF APPEALS. E. IN ALL TRIALS, ACTIONS AND PROCEEDINGS THE BURDEN OF PROOF SHALL BE UPON THE PARTY ADVERSE TO THE GOVERNING BODY OF THE PUBLIC POWER ENTITY OR SEEKING TO VACATE OR SET ASIDE ANY DETERMINATION OF THE GOVERNING BODY OF THE PUBLIC POWER ENTITY TO SHOW THAT IT IS UNLAWFUL, THAT IS NOT SUPPORTED BY SUBSTANTIAL EVIDENCE OR THAT THE GOVERNING BODY OF THE PUBLIC POWER ENTITY ABUSED ITS DISCRETION. F. EXCEPT AS PROVIDED BY THIS SECTION NO COURT OF THIS STATE SHALL HAVE JURISDICTION TO ENJOIN, RESTRAIN, SUSPEND, DELAY OR REVIEW ANY DECISION OF THE GOVERNING BODY OF THE PUBLIC POWER ENTITY, OR TO ENJOIN RESTRAIN OR INTERFERE WITH THE GOVERNING BODY OF THE PUBLIC POWER ENTITY IN THE PERFORMANCE OF ITS OFFICIAL DUTIES, AND THE RULES OR DECREES FIXED BY THE GOVERNING BODY OF THE PUBLIC POWER ENTITY SHALL REMAIN IN FORCE PENDING THE DECISION OF THE COURTS, BUT A WRIT OF MANDAMUS SHALL LIE FROM THE SUPREME COURT TO THE GOVERNING BODY OF THE PUBLIC POWER ENTITY IN CASES AUTHORIZED BY LAW. Section ___. Section 30-812, Arizona Revised Statutes is inserted: 30-812 Application of antitrust statutes NOTWITHSTANDING ANY OTHER PROVISIONS OF LAW, THE PROVISIONS OF TITLE 44, CHAPTER 10, ARTICLE 1 SHALL APPLY TO THE PROVISION OF COMPETITIVE ELECTRIC GENERATION SERVICE BY PUBLIC POWER ENTITIES. Page 11 Line 31 strike "CURRENT SERVICE"; before "TERRITORIES" insert "EXCLUSIVE DISTRIBUTION SERVICE" Line 38 after "PROVIDE" insert ", ON AN EXCLUSIVE BASIS," Page 12 Line 12 strike "PEAK DEMAND IS TWENTY KILOWATTS" and insert "ANNUAL USAGE IS ONE HUNDRED THOUSAND KILOWATT HOURS" Line 20 strike "PEAK DEMAND IS TWENTY" Line 21 strike "KILOWATTS" and insert "ANNUAL USAGE IS ONE HUNDRED THOUSAND KILOWATT HOURS" Line 36 strike "MAILINGS FOR" Strike lines 37 through 41 Page 21 Page 13 Afterline 24 insert "6. PERMIT THE AGGREGATION OF LOADS OF MULTIPLE CUSTOMERS." Strike lines 25 through 28. Line 35 strike "AGGREGATED PEAK" Line 36 strike "LOAD OF TWENTY KILOWATTS"; and insert "ANNUAL USAGE OF ONE HUNDRED THOUSAND KILOWATT HOURS" Page 15 Line 39 strike "EXCEPT" Line 40 strike "TO THE EXTENT THAT THE CONDUCT OR ACTIVITY IS SUBJECT TO COMPETITION," Line 43 after the period insert "THIS SECTION SHALL NOT APPLY TO THE PROVISION OF COMPETITIVE ELECTRIC GENERATION SERVICE." Page 16 Between lines 32 and 33 insert five new sections: Section ___. Section 41-2531, Arizona Revised Statutes is amended to read: 41-2531 Definitions In this article, unless the context otherwise requires: 1. "Bidder prequalification" means determining in accordance with rules adopted pursuant to this chapter that a prospective bidder or offeror satisfies the criteria for being included on the bidder's list. 2. "CONFIDENTIAL INFORMATION" MEANS TRADE SECRETS OR OTHER PROPRIETARY INFORMATION BELONGING TO A COMPETING BIDDER OR OFFEROR WHICH IS NOT PUBLICLY KNOWN, THE DISCLOSURE OF WHICH IS IN THE SOLE DISCRETION OF THE COMPETING BIDDER OR OFFEROR AND WHICH IS INCLUDED IN A BID OR PROPOSAL FOR THE LIMITED PURPOSE OF RESPONDING TO THE BID OR REQUEST FOR PROPOSAL WITH AN EXPECTATION OF CONTINUED PRIVACY. CONFIDENTIAL INFORMATION MAY NOT BE DISCLOSED WITHOUT THE EXPRESS PERMISSION OF THE COMPETING BIDDER OR OFFEROR TO WHOM IT BELONGS. 3. "Cost-reimbursement contract" means a contract under which a contractor is reimbursed for costs which are reasonable, allowable and allocable in accordance with the contract terms and the provisions of this chapter, and a fee, if provided for in the contract. 4. "Demonstration project" means a project in which a vendor supplies a service or material to this state for which the state does not pay but for which this state may be obligated to provide routine support such as utility cost and operating personnel. 5. "ESSENTIAL GOODS AND SERVICES" MEANS THOSE GOODS AND SERVICES, INCLUDING THE PROVISION OF ELECTRIC SERVICE, WHICH ARE NECESSARY FOR THE OPERATION OF GOVERNMENT Page 22 AND/OR FOR THE PUBLIC HEALTH, SAFETY AND WELFARE, AND FOR WHICH IT IS PRESUMPTIVE THAT THE COMPETITIVE BIDDING PROCESS IS NOT PRACTICAL OR ADVANTAGEOUS TO THE STATE AND FOR WHICH THE COMPETITIVE SEALED PROPOSAL PROCESS SHALL BE USED IN PLACE OF THE COMPETITIVE SEALED BID PROCESS. 6. "Established catalogue price" means the price included in a catalogue, price list, schedule or other form that: (a) Is regularly maintained by a manufacturer, distributor or contractor. (b) Is either published or otherwise available for inspection by customers. (c) States prices at which sales are currently or were last made to a significant number of any category of buyers or buyers constituting the general buying public for the materials or services involved. 7. "Invitation for bids" means all documents, whether attached or incorporated by reference, which are used for soliciting bids in accordance with the procedures prescribed in section 41-2533. 