10-Q

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2005

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                    

Commission	Exact Name of Each Registrant as specified in	IRS Employer
File Number	its charter; State of Incorporation; Address;	Identification No.
	and Telephone Number
1-8962	PINNACLE WEST CAPITAL CORPORATION	86-0512431
	(an Arizona corporation)
	400 North Fifth Street, P.O. Box 53999
	Phoenix, Arizona 85072-3999
	(602) 250-1000
1-4473	ARIZONA PUBLIC SERVICE COMPANY	86-0011170
	(an Arizona corporation)
	400 North Fifth Street, P.O. Box 53999
	Phoenix, Arizona 85072-3999
	(602) 250-1000

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

Indicate by check mark whether each registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
PINNACLE WEST CAPITAL CORPORATION ARIZONA PUBLIC SERVICE COMPANY	Yesþ Yeso	Noo Noþ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
PINNACLE WEST CAPITAL CORPORATION	Number of shares of common stock, no par value, outstanding as of August 8, 2005: 98,760,860
ARIZONA PUBLIC SERVICE COMPANY	Number of shares of common stock, $2.50 par value, outstanding as of August 8, 2005: 71,264,947

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

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

TABLE OF CONTENTS

Glossary			Page 2
Part I
	Item 1.	Financial Statements
		Pinnacle West Capital Corporation	4
		Arizona Public Service Company	30
	Item 2.	Management's Discussion and Analysis of Financial Condition And Results of Operations	40
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	65
	Item 4.	Controls and Procedures	66
Part II
	Item 1.	Legal Proceedings	67
	Item 4.	Submission of Matters to a Vote of Security Holders	67
	Item 5.	Other Information	67
	Item 6.	Exhibits	70
Signatures			72
Exhibit 12.1
Exhibit 12.2
Exhibit 31.1
Exhibit 31.2
Exhibit 31.3
Exhibit 31.4
Exhibit 32.1
Exhibit 32.2
Exhibit 99.1
Exhibit 99.2
Exhibit 99.3
Exhibit 99.4
Exhibit 99.5
Exhibit 99.6

GLOSSARY

ACC — Arizona Corporation Commission

ADEQ — Arizona Department of Environmental Quality

ALJ — Administrative Law Judge

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

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

CC&N — Certificate of Convenience and Necessity

Clean Air Act — Clean Air Act, as amended

Company — Pinnacle West Capital Corporation

DOE — United States Department of Energy

EITF — FASB’s Emerging Issues Task Force

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

EPA — United States Environmental Protection Agency

ERMC — Energy Risk Management Committee

FASB — Financial Accounting Standards Board

FERC — United States Federal Energy Regulatory Commission

FIN — FASB Interpretation

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

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

IRS — United States Internal Revenue Service

March 2005 Form 10-Q — Pinnacle West/APS Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2005

Moody’s — Moody’s Investors Service

MW — megawatt, one million watts

MWh — megawatt-hours, one million watts per hour

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

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

NPC — Nevada Power Company

NRC — United States Nuclear Regulatory Commission

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

OCI — other comprehensive income

Off-System Sales — sales of electricity from generation owned by the Company that is over and above the amount required to serve the Company’s retail customers and traditional wholesale contracts

2

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

Pinnacle West — Pinnacle West Capital Corporation, the Company

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

PPL Sundance — PPL Sundance Energy, LLC

PRP — potentially responsible party

PSA — power supply adjuster

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

PX — California Power Exchange

RFP — request for proposals

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

SEC — United States Securities and Exchange Commission

SFAS — Statement of Financial Accounting Standards

Silverhawk — Silverhawk Power Station, a 570-megawatt, natural gas-fueled, combined-cycle electric generating facility located 20 miles north of Las Vegas, Nevada

Standard & Poor’s — Standard & Poor’s Corporation

SunCor — SunCor Development Company, a subsidiary of the Company

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

Superfund — Comprehensive Environmental Response, Compensation and Liability Act

T&D — transmission and distribution

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

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

2004 Settlement Agreement — an agreement settling APS’ general rate case

2004 Form 10-K — Pinnacle West/APS Annual Report on Form 10-K for the fiscal year ended December 31, 2004

VIE — variable interest entity

3

PART I — FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

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

	Three Months Ended
	June 30,
	2005			2004
OPERATING REVENUES
Regulated electricity segment	$	579,652		$	519,929
Marketing and trading segment		71,172			110,156
Real estate segment		84,753			66,084
Other revenues		20,259			9,414
Total		755,836			705,583
OPERATING EXPENSES
Regulated electricity segment purchased power and fuel		160,590			151,642
Marketing and trading segment purchased power and fuel		57,593			88,067
Operations and maintenance		153,097			138,595
Real estate operations segment		68,593			62,217
Depreciation and amortization		85,142			102,012
Taxes other than income taxes		34,638			32,308
Other expenses		17,556			7,575
Total		577,209			582,416
OPERATING INCOME		178,627			123,167
OTHER
Allowance for equity funds used during construction		2,952			2,184
Other income (Note 14)		8,684			36,496
Other expense (Note 14)		(3,846	)		(3,371	)
Total		7,790			35,309
INTEREST EXPENSE
Interest charges		49,781			42,061
Capitalized interest		(3,544	)		(2,681	)
Total		46,237			39,380
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		140,180			119,096
INCOME TAXES		55,024			45,028
INCOME FROM CONTINUING OPERATIONS		85,156			74,068
Loss from discontinued operations — net of income tax benefit of $37,710 and $798 (Note 17)		(58,421	)		(1,428	)
NET INCOME	$	26,735		$	72,640
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING — BASIC		96,192			91,315
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING — DILUTED		96,299			91,400
EARNINGS PER WEIGHTED — AVERAGE COMMON SHARE OUTSTANDING
Income from continuing operations — basic	$	0.89		$	0.81
Net income — basic		0.28			0.80
Income from continuing operations — diluted		0.88			0.81
Net income — diluted		0.28			0.79
DIVIDENDS DECLARED PER SHARE	$	—		$	—

See Notes to Pinnacle West’s Condensed Consolidated Financial Statements.

4

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

	Six Months Ended
	June 30,
	2005			2004
OPERATING REVENUES
Regulated electricity segment	$	995,682		$	935,393
Marketing and trading segment		160,429			198,840
Real estate segment		156,809			116,547
Other revenues		30,394			20,319
Total		1,343,314			1,271,099
OPERATING EXPENSES
Regulated electricity segment purchased power and fuel		239,013			240,253
Marketing and trading segment purchased power and fuel		128,402			155,832
Operations and maintenance		308,181			275,981
Real estate operations segment		125,069			109,510
Depreciation and amortization		176,535			203,115
Taxes other than income taxes		69,203			62,638
Other expenses		25,930			16,325
Total		1,072,333			1,063,654
OPERATING INCOME		270,981			207,445
OTHER
Allowance for equity funds used during construction		5,555			4,186
Other income (Note 14)		9,487			47,330
Other expense (Note 14)		(8,232	)		(9,316	)
Total		6,810			42,200
INTEREST EXPENSE
Interest charges		96,042			88,617
Capitalized interest		(6,833	)		(4,180	)
Total		89,209			84,437
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		188,582			165,208
INCOME TAXES		73,685			60,439
INCOME FROM CONTINUING OPERATIONS		114,897			104,769
Loss from discontinued operations — net of income tax benefit of $41,120 and $330 (Note 17)		(63,714	)		(703	)
NET INCOME	$	51,183		$	104,066
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING — BASIC		94,089			91,304
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING — DILUTED		94,189			91,391
EARNINGS PER WEIGHTED — AVERAGE COMMON SHARE OUTSTANDING
Income from continuing operations — basic	$	1.22		$	1.15
Net income — basic		0.54			1.14
Income from continuing operations — diluted		1.22			1.15
Net income — diluted		0.54			1.14
DIVIDENDS DECLARED PER SHARE	$	0.95		$	0.90

See Notes to Pinnacle West’s Condensed Consolidated Financial Statements.

5

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

	June 30,			December 31,
	2005			2004
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	300,403		$	163,366
Investment in debt securities		329,719			181,175
Customer and other receivables		335,316			367,863
Allowance for doubtful accounts		(4,574	)		(4,896	)
Accrued utility revenues		130,565			93,227
Materials and supplies (at average cost)		105,630			101,333
Fossil fuel (at average cost)		26,596			20,512
Assets from risk management and trading activities (Note 10)		305,711			166,896
Assets held for sale (Note 17)		241,943			—
Other current assets		80,581			47,654
Total current assets		1,851,890			1,137,130
INVESTMENTS AND OTHER ASSETS
Real estate investments — net		349,129			382,398
Assets from long-term risk management and trading activities (Note 10)		314,309			224,341
Decommissioning trust accounts		276,746			267,700
Other assets		110,685			107,212
Total investments and other assets		1,050,869			981,651
PROPERTY, PLANT AND EQUIPMENT
Plant in service and held for future use		10,668,777			10,486,648
Less accumulated depreciation and amortization		3,582,292			3,365,954
Total		7,086,485			7,120,694
Construction work in progress		299,330			258,119
Intangible assets, net of accumulated amortization		112,154			105,486
Nuclear fuel, net of accumulated amortization		53,459			51,188
Net property, plant and equipment		7,551,428			7,535,487
DEFERRED DEBITS
Deferred purchased power and fuel regulatory asset		33,785			—
Other regulatory assets		139,690			135,051
Other deferred debits		105,343			107,428
Total deferred debits		278,818			242,479
TOTAL ASSETS	$	10,733,005		$	9,896,747

See Notes to Pinnacle West’s Condensed Consolidated Financial Statements.

6

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

	June 30,			December 31,
	2005			2004
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable	$	264,252		$	373,526
Accrued taxes		316,180			245,611
Accrued interest		39,851			38,795
Short-term borrowings		93,388			71,030
Current maturities of long-term debt		652,213			617,165
Customer deposits		57,480			55,558
Deferred income taxes		9,057			9,057
Liabilities from risk management and trading activities (Note 10)		245,978			113,406
Liabilities held for sale (Note 17)		30,683			—
Other current liabilities		212,925			101,748
Total current liabilities		1,922,007			1,625,896
LONG-TERM DEBT LESS CURRENT MATURITIES		2,772,458			2,584,985
DEFERRED CREDITS AND OTHER
Deferred income taxes		1,238,113			1,227,553
Regulatory liabilities		524,107			506,646
Liability for asset retirements		259,524			251,612
Pension liability		251,680			234,445
Liabilities from long term risk management and trading activities (Note 10)		137,264			156,262
Unamortized gain — sale of utility plant		48,045			50,333
Other		327,379			308,819
Total deferred credits and other		2,786,112			2,735,670
COMMITMENTS AND CONTINGENCIES (Notes 5, 12 and 13)
COMMON STOCK EQUITY
Common stock, no par value		2,038,608			1,769,047
Treasury stock		(1,340	)		(428	)
Total common stock		2,037,268			1,768,619
Accumulated other comprehensive income (loss):
Minimum pension liability adjustment		(81,788	)		(81,788	)
Derivative instruments		132,007			59,243
Total accumulated other comprehensive income (loss)		50,219			(22,545	)
Retained earnings		1,164,941			1,204,122
Total common stock equity		3,252,428			2,950,196
TOTAL LIABILITIES AND EQUITY	$	10,733,005		$	9,896,747

     See Notes to Pinnacle West’s Condensed Consolidated Financial Statements.

7

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

	Six Months Ended
	June 30,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	51,183		$	104,066
Adjustment to reconcile net income to net cash provided by operating activities:
Silverhawk impairment loss		91,057			—
Equity earnings in Phoenix Suns partnership		—			(34,594	)
Depreciation and amortization		181,994			205,745
Deferred purchased power and fuel		(33,785	)		—
Nuclear fuel amortization		3,619			14,501
Allowance for equity funds used during construction		(5,555	)		(4,186	)
Deferred income taxes		(36,209	)		23,854
Change in mark-to-market valuations		(17,436	)		2,413
Changes in current assets and liabilities:
Customer and other receivables		37,682			26,335
Accrued utility revenues		(37,338	)		(37,429	)
Materials, supplies and fossil fuel		(15,773	)		2,760
Other current assets		(33,031	)		27,097
Accounts payable		(107,299	)		(11,041	)
Accrued taxes		70,268			18,938
Accrued interest		1,056			(13,442	)
Other current liabilities		113,099			31,839
Proceeds from the sale of real estate assets		41,259			29,266
Real estate investments		(39,968	)		(24,851	)
Change in risk management and trading activities — assets		16,360			12,402
Change in risk management and trading activities — liabilities		5,603			1,119
Change in pension liability		7,238			29,673
Change in other long-term assets		6,017			(26,178	)
Change in other long-term liabilities		34,105			18,133
Net cash flow provided by operating activities		334,146			396,420
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(302,880	)		(264,571	)
Purchase of Sundance		(185,046	)		—
Proceeds from the sale of 25% of Silverhawk		—			93,378
Capitalized interest		(6,833	)		(9,031	)
Purchases of investment securities		(1,579,906	)		(293,145	)
Proceeds from sale of investment securities		1,431,348			285,195
Other		(5,326	)		(12,863	)
Net cash flow used for investing activities		(648,643	)		(201,037	)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt		664,003			476,268
Short-term borrowings and payments — net		16,253			41,721
Dividends paid on common stock		(90,364	)		(82,192	)
Repayment of long-term debt		(430,673	)		(602,831	)
Common stock equity issuance		271,069			—
Other		21,246			6,738
Net cash flow provided by (used for) financing activities		451,534			(160,296	)
NET INCREASE IN CASH AND CASH EQUIVALENTS		137,037			35,087
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		163,366			136,929
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	300,403		$	172,016
Supplemental disclosure of cash flow information
Cash paid during the period for:
Income taxes paid — net of refunds	$	7,733		$	7,300
Interest paid, net of amounts capitalized	$	132,994		$	119,458

See Notes to Pinnacle West’s Condensed Consolidated Financial Statements.

8

PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Consolidation and Nature of Operations

     The condensed consolidated financial statements include the accounts of Pinnacle West and our wholly-owned subsidiaries: APS, Pinnacle West Energy, APS Energy Services, SunCor and El Dorado. All significant intercompany accounts and transactions between the consolidated companies have been eliminated. Our accounting records are maintained in accordance with GAAP. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. We have reclassified certain prior year amounts to conform to the current year presentation.

2. Condensed Consolidated Financial Statements

     Our unaudited condensed consolidated financial statements reflect all adjustments which we believe are necessary for the fair presentation of our financial position, results of operations and cash flows for the periods presented. We suggest that these condensed consolidated financial statements and notes to condensed consolidated financial statements be read along with the consolidated financial statements and notes to consolidated financial statements included in our 2004 Form 10-K.

3. Quarterly Fluctuations

     Weather conditions cause significant seasonal fluctuations in our revenues. In addition, real estate, trading and wholesale marketing activities can have significant impacts on our results for interim periods. For these reasons, results for interim periods do not necessarily represent results to be expected for the year.

4. Changes in Liquidity

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

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

     On April 11, 2005, Pinnacle West Energy issued $500 million of Floating Rate Senior Notes due April 1, 2007. Pinnacle West has unconditionally guaranteed these notes. Pinnacle West Energy used the proceeds of this issuance to repay a $500 million loan from APS. See “ACC Financing Order” in Note 5. APS intends to transfer $500 million in connection with Pinnacle West Energy’s transfer of the PWEC Dedicated Assets to APS. In the interim, APS intends to invest the proceeds or use them for general corporate purposes. See “APS General Rate Case” in Note 5 for information regarding APS’ acquisition of the PWEC Dedicated Assets.

9

PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     On May 2, 2005, Pinnacle West redeemed at par all of its $165 million Floating Rate Senior Notes due November 1, 2005. Pinnacle West used cash on hand to redeem the notes.

     On May 2, 2005, Pinnacle West issued 6,095,000 shares of its common stock at an offering price of $42 per share, resulting in net proceeds of approximately $248 million. Pinnacle West used the net proceeds for general corporate purposes, including making capital contributions to APS, which, in turn, used such funds to pay a portion of the approximately $190 million purchase price to acquire the Sundance Plant and for other capital expenditures incurred to meet the growing needs of APS’ service territory.

     On August 1, 2005, APS repaid $300 million of its 7.625% Notes due 2005. APS used cash on hand to repay these notes.

     APS had $566 million of pollution control bonds outstanding under which interest rates are reset on a daily, weekly or annual basis as of June 30, 2005. The holders of $223 million of these bonds have the right to cause APS to purchase their bonds on the applicable reset date if the bonds are not remarketed. Of these bonds, $50 million is classified as current maturities of long-term debt. The remaining $173 million of bonds are classified as long-term debt because APS has the intent and ability, as demonstrated by credit agreements in place that extend for more than one year, to refinance any bonds that APS is required to purchase.

     The following is a list of principal payments due on Pinnacle West’s consolidated long-term debt and capitalized lease requirements as of June 30, 2005:

• $352 million in 2005;

• $389 million in 2006;

• $674 million in 2007;

• $6 million in 2008;

• $1 million in 2009; and

• $2.012 billion thereafter.

     We have investments in auction rate securities in which interest rates are reset on a short-term basis; however, the underlying contract maturity dates extend beyond three months. We classify the investments in auction rate securities as investments in debt securities on our Condensed Consolidated Balance Sheets. The purchase and sale activities related to these investments have been reclassified on the Condensed Consolidated Statements of Cash Flows for the prior-year period to show purchases and sales on a gross basis.

10

PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5. Regulatory Matters

Electric Industry Restructuring

State

     APS General Rate Case

     On April 7, 2005, the ACC issued an order in the general rate case that APS filed on June 27, 2003. The order became final and non-appealable on April 28, 2005. In its order, the ACC approved the 2004 Settlement Agreement, with certain revisions. Certain key financial components of the order include:

• APS received an annual retail rate increase of approximately $75.5 million, or 4.21%, which was effective as of April 1, 2005. This increase does not include the impact of the PSA (discussed below).