8. "Multistep sealed bidding" means a two phase process consisting of a technical first phase composed of one or more steps in which bidders submit unpriced technical offers to be evaluated by this state and a second phase in which those bidders whose technical offers are determined to be acceptable during the first phase have their price bids considered. 9. "Paper" means newspaper, high grade office paper, fine paper, bond paper, offset paper, xerographic paper, duplicator paper and related types of cellulosic material containing not more than ten per cent by weight or volume of noncellulosic material such as laminates, binders, coatings or saturants. 10. "Paper product" means paper items or commodities, including paper napkins, towels, corrugated paper and related types of cellulosic products containing not more than ten per cent by weight or volume of noncellulosic material such as laminates, binders, coatings or saturates. 11. "Post-consumer material" means a discard generated by a business or residence that has fulfilled its useful life. Post-consumer material does not include discards from industrial or manufacturing processes. 12. "Purchase description" means the words used in a solicitation to describe the materials, services or construction for purchase and includes specifications attached to, or made a part of, the solicitation. 13. "Recycled paper" means paper products which have been manufactured from materials otherwise destined for the waste stream and which contain at least forty per cent recovered wastepaper with ten per cent of that being post-consumer material. 14. "Request for information" means all documents issued to vendors for the sole purpose of seeking information about the availability in the commercial marketplace of materials or services. Page 23 15. "Request for proposals" means all documents, whether attached or incorporated by reference, which are used for soliciting proposals in accordance with procedures prescribed in section 41-2534. 16. "Responsible bidder or offeror" means a person who has the capability to perform the contract requirements and the integrity and reliability which will assure good faith performance. IN THE CASE OF ESSENTIAL GOODS AND SERVICES, RESPONSIBLE BIDDER OR OFFEROR SHALL, IN ADDITION, MEAN A PERSON WHOSE OFFER MEETS MINIMAL SPECIFIED STANDARDS FOR QUALITY OF THE GOOD OR SERVICE, WHO DEMONSTRATES PROVEN RELIABILITY FOR DELIVERY, WHO OFFERS APPROPRIATE WARRANTIES, GUARANTIES AND RETURN POLICIES, AS APPLICABLE, WHO POSSESSES RELEVANT INDUSTRY AND PROGRAM EXPERIENCE. IN THE CASE OF ELECTRIC CONTRACTS, RESPONSIBLE BIDDER OR OFFEROR MEANS AN ENTERPRISE WHICH CAN DEMONSTRATE THAT IT POSSESSES OR CONTROLS THE REQUIRED RESOURCES TO PERFORM ITS OBLIGATIONS FOR THE TERM OF THE COMMITMENT. 17. "Responsive bidder or offeror" means a person who submits a bid which conforms in all material respects to the invitation for bids or request for proposals. 18. "Unsolicited proposal" means a written proposal that is submitted on the initiative of the offeror for the purposes of obtaining a contract with this state and which is not in response to a formal or informal request from this state. 19. "Wastepaper" means recyclable paper and paperboard, including high grade office paper, computer paper, fine paper, bond paper, offset paper, xerographic paper, duplicator paper and corrugated paper. Section ___. Section 41-2534, Arizona Revised Statutes is amended to read: 41-2534 Competitive sealed proposals A. If, under regulations promulgated pursuant to this chapter, the director determines in writing that the use of competitive sealed bidding is either not practicable or not advantageous to this state, a contract may be entered into by competitive sealed proposals. The director may provide by regulation that it is either not practicable or not advantageous to this state to procure specified types of materials or services by competitive sealed bidding, except that the competitive sealed proposal method may not be used for construction contracts. COMPETITIVE SEALED PROPOSALS SHALL NOT BE REQUIRED FOR THE PURCHASE OF ESSENTIAL GOODS AND SERVICES. B. Proposals shall be solicited through a request for proposals. C. Adequate public notice of the request for proposals shall be given in the same manner as provided in section 41-2533. D. Proposals shall be opened publicly at the time and place designated in the request for proposals. The name of each offeror and NONCONFIDENTIAL relevant information as is specified by regulation shall be publicly read and recorded in accordance with regulations promulgated by the director. All other information contained in the proposals shall be confidential so as to avoid disclosure of contents prejudicial to competing