• The PSA provides for the annual adjustment of rates to reflect variations in fuel and purchased power costs, subject to specified parameters and procedures, including the following:

• APS will record deferrals for recovery or refund to the extent actual fuel and purchased power costs vary from $0.020743 per kWh (basic fuel amount);

• The above deferrals are subject to a 90/10 sharing arrangement in which APS must absorb 10% of the costs above the base fuel amount and may retain 10% of the benefit from the costs that are below the base fuel amount;

• amounts to be recovered or refunded through the annual PSA adjustment are limited to a cumulative plus or minus $0.004 per kWh over the life of the PSA;

• in addition, the ACC order provides for a PSA surcharge mechanism as follows:

• each time the accumulated pretax net deferrals reach $50 million, APS must notify the ACC, but prior to the deferral balance exceeding $100 million, APS must file with the ACC to recover or refund such deferral balance through a surcharge;

• amounts recovered or refunded through any surcharge are not included in the $0.004 per kWh PSA annual adjustment limit;

• the recoverable amount of net fuel and purchased power costs through base rates and the $0.004 per kWh adjustment is capped at $776.2 million per year - PSA surcharge amounts are not included in the $776.2 million annual limits on fuel and purchased power recovery (APS does not expect such costs to exceed $776.2 million in 2005);

11

PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

• the PSA will remain in effect for a minimum five-year period, but the ACC may eliminate the PSA at any time, if appropriate, in the event APS files a rate case before the expiration of the five-year period or if APS does not comply with the terms of the PSA;

• APS filed a request for a PSA surcharge on July 22, 2005 (see discussion below); and

• the first regular annual adjustment to the PSA would be on April 1, 2006, and is expected to be for the full $0.004 per kWh permitted by the ACC’s order, which is in addition to the PSA surcharge requested on July 22, 2005.

• The 2004 Settlement Agreement included a self-build moratorium for generating plants to be in service prior to January 1, 2015. The ACC order modified that moratorium to include the acquisition of a generating unit, or an interest in a generating unit, from any utility or merchant generator without prior ACC approval.

• APS was authorized to acquire Redhawk Units 1 and 2, West Phoenix Units 4 and 5, and Saguaro Unit 3, which are dedicated to serving APS’ customers (the “PWEC Dedicated Assets”) from Pinnacle West Energy, with a net carrying value of approximately $850 million, and to rate base the PWEC Dedicated Assets at a rate base value of $700 million, which will result in a mandatory rate base disallowance of approximately $150 million. This transfer was approved by the FERC on June 15, 2005 and completed on July 29, 2005. As a result, for financial reporting purposes, APS will recognize a one-time, after-tax net plant write-off of approximately $90 million during the third quarter of 2005.

• To bridge the time between the effective date of the rate increase and the actual date the PWEC Dedicated Assets transfer, effective April 1, 2005, APS and PWEC entered into a cost-based purchase power agreement (the “Bridge PPA”), which was based on the value of the PWEC Dedicated Assets. When the Bridge PPA became effective, prior power purchase agreements entered into between APS and PWEC were terminated. The Bridge PPA was terminated on July 29, 2005, upon Pinnacle West Energy’s transfer of the PWEC Dedicated Assets to APS.

• Effective April 1, 2005, APS adopted longer service lives in accordance with the 2004 Settlement Agreement for certain depreciable assets. This change is expected to have the effect of reducing annual depreciation expense for financial reporting purposes by approximately $30 million. Also in accordance with the 2004 Settlement Agreement, we adopted longer service lives for the PWEC Dedicated Assets, which is expected to have the effect of reducing annual depreciation expense for financial reporting purposes by approximately $10 million.

     Power Supply Adjuster

     On July 22, 2005, APS filed an Application for Surcharge with the ACC requesting recovery of $100 million in deferred purchased power and fuel costs under the PSA approved by the ACC in APS’ recent general rate case. As required by the ACC order approving the PSA, APS filed the Application for Surcharge after the PSA “bank balance” reached $50 million and before it reached

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$100 million, which APS expects to occur by mid-August of this year. APS proposes to recover the $100 million PSA bank balance over a 24-month period beginning with the billing cycle one of November 2005. The requested PSA surcharge represents an approximate 2.2% temporary increase in overall APS retail revenues.

     Equity Infusion Notice

     On July 20, 2005, Pinnacle West filed a Notice with the ACC indicating its intent to infuse more than $100 million of equity into APS during each of 2005, 2006 and subsequent years. Under Arizona law and decisions, Pinnacle West is required to give such notice at least 120 days prior to such an equity infusion into APS. The ACC may, but need not, take action on this Notice. If the ACC takes no action within the 120 day notice period, Pinnacle West may thereafter make the proposed equity infusions, at management’s discretion.

     ACC Financing Order

     On May 12, 2003, APS issued $500 million of debt pursuant to the Financing Order and made a $500 million loan to Pinnacle West Energy. Pinnacle West Energy distributed the net proceeds of that loan to the Company to fund the repayment of a portion of the debt incurred to finance the construction of the PWEC Dedicated Assets. On April 11, 2005, this loan was repaid with the proceeds of a new debt issuance by Pinnacle West Energy. See “Capital Needs and Resources — By Company — Pinnacle West Energy” in Part I, Item 2 below.

     The ACC granted the Financing Order subject to various conditions. One of these conditions is that APS must maintain a common equity ratio of at least 40% and may not pay common dividends if such payment would reduce its common equity ratio below that threshold, unless otherwise waived by the ACC. This condition is an ongoing requirement and was not affected by Pinnacle West Energy’s repayment of APS’ $500 million loan.

     Retail Electric Competition Rules

     In 1999, the ACC approved rules for the introduction of retail electric competition in Arizona. The rules include the following major provisions:

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

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

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

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

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

     On November 27, 2000, a Maricopa County, Arizona, Superior Court judge issued a final judgment holding that the rules are unconstitutional and unlawful in their entirety due to failure to establish a fair value rate base for competitive electric service providers and because certain of the rules were not submitted to the Arizona Attorney General for certification. The judgment also invalidates all ACC orders authorizing competitive electric service providers, including APS Energy Services, to operate in Arizona. The ACC and other parties aligned with the ACC appealed the ruling to the Arizona Court of Appeals, and in January 2004, the Court invalidated some, but not all, of the rules as either violative of Arizona’s constitutional requirement that the ACC consider the “fair value” of a utility’s property in setting rates or as being beyond the ACC’s constitutional and statutory powers. Other rules were set aside for failure to submit such regulations to the Arizona Attorney General for certification as required by statute. A request for the Arizona Supreme Court to review the Court of Appeals decision was denied on January 4, 2005. To date, the ACC has taken no action on either the rules or the orders authorizing competitive electric service providers in response to the now final Court of Appeals decision. As a result, at present only limited electric retail competition exists in Arizona and only with certain entities not regulated by the ACC.

     Track B Order

     On March 14, 2003, the ACC issued the Track B Order, which required APS to solicit bids for certain estimated amounts of capacity and energy for periods beginning July 1, 2003. By May 6, 2003, APS entered into contracts to meet all or a portion of its requirements for the years 2003 through 2006 as follows:

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

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     With final ACC approval of the 2004 Settlement Agreement, the Track B contract with Pinnacle West Energy was cancelled, effective April 1, 2005 and replaced by the Bridge PPA. Also, the Track B contract with PPL was cancelled upon closing of the purchase of the Sundance Plant. On May 13, 2005, APS acquired the Sundance Plant from PPL Sundance for a purchase price of approximately $190 million.

     General

     Although some very limited retail competition existed in APS’ service area in 1999 and 2000, there are currently no active retail competitors providing unbundled energy or other utility services to APS’ customers. As a result, we cannot predict when, and the extent to which, additional competitors will re-enter APS’ service territory.

Federal

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

     On July 31, 2002, the FERC issued a Notice of Proposed Rulemaking for Standard Market Design for wholesale electric markets and, on April 28, 2003, the FERC Staff issued an additional white paper on the proposed Standard Market Design. On July 19, 2005, the FERC terminated the rulemaking proceeding.

     On August 11, 2004, Pinnacle West, APS, Pinnacle West Energy, and APS Energy Services (collectively, the “Pinnacle West Companies”) submitted to the FERC an update to its three-year market-based rate review, pursuant to the FERC’s order implementing a new generation market power analysis. On December 20, 2004, the FERC issued an order approving market-based rates for control areas other than those of APS, Public Service Company of New Mexico and Tucson Electric Company. The order required the Pinnacle West Companies to submit additional data with respect to these control areas, and on February 18, 2005, the Pinnacle West Companies submitted such data. On April 11, 2005, APS and a group of APS wholesale electric customers, the Arizona Districts, submitted a settlement that resolved concerns raised by the Arizona Districts in the proceeding. On May 2, 2005, a protest and a motion to intervene were filed by the Yavapai-Apache Energy Office with respect to the settlement between APS and the Arizona Districts. On April 5, 2005, the FERC issued a deficiency letter seeking further information from the Pinnacle West Companies relating to the APS control area and the Pinnacle West Companies filed a response on April 22, 2005. The notice period for filing comments on that response expired on May 5, 2005, and no additional comments were filed. We cannot currently predict the outcome of this proceeding, but we do not believe that the outcome will have a material adverse effect on our financial position, results of operations or cash flows.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6. Retirement Plans and Other Benefits

     Pinnacle West sponsors a qualified defined benefit and account balance pension plan, a nonqualified supplemental excess benefit retirement plan, and other postretirement benefit plans for the employees of Pinnacle West and our subsidiaries.

     The following table provides details of the plans’ benefit costs for the three and six months ended June 30, 2005 and 2004. Also included is the portion of these costs charged to expense, including administrative costs and excluding amounts billed to electric plant participants or amounts capitalized as overhead construction (dollars in millions):

	Pension Benefits												Other Benefits
	Three Months						Six Months						Three Months						Six Months
	Ended June 30,						Ended June 30,						Ended June 30,						Ended June 30,
	2005			2004			2005			2004			2005			2004			2005			2004
Service cost-benefits earned
during the period	$	11		$	11		$	23		$	22		$	5		$	4		$	11		$	8
Interest cost on benefit
obligation		21			21			44			43			9			7			17			14
Expected return on plan assets		(21	)		(21	)		(44	)		(42	)		(8	)		(6	)		(16	)		(12	)
Amortization of:
Transition (asset)
obligation		(1	)		(1	)		(2	)		(2	)		1			1			2			1
Prior service cost		1			1			1			1			—			—			—			—
Net actuarial loss		4			4			10			9			2			2			5			4
Net periodic benefit cost	$	15		$	15		$	32		$	31		$	9		$	8		$	19		$	15
Portion of cost charged to
expense	$	6		$	7		$	13		$	14		$	4		$	3		$	8		$	7
APS share of costs charged to
expense	$	6		$	6		$	12		$	12		$	3		$	3		$	7		$	6

Contributions

     Our minimum required pension contribution in 2005 is approximately $53 million. Of this amount, we have contributed approximately $27 million through July 2005. The contribution to be made to other postretirement benefit plans in 2005 is estimated to be approximately $37 million. Of this amount, we contributed approximately $18 million through July 2005. APS’ share is approximately 92% of both plans.

7. Business Segments

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

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

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

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

     Financial data for the three and six months ended June 30, 2005 and 2004 and at June 30, 2005 and December 31, 2004 by business segment is provided as follows (dollars in millions):

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2005			2004		2005			2004
Operating Revenues:
Regulated electricity (a)	$	580		$	520	$	996		$	935
Marketing and trading (a)		71			110		160			199
Real estate		85			66		157			117
Other		20			10		30			20
Total	$	756		$	706	$	1,343		$	1,271
Net Income (Loss):
Regulated electricity (a)	$	69		$	40	$	83		$	55
Marketing and trading (a)(b)		(55	)		6		(54	)		19
Real estate		12			4		20			6
Other (c)		1			23		2			24
Total	$	27		$	73	$	51		$	104

(a)	Effective April 1, 2005, Off-System Sales of approximately $12 million that would have previously been reported in the marketing and trading segment are now included in the regulated electricity segment in accordance with the retail rate settlement.
(b)	The 2005 periods include a $59 million (after-tax) loss in discontinued operations related to the pending sale of Silverhawk.
(c)	The 2004 periods include $21 million (after-tax) gain related to the sale of a limited partnership interest in the Phoenix Suns.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	As of		As of
	June 30, 2005		December 31, 2004
Assets:
Regulated electricity	$	9,467	$	8,674
Marketing and trading		763		746
Real estate		477		454
Other		26		23
Total	$	10,733	$	9,897

8. New Accounting Standards

     In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment.” The standard establishes accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. SFAS No. 123(R) is effective for us as of January 1, 2006. We have evaluated the impacts of this new guidance and do not believe it will have a material impact on our financial statements.

     In March 2005, the FASB issued FIN No. 47, “Accounting for Conditional Asset Retirement Obligations.” FIN No. 47 clarifies that an entity must record a liability for the fair value of an asset retirement obligation for which the timing and (or) method of settlement are conditional on a future event if the liability’s fair value can be reasonably estimated. FIN No. 47 is effective no later than the end of fiscal years ending after December 15, 2005. We are currently evaluating the new guidance, but do not expect the adoption of this interpretation to have a material impact on our financial statements.

9. Variable Interest Entities

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

     APS is exposed to losses under the Palo Verde sale leaseback agreements upon the occurrence of certain events that APS does not consider to be reasonably likely to occur. Under certain circumstances (for example, the NRC issuing specified violation orders with respect to Palo Verde or the occurrence of specified nuclear events), APS would be required to assume the debt associated with the transactions, make specified payments to the equity participants, and take title to the leased Unit 2 interests, which, if appropriate, may be required to be written down in value. If such an event had occurred as of June 30, 2005, APS would have been required to assume approximately $245 million of debt and pay the equity participants approximately $191 million.

10. Derivative and Energy Trading Accounting

     We are exposed to the impact of market fluctuations in the commodity price of electricity, natural gas, coal and emissions allowances and in interest rates. We manage risks associated with

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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

these market fluctuations by utilizing various instruments that qualify as derivatives, including exchange-traded futures and options and over-the-counter forwards, options and swaps. As part of our overall risk management program, we use such instruments to hedge our exposure to changes in interest rates and to hedge purchases and sales of electricity, fuels, and emissions allowances and credits. As of June 30, 2005, we hedged exposures to the price variability of the commodities for a maximum of four years. The changes in market value of such contracts have a high correlation to price changes in the hedged transactions. In addition, subject to specified risk parameters monitored by the ERMC, we engage in marketing and trading activities intended to profit from market price movements.

Cash Flow Hedges

     The changes in the fair value of our hedged positions included in the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2005 and 2004 were comprised of the following (dollars in thousands):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Gains on the ineffective portion of derivatives qualifying for hedge accounting	$	4,514		$	88		$	11,837		$	1,472
Gains (losses) from the change in options’ time value excluded from measurement of effectiveness		(1,189	)		(17	)		(331	)		63
Gains from the discontinuance of cash flow hedges		—			—			385			1,137

     During the twelve months ending June 30, 2006, we estimate that a net gain of $87 million before income taxes will be reclassified from accumulated other comprehensive income as an offset to the effect of market price changes for the related hedged transactions.

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

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

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

     The following table summarizes our assets and liabilities from risk management and trading activities at June 30, 2005 and December 31, 2004 (dollars in thousands):

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2005

	Current				Current			Other			Net Asset
	Assets		Investments		Liabilities			Liabilities			(Liability)
Regulated electricity:
Mark-to-market	$	121,482	$	68,458	$	(55,495	)	$	(8,346	)	$	126,099
Options and futures — at cost		2,555		4		(11,123	)		—			(8,564	)
Marketing and trading:
Mark-to-market		181,674		245,533		(147,094	)		(128,918	)		151,195
Options and futures and emission allowances - - at cost		—		314		(32,266	)		—			(31,952	)
Total	$	305,711	$	314,309	$	(245,978	)	$	(137,264	)	$	236,778

December 31, 2004

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

     Cash or other assets may be required to serve as collateral against our open positions on certain energy-related contracts. Collateral provided to counterparties was $6 million at June 30, 2005 and $1 million at December 31, 2004, and is included in other current assets on the Condensed Consolidated Balance Sheets. Collateral provided to us by counterparties was $122 million at June 30, 2005 and $24 million at December 31, 2004, and is included in other current liabilities on the Condensed Consolidated Balance Sheets.

Fair Value Hedges

     On January 29, 2004, we entered into two fixed-for-floating interest rate swap transactions on our $300 million 6.4% Senior Notes. The purpose of these hedges is to protect against significant fluctuations in the fair value of our debt. Our interest rate swaps are considered to be fully effective with any resulting gains or losses on the derivative offset by a similar loss or gain amount on the underlying fair value of our debt. The fair value of the interest rate swaps was a loss of approximately $2.7 million at June 30, 2005 and is included in other current liabilities with the corresponding offset in current maturities of long-term debt on the Condensed Consolidated Balance Sheets.

Credit Risk

     We are exposed to losses in the event of nonperformance or nonpayment by counterparties. We have risk management and trading contracts with many counterparties, including one counterparty for which a worst case exposure represents approximately 16% of Pinnacle West’s $620 million of risk management and trading assets as of June 30, 2005. Our risk management process assesses and monitors the financial exposure of these and all other counterparties. Despite the fact that the great majority of trading counterparties are rated as investment grade by the credit rating agencies, including the counterparty discussed above, there is still a possibility that one or more of these companies could default, resulting in a material impact on consolidated earnings for a given period. Counterparties in the portfolio consist principally of major energy companies, municipalities, local distribution companies and financial institutions. We maintain credit policies that we believe minimize overall credit risk to within acceptable limits. Determination of the credit quality of our counterparties is based upon a number of factors, including credit ratings and our evaluation of their financial condition. In many contracts, we employ collateral requirements and standardized agreements that allow for the netting of positive and negative exposures associated with a single counterparty. Valuation adjustments are established representing our estimated credit losses on our overall exposure to counterparties.

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11. Comprehensive Income

     Components of comprehensive income for the three and six months ended June 30, 2005 and 2004, are as follows (dollars in thousands):

	Three Months						Six Months
	Ended June 30,						Ended June 30,
	2005			2004			2005			2004
Net income	$	26,735		$	72,640		$	51,183		$	104,066
Other comprehensive income (loss):
Unrealized gain (loss) on derivative instruments (a)		(24,220	)		25,721			135,424			73,287
Reclassification of realized gain to income (b)		(9,769	)		(6,318	)		(15,688	)		(6,480	)
Income tax (expense) benefit related to items of other comprehensive income		13,334			(7,620	)		(46,972	)		(26,235	)
Total other comprehensive income (loss)		(20,655	)		11,783			72,764			40,572
Comprehensive income	$	6,080		$	84,423		$	123,947		$	144,638

(a)	These amounts primarily include unrealized gains and losses on contracts used to hedge our forecasted electricity and gas requirements to serve Native Load.
(b)	These amounts primarily include the reclassification of unrealized gains and losses to realized for contracted commodities delivered during the period.

12. Commitments and Contingencies

Palo Verde Nuclear Generating Station

     Spent Nuclear Fuel and Waste Disposal

     Nuclear power plant operators are required to enter into spent fuel disposal contracts with the DOE, and the DOE is required to accept and dispose of all spent nuclear fuel and other high-level radioactive wastes generated by domestic power reactors. Although the Nuclear Waste Act required the DOE to develop a permanent repository for the storage and disposal of spent nuclear fuel by 1998, the DOE has announced that the repository cannot be completed before 2010 and it does not intend to begin accepting spent nuclear fuel prior to that date. In

21

November 1997, the United States Court of Appeals for the District of Columbia Circuit (D.C. Circuit) issued a decision preventing the DOE from excusing its own delay, but refused to order the DOE to begin accepting spent nuclear fuel. Based on this decision and the DOE’s delay, a number of utilities, including APS (on behalf of itself and the other Palo Verde owners), filed damages actions against the DOE in the Court of Federal Claims. Arizona Public Service Company v. United States of America, United States Court of Federal Claims, 03-2832C.

     APS currently estimates it will incur $147 million (in 2004 dollars) over the life of Palo Verde for its share of the costs related to the on-site interim storage of spent nuclear fuel. At June 30, 2005, APS had a regulatory asset of $10 million which represents amounts spent for on-site interim spent fuel storage net of amounts recovered in rates per the ACC rate order that was effective April 1, 2005.

California Energy Market Issues and Refunds in the Pacific Northwest

     FERC

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

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

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

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

     California Civil Energy Market Litigation

     The State of California and others have filed various claims, which have now been consolidated, against several power suppliers to California alleging antitrust violations. Wholesale Electricity Antitrust Cases I and II, Superior Court in and for the County of San Diego, Proceedings Nos. 4204-00005 and 4204-00006. Two of the suppliers who were named as defendants in those matters, Reliant Energy Services, Inc. (and other Reliant entities) and Duke Energy and Trading, LLP (and other Duke entities), filed cross-claims against various other participants in the PX and California independent system operator markets, including APS, attempting to expand those matters to such other participants. On December 13, 2002, the judge remanded the case to state court for the second time and the matter was appealed. On December 8, 2004, the Ninth Circuit issued its opinion on immunity on certain unrelated defendants. The cross-defendants will not be required to respond until the Court rules on pending motions. APS believes the claims by Reliant and Duke as they relate to APS are without merit.

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

Natural Gas Supply

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

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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     On July 9, 2003 the FERC issued an order that altered the capacity rights of parties to the 1996 settlement but maintained the cost responsibility provisions agreed to by parties to that settlement. On December 28, 2004, the D.C. Court of Appeals upheld the FERC’s authority to alter the capacity rights of parties to the settlement. With respect to the FERC’s authority to maintain the cost responsibility provisions of the settlement, a party has sought appellate review and is seeking to reallocate the costs responsibility associated with the changed contractual obligations in a way that would be less favorable to APS and Pinnacle West Energy than under the FERC’s July 9, 2003 order. Should this party prevail on this point, APS and Pinnacle West Energy’s annual capacity cost could be increased by approximately $3 million per year, from September 2003 through December 2005.

     Consistent with its obligations under the 1996 settlement, El Paso filed a new rate case on June 30, 2005, which proposes new rates and new services to become effective on January 1, 2006. Protests were filed on July 12, 2005.

Navajo Nation Litigation

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

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

Environmental Matters

     Superfund Superfund establishes liability for the cleanup of hazardous substances found contaminating the soil, water or air. Those who generated, transported or disposed of hazardous substances at a contaminated site are among those who are PRPs. PRPs may be strictly, and often jointly and severally, liable for clean-up. On September 3, 2003, the EPA advised APS that the EPA considers APS to be a PRP in the Motorola 52^nd Street Superfund Site, Operable Unit 3 (OU3) in Phoenix, Arizona. APS has facilities that are within this Superfund site. APS

24

PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

and Pinnacle West have agreed with the EPA to perform certain investigative activities of the APS facilities within OU3. Because the investigation has not yet been completed and ultimate remediation requirements are not yet finalized, neither APS nor Pinnacle West can currently estimate the expenditures which may be required.

Litigation

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

13. Nuclear Insurance

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

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

     Possible Price-Anderson Act Changes

     Versions of comprehensive energy bills signed by the President on August 8, 2005 contain provisions that would amend the Price-Anderson Act, addressing public liability from nuclear energy hazards in ways that would increase the annual limit on retrospective assessments from $10.0 million to $15.0 million per reactor per incident with APS’ annual exposure per incident increasing from $9.0 million to $13 million.

14. Other Income and Other Expense

     The following table provides detail of other income and other expense for the three and six months ended June 30, 2005 and 2004 (dollars in thousands):

25

PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Other income:
Investment gains – net (a)	$	923		$	34,863		$	—		$	37,081
Interest income		3,872			374			5,191			3,597
SunCor joint venture earnings		2,370			2,006			2,342			3,191
Asset sales		142			(1,189	)		383			2,462
Miscellaneous		1,377			442			1,571			999
Total other income	$	8,684		$	36,496		$	9,487		$	47,330
Other expense:
Non-operating costs (b)	$	(3,058	)	$	(3,831	)	$	(6,156	)	$	(6,658	)
Asset sales		(249	)		1,871			(313	)		(268	)
Investment losses – net		—			—			(326	)		—
Miscellaneous		(539	)		(1,411	)		(1,437	)		(2,390	)
Total other expense	$	(3,846	)	$	(3,371	)	$	(8,232	)	$	(9,316	)

(a)	The three and six months ended June 30, 2004 include a $35 million gain ($21 million after tax) related to the sale of a limited partnership interest in the Phoenix Suns.
(b)	As defined by the FERC, includes below-the-line non-operating utility costs (primarily community relations and other costs excluded from utility rate recovery).

15. Guarantees

     We have issued parental guarantees and letters of credit and obtained surety bonds on behalf of our unregulated subsidiaries. Our parental guarantees related to Pinnacle West Energy consist of equipment and performance guarantees related to our generation construction program, and long-term service agreement guarantees for new power plants. Our credit support instruments enable APS Energy Services to offer commodity energy and energy-related products. Non-performance or non-payment under the original contract by our unregulated subsidiaries would require us to perform under the guarantee or surety bond. No liability is currently recorded on the Condensed Consolidated Balance Sheets related to Pinnacle West’s guarantees on behalf of its subsidiaries. Our guarantees have no recourse or collateral provisions to allow us to recover amounts paid under the guarantee. The amounts and approximate terms of our guarantees and surety bonds for each subsidiary at June 30, 2005 are as follows (dollars in millions):

26

PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Guarantees				Surety Bonds
	Amount		Term		Amount		Term
	(in years)				(in years)
Parental:
Pinnacle West Energy	$	17		1	$	—		—
APS Energy Services		26		1		83		1
Total	$	43			$	83

     At June 30, 2005, we had entered into approximately $37 million of letters of credit which support various transmission and construction agreements. These letters of credit expire in 2005 and 2006. We intend to provide from either existing or new facilities for the extension, renewal or substitution of the letters of credit to the extent required. At June 30, 2005, Pinnacle West had approximately $4 million of letters of credit related to workers’ compensation expiring in 2006.

     APS has entered into various agreements that require letters of credit for financial assurance purposes. At June 30, 2005, approximately $200 million of letters of credit were outstanding to support existing pollution control bonds of approximately $200 million. The letters of credit are available to fund the payment of principal and interest of such debt obligations. In July 2004, $150 million of these letters of credit were renewed for a three-year term and expire in 2007. The remainder expire in 2005. APS has also entered into approximately $100 million of letters of credit to support certain equity lessors in the Palo Verde sale leaseback transactions (see Note 9 for further details on the Palo Verde sale leaseback transactions). These letters of credit expire in 2010. Additionally, APS has approximately $5 million of letters of credit related to counterparty collateral requirements expiring in 2006. APS intends to provide from either existing or new facilities for the extension, renewal or substitution of the letters of credit to the extent required.

     We enter into agreements that include indemnification provisions relating to liabilities arising from or related to certain of our agreements. APS has agreed to indemnify the equity participants and other parties in the Palo Verde sale leaseback transactions with respect to certain tax matters. Generally, a maximum obligation is not explicitly stated in the indemnification provisions and therefore, the overall maximum amount of the obligation under such indemnification provisions cannot be reasonably estimated. Based on historical experience and evaluation of the specific indemnities, we do not believe that any material loss related to such indemnification provisions is likely.

     See Note 4 for information regarding Pinnacle West’s guarantee of $500 million of Pinnacle West Energy’s debt obligations.

16. Earnings Per Share

     The following table presents earnings per weighted average common share outstanding for the three and six months ended June 30, 2005 and 2004:

27

PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Basic earnings per share:
Income from continuing operations	$	0.89		$	0.81		$	1.22		$	1.15
Loss from discontinued operations		(0.61	)		(0.01	)		(0.68	)		(0.01	)
Earnings per share – basic	$	0.28		$	0.80		$	0.54		$	1.14
Diluted earnings per share:
Income from continuing operations	$	0.88		$	0.81		$	1.22		$	1.15
Loss from discontinued operations		(0.60	)		(0.02	)		(0.68	)		(0.01	)
Earnings per share – diluted	$	0.28		$	0.79		$	0.54		$	1.14

     Dilutive stock options increased average common shares outstanding by approximately 107,000 shares and 85,000 shares for the three months ended June 30, 2005 and June 30, 2004, respectively, and by approximately 100,000 shares and 87,000 shares for the six months ended June 30, 2005 and June 30, 2004, respectively.

     Options to purchase 491,984 shares for the three-month period ended June 30, 2005 and 503,859 shares of common stock for the six month period ended June 30, 2005 were outstanding but were not included in the computation of earnings per share because the options’ exercise prices were greater than the average market price of the common shares. Options to purchase shares of common stock that were not included in the computation of diluted earnings per share for that same reason were 2,325,165 shares for the three-month period ended June 30, 2004 and 2,355,287 shares for the six-month period ended June 30, 2004.

17. Discontinued Operations

     Silverhawk (marketing and trading segment) – In June 2005, we entered into an agreement to sell our 75% interest in Silverhawk to NPC. Closing of the sale is subject to regulatory approvals, including approval by the Nevada Public Utilities Commission and the FERC, which are expected to occur by this fall. As a result of this pending sale, we recorded an after-tax loss from discontinued operations of approximately $55 million. The assets held for sale at June 30, 2005 are $207 million, of which property, plant and equipment accounted for approximately $200 million. Liabilities held for sale relate to accounts payable in the amount of $2 million.

     SunCor (real estate segment) – In 2005, SunCor sold commercial properties, which are required to be reported as discontinued operations on Pinnacle West’s Condensed Consolidated Statements of Income in accordance with SFAS No. 144. The assets held for sale at June 30, 2005 relate to property in the amount of $35 million. Liabilities held for sale relate to current maturities of long-term debt in the amount of $29 million.

     NAC (other segment) – In 2004, we sold our investment in NAC.

     The following table provides revenue and income (loss) before income taxes and after income taxes classified as discontinued operations on Pinnacle West’s Condensed Consolidated Statements of Income for the three and six months ended June 30, 2005 and 2004 (dollars in millions):

28

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Revenue:
Silverhawk	$	15		$	5		$	43		$	5
SunCor – commercial operations		3			2			4			4
NAC		—			11			—			19
Total revenue	$	18		$	18		$	47		$	28
Income (loss) before taxes:
Silverhawk	$	(97	)	$	(4	)	$	(107	)	$	(4	)
SunCor – commercial operations		1			—			2			1
NAC		—			2			—			2
Total loss before taxes	$	(96	)	$	(2	)	$	(105	)	$	(1	)
Income (loss) after taxes:
Silverhawk	$	(59	)	$	(2	)	$	(65	)	$	(3	)
SunCor – commercial operations		1			—			1			1
NAC		—			1			—			1
Total loss after taxes	$	(58	)	$	(1	)	$	(64	)	$	(1	)

29

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

	Three Months Ended
	June 30,
	2005			2004
ELECTRIC OPERATING REVENUES
Regulated electricity	$	581,757		$	523,973
Marketing and trading		7,000			45,685
Total		588,757			569,658
OPERATING EXPENSES
Regulated electricity purchased power and fuel		201,871			162,667
Marketing and trading purchased power and fuel		3,349			45,886
Operations and maintenance		138,314			126,871
Depreciation and amortization		76,808			88,385
Income taxes		41,772			32,371
Other taxes		31,322			29,874
Total		493,436			486,054
OPERATING INCOME		95,321			83,604
OTHER INCOME (DEDUCTIONS)
Income taxes		(1,549	)		(1,301	)
Allowance for equity funds used during construction		2,952			2,184
Other income (Note S-4)		7,005			4,668
Other expense (Note S-4)		(2,876	)		(1,220	)
Total		5,532			4,331
INTEREST DEDUCTIONS
Interest on long-term debt		35,612			31,997
Interest on short-term borrowings		2,055			1,215
Debt discount, premium and expense		1,188			1,188
Capitalized interest		(2,000	)		(1,399	)
Total		36,855			33,001
NET INCOME	$	63,998		$	54,934

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

30

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

	Six Months Ended
	June 30,
	2005			2004
ELECTRIC OPERATING REVENUES
Regulated electricity	$	1,000,191		$	944,272
Marketing and trading		29,858			66,488
Total		1,030,049			1,010,760
OPERATING EXPENSES
Regulated electricity purchased power and fuel		283,785			251,259
Marketing and trading purchased power and fuel		31,651			71,644
Operations and maintenance		280,608			252,783
Depreciation and amortization		159,022			177,233
Income taxes		58,152			49,733
Other taxes		62,767			57,454
Total		875,985			860,106
OPERATING INCOME		154,064			150,654
OTHER INCOME (DEDUCTIONS)
Income taxes		(2,386	)		(3,770	)
Allowance for equity funds used during construction		5,555			4,186
Other income (Note S-4)		12,664			15,903
Other expense (Note S-4)		(6,234	)		(6,124	)
Total		9,599			10,195
INTEREST DEDUCTIONS
Interest on long-term debt		71,129			67,643
Interest on short-term borrowings		3,246			3,716
Debt discount, premium and expense		2,192			2,383
Capitalized interest		(3,947	)		(2,256	)
Total		72,620			71,486
NET INCOME	$	91,043		$	89,363

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

31

ARIZONA PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
(unaudited)
(dollars in thousands)

	June 30,			December 31,
	2005			2004
ASSETS
UTILITY PLANT
Electric plant in service and held for future use	$	9,617,099		$	9,120,407
Less accumulated depreciation and amortization		3,475,696			3,266,181
Total		6,141,403			5,854,226
Construction work in progress		293,610			249,243
Intangible assets, net of accumulated amortization		96,800			103,701
Nuclear fuel, net of accumulated amortization		53,459			51,188
Utility plant – net		6,585,272			6,258,358
INVESTMENTS AND OTHER ASSETS
Note receivable from Pinnacle West Energy (Notes 5 and S-5)		—			498,489
Decommissioning trust accounts		276,746			267,700
Assets from long-term risk management and trading activities (Note S-2)		75,236			20,123
Other assets		61,086			61,364
Total investments and other assets		413,068			847,676
CURRENT ASSETS
Cash and cash equivalents		204,597			49,575
Investment in debt securities		272,783			181,175
Accounts receivable:
Service customers		178,304			214,487
Other		73,093			63,131
Allowance for doubtful accounts		(3,228	)		(3,444	)
Accrued utility revenues		120,678			76,154
Materials and supplies (at average cost)		88,663			83,893
Fossil fuel (at average cost)		26,590			20,506
Assets from risk management and trading activities (Note S-2)		133,685			70,430
Other current assets		9,634			10,187
Total current assets		1,104,799			766,094
DEFERRED DEBITS
Deferred purchased power and fuel regulatory asset		33,785			—
Other regulatory assets		139,690			135,051
Unamortized debt issue costs		22,951			21,832
Other deferred debits		72,566			69,541
Total deferred debits		268,992			226,424
TOTAL ASSETS	$	8,372,131		$	8,098,552

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

32

ARIZONA PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
(unaudited)
(dollars in thousands)