offerors during the process of negotiation AND Page24 SO AS TO PREVENT DISCLOSURE OF TRADE SECRETS OR OTHER PROPRIETARY INFORMATION. The proposals shall be open for public inspection after contract award. Except to the extent the bidder designates and the state concurs, trade secrets or other proprietary data contained in the bid documents shall remain confidential in accordance with regulations promulgated by the director. ANY PERSON WHO IMPROPERLY DISCLOSES CONFIDENTIAL INFORMATION PROVIDED BY COMPETING OFFERORS SHALL BE SUBJECT TO A CIVIL FINE OF UP TO $10,000 FOR EACH IMPROPER DISCLOSURE. E. The request for proposals shall state the relative importance of price and other evaluation factors. Specific numerical weighting is not required. F. As provided in the request for proposals, and under regulations promulgated by the director, discussions may be conducted with responsible offerors who submit proposals determined to be reasonably susceptible to being selected for award for the purpose of clarification to assure full understanding of, and responsiveness to, the solicitation requirements. Offerors shall be accorded fair treatment with respect to any opportunity for discussion and revision of proposals, and such revisions may be permitted after submissions and before award for the purpose of obtaining best and final offers. In conducting discussions, there shall be no disclosure of any information derived from proposals submitted by competing offerors. G. The award shall be made to the responsible offeror whose proposal is determined in writing to be the most advantageous to this state taking into consideration the evaluation factors set forth in the request for proposals, WHICH MAY INCLUDE PRICE OR OTHER VALUE-RELATED TERMS AND CONDITIONS WHICH, IN THE DIRECTOR'S DISCRETION, PROVIDE AN ADVANTAGE TO THE STATE. No other factors or criteria may be used in the evaluation. The amount of any applicable transaction privilege or use tax of a political subdivision of this state is not a factor in determining the most advantageous proposal if a competing offeror located outside this state is not subject to a transaction privilege or use tax of a political subdivision of this state. The contract file shall contain the basis on which the award is made. Section ___. Section 41-2537, Arizona Revised Statutes is amended to read: 41-2537 Emergency procurements Notwithstanding any other provision of this chapter, the director may make or authorize others to make emergency procurements if there exists a threat to public health, welfare, or safety or if a situation exists which makes compliance with section 41-2533 or 41-2534 impracticable, unnecessary or contrary to the public interest as defined in regulations promulgated by the director, except that such emergency procurements shall be made with such competition as is practicable under the circumstances. AN IMMINENT LOSS OR SHORTAGE OF ELECTRIC POWER SHALL CONSTITUTE AN EMERGENCY PERMITTING PURCHASES OUTSIDE OF THE REQUEST FOR PROPOSALS PROCESS. PREFERENCE SHALL BE GIVEN TO THE CURRENT ELECTRIC POWER SUPPLIER TO PROVIDE SUCH ELECTRIC POWER AS SHALL BE Page 25 NECESSARY TO SATISFY THE EMERGENCY NEED. A written determination of the basis for the emergency and for the selection of the particular contractor shall be included in the contract file. Section ___. Section 41-2541, Arizona Revised Statutes is amended to read: 41-2541 Prequalification of contractors Prospective contractors may be prequalified for particular types of materials, services and construction. Prospective contractors of essential goods and services shall be prequalified and must be so in order to participate in requests for proposals for electric service. In the case of electric service, prequalification shall include, at a minimum, a demonstration of the contractor's resources that support its commitment to serve electricity, including plant and transmission/distribution rights and proof that it holds all licenses and authorizations to serve the state or the agency concerned. Prospective contractors have a continuing duty to provide the director with information on any material change affecting the basis of prequalification. Solicitation mailing lists of potential contractors shall include the prequalified contractors. Only those prospective contractors of essential goods and services who are prequalified will be included on the solicitation mailing list for essential goods and services. Section ___. Section 41-2546, Arizona Revised Statutes is amended to read: 41-2546 Multi-term contracts A. Unless otherwise provided by law, a contract for materials or services may be entered into for a period of time up to five years, as deemed to be in the best interest of this state, if the term of the contract and conditions