	June 30,			December 31,
	2005			2004
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common stock	$	178,162		$	178,162
Additional paid-in capital		1,346,804			1,246,804
Retained earnings		908,739			860,196
Accumulated other comprehensive income (loss):
Minimum pension liability adjustment		(71,087	)		(71,087	)
Derivative instruments		65,771			18,327
Common stock equity		2,428,389			2,232,402
Long-term debt less current maturities		2,266,465			2,267,094
Total capitalization		4,694,854			4,499,496
CURRENT LIABILITIES
Current maturities of long-term debt		351,395			451,247
Accounts payable		153,340			215,076
Accrued taxes		373,337			292,521
Accrued interest		30,105			33,332
Customer deposits		53,500			51,804
Deferred income taxes		9,057			9,057
Liabilities from risk management and trading activities (Note S-2)		74,250			34,292
Other current liabilities		156,451			91,441
Total current liabilities		1,201,435			1,178,770
DEFERRED CREDITS AND OTHER
Deferred income taxes		1,137,253			1,108,571
Regulatory liabilities		524,107			506,646
Liability for asset retirements		259,524			251,612
Pension liability		219,812			203,668
Customer advances for construction		60,851			59,185
Unamortized gain — sale of utility plant		48,045			50,333
Liabilities from long term risk management and trading activities (Note S-2)		19,722			13,124
Other		206,528			227,147
Total deferred credits and other		2,475,842			2,420,286
COMMITMENTS AND CONTINGENCIES (Notes 5, 12, 13 and S-5)
TOTAL LIABILITIES AND EQUITY	$	8,372,131		$	8,098,552

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

33

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

	Six Months Ended
	June 30,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	91,043		$	89,363
Items not requiring cash:
Depreciation and amortization		159,022			177,233
Deferred purchased power and fuel		(33,785	)		—
Nuclear fuel amortization		3,619			14,501
Allowance for equity funds used during construction		(5,555	)		(4,186	)
Deferred income taxes		(1,926	)		8,770
Change in mark-to-market valuations		(12,191	)		4,423
Changes in current assets and liabilities:
Accounts receivable		32,301			(4,630	)
Accrued utility revenues		(44,524	)		(38,126	)
Materials, supplies and fossil fuel		(10,854	)		3,416
Other current assets		2,566			(2,836	)
Accounts payable		(61,798	)		28,686
Accrued taxes		80,816			54,242
Accrued interest		(3,227	)		(9,500	)
Other current liabilities		68,372			5,519
Increase in regulatory assets		(4,699	)		(5,205	)
Change in risk management and trading activities – assets		16,387			7,203
Change in risk management and trading activities – liabilities		2,244			—
Change in pension liability		6,458			26,141
Change in other long-term assets		12,038			7,007
Change in other long-term liabilities		(4,923	)		3,934
Net cash flow provided by operating activities		291,384			365,955
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(301,098	)		(224,259	)
Purchase of Sundance Plant		(185,046	)		—
Capitalized interest		(3,947	)		(2,256	)
Repayment of loan by Pinnacle West Energy		500,000			—
Purchases of investment securities		(769,166	)		(124,000	)
Proceeds from sale of investment securities		677,558			94,050
Other		(11,163	)		(13,657	)
Net cash flow used for investing activities		(92,862	)		(270,122	)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt		163,975			476,240
Equity infusion		100,000			—
Dividends paid on common stock		(42,500	)		(85,000	)
Repayment and reacquisition of long-term debt		(264,975	)		(385,133	)
Net cash flow provided by (used for) financing activities		(43,500	)		6,107
NET INCREASE IN CASH AND CASH EQUIVALENTS		155,022			101,940
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		49,575			141,952
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	204,597		$	243,892
Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:
Income taxes refunded	$	(8,829	)	$	(1,726	)
Interest, net of amounts capitalized	$	73,656		$	78,604

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

34

     Certain notes to APS’ Condensed Financial Statements are combined with the Notes to Pinnacle West’s Condensed Consolidated Financial Statements. Listed below are the Condensed Consolidated Notes to Pinnacle West’s Condensed Consolidated Financial Statements, the majority of which also relate to APS’ Condensed Financial Statements. In addition, listed below are the Supplemental Notes which are required disclosures for APS and should be read in conjunction with Pinnacle West‘s Condensed Consolidated Notes.

	Condensed	APS'
	Consolidated	Supplemental
	Footnote	Footnote
	Reference	Reference
Consolidation and Nature of Operations	Note 1	—
Condensed Consolidated Financial Statements	Note 2	—
Quarterly Fluctuations	Note 3	—
Changes in Liquidity	Note 4	Note S-1
Regulatory Matters	Note 5	—
Retirement Plans and Other Benefits	Note 6	—
Business Segments	Note 7	—
New Accounting Standards	Note 8	—
Variable Interest Entities	Note 9	—
Derivative and Energy Trading Accounting	Note 10	Note S-2
Comprehensive Income	Note 11	Note S-3
Commitments and Contingencies	Note 12	—
Nuclear Insurance	Note 13	—
Other Income and Other Expense	Note 14	Note S-4
Guarantees	Note 15	—
Earnings Per Share	Note 16	—
Discontinued Operations	Note 17	—
Related Party Transactions	—	Note S-5

S-1. Changes in Liquidity

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

• $351 million in 2005;

• $86 million in 2006;

• $174 million in 2007;

• $1 million in 2008;

• $1 million in 2009; and

• $2.012 billion, thereafter.

S-2. Derivative and Energy Trading Accounting

     APS is exposed to the impact of market fluctuations in the commodity price of electricity, natural gas and coal. As part of its overall risk management program, APS uses various commodity

35

ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE CONDENSED FINANCIAL STATEMENTS

instruments that qualify as derivatives to hedge purchases and sales of electricity and fuels. As of June 30, 2005, APS hedged exposures to these risks for a maximum of three years.

Cash Flow Hedges

     The changes in the fair value of APS’ hedged positions included in the APS Condensed Statements of Income for the three and six months ended June 30, 2005 and 2004 were comprised of the following (dollars in thousands):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Gains on the ineffective portion of derivatives qualifying for hedge accounting	$	4,512		$	124		$	11,930		$	1,535
Gains (losses) from the change in options’ time value excluded from measurement of effectiveness		(1,189	)		(17	)		(331	)		63
Gains from the discontinuance of cash flow hedges		—			—			302			575

     During the twelve months ending June 30, 2006, we estimate that a net gain of $54 million before income taxes will be reclassified from accumulated other comprehensive income as an offset to the effect of market price changes for the related hedged transactions.

     APS’ assets and liabilities from risk management and trading activities are presented in two categories, consistent with Pinnacle West’s business segments:

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

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

     The following table summarizes APS’ assets and liabilities from risk management and trading activities at June 30, 2005 and December 31, 2004 (dollars in thousands):

June 30, 2005

	Current				Current			Other			Net Asset
	Assets		Investments		Liabilities			Liabilities			(Liability)
Regulated Electricity:
Mark-to-market	$	121,482	$	68,458	$	(55,495	)	$	(8,346	)	$	126,099
Options and futures — at cost		2,555		4		(11,123	)		—			(8,564	)
Marketing and Trading:
Mark-to-market		9,648		6,774		(7,632	)		(11,376	)		(2,586	)
Total	$	133,685	$	75,236	$	(74,250	)	$	(19,722	)	$	114,949

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ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE CONDENSED FINANCIAL STATEMENTS

December 31, 2004

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

     Cash or other assets may be required to serve as collateral against APS’ open positions on certain energy-related contracts. No collateral was provided to counterparties at June 30, 2005 or December 31, 2004. Collateral provided to us by counterparties was $90 million at June 30, 2005 and $6 million at December 31, 2004, and is included in other current liabilities on the Condensed Balance Sheets.

S-3. Comprehensive Income

     Components of APS’ comprehensive income for the three and six months ended June 30, 2005 and 2004, are as follows (dollars in thousands):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Net income	$	63,998		$	54,934		$	91,043		$	89,363
Other comprehensive income (loss):
Unrealized gains (losses) on derivative instruments (a)		(24,147	)		17,836			84,070			48,078
Reclassification of realized gain to income (b)		(4,437	)		(4,963	)		(5,819	)		(6,829	)
Income tax (expense) benefit related to items of other comprehensive income		11,253			(5,076	)		(30,807	)		(16,267	)
Total other comprehensive income (loss)		(17,331	)		7,797			47,444			24,982
Comprehensive income	$	46,667		$	62,731		$	138,487		$	114,345

(a)	These amounts primarily include unrealized gains and losses on contracts used to hedge our forecasted electricity and gas requirements to serve Native Load.
(b)	These amounts primarily include the reclassification of unrealized gains and losses to realized for contracted commodities delivered during the period.

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ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE CONDENSED FINANCIAL STATEMENTS

S-4. Other Income and Other Expense

     The following table provides detail of APS’ other income and other expense for the three and six months ended June 30, 2005 and 2004 (dollars in thousands):

	Three Months						Six Months
	Ended June 30,						Ended June 30,
	2005			2004			2005			2004
Other income:
Interest income	$	4,177		$	5,015		$	9,600		$	10,053
Asset sales		142			(1,189	)		383			2,462
Investment gains – net		981			350			479			2,397
Miscellaneous		1,705			492			2,202			991
Total other income	$	7,005		$	4,668		$	12,664		$	15,903
Other expense:
Non-operating costs(a)	$	(2,708	)	$	(2,310	)	$	(5,335	)	$	(4,542	)
Asset sales		(249	)		1,871			(313	)		(268	)
Miscellaneous		81			(781	)		(586	)		(1,314	)
Total other expense	$	(2,876	)	$	(1,220	)	$	(6,234	)	$	(6,124	)

(a) As defined by the FERC, includes below-the-line non-operating utility costs (primarily community relations and other costs excluded from utility rate recovery).

S-5. Related Party Transactions

     From time to time, APS enters into transactions with Pinnacle West or Pinnacle West’s subsidiaries. The following table summarizes the amounts included in the APS Condensed Statements of Income and Condensed Balance Sheets related to transactions with affiliated companies (dollars in millions):

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ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE CONDENSED FINANCIAL STATEMENTS

	Three Months				Six Months
	Ended				Ended
	June 30,				June 30,
	2005		2004		2005		2004
Electric operating revenues:
Pinnacle West – marketing and trading	$	2	$	4	$	3	$	8
Pinnacle West Energy		1		—		2		1
Total	$	3	$	4	$	5	$	9
Purchased power and fuel costs:
Pinnacle West Energy	$	39	$	19	$	47	$	29
Total	$	39	$	19	$	47	$	29
Other:
Pinnacle West Energy interest income	$	—	$	4	$	5	$	9
Total	$	—	$	4	$	5	$	9

	As of			As of
	June 30, 2005			December 31, 2004
Net intercompany receivables (payables):
Pinnacle West Energy	$	(13	)	$	467
Pinnacle West – marketing and trading		9			19
APS Energy Services		7			9
Pinnacle West		(8	)		(5	)
Total	$	(5	)	$	490

     Electric revenues include sales of electricity to affiliated companies at contract prices. Purchased power includes purchases of electricity from affiliated companies at contract prices. The Company purchases electricity from and sells electricity to APS Energy Services; however, these transactions are settled net and reported net in accordance with EITF 03-11, “Reporting Realized Gains and Losses on Derivative Instruments That Are Subject to FASB Statement No. 133 and Not ‘Held for Trading Purposes’ As Defined in EITF Issue No. 2-3.”

     Intercompany receivables primarily include amounts related to the $500 million loan APS made to Pinnacle West Energy and intercompany sales of electricity. This loan was settled in May 2005. Intercompany payables primarily include amounts related to the intercompany purchases of electricity. Intercompany receivables and payables are generally settled on a current basis in cash.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

     The following discussion should be read in conjunction with Pinnacle West’s Condensed Consolidated Financial Statements and Arizona Public Service Company’s Condensed Financial Statements and the related Notes that appear in Item 1 of this report.

OVERVIEW

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

     Pinnacle West Energy is our unregulated generation subsidiary. Pursuant to the ACC’s April 7, 2005 order in APS’ general rate case, on July 29, 2005, Pinnacle West Energy transferred the PWEC Dedicated Assets to APS. See “APS General Rate Case” in Note 5. As a result, Pinnacle West Energy’s remaining generating plant is Silverhawk, a 570 MW combined cycle plant located north of Las Vegas, Nevada. See Note 17 of Notes to Condensed Consolidated Financial Statements for a discussion of the pending sale of our 75% ownership interest in this plant.

     As part of the ACC order in APS’ general rate case, the ACC approved the PSA, which permits APS to defer for recovery or refund fuel and purchased power costs, subject to specified parameters and procedures. On July 22, 2005, APS filed an Application for Surcharge with the ACC requesting the recovery of $100 million in deferred fuel and purchased power costs over a 24-month period beginning with billing cycle one of November, 2005. See “APS General Rate Case” in Note 5. APS expects to file another general rate case in late 2005.

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

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

     El Dorado, our investment subsidiary, owns minority interests in several energy-related investments and Arizona community-based ventures.

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

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

     See “Pinnacle West Consolidated – Factors Affecting Our Financial Outlook” below for a discussion of several factors that could affect our future financial results.

EARNINGS CONTRIBUTION BY BUSINESS SEGMENT

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

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

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

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

     The following table summarizes net income for the three months and six months ended June 30, 2005 and 2004 (dollars in millions):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Regulated electricity	$	69		$	40		$	83		$	55
Marketing and trading		4			8			11			22
Real estate		11			4			19			5
Other (a)		1			22			2			23
Income from continuing operations		85			74			115			105
Silverhawk discontinued operations – net of income taxes (see “Pending Sale of Silverhawk” below)		(59	)		(2	)		(65	)		(3	)
Real estate discontinued operations – net of income taxes		1			—			1			1
Other segment discontinued operations- net of income taxes		—			1			—			1
Net income	$	27		$	73		$	51		$	104

(a) The 2004 periods include $21 million (after-tax) gain related to the sale of a limited partnership interest in the Phoenix Suns.

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General

     Throughout the following explanations of our results of operations, we refer to “gross margin.” With respect to our regulated electricity segment and our marketing and trading segment, gross margin refers to electric operating revenues less purchased power and fuel costs. “Gross margin” is a “non-GAAP financial measure,” as defined in accordance with SEC rules. Exhibit 99.3 reconciles this non-GAAP financial measure to operating income, which is the most directly comparable financial measure calculated and presented in accordance with GAAP. We view gross margin as an important performance measure of the core profitability of our operations. This measure is a key component of our internal financial reporting and is used by our management in analyzing our business segments. We believe that investors benefit from having access to the same financial measures that our management uses. In addition, we have reclassified certain prior-period amounts to conform to our current-period presentation.

Pending Sale of Silverhawk

     In June 2005, we entered into an agreement to sell our 75% interest in Silverhawk to NPC. Closing of the sale is subject to regulatory approvals, including approval by the Nevada Public Utilities Commission and the FERC, which are expected to occur by this fall. As a result of this pending sale, we recorded an after-tax loss from discontinued operations of approximately $55 million. We have also reclassified Silverhawk operations in the current and prior periods to discontinued operations.

Deferred Purchased Power and Fuel Costs

     APS’ retail rate case settlement became effective April 1, 2005. As part of the settlement, the ACC approved a 4.2% annual retail rate increase and a PSA that provides mechanisms for adjusting rates to reflect variations in fuel and purchased power costs. In accordance with the PSA, APS defers for future rate recovery 90% of the difference between actual purchased power and fuel costs and the amount for such costs currently included in base rates. As of June 30, 2005, APS had deferred $34 million of pretax purchased power and fuel costs.

Operating Results – Three-month period ended June 30, 2005 compared with three-month period ended June 30, 2004

     Our consolidated net income for the three months ended June 30, 2005 was $27 million compared with $73 million for the prior-year period. The current-quarter net income included a loss from discontinued operations of $58 million which is primarily related to the pending sale and operations of Silverhawk (see discussion above). Income from continuing operations increased $11 million in the period-to-period comparison reflecting the following changes in earnings by segment:

• Regulated Electricity Segment – Income from continuing operations increased approximately $29 million primarily due to a retail price increase effective April 1, 2005, higher retail sales volumes due to customer growth, the absence of regulatory asset amortization, deferred purchased power and fuel costs, net of higher costs, in accordance with the retail rate settlement, and lower depreciation due to lower depreciation rates. These positive factors were partially offset by higher operations and maintenance costs primarily related to generation, customer service, and benefit costs.

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• Marketing and Trading Segment – Income from continuing operations decreased approximately $4 million primarily due to lower realized margins on wholesale sales.

• Real Estate Segment – Income from continuing operations increased approximately $7 million primarily due to increased parcel sales.

• Other Segment – Income from continuing operations decreased approximately $21 million primarily due to an after-tax gain related to the sale of El Dorado’s limited partnership interest in the Phoenix Suns recorded in the prior-year period.

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

	Increase (Decrease)
	Pretax			After Tax
Regulated electricity segment gross margin:
Retail price increase effective April 1, 2005	$	28		$	17
Higher retail sales volumes due to customer growth, excluding weather effects		13			8
Deferred purchased power and fuel costs, net of higher costs, in accordance with the retail rate settlement		8			5
Miscellaneous items, net		2			1
Net increase in regulated electricity segment gross margin		51			31
Marketing and trading segment gross margin:
Lower realized margins on wholesale sales primarily due to lower unit margins and lower sales volumes		(6	)		(4	)
Miscellaneous items, net		(3	)		(1	)
Net decrease in marketing and trading segment gross margin		(9	)		(5	)
Net increase in gross margin for regulated electricity and marketing and trading segments		42			26
Higher real estate segment contribution primarily related to increased parcel sales		12			7
Lower other income due to sale of limited partnership interest in Phoenix Suns recorded in prior-year period		(35	)		(21	)
Higher operation and maintenance expense due to generation, customer service and benefit costs		(15	)		(9	)
Depreciation and amortization decreases primarily due to:
Absence of regulatory asset amortization		10			6
Lower depreciation rates (see Note 5) partially offset by higher depreciable assets		7			4
Higher interest expense, net of capitalized financing costs, primarily due to higher debt balances and interest rates		(6	)		(4	)
Miscellaneous items, net		6			2
Net increase in income from continuing operations	$	21			11
Discontinued operations primarily related to the pending sale of Silverhawk (see discussion above)					(57	)
Net decrease in net income				$	(46	)

     Regulated Electricity Segment Revenues

     Regulated electricity segment revenues were $60 million higher for the three months ended June 30, 2005 compared with the prior-year period primarily as a result of:

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• a $28 million increase in retail revenues due to a price increase effective April 1, 2005;

• an $18 million increase in retail revenues related to customer growth, excluding weather effects;

• a $12 million increase in Off-System Sales primarily due to sales previously reported in the marketing and trading segment now classified as sales in the regulated electricity segment in accordance with the retail rate settlement; and

• a $2 million increase due to miscellaneous factors.

     Marketing and Trading Segment Revenues

     Marketing and trading segment revenues were $39 million lower for the three months ended June 30, 2005 compared with the prior-year period primarily as a result of:

• a $25 million decrease in revenues from Off-System Sales primarily due to lower sales volumes and sales previously reported in the marketing and trading segment now classified as sales in the regulated electricity segment in accordance with the retail rate settlement;

• a $7 million decrease in energy trading revenues on realized sales of electricity primarily due to lower delivered electricity prices and lower sales volumes;

• a $5 million decrease from lower volumes and prices for competitive retail sales in California; and

• a $2 million decrease on future mark-to-market gains due to higher price volatility.

     Real Estate Revenues

     Real estate revenues were $19 million higher for the three months ended June 30, 2005 compared with the prior-year period primarily due to increased parcel sales.

Operating Results – Six-month period ended June 30, 2005 compared with six-month period ended June 30, 2004

     Our consolidated net income for the six months ended June 30, 2005 was $51 million compared with $104 million for the prior-year period. The current year period net income included a loss from discontinued operations of $64 million which is primarily related to the pending sale and operations of Silverhawk (see discussion above). Income from continuing operations increased $10 million in the period-to-period comparison reflecting the following changes in earnings by segment:

• Regulated Electricity Segment – Income from continuing operations increased approximately $28 million primarily due to a retail price increase effective April 1, 2005, higher retail sales volumes due to customer growth, the absence of regulatory asset amortization, deferred purchased power and fuel costs, net of higher costs, in

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accordance with the retail rate settlement, and lower depreciation due to lower depreciation rates. These positive factors were partially offset by higher operations and maintenance costs primarily related to generation, customer service, and benefit costs, and higher property taxes due to increased plant in service.

• Marketing and Trading Segment – Income from continuing operations decreased approximately $11 million primarily due to lower realized margins on wholesale sales and competitive retail sales in California.

• Real Estate Segment – Income from continuing operations increased approximately $14 million primarily due to increased parcel sales.

• Other Segment – Income from continuing operations decreased approximately $21 million primarily due to an after-tax gain related to the sale of El Dorado’s limited partnership interest in the Phoenix Suns recorded in the prior-year period.

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

	Increase (Decrease)
	Pretax			After Tax
Regulated electricity segment gross margin:
Retail price increase effective April 1, 2005	$	28		$	17
Higher retail sales volumes due to customer growth, excluding weather effects		20			12
Deferred purchased power and fuel costs, net of higher costs, in accordance with the retail rate settlement		15			9
Miscellaneous items, net		(1	)		(1	)
Net increase in regulated electricity segment gross margin		62			37
Marketing and trading segment gross margin:
Lower unit margins on competitive retail sales in California		(7	)		(4	)
Lower realized margins on wholesale sales primarily due to lower unit margins and lower sales volumes		(5	)		(3	)
Miscellaneous items, net		1			—
Net decrease in marketing and trading segment gross margin		(11	)		(7	)
Net increase in gross margin for regulated electricity and marketing and trading segments		51			30
Higher real estate segment contribution primarily related to increased parcel sales		24			14
Lower other income due to sale of limited partnership interest in
Phoenix Suns recorded in the prior-year period		(35	)		(21	)
Operations and maintenance increases primarily due to:
Generation costs, including planned maintenance		(11	)		(7	)
Customer service costs, including planned maintenance		(10	)		(6	)
Benefit costs		(8	)		(5	)
Miscellaneous items, net		(3	)		(2	)
Depreciation and amortization decreases primarily due to:
Absence of regulatory asset amortization		19			11
Lower depreciation rates (see Note 5) partially offset by higher depreciable assets		8			5
Higher property taxes due to increased plant in service		(7	)		(4	)
Miscellaneous items, net		(5	)		(5	)
Net increase in income from continuing operations	$	23			10
Discontinued operations primarily related to the pending sale of Silverhawk (see discussion above)					(63	)
Net decrease in net income				$	(53	)

     Regulated Electricity Segment Revenues

Regulated electricity segment revenues were $60 million higher for the six months ended June 30, 2005 compared with the prior-year period primarily as a result of:

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• a $28 million increase in retail revenues related to customer growth, excluding weather effects;

• a $28 million increase in retail revenues due to a price increase effective April 1, 2005;

• a $12 million increase in Off-System Sales primarily due to sales previously reported in the marketing and trading segment now classified as sales in the regulated electricity segment in accordance with the retail rate settlement;

• a $9 million decrease in retail revenues related to milder weather; and

• a $1 million increase due to miscellaneous factors.

     Marketing and Trading Segment Revenues

     Marketing and trading segment revenues were $38 million lower for the six months ended June 30, 2005 compared with the prior-year period primarily as a result of:

• a $19 million decrease in revenues from Off-System Sales primarily due to lower sales volumes, prices and sales previously reported in the marketing and trading segment now classified as sales in the regulated electricity segment in accordance with the retail rate settlement;

• a $14 million decrease from lower volumes and prices on competitive retail sales in California; and

• a $5 million decrease in energy trading revenues on realized sales of electricity primarily due to lower delivered electricity prices and lower volumes.

     Real Estate Revenues

     Real estate revenues were $40 million higher for the six months ended June 30, 2005 compared with the prior-year period primarily due to increased parcel sales.

LIQUIDITY AND CAPITAL RESOURCES

Capital Needs and Resources – Pinnacle West Consolidated

     Capital Expenditure Requirements

     The following table summarizes the actual capital expenditures for the six months ended June 30, 2005 and estimated capital expenditures for the next three years.

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CAPITAL EXPENDITURES
(dollars in millions)

	Six Months Ended		Estimated for the Year Ended
	June 30,		December 31,
	2005		2005		2006		2007
APS Delivery	$	203	$	390	$	395	$	440
Generation (a) (b)		259		352		158		195
Other (c)		16		30		7		6
Subtotal		478		772		560		641
Pinnacle West Energy (a)		1		7		—		—
SunCor (d)		45		114		61		63
Other		1		8		7		4
Total	$	525	$	901	$	628	$	708

(a)	As discussed in Note 5 under “APS General Rate Case,” as part of the ACC’s order in APS’ general rate case, APS received rate base treatment of the PWEC Dedicated Assets. The estimated capital expenditures related to the PWEC Dedicated Assets are reflected in APS generation for the years 2005, 2006 and 2007.
(b)	The six months ended June 30, 2005 includes $190 million for the acquisition of the Sundance Plant. See Note 4 for a discussion of APS’ acquisition of the Sundance Plant.
(c)	Primarily information systems and facilities projects.
(d)	Consists primarily of capital expenditures for land development and retail and office building construction reflected in “Real estate investments” on the Condensed Consolidated Statements of Cash Flows.

     Delivery capital expenditures are comprised of T&D infrastructure additions and upgrades, capital replacements, new customer construction and related information systems and facility costs. Examples of the types of projects included in the forecast include T&D lines and substations, line extensions to new residential and commercial developments and upgrades to customer information systems. Major transmission projects are driven by strong regional customer growth. APS will begin major projects each year for the next several years, and expects to spend about $200 million on major transmission projects during the 2005 to 2007 time frame. These amounts are included in “APS-Delivery” in the table above. Completion of these projects is expected by at least 2008.

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

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

Contractual Obligations

     Our future contractual obligations have not changed materially from the amounts disclosed in Part II, Item 7 of the 2004 Form 10-K with the exception of our aggregate:

• purchased power and fuel commitments, which increased from approximately $855 million at December 31, 2004 to $1.0 billion at June 30, 2005 primarily due to increased commitment for the years 2005 through 2007; and

• nuclear decommissioning funding requirements, which increased from approximately $201 million at December 31, 2004 to $386 million at June 30, 2005 for the years 2005 and thereafter.

     See Note 4 for a list of payments due on total long-term debt and capitalized lease requirements.

     Off-Balance Sheet Arrangements

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

     APS is exposed to losses under the Palo Verde sale leaseback agreements upon the occurrence of certain events that APS does not consider to be reasonably likely to occur. Under certain circumstances (for example, the NRC issuing specified violation orders with respect to Palo Verde or the occurrence of specified nuclear events), APS would be required to assume the debt associated with the transactions, make specified payments to the equity participants, and take title to the leased Unit 2 interests, which, if appropriate, may be required to be written down in value. If such an event had occurred as of June 30, 2005, APS would have been required to assume approximately $245 million of debt and pay the equity participants approximately $191 million.

     Guarantees and Letters of Credit

     We and certain of our subsidiaries have issued guarantees and letters of credit in support of our unregulated businesses. We have also obtained surety bonds on behalf of APS Energy Services. We have not recorded any liability on our Condensed Consolidated Balance Sheets with respect to these obligations. We generally agree to indemnification provisions related to liabilities arising from or related to certain of our agreements, with limited exceptions depending on the particular agreement. See Note 15 for additional information regarding guarantees and letters of credit.

     See “Pinnacle West Energy” below for information regarding Pinnacle West’s guarantee of $500 million of Pinnacle West Energy’s debt obligations.

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     Credit Ratings

     The ratings of securities of Pinnacle West and APS as of August 8, 2005 are shown below and are considered to be “investment-grade” ratings. The ratings reflect the respective views of the rating agencies, from which an explanation of the significance of their ratings may be obtained. There is no assurance that these ratings will continue for any given period of time. The ratings may be revised or withdrawn entirely by the rating agencies, if, in their respective judgments, circumstances so warrant. Any downward revision or withdrawal may adversely affect the market price of Pinnacle West’s or APS’ securities and serve to increase those companies’ cost of and access to capital. It may also require additional collateral related to certain derivative instruments (see Note 10).

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

     Debt Provisions

     Pinnacle West’s and APS’ debt covenants related to their respective bank financing arrangements include a debt-to-total-capitalization ratio and an interest coverage test. Pinnacle West and APS comply with these covenants and each anticipates it will continue to meet these and other significant covenant requirements. These covenants require that the ratio of debt to total capitalization cannot exceed 65% for the Company and for APS. At June 30, 2005, the ratio was approximately 53% for Pinnacle West and 51% for APS. The provisions regarding interest coverage require a minimum cash coverage of two times the interest requirements for each of the Company and APS. The interest coverage is approximately 4 times under the Company’s and APS’ bank financing agreements. Failure to comply with such covenant levels would result in an event of default which, generally speaking, would require the immediate repayment of the debt subject to the covenants.

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

     All of Pinnacle West’s bank agreements contain “cross-default” provisions that would result in defaults and the potential acceleration of payment under these loan agreements if Pinnacle West or APS were to default under other agreements. All of APS’ bank agreements contain cross-default

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

     See Note 4 for further discussions.

Capital Needs and Resources — By Company

     Pinnacle West (Parent Company)

     Our primary cash needs are for dividends to our shareholders; interest payments and optional and mandatory repayments of principal on our long-term debt. The level of our common dividends and future dividend growth will be dependent on a number of factors including, but not limited to, payout ratio trends, free cash flow and financial market conditions.

     Our primary sources of cash are dividends from APS, external financings and cash distributions from our other subsidiaries, primarily SunCor. We expect SunCor to make cash distributions to the parent company of approximately $80 to $100 million in 2005 based on anticipated asset sales activities. As discussed in Note 5 under “ACC Financing Order,” APS must maintain a common equity ratio of at least 40% and may not pay common dividends if the payment would reduce its common equity below that threshold. As defined in the Financing Order, common equity ratio is common equity divided by common equity plus long-term debt, including current maturities of long-term debt. At June 30, 2005, APS’ common equity ratio as defined was approximately 48%.

     Pinnacle West sponsors a qualified pension plan for the employees of Pinnacle West and our subsidiaries. We contribute at least the minimum amount required under IRS regulations, but no more than the maximum tax-deductible amount. The minimum required funding takes into consideration the value of the fund assets and our pension obligation. We contributed $35 million in 2004. APS and other subsidiaries fund their share of the pension contribution, of which APS represents approximately 92% of the total funding amounts described above. The assets in the plan are comprised of common stocks, bonds and real estate. Future year contribution amounts are dependent on fund performance and fund valuation assumptions. Our minimum required pension contribution in 2005 is approximately $53 million. Of this amount, we have contributed approximately $27 million through July 2005. The contribution to be made to other post retirement benefit plans in 2005 is estimated to be approximately $37 million. Of this amount, we contributed approximately $18 million through July 2005. APS’ share is approximately 92% of both plans.

     On May 2, 2005, Pinnacle West redeemed at par all of its $165 million Floating Rate Senior Notes due November 1, 2005. The Company used cash on hand to redeem the notes.

     On May 2, 2005, Pinnacle West issued 6,095,000 shares of its common stock at an offering price of $42 per share, resulting in net proceeds of approximately $248 million. Pinnacle West used the net proceeds for general corporate purposes, including making capital contributions to APS, which, in turn, used such funds to pay a portion of the approximately $190 million purchase price to acquire the Sundance Plant and for other capital expenditures incurred to meet the growing needs of

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APS’ service territory.

     On July 13, 2005, the Pinnacle West Board of Directors declared a quarterly dividend of $0.475 per share of common stock, payable on September 1, 2005, to shareholders of record on August 1, 2005.

     APS

     APS’ capital requirements consist primarily of capital expenditures and optional and mandatory redemptions of long-term debt. See “ACC Financing Order” in Note 5 for a discussion of the $500 million loan from APS to Pinnacle West Energy authorized by the ACC pursuant to the Financing Order. This loan was repaid on April 11, 2005.

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

     On January 15, 2005, APS repaid its $100 million 6.25% Notes due 2005. APS used cash on hand to redeem these notes.

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

     On August 1, 2005, APS repaid $300 million of its 7.625% Notes due 2005. APS used cash on hand to repay these notes.

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

     See “Deferred Purchased Power and Fuel Costs” above and “APS General Rate Case” in Note 5 for information regarding the PSA approved by the ACC.

     Pinnacle West Energy

     Pinnacle West Energy expects minimal capital expenditures over the next three years. See the capital expenditures table above for actual capital expenditures during the six months ended June 30, 2005 and projected capital expenditures for the next three years (the estimated capital expenditures related to the PWEC Dedicated Assets are reflected in APS).

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     See “ACC Financing Order” in Note 5 for a discussion of the $500 million loan from APS to Pinnacle West Energy authorized by the ACC pursuant to the Financing Order. On April 11, 2005 Pinnacle West Energy issued $500 million Floating Rate Senior Notes due April 1, 2007. Pinnacle West has unconditionally guaranteed these notes. Pinnacle West Energy used the proceeds of this issuance to repay the APS loan. Pinnacle West Energy intends to repay the Floating Rate Senior Note with $500 million expected to be received from APS in connection with Pinnacle West Energy’s transfer of the PWEC Dedicated Assets to APS.

     See Note 17 of Notes to Condensed Consolidated Financial Statements above for a discussion of the pending sale of our 75% ownership interest in Silverhawk.

     Other Subsidiaries

     During the past three years, SunCor funded its cash requirements with cash from operations and its own external financings. SunCor’s capital needs consist primarily of capital expenditures for land development and retail and office building construction. See the capital expenditures table above for actual capital expenditures during the six months ended June 30, 2005 and projected capital expenditures for the next three years. SunCor expects to fund its capital requirements with cash from operations and external financings.

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

     El Dorado expects minimal capital requirements over the next three years and intends to focus on prudently realizing the value of its existing investments.

     APS Energy Services expects minimal capital expenditures over the next three years.

CRITICAL ACCOUNTING POLICIES

     In preparing the financial statements in accordance with GAAP, management must often make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period. Some of those judgments can be subjective and complex, and actual results could differ from those estimates. Our most critical accounting policies include the impacts of regulatory accounting and the determination of the appropriate accounting for our pension and other postretirement benefits and derivatives accounting. There have been no changes to our critical accounting policies since our 2004 Form 10-K. See “Critical Accounting Policies” in Item 7 of the 2004 Form 10-K for further details about our critical accounting policies.

PINNACLE WEST CONSOLIDATED – FACTORS AFFECTING
OUR FINANCIAL OUTLOOK

Factors Affecting Operating Revenues, Purchased Power and Fuel Costs

     General Electric operating revenues are derived from sales of electricity in regulated retail markets in Arizona and from competitive retail and wholesale power markets in the western United States. These revenues are affected by electricity sales volumes related to customer mix, customer

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growth and average usage per customer as well as electricity prices and variations in weather from period to period. Competitive sales of energy and energy-related products and services are made by APS Energy Services in western states that have opened to competition.