of renewal or extension, if any, are included in the solicitation and monies are available for the first fiscal period at the time of contracting. A contract may be entered into for a period of time exceeding five years if, under regulations promulgated pursuant to this chapter, the director determines in writing that such a contract would be advantageous to this state. IN THE CASE OF ESSENTIAL GOODS AND SERVICES, IT IS PRESUMPTIVELY ADVANTAGEOUS TO THE STATE TO ENTER INTO CONTRACTS EXCEEDING FIVE YEARS IN ORDER TO TAKE ADVANTAGE OF ECONOMIES OFFERED UNDER SUCH LONG-TERM CONTRACTS AND TO ENSURE UNINTERRUPTED AVAILABILITY OF ESSENTIAL GOODS AND SERVICES. Payment and performance obligations for succeeding fiscal periods are subject to the availability and appropriation of monies, EXCEPT AS OTHERWISE AGREED IN CONTRACTS FOR ESSENTIAL GOODS AND SERVICES. B. Before the use of a multi-term contract, it shall be determined in writing that: 1. Estimated requirements cover the period of the contract and are reasonable and continuing. 2. Such a contract will serve the best interests of this state by encouraging effective competition or otherwise promoting economies in state procurement. C. If monies are not appropriated or otherwise made available to support continuation of performance in a subsequent fiscal period, the contract shall be canceled and the contractor may only be reimbursed for the reasonable value of any nonrecurring Page 26 costs incurred but not amortized in the price of the materials or services delivered under the contract or which are otherwise not recoverable. The cost of cancellation may be paid from any appropriations available for such purposes. Reference: Senate Commerce and Economic Development Committee Amendment Page 15 Strike lines 27 through 28 Line 15 strike "JUNE 30", replace with "DECEMBER 31" Page 16 Strike lines 5 and 6 Page 17 Line 27 strike "JUNE 30", replace with "DECEMBER 31" Strike line 29 Strike line 33 Page 27 Exhibit Four Stranded costs would be measured during concurrent applicable periods, in no event ending later than December 31, 2006, for the respective utilities ("Transition Period") by comparing the respective utilities' actual and reasonable generation and generation-related costs including purchased power, cost of capital, and all mitigation costs during this period, and actual market prices for the preceding year using a four-step process. STEP 1 ------ Market prices will be determined by reference to the California PX market (or some comparable market index). If the California PX price is used it will be adjusted for transmission wheeling, administrative and other applicable charges, and transmission losses in an attempt to determine the hourly market price at Palo Verde. The respective utilities will apply the same market index in determining any applicable stranded cost charges. STEP 2 ------ Actual hourly system loads will be multiplied by hourly market prices from Step 1 to determine hourly revenues which could have been produced if the utilities were to sell their power supply in the competitive market. Summation of these hourly dollar values will produce annual revenues. STEP 3 ------ The utilities will determine their actual and reasonable generation and generation-related costs including purchased power, cost of capital and all mitigation costs, from relevant financial and accounting data. STEP 4 ------ If the amount of the utilities' costs (Step 3) is greater than the utilities' calculated retail market revenues (Step 2), the difference will then be allocated among the respective utilities' rate classes, using traditional cost allocation and rate design principles, and will be charged to all customers on a demand and/or energy basis, depending upon the customer's class. Such recovery will occur over a concurrent period for the respective utilities, in no event to end later than 2006. For purposes of this calculation, "stranded costs" will include only those prudent, verifiable and unmitigated costs as defined by each party. SRP will propose and support before its Board of Directors the stranded cost methodology as set forth in this Exhibit. Page 28 APS will propose and support before the Arizona Corporation Commission the stranded cost methodology as set forth in this Exhibit, except that APS will not count regulatory assets recovered under existing ACC orders. Page 29 EX-27 5 FDS
UT 1,000 U.S. Dollars 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 1 PER-BOOK 4,668,691 167,243 301,806 1,103,377 0 6,241,117 178,162 1,142,499 472,853 1,793,514 19,110 141,317 2,019,248 0 0 81,000 4,068 0 0 0 2,182,860 6,241,117 380,423 24,464 292,418 316,882 63,541 2,059 65,600 33,665 31,935 2,878 29,057 85,000 30,028 205,088 0 0
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