     Customer and Sales Growth The customer and sales growth referred to in this paragraph applies to Native Load customers and sales to them. Customer growth in APS’ service territory averaged about 3.4% a year for the three years 2002 through 2004; we currently expect customer growth to average about 3.8% per year from 2005 to 2007. We currently estimate that total retail electricity sales in kilowatt-hours will grow 5.0% on average, from 2005 through 2007, before the effects of weather variations. Customer growth for the six-month period ended June 30, 2005 compared with the prior year period was 4.1%.

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

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

     Retail Rate Matters See “APS General Rate Case” in Note 5 for a discussion of the ACC’s order in APS’ general rate case and “Power Supply Adjuster” for information regarding APS’ application to the ACC requesting recovery of $100 million in deferred fuel and purchased power costs under the PSA. APS expects to file another general rate case in late 2005.

     Purchased Power and Fuel Costs See “APS General Rate Case” in Note 5 for information regarding the PSA approved by the ACC. Purchased power and fuel costs are impacted by our electricity sales volumes, existing contracts for purchased power and generation fuel, our power plant performance, transmission availability or constraints, prevailing market prices, new generating plants being placed in service and our hedging program for managing such costs. See “Natural Gas Supply” in Note 12 for more information on fuel costs.

     Wholesale Power Market Conditions The marketing and trading division focuses primarily on managing APS’ purchased power and fuel risks in connection with its costs of serving retail customer demand. The marketing and trading division, subject to specified parameters, markets, hedges and trades in electricity, fuels and emission allowances and credits. Our future earnings will be affected by the strength or weakness of the wholesale power market.

Other Factors Affecting Financial Results

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

     Depreciation and Amortization Expenses Depreciation and amortization expenses are impacted by net additions to utility plant and other property, which includes generation construction

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or acquisition, changes in depreciation and amortization rates (see Note 5), and changes in regulatory asset amortization. See Note 17 for information on the pending sale of Silverhawk. See Note 4 for information on APS’ acquisition of the Sundance Plant in 2005 and “Requests for Proposals” in Part II, Item 5 of this report for more information on requests for proposals to acquire additional long-term resources in 2006 and 2007.

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

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

     Retail Competition Although some very limited retail competition existed in APS’ service area in 1999 and 2000, there are currently no active retail competitors providing unbundled energy or other utility services to APS’ customers. As a result, we cannot predict when, and the extent to which, additional competitors will re-enter APS’ service territory.

     Subsidiaries In the case of SunCor, efforts to accelerate asset sales activities in 2004 were successful. A portion of these sales have been, and additional amounts may be required to be, reported as discontinued operations on our Condensed Consolidated Statements of Income. SunCor’s net income was $45 million in 2004. See Note 17 for further discussion. We anticipate SunCor’s earnings contributions in 2005 to be approximately $50 million after income taxes.

     El Dorado’s historical results are not indicative of future performance.

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

Market Risks

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

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     Interest Rate and Equity Risk

     Our major financial market risk exposure is to changing interest rates. Changing interest rates will affect interest paid on variable-rate debt and interest earned by our nuclear decommissioning trust fund. Our policy is to manage interest rates through the use of a combination of fixed-rate and floating-rate debt.

     Commodity Price Risk

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

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

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

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

     The following tables show the pretax changes in mark-to-market of our non-trading and trading derivative positions for the six months ended June 30, 2005 and 2004 (dollars in millions):

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	Six Months Ended						Six Months Ended
	June 30, 2005						June 30, 2004
	Regulated			Marketing			Regulated		Marketing
	Electricity			and Trading			Electricity		and Trading
Mark-to-market of net positions at beginning of period	$	33		$	107		$	—	$	69
Change in mark-to-market gains for future period deliveries		4			12			11		13
Changes in cash flow hedges recorded in OCI		84			(9	)		48		25
Ineffective portion of changes in fair value		12			—			1		1
Mark-to-market (gains) losses realized during the period		(7	)		41			3		(10	)
Mark-to-market of net positions at end of period	$	126		$	151		$	63	$	98

     The tables below show the fair value of maturities of our non-trading and trading derivative contracts (dollars in millions) at June 30, 2005 by maturities and by the type of valuation that is performed to calculate the fair values. See Note 1, “Derivative Accounting,” in Item 8 of our 2004 Form 10-K for more discussion of our valuation methods.

Regulated Electricity

									Total
									fair
Source of Fair Value	2005			2006			2007		value
Prices actively quoted	$	39		$	54		$	28	$	121
Prices provided by other external sources		—			4			3		7
Prices based on models and other valuation methods		(1	)		(1	)		—		(2	)
Total by maturity	$	38		$	57		$	31	$	126

Marketing and Trading

																Total
																fair
Source of Fair Value	2005			2006			2007			2008			2009			value
Prices actively quoted	$	28		$	—		$	—		$	—		$	—		$	28
Prices provided by other external sources		—			66			83			41			(1	)		189
Prices based on models and other valuation methods		(5	)		(21	)		(30	)		(10	)		—			(66	)
Total by maturity	$	23		$	45		$	53		$	31		$	(1	)	$	151

     The table below shows the impact that hypothetical price movements of 10% would have on the market value of our risk management and trading assets and liabilities included on Pinnacle

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West’s Condensed Consolidated Balance Sheets at June 30, 2005 and December 31, 2004 (dollars in millions).

	June 30, 2005						December 31, 2004
	Gain (Loss)						Gain (Loss)
Commodity	Price Up 10%			Price Down 10%			Price Up 10%			Price Down 10%
Mark-to-market changes reported in earnings (a):
Electricity	$	(3	)	$	2		$	(4	)	$	4
Natural gas		1			(1	)		2			(2	)
Other		1			(1	)		1			(1	)
Mark-to-market changes reported in OCI (b):
Electricity		44			(44	)		35			(35	)
Natural gas		72			(72	)		43			(43	)
Total	$	115		$	(116	)	$	77		$	(77	)

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

Credit Risk

     We are exposed to losses in the event of nonperformance or nonpayment by counterparties. We have risk management and trading contracts with many counterparties, including one counterparty for which a worst case exposure represents approximately 16% of Pinnacle West’s $620 million of risk management and trading assets as of June 30, 2005. See Note 1, “Derivative Accounting” in Item 8 of our 2004 Form 10-K for a discussion of our credit valuation adjustment policy. See Note 10 for further discussion of credit risk.

ARIZONA PUBLIC SERVICE COMPANY – RESULTS OF OPERATIONS

General

     Throughout the following explanations of our results of operations, we refer to “gross margin.” Gross margin refers to electric operating revenues less purchased power and fuel costs. Gross margin is a “non-GAAP financial measure,” as defined in accordance with SEC rules. Exhibit 99.4 reconciles this non-GAAP financial measure to operating income, which is the most directly comparable financial measure calculated and presented in accordance with GAAP. We view gross margin as an important performance measure of the core profitability of our operations. This measure is a key component of our internal financial reporting and is used by our management in analyzing our business. We believe that investors benefit from having access to the same financial

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measures that our management uses. In addition, we have reclassified certain prior-period amounts to conform to our current-period presentation.

Deferred Purchased Power and Fuel Costs

     APS’ retail rate case settlement became effective April 1, 2005. As part of the settlement, the ACC approved a 4.2% annual retail rate increase and a PSA that provides mechanisms for adjusting rates to reflect variations in fuel and purchased power costs. In accordance with the PSA, APS defers for future rate recovery 90% of the difference between actual purchased power and fuel costs and the amount for such costs currently included in base rates. As of June 30, 2005, APS had deferred $34 million of pretax purchased power and fuel costs.

Operating Results – Three-month period ended June 30, 2005 compared with three-month period ended June 30, 2004

     APS’ net income for the three months ended June 30, 2005 was $64 million compared with $55 million for the prior-year period. The $9 million increase in the period-to-period comparison is due to a retail price increase effective April 1, 2005, higher retail sales volumes due to customer growth, the absence of regulatory asset amortization, and lower depreciation due to lower depreciation rates. These positive factors were partially offset by higher purchased power and fuel costs, net of deferred costs, in accordance with the retail rate settlement, higher operations and maintenance costs primarily related to generation, customer service, and benefit costs and lower realized margins on wholesale sales.

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Additional details on the major factors that increased (decreased) net income are contained in the following table (dollars in millions):

	Increase (Decrease)
	Pretax			After Tax
Gross margin:
Retail price increase effective April 1, 2005	$	28		$	17
Higher retail sales volumes due to customer growth, excluding weather effects		13			8
Higher purchased power and fuel costs, net of deferred costs, in accordance with the retail rate settlement		(23	)		(14	)
Higher margins on energy trading primarily due to higher wholesale electricity prices		3			2
Miscellaneous items, net		1			—
Net increase in gross margin		22			13
Higher operation and maintenance expense due to generation, customer service and benefit costs		(11	)		(7	)
Depreciation and amortization decreases primarily due to:
Absence of regulatory asset amortization		10			6
Lower depreciation rates (see note 5) partially offset by higher depreciable assets		2			1
Higher interest expense, net of capitalized financing costs, primarily due to higher debt balances and interest rates		(3	)		(2	)
Miscellaneous items, net		(1	)		(2	)
Net increase in net income	$	19		$	9

Regulated Electricity Revenues

     Regulated electricity revenues were $58 million higher for the three months ended June 30, 2005 compared with the prior-year period primarily as a result of:

• a $28 million increase in retail revenues due to a price increase effective April 1, 2005;

• an $18 million increase in retail revenues related to customer growth, excluding weather effects; and

• a $12 million increase in Off-System Sales primarily due to sales previously reported in marketing and trading now classified as sales in regulated electricity in accordance with the retail rate settlement.

Marketing and Trading Revenues

     Marketing and trading revenues were $39 million lower for the three months ended June 30, 2005 compared with the prior-year period primarily as a result of:

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• a $25 million decrease in revenues from Off-System Sales primarily due to lower sales volumes and sales previously reported in marketing and trading now classified as sales in the regulated electricity in accordance with the retail rate settlement;

• a $15 million decrease in energy trading revenues on realized sales of electricity primarily due to lower delivered electricity prices and lower sales volumes; and

• a $1 million increase on future mark-to-market gains due to higher price volatility.

Operating Results – Six-month period ended June 30, 2005 compared with six-month period ended June 30, 2004

     APS’ net income for the six months ended June 30, 2005 was $91 million compared with $89 million for the prior-year period. The $2 million increase in the period-to-period comparison is due to a retail price increase effective April 1, 2005, higher retail sales volumes due to customer growth, the absence of regulatory asset amortization, and lower depreciation due to lower depreciation rates. These positive factors were partially offset by higher purchased power and fuel costs, net of deferred costs, in accordance with the retail rate settlement, higher operations and maintenance costs primarily related to generation, customer service, and benefit costs, lower realized margins on wholesale sales, and higher property taxes due to increased plant in service.

Additional details on the major factors that increased (decreased) net income are contained in the following table (dollars in millions):

	Increase (Decrease)
	Pretax			After Tax
Gross margin:
Retail price increase effective April 1, 2005	$	28		$	17
Higher retail sales volumes due to customer growth, excluding weather effects		20			12
Higher purchased power and fuel costs, net of deferred costs, in accordance with the retail rate settlement		(24	)		(15	)
Higher margins on energy trading primarily due to lower wholesale electricity prices		5			3
Miscellaneous items, net		(2	)		(1	)
Net increase in gross margin		27			16
Operations and maintenance increases primarily due to:
Generation costs, including planned maintenance		(9	)		(5	)
Customer service costs, including planned maintenance		(10	)		(6	)
Benefit costs		(7	)		(4	)
Miscellaneous items, net		(2	)		(2	)
Depreciation and amortization decreases primarily due to:
Absence of regulatory asset amortization		19			11
Higher depreciable assets partially offset by lower depreciation rates (see Note 5)		(1	)		—
Higher property taxes due to increased plant in service		(5	)		(3	)
Miscellaneous items, net		(3	)		(5	)
Net increase in net income	$	9		$	2

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     Regulated Electricity Revenues

     Regulated electricity revenues were $56 million higher for the six months ended June 30, 2005 compared with the prior-year period primarily as a result of:

• a $28 million increase in retail revenues related to customer growth, excluding weather effects;

• a $28 million increase in retail revenues due to a price increase effective April 1, 2005;

• a $12 million increase in Off-System Sales due to increased volumes for plants dedicated to APS customers and sales previously reported in marketing and trading now classified as sales in regulated electricity in accordance with the retail rate settlement;

• a $9 million decrease in retail revenues related to milder weather; and

• a $3 million decrease due to miscellaneous factors.

     Marketing and Trading Revenues

     Marketing and trading revenues were $37 million lower for the six months ended June 30, 2005 compared with the prior-year period primarily as a result of:

• an $18 million decrease in revenues from Off-System Sales primarily due to lower sales volumes, prices, and sales previously reported in marketing and trading now classified as sales in regulated electricity in accordance with the retail rate settlement;

• a $17 million decrease in energy trading revenues on realized sales of electricity primarily due to lower delivered electricity prices and lower volumes; and

• a $2 million decrease due to miscellaneous factors.

ARIZONA PUBLIC SERVICE COMPANY – LIQUIDITY AND CAPITAL RESOURCES

     Contractual Obligations

     APS’ future contractual obligations have not changed materially from the amounts disclosed in Part II, Item 7 of the 2004 Form 10-K with the exception of our aggregate:

• purchased power and fuel commitments, which increased from approximately $948 million at December 31, 2004 to $1.1 billion at June 30, 2005 primarily due to increased commitments for the years 2005 through 2007; and

• nuclear decommissioning funding requirements which increased from approximately $201 million at December 31, 2004 to $386 million at June 30, 2005 for the years 2005 and thereafter.

     See Note S-1 for a list of APS’ payments due on total long-term debt and capitalized lease requirements.

RISK FACTORS

     Exhibit 99.1 and Exhibit 99.2, which are hereby incorporated by reference, contain a discussion of risk factors affecting Pinnacle West and APS, respectively.

FORWARD-LOOKING STATEMENTS

     This document contains forward-looking statements based on current expectations, and neither Pinnacle West nor APS assumes any obligation to update these statements or make any further statements on any of these issues, except as required by applicable law. These forward-looking statements are often identified by words such as “estimate,” “predict,” “hope,” “may,” “believe,” “anticipate,” “plan,” “expect,” “require,” “intend,” “assume” and similar words. Because actual results may differ materially from expectations, we caution readers not to place undue reliance on these statements. A number of factors could cause future results to differ materially from historical results, or

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from results or outcomes currently expected or sought by Pinnacle West or APS. In addition to the “Risk Factors” described in Exhibits 99.1 and 99.2 to this report, these factors include, but are not limited to:

• state and federal regulatory and legislative decisions and actions, including by the ACC and the FERC;

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

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

• market prices for electricity and natural gas;

• power plant performance and outages;

• transmission outages and constraints;

• weather variations affecting local and regional customer energy usage;

• customer growth and energy usage;

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

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

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

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

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

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

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

• technological developments in the electric industry;

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

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

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     See “Pinnacle West Consolidated – Factors Affecting Our Financial Outlook” in Item 2 above for a discussion of quantitative and qualitative disclosures about market risks.

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Item 4. CONTROLS AND PROCEDURES

     (a) Disclosure Controls and Procedures

     The term “disclosure controls and procedures” means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to a company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

     Pinnacle West’s management, with the participation of Pinnacle West’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of Pinnacle West’s disclosure controls and procedures as of June 30, 2005. Based on that evaluation, Pinnacle West’s Chief Executive Officer and Chief Financial Officer have concluded that, as of that date, Pinnacle West’s disclosure controls and procedures were effective.

     APS’ management, with the participation of APS’ Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of APS’ disclosure controls and procedures as of June 30, 2005. Based on that evaluation, APS’ Chief Executive Officer and Chief Financial Officer have concluded that, as of that date, APS’ disclosure controls and procedures were effective.

     (b) Changes In Internal Control Over Financial Reporting

     The term “internal control over financial reporting” (defined in SEC Rule 13a-15(f)) refers to the process of a company that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

     No change in Pinnacle West’s or APS’ internal control over financial reporting occurred during the fiscal quarter ended June 30, 2005 that materially affected, or is reasonably likely to materially affect, Pinnacle West’s or APS’ internal control over financial reporting.

66

Part II — OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

     See Note 12 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report in regard to pending or threatened litigation or other disputes.

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

Directors

     At our Annual Meeting of Shareholders held on May 18, 2005, the following persons were elected as directors:

Class II (Term to expire at					Abstentions and
2008 Annual Meeting)	Votes For		Votes Against		Broker Non-Votes
Edward N. Basha, Jr.		77,333,734		1,359,058	N/A
Michael L. Gallagher		70,656,769		8,036,023	N/A
Bruce J. Nordstrom		77,456,120		1,236,672	N/A
William J. Post		76,929,393		1,763,399	N/A

Continuing Directors

     The terms of Jack E. Davis, Pamela Grant, Martha O. Hesse, and William S. Jamieson, Jr. will expire in 2006. The terms of Roy A. Herberger, Jr., Humberto S. Lopez, Kathryn L. Munro, and William L. Stewart will expire in 2007.

Independent Auditors

     At the same meeting, a proposal for the ratification of the selection of Deloitte & Touche LLP as independent Auditors of the Company was submitted to the shareholders, and the voting was as follows:

Proposal for the ratification					Abstentions and
of Deloitte & Touche LLP	Votes For		Votes Against		Broker Non-Votes
		75,880,147		2,031,585	781,060

Item 5. OTHER INFORMATION

Construction and Financing Programs

     See “Liquidity and Capital Resources” in Part I, Item 2 of this report for a discussion of construction and financing programs of the Company and its subsidiaries.

67

Regulatory Matters

     See Note 5 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for a discussion of regulatory developments.

     In connection with the FERC proceeding under which APS received approval to acquire the Sundance Plant, APS committed to an independent market monitoring plan that provides for an independent expert to monitor APS’ generation dispatch and operation of its transmission system and report to the FERC any potentially anti-competitive conduct. The plan took effect upon closing of the transaction and will continue in effect until the FERC approves a regional market monitoring plan or five years, whichever is earlier.

Environmental Matters

     See “Environmental Matters — Superfund” in Note 12 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for a discussion of a Superfund site.

     Regional Haze Rules

     On June 15, 2005, EPA issued the Clean Air Visibility Rule, which amends the 1999 regional haze rules by providing guidelines, known as the BART guidelines, for states to use in determining which facilities must install controls and the type of controls the facilities must use. See “Environmental Matters — Regional Haze Rules” in Part I, Item 1 of the 2004 Form 10-K. The Company is currently evaluating the potential impact of this rule.

     On August 1, 2005, the EPA proposed a rule to, among other things, revise a previously-adopted rule that would have allowed nine western states and tribes to follow a regional haze implementation plan for “Class I Areas” different from that provided for in the Clean Air Visibility Rule. See “EPA Environmental Regulation - Regional Haze Rules” in Part I, Item 1 of the 2004 Form 10-K for additional information about the previously-adopted rule. The Company is currently evaluating the impact of the proposed rule.

     Navajo Nation Environmental Issues

     On October 16, 1995, the Four Corners participants and the Navajo Generating Station participants each filed a lawsuit in the District Court of the Navajo Nation, Window Rock District, challenging the applicability of the Navajo Nation Air Pollution Prevention and Control Act, the Navajo Nation Safe Drinking Water Act and the Navajo Nation Pesticide Act (collectively, the Navajo Acts). See “Environmental Matters — Navajo Nation Environmental Issues”, in Part I, Item 1 of the 2004 Form 10-K. On May 18, 2005, APS, Salt River Project and the Navajo Nation executed a Voluntary Compliance Agreement (“VCA”) to resolve their disputes regarding the Navajo Nation Air Pollution Prevention and Control Act for the Four Corners Power Plant and the Navajo Generating Station. The fundamental premise of the VCA is that the Navajo Nation EPA may regulate air issues for the Four Corners Power Plant only because the participants have agreed to submit to such regulation for the term of the agreement and under certain circumstances. If EPA approves the Navajo Nation’s air programs consistent with the VCA, APS would dismiss the pending litigation in the Navajo Nation Supreme Court and would dismiss the pending litigation in the Navajo Nation District Court to the extent the claims relate to the Clean Air Act. The Agreement does not address or resolve any dispute relating to the other Navajo Acts.

     The Four Corners region, in which the Four Corners Plant is located, has been experiencing drought conditions. See “Water Supply” in Part I, Item 1 of the 2004 Form 10-K. APS has signed an agreement with area stakeholders to minimize the effect of the drought on the operations of the plant in 2005. The effect of the drought cannot be fully assessed at this time, and APS cannot predict the ultimate outcome, if any, of the drought or whether the drought will adversely affect the amount of power available, or the price thereof, from Four Corners.

     Maricopa County Environmental Issues

     During the period from November 2004 through March 2005, the Maricopa County Air Quality Department (“MCAQD”) issued a series of Notices of Violation (“NOVs”) to APS’ West Phoenix Power Plant that generally allege that the plant failed to comply with applicable permit requirements. APS is currently engaged in discussions with MCAQD concerning the NOVs. We do not expect the resolution of these matters to have a material adverse effect on our financial position, results of operations, or cash flows.

68

Regional Transmission Organizations (“RTO”)

     On October 16, 2001, APS and other owners of electric transmission lines in the southwestern U.S. filed with the FERC a request for a declaratory order confirming that their proposal to form WestConnect RTO, LLC would satisfy the FERC’s requirements for the formation of an RTO. See “Regulation and Competition — Wholesale — Regional Transmission Organizations” in Part I, Item 1 of the 2004 Form 10-K. On July 1, 2005, FERC issued an order in response to a request from Bonneville Power Administration and utilities in the Northwest, regarding Grid West, a proposed regional organization for the Northwest region. In that order, FERC agreed that a regional organization for the Northwest region would not need to satisfy all of the RTO requirements established in the December 1999 order. APS is currently evaluating the impact of this order on its RTO initiative.

Federal Energy Legislation

     On August 8, 2005, the President signed the Energy Policy Act of 2005 into law. Due to its recent enactment and because many provisions require implementing regulations, the Company is unable to predict the impact of the Act on its operations.

Requests for Proposals

     APS continually assesses its need for additional capacity resources to assure system reliability. Under the terms of the 2004 Settlement Agreement, APS committed to seek proposals from the competitive wholesale market for filling its future resource needs. The current reliability RFP identifies the amount of capacity and energy needed to reliably meet expected customer demands and sought proposals for at least 1,000 MW of new generating capacity for 2007 and beyond. Bid responses were submitted by July 18, 2005. Short-listed bidders will be notified by August 30, 2005, and winning bidders will be notified in mid-October.

     APS also has in process a renewable RFP seeking at least 100 MW of renewable capacity with a capability of producing at least 250,000 MWH annually. In accordance with the terms of the 2004 Settlement Agreement, power must be deliverable to the APS transmission system and its pricing must not exceed 125% of conventional resource alternatives. A final decision, which is expected in mid-September 2005, is subject to ACC approval if an out-of-state provider is selected.

69

Item 6. EXHIBITS

     (a) Exhibits

Exhibit No.	Registrant(s)	Description
12.1	Pinnacle West	Ratio of Earnings to Fixed Charges
12.2	APS	Ratio of Earnings to Fixed Charges
31.1	Pinnacle West	Certificate of William J. Post, Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
31.2	Pinnacle West	Certificate of Donald E. Brandt, Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
31.3	APS	Certificate of Jack E. Davis, Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
31.4	APS	Certificate of Donald E. Brandt, Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
32.1	Pinnacle West	Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1850, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	APS	Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1850, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1	Pinnacle West	Pinnacle West Risk Factors
99.2	APS	APS Risk Factors
99.3	Pinnacle West	Reconciliation of Operating Income to Gross Margin

70

Exhibit No.	Registrant(s)	Description
99.4	APS	Reconciliation of Operating Income to Gross Margin
99.5	Pinnacle West	Purchase Agreement by and among Pinnacle West Energy Corporation and GenWest, L.L.C. and Nevada Power Company, dated June 21, 2005
99.6	APS	Amended and Restated Reimbursement Agreement among Arizona Public Service Company, The Banks party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent and Issuing Bank, and Barclays Bank PLC, as Syndication Agent, dated as of May 19, 2005.

     In addition, the Company hereby incorporates the following Exhibits pursuant to Exchange Act Rule 12b-32 and Regulation §229.10(d) by reference to the filings set forth below:

Exhibit				Date
No.	Registrant(s)	Description	Previously Filed as Exhibit a	Effective
3.1	Pinnacle West	Articles of Incorporation, restated as of July 29, 1988	19.1 to Pinnacle West’s September 1988 Form 10-Q Report, File No. 1-8962	11-14-88
3.2	Pinnacle West	Pinnacle West Capital Corporation Bylaws, amended as of June 23, 2004	3.1 to Pinnacle West’s June 30, 2004 Form 10-Q Report, File No. 1-8962	8-9-04
3.3	APS	Articles of Incorporation, restated as of May 25, 1988	4.2 to APS’ Form S-3 Registration Nos. 33-33910 and 33-55248 by means of September 24, 1993 Form 8-K Report, File No. 1-4473	9-29-93
3.4	APS	Arizona Public Service Company Bylaws, amended as of June 23, 2004	3.1 to APS’ June 30, 2004 Form 10-Q Report, File No. 1-4473	8-9-04

^a Reports filed under File Nos. 1-4473 and 1-8962 were filed in the office of the Securities and Exchange Commission located in Washington, D.C.

71

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PINNACLE WEST CAPITAL CORPORATION (Registrant)
Dated: August 9, 2005	By:	/s/ Donald E. Brandt
		Donald E. Brandt
		Executive Vice President and Chief Financial Officer (Principal Financial Officer and Officer Duly Authorized to sign this Report)
	ARIZONA PUBLIC SERVICE COMPANY (Registrant)
Dated: August 9, 2005	By:	/s/ Donald E. Brandt
		Donald E. Brandt
		Executive Vice President and Chief Financial Officer (Principal Financial Officer and Officer Duly Authorized to sign this Report)

72

EXHIBIT INDEX

Exhibit No.	Registrant(s)	Description
12.1	Pinnacle West	Ratio of Earnings to Fixed Charges
12.2	APS	Ratio of Earnings to Fixed Charges
31.1	Pinnacle West	Certificate of William J. Post, Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
31.2	Pinnacle West	Certificate of Donald E. Brandt, Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
31.3	APS	Certificate of Jack E. Davis, Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
31.4	APS	Certificate of Donald E. Brandt, Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
32.1	Pinnacle West	Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1850, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	APS	Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1850, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1	Pinnacle West	Pinnacle West Risk Factors
99.2	APS	APS Risk Factors
99.3	Pinnacle West	Reconciliation of Operating Income to Gross Margin

Exhibit No.	Registrant(s)	Description
99.4	APS	Reconciliation of Operating Income to Gross Margin
99.5	Pinnacle West	Purchase Agreement by and among Pinnacle West Energy Corporation and GenWest, L.L.C. and Nevada Power Company, dated June 21, 2005
99.6	APS	Amended and Restated Reimbursement Agreement among Arizona Public Service Company, The Banks party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent and Issuing Bank, and Barclays Bank PLC, as Syndication Agent, dated as of May 19, 2005.

     In addition, the Company hereby incorporates the following Exhibits pursuant to Exchange Act Rule 12b-32 and Regulation §229.10(d) by reference to the filings set forth below:

Exhibit				Date
No.	Registrant(s)	Description	Previously Filed as Exhibit a	Effective
3.1	Pinnacle West	Articles of Incorporation, restated as of July 29, 1988	19.1 to Pinnacle West’s September 1988 Form 10-Q Report, File No. 1-8962	11-14-88
3.2	Pinnacle West	Pinnacle West Capital Corporation Bylaws, amended as of June 23, 2004	3.1 to Pinnacle West’s June 30, 2004 Form 10-Q Report, File No. 1-8962	8-9-04
3.3	APS	Articles of Incorporation, restated as of May 25, 1988	4.2 to APS’ Form S-3 Registration Nos. 33-33910 and 33-55248 by means of September 24, 1993 Form 8-K Report, File No. 1-4473	9-29-93
3.4	APS	Arizona Public Service Company Bylaws, amended as of June 23, 2004	3.1 to APS’ June 30, 2004 Form 10-Q Report, File No. 1-4473	8-9-04

^a Reports filed under File Nos. 1-4473 and 1-8962 were filed in the office of the Securities and Exchange Commission located in Washington, D.C.

EX-12.1

Exhibit 12.1

PINNACLE WEST CAPITAL CORPORATION
COMPUTATION OF EARNINGS TO FIXED CHARGES
($000’s)

	Six Months
	Ended		Twelve Months Ended
	June 30,		December 31,
	2005		2004		2003		2002		2001		2000
Earnings:
Income From Continuing Operations	$	114,897	$	246,591	$	225,384	$	236,563	$	327,367	$	302,332
Income Taxes		73,685		136,142		102,202		152,145		213,535		194,200
Fixed Charges		111,010		214,803		225,041		219,178		211,958		202,804
Total Earnings	$	299,592	$	597,536	$	552,627	$	607,886	$	752,860	$	699,336
Fixed Charges:
Interest Expense	$	96,042	$	183,527	$	193,973	$	187,039	$	175,822	$	166,447
Estimated Interest Portion of Annual Rents		14,968		31,276		31,068		32,139		36,136		36,357
Total Fixed Charges	$	111,010	$	214,803	$	225,041	$	219,178	$	211,958	$	202,804
Ratio of Earnings to Fixed Charges (rounded down)		2.69		2.78		2.45		2.77		3.55		3.44

EX-12.2

Exhibit 12.2

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

	Six Months
	Ended		Twelve Months Ended
	June 30,		December 31,
	2005		2004		2003		2002		2001		2000
Earnings:
Income From Continuing Operations	$	91,043	$	199,627	$	180,937	$	199,343	$	280,688	$	306,594
Income Taxes		60,538		120,030		86,854		126,805		183,136		195,665
Fixed Charges		91,171		181,372		181,793		168,985		166,939		179,381
Total Earnings	$	242,752	$	501,029	$	449,584	$	495,133	$	630,763	$	681,640
Fixed Charges:
Interest Charges	$	74,375	$	146,983	$	147,610	$	133,878	$	130,525	$	141,886
Amortization of Debt Discount		2,192		4,854		3,337		2,888		2,650		2,105
Estimated Interest Portion of Annual Rents		14,604		29,535		30,846		32,219		33,764		35,390
Total Fixed Charges	$	91,171	$	181,372	$	181,793	$	168,985	$	166,939	$	179,381
Ratio of Earnings to Fixed Charges (rounded down)		2.66		2.76		2.47		2.93		3.77		3.79

EX-31.1

Exhibit 31.1

CERTIFICATION

I, William J. Post, certify that:

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

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

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

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

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

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

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

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

     Date: August 9, 2005.

/s/ William J. Post

William J. Post

Chairman and Chief Executive Officer

  EX-31.2 5 p71004exv31w2.htm EXHIBIT 31.2

Exhibit 31.2

CERTIFICATION

I, Donald E. Brandt, certify that:

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

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

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

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

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

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

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

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

Date: August 9, 2005.

/s/ Donald E. Brandt

Donald E. Brandt

Executive Vice President &

Chief Financial Officer

  EX-31.3 6 p71004exv31w3.htm EXHIBIT 31.3

Exhibit 31.3

CERTIFICATION

I, Jack E. Davis, certify that:

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

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

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

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

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

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

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

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

Date: August 9, 2005.

/s/ Jack E. Davis

Jack E. Davis

President and Chief Executive Officer

  EX-31.4 7 p71004exv31w4.htm EXHIBIT 31.4

Exhibit 31.4

CERTIFICATION

I, Donald E. Brandt, certify that:

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

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

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

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

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

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

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

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

Date: August 9, 2005.

/s/ Donald E. Brandt

Donald E. Brandt

Executive Vice President &

Chief Financial Officer

  EX-32.1 8 p71004exv32w1.htm EXHIBIT 32.1

EXHIBIT 32.1

CERTIFICATION
OF
CHIEF EXECUTIVE OFFICER
AND
CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     I, William J. Post, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Pinnacle West Capital Corporation for the fiscal quarter ended June 30, 2005, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Pinnacle West Capital Corporation.

Date: August 9, 2005.

/s/  William J. Post

William J. Post 

Chairman and Chief Executive Officer 

     I, Donald E. Brandt, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Pinnacle West Capital Corporation for the fiscal quarter ended June 30, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Pinnacle West Capital Corporation.

Date: August 9, 2005.

/s/   Donald E. Brandt

Donald E. Brandt 

Executive Vice President and
Chief Financial Officer 

EX-31.2

exv31w2

EX-31.3

exv31w3

EX-31.4

exv31w4

EX-32.1

exv32w1

EX-32.2

EXHIBIT 32.2

CERTIFICATION
OF
CHIEF EXECUTIVE OFFICER
AND
CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     I, Jack E. Davis, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Arizona Public Service Company for the fiscal quarter ended June 30, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Arizona Public Service Company.

Date: August 9, 2005.

/s/   Jack E. Davis

Jack E. Davis 

President and Chief Executive Officer 

     I, Donald E. Brandt, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Arizona Public Service Company for the fiscal quarter ended June 30, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Arizona Public Service Company.

Date: August 9, 2005.

/s/   Donald E. Brandt

Donald E. Brandt 

Executive Vice President and
Chief Financial Officer 

EX-99.1

EXHIBIT 99.1

PINNACLE WEST RISK FACTORS

(Report on Form 10-Q for the fiscal quarter ended June 30, 2005)

     Set forth below and in other documents we file with the Securities and Exchange Commission are risks and uncertainties that could affect our financial results.

     Deregulation or restructuring of the electric industry may result in increased competition, which could have a significant adverse impact on our business and our financial results.

     In 1999, the Arizona Corporation Commission (the “ACC”) approved rules for the introduction of retail electric competition in Arizona. Retail competition could have a significant adverse financial impact on us due to an impairment of assets, a loss of retail customers, lower profit margins or increased costs of capital. Although some very limited retail competition existed in the service area of Arizona Public Service Company (“APS”) in 1999 and 2000, there are currently no active retail competitors offering unbundled energy or other utility services to APS’ customers. As a result, we cannot predict when, and the extent to which, additional competitors will re-enter APS’ service territory.

     As a result of changes in federal law and regulatory policy, competition in the wholesale electricity market has greatly increased due to a greater participation by traditional electricity suppliers, non-utility generators, independent power producers, and wholesale power marketers and brokers. This increased competition could affect our load forecasts, plans for power supply and wholesale energy sales and related revenues. As a result of the changing regulatory environment and the relatively low barriers to entry, we expect wholesale competition to increase. As competition continues to increase, our financial position and results of operations could be adversely affected.

     We are subject to complex government regulation that may have a negative impact on our business and our results of operations.

     We are, directly and through our subsidiaries, subject to governmental regulation that may have a negative impact on our business and results of operations. We are a “holding company” within the meaning of the Public Utility Holding Company Act of 1935 (“PUHCA”); however, we are exempt from the provisions of PUHCA (except Section 9(a)(2) thereof) by virtue of our filing of an annual exemption statement with the Securities and Exchange Commission (the “SEC”).

     APS is subject to comprehensive regulation by several federal, state and local regulatory agencies, which significantly influence its operating environment and may affect its ability to recover costs from utility customers. APS is required to have numerous permits, approvals and certificates from the agencies that regulate APS’ business. The FERC, the Nuclear Regulatory Commission (“NRC”), the Environmental Protection Agency (“EPA”), and the ACC regulate many aspects of our utility operations, including siting and construction of facilities, customer service and the rates that APS can charge customers. We believe the necessary permits, approvals and certificates have been obtained for APS’ existing operations. However, changes in regulations or the imposition of additional regulations could have an adverse impact on our results of operations. We are also unable to predict the impact on our business and operating results from pending or future regulatory activities of any of these agencies.

     We are subject to numerous environmental laws and regulations that may increase our cost of operations, impact our business plans, or expose us to environmental liabilities.

     We are subject to numerous environmental laws and regulations affecting many aspects of our present and future operations, including air emissions, water quality, wastewater discharges, solid waste, and hazardous waste. These laws and regulations can result in increased capital, operating, and other costs, particularly with regard to enforcement efforts focused on power plant emissions obligations. These laws and regulations generally require us to obtain and comply with a wide variety of environmental licenses, permits, inspections and other approvals. Both public officials and private individuals may seek to enforce applicable environmental laws and regulations. We cannot predict the outcome (financial or operational) of any related litigation that may arise.

     In addition, we may be a responsible party for environmental clean up at sites identified by a regulatory body. We cannot predict with certainty the amount and timing of all future expenditures related to environmental matters

because of the difficulty of estimating clean-up costs. There is also uncertainty in quantifying liabilities under environmental laws that impose joint and several liability on all potentially responsible parties.

     We cannot be sure that existing environmental regulations will not be revised or that new regulations seeking to protect the environment will not be adopted or become applicable to us. Revised or additional regulations that result in increased compliance costs or additional operating restrictions, particularly if those costs are not fully recoverable from APS’ customers, could have a material adverse effect on our results of operations.

     There are inherent risks in the operation of nuclear facilities, such as environmental, health and financial risks and the risk of terrorist attack.

     Through APS, we have an ownership interest in and operate, on behalf of a group of owners, the Palo Verde Nuclear Generating Station (“Palo Verde”), which is the largest nuclear electric generating facility in the United States. Palo Verde is subject to environmental, health and financial risks such as the ability to dispose of spent nuclear fuel, the ability to maintain adequate reserves for decommissioning, potential liabilities arising out of the operation of these facilities, and the costs of securing the facilities against possible terrorist attacks and unscheduled outages due to equipment and other problems. We maintain nuclear decommissioning trust funds and external insurance coverage to minimize our financial exposure to some of these risks; however, it is possible that damages could exceed the amount of insurance coverage.

     The NRC has broad authority under federal law to impose licensing and safety-related requirements for the operation of nuclear generation facilities. In the event of noncompliance, the NRC has the authority to impose fines or shut down a unit, or both, depending upon its assessment of the severity of the situation, until compliance is achieved. In addition, although we have no reason to anticipate a serious nuclear incident at Palo Verde, if an incident did occur, it could materially and adversely affect our results of operations or financial condition. A major incident at a nuclear facility anywhere in the world could cause the NRC to limit or prohibit the operation or licensing of any domestic nuclear unit.

     The uncertain outcome regarding the creation of regional transmission organizations, or RTOs, may materially impact our operations, cash flows or financial position.

     In a December 1999 order, the FERC established characteristics and functions that must be met by utilities in forming and operating RTOs. The characteristics for an acceptable RTO include independence from market participants, operational control over a region large enough to support efficient and nondiscriminatory markets and exclusive authority to maintain short-term reliability. Additionally, in a pending notice of proposed rulemaking, the FERC is considering implementing a standard market design for wholesale markets. On October 16, 2001, APS and other owners of electric transmission lines in the southwestern U.S. filed with the FERC a request for a declaratory order confirming that their proposal to form WestConnect RTO, LLC would satisfy the FERC’s requirements for the formation of an RTO. On October 10, 2002, the FERC issued an order finding that the WestConnect proposal, if modified to address specified issues, could meet the FERC’s RTO requirements and provide the basic framework for a standard market design for the southwestern U.S. Since that time, APS has been evaluating a phased approach to RTO implementation in the desert Southwest. APS is currently participating with other entities in the southwestern U.S. in a cost/benefit analysis of implementing the WestConnect RTO, the results of which are expected to be completed in 2005.

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

     Recent events in the energy markets that are beyond our control may have negative impacts on our business.

     As a result of the energy crisis in California during the summer of 2001, the recent volatility of natural gas prices in North America, the filing of bankruptcy by the Enron Corporation, and investigations by governmental authorities into energy trading activities, companies generally in the regulated and unregulated utility businesses have been under an increased amount of public and regulatory scrutiny. The capital markets and rating agencies also have increased their level of scrutiny. We believe that we are in material compliance with all applicable laws, but it

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is difficult or impossible to predict or control what effect these or related issues may have on our business or our access to the capital markets.

Our results of operations can be adversely affected by milder weather.

     Weather conditions directly influence the demand for electricity and affect the price of energy commodities. Electric power demand is generally a seasonal business. In Arizona, demand for power peaks during the hot summer months, with market prices also peaking at that time. As a result, our overall operating results fluctuate substantially on a seasonal basis. In addition, we have historically sold less power, and consequently earned less income, when weather conditions are milder. As a result, unusually mild weather could diminish our results of operations and harm our financial condition.

Our cash flow largely depends on the performance of our subsidiaries.

     We conduct our operations primarily through subsidiaries. Substantially all of our consolidated assets are held by such subsidiaries. Accordingly, our cash flow is dependent upon the earnings and cash flows of these subsidiaries and their distributions to us. The subsidiaries are separate and distinct legal entities and have no obligation to make distributions to us.

     The debt agreements of some of our subsidiaries may restrict their ability to pay dividends, make distributions or otherwise transfer funds to us. An ACC financing order requires APS to indefinitely maintain a common equity ratio of at least 40% and does not allow APS to pay common dividends if the payment would reduce its common equity below that threshold. As defined in the ACC financing order approving the arrangement, common equity ratio is common equity divided by common equity plus long-term debt, including current maturities of long-term debt. At June 30, 2005, APS’ common equity ratio, as defined, was approximately 48%.

     Our debt securities are structurally subordinated to the debt securities and other obligations of our subsidiaries.

     Because we are structured as a holding company, all existing and future debt and other liabilities of our subsidiaries will be effectively senior in right of payment to our debt securities. None of the indentures under which we or our subsidiaries may issue debt securities limits our ability or the ability of our subsidiaries to incur additional debt in the future. The assets and cash flows of our subsidiaries will be available, in the first instance, to service their own debt and other obligations. Our ability to have the benefit of their assets and cash flows, particularly in the case of any insolvency or financial distress affecting our subsidiaries, would arise only through our equity ownership interests in our subsidiaries and only after their creditors have been satisfied.

     If we are not able to access capital at competitive rates, our ability to implement our financial strategy will be adversely affected.

     We rely on access to short-term money markets, longer-term capital markets and the bank markets as a significant source of liquidity and for capital requirements not satisfied by the cash flow from our operations. We believe that we will maintain sufficient access to these financial markets based upon current credit ratings. However, certain market disruptions or a downgrade of our credit ratings may increase our cost of borrowing or adversely affect our ability to access one or more financial markets. Such disruptions could include:

• an economic downturn;

• capital market conditions generally;

• the bankruptcy of an unrelated energy company;

• increased market prices for electricity and gas;

• terrorist attacks or threatened attacks on our facilities or those of unrelated energy companies; or

• the overall health of the utility industry.

     Changes in economic conditions could result in higher interest rates, which would increase our interest expense on our debt and reduce funds available to us for our current plans. Additionally, an increase in our leverage could adversely affect us by:

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• increasing the cost of future debt financing;

• increasing our vulnerability to adverse economic and industry conditions;

• requiring us to dedicate a substantial portion of our cash flow from operations to payments on our debt, which would reduce funds available to us for operations, future business opportunities or other purposes; and

• placing us at a competitive disadvantage compared to our competitors that have less debt.

     A significant reduction in our credit ratings could materially and adversely affect our business, financial condition and results of operations.

     We cannot be sure that any of our current ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances in the future so warrant. Any downgrade could increase our borrowing costs, which would diminish our financial results. We would likely be required to pay a higher interest rate in future financings, and our potential pool of investors and funding sources could decrease. In addition, borrowing costs under certain of our existing credit facilities depend on our credit ratings. A downgrade could also require us to provide additional support in the form of letters of credit or cash or other collateral to various counterparties. If our short-term ratings were to be lowered, it could limit our access to the commercial paper market. We note that the ratings from rating agencies are not recommendations to buy, sell or hold our securities and that each rating should be evaluated independently of any other rating.

     The use of derivative contracts in the normal course of our business and changing interest rates and market conditions could result in financial losses that negatively impact our results of operations.

     Our operations include managing market risks related to commodity prices and, subject to specified risk parameters, engaging in marketing and trading activities intended to profit from market price movements. We are exposed to the impact of market fluctuations in the price and transportation costs of electricity, natural gas, coal, and emissions allowances. We have established procedures to manage risks associated with these market fluctuations by utilizing various commodity derivatives, including exchange-traded futures and options and over-the-counter forwards, options, and swaps. As part of our overall risk management program, we enter into derivative transactions to hedge purchases and sales of electricity, fuels, and emissions allowances and credits. The changes in market value of such contracts have a high correlation to price changes in the hedged commodity.

     We are exposed to losses in the event of nonperformance or nonpayment by counterparties. We use a risk management process to assess and monitor the financial exposure of all counterparties. Despite the fact that the majority of trading counterparties are rated as investment grade by the rating agencies, there is still a possibility that one or more of these companies could default, resulting in a material adverse impact on our earnings for a given period.

     Changing interest rates will affect interest paid on variable-rate debt and interest earned by our pension plan and nuclear decommissioning trust funds. Our policy is to manage interest rates through the use of a combination of fixed-rate and floating-rate debt. The pension plan is also impacted by the discount rate, which is the interest rate used to discount future pension obligations. Continuation of recent decreases in the discount rate would result in increases in pension costs, cash contributions, and charges to other comprehensive income. The pension plan and nuclear decommissioning trust funds also have risks associated with changing market values of equity investments. A significant portion of the pension costs and all of the nuclear decommissioning costs are recovered in regulated electricity prices.

Actual results could differ from estimates used to prepare our financial statements.

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

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• Regulatory Accounting — Regulatory accounting allows for the actions of regulators, such as the ACC and the FERC, to be reflected in our financial statements. Their actions may cause us to capitalize costs that would otherwise be included as an expense in the current period by unregulated companies. If future recovery of costs ceases to be probable, the assets would be written off as a charge in current period earnings. We had approximately $174 million of regulatory assets on our Condensed Consolidated Balance Sheets at June 30, 2005.

• Pensions and Other Postretirement Benefit Accounting — Changes in our actuarial assumptions used in calculating our pension and other postretirement benefit liability and expense can have a significant impact on our earnings and financial position. The most relevant actuarial assumptions are the discount rate used to measure our liability and net periodic cost, the expected long-term rate of return on plan assets used to estimate earnings on invested funds over the long-term, and the assumed healthcare cost trend rates. We review these assumptions on an annual basis and adjust them as necessary.

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

     The market price of our common stock may be volatile.

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

• variations in our quarterly operating results;

• operating results that vary from the expectations of management, securities analysts and investors;

• changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;

• developments generally affecting industries in which we operate, particularly the energy distribution and energy generation industries;

• announcements by us or our competitors of significant contracts, acquisitions, joint marketing relationships, joint ventures or capital commitments;

• announcements by third parties of significant claims or proceedings against us;

• favorable or adverse regulatory developments;

• our dividend policy;

• future sales of our equity or equity-linked securities; and

• general domestic and international economic conditions.

     In addition, the stock market in general has experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the market price of our common stock.

     Our common stock price could be affected because a substantial number of our shares could be available for sale in the future.

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     Sales in the public market of a substantial number of shares of common stock could depress the market price of the common stock and could impair our ability to raise capital through the sale of additional equity securities. Because of the number of shares of our common stock that we are authorized to issue under our articles of incorporation, a substantial number of shares of our common stock could be available for future sale.

     We may enter into credit and other agreements from time to time that restrict our ability to pay dividends.

     Payment of dividends on our common stock may be restricted by credit and other agreements entered into by us from time to time. At June 30, 2005, there were no material restrictions on our ability to pay dividends under any such agreement.

     Certain provisions of our articles of incorporation and bylaws and of Arizona law make it more difficult for shareholders to change the composition of our board and may discourage takeover attempts that could be beneficial to us and our shareholders.

     Certain provisions of our articles of incorporation and bylaws and of Arizona law make it more difficult for shareholders to change the composition of our board and may discourage unsolicited attempts to acquire us, which could preclude our shareholders from receiving a change of control premium. These provisions include the following:

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

• anti-greenmail provisions of Arizona law and our bylaws that prohibit us from purchasing shares of our voting stock from beneficial owners of more than 5% of our outstanding shares unless specified conditions are satisfied;

• provisions of our bylaws and Arizona law that provide that shareholder action may be taken only at an annual or special meeting or by unanimous written consent, and provisions of our bylaws that provide that a special meeting of shareholders may only be called by a majority of our Board of Directors, the Chairman of our Board of Directors, or our President;

• advance notice procedures for nominating candidates to our Board of Directors or presenting matters at shareholder meetings;

• provisions of our articles and bylaws that provide for a staggered Board of Directors;

• provisions of our bylaws that provide that shareholders may only remove a director with or without cause if the votes cast in favor of such removal exceed the votes cast against such removal (with special requirements, based on cumulative voting rights, if less than the entire board is to be removed); and

• the ability of our Board of Directors to issue additional shares of common stock and shares of preferred stock and to determine the price and, with respect to preferred stock, the other terms, including preferences and voting rights, of those shares without shareholder approval.

     In addition, we have adopted a shareholder rights plan that may have the effect of discouraging unsolicited takeover proposals, including takeover proposals that could result in a premium over the market price of our common stock.

     While these provisions have the effect of encouraging persons seeking to acquire control of us to negotiate with our Board of Directors, they could enable the board to hinder or frustrate a transaction that some, or a majority, of our shareholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors.

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EX-99.2

EXHIBIT 99.2

APS RISK FACTORS

(Report on Form 10-Q for the fiscal quarter ended June 30, 2005)

     Set forth below and in other documents we file with the Securities and Exchange Commission are risks and uncertainties that could affect our financial results.

     Deregulation or restructuring of the electric industry may result in increased competition, which could have a significant adverse impact on our business and our financial results.

     In 1999, the Arizona Corporation Commission (the “ACC”) approved rules for the introduction of retail electric competition in Arizona. Retail competition could have a significant adverse financial impact on us due to an impairment of assets, a loss of retail customers, lower profit margins or increased costs of capital. Although some very limited retail competition existed in our service area in 1999 and 2000, there are currently no active retail competitors offering unbundled energy or other utility services to our customers. As a result, we cannot predict when, and the extent to which, additional competitors will re-enter our service territory.

     As a result of changes in federal law and regulatory policy, competition in the wholesale electricity market has greatly increased due to a greater participation by traditional electricity suppliers, non-utility generators, independent power producers, and wholesale power marketers and brokers. This increased competition could affect our load forecasts, plans for power supply and wholesale energy sales and related revenues. As a result of the changing regulatory environment and the relatively low barriers to entry, we expect wholesale competition to increase. As competition continues to increase, our financial position and results of operations could be adversely affected.

     We are subject to complex government regulation that may have a negative impact on our business and our results of operations.

     We are subject to governmental regulation that may have a negative impact on our business and results of operations. We are a “subsidiary company” of a “holding company” within the meaning of the Public Utility Holding Company Act of 1935 (“PUHCA”); however, we are exempt from the provisions of PUHCA (except Section 9(a)(2) thereof) by virtue of the filing of an annual exemption statement with the Securities and Exchange Commission (the “SEC”) by our parent company, Pinnacle West Capital Corporation (“Pinnacle West”).

     We are subject to comprehensive regulation by several federal, state and local regulatory agencies, which significantly influence our operating environment and may affect our ability to recover costs from utility customers. We are required to have numerous permits, approvals and certificates from the agencies that regulate our business. The FERC, the Nuclear Regulatory Commission (“NRC”), the Environmental Protection Agency (“EPA”), and the ACC regulate many aspects of our utility operations, including siting and construction of facilities, customer service and the rates that we can charge customers. We believe the necessary permits, approvals and certificates have been obtained for our existing operations. However, changes in regulations or the imposition of additional regulations could have an adverse impact on our results of operations. We are also unable to predict the impact on our business and operating results from pending or future regulatory activities of any of these agencies.

     We are subject to numerous environmental laws and regulations that may increase our cost of operations, impact our business plans, or expose us to environmental liabilities.

     We are subject to numerous environmental laws and regulations affecting many aspects of our present and future operations, including air emissions, water quality, wastewater discharges, solid waste, and hazardous waste. These laws and regulations can result in increased capital, operating, and other costs, particularly with regard to enforcement efforts focused on power plant emissions obligations. These laws and regulations generally require us to obtain and comply with a wide variety of environmental licenses, permits, inspections and other approvals. Both public officials and private individuals may seek to enforce applicable environmental laws and regulations. We cannot predict the outcome (financial or operational) of any related litigation that may arise.

     In addition, we may be a responsible party for environmental clean up at sites identified by a regulatory body. We cannot predict with certainty the amount and timing of all future expenditures related to environmental matters because of the difficulty of estimating clean-up costs. There is also uncertainty in quantifying liabilities under environmental laws that impose joint and several liability on all potentially responsible parties.

     We cannot be sure that existing environmental regulations will not be revised or that new regulations seeking to protect the environment will not be adopted or become applicable to us. Revised or additional regulations that result in increased compliance costs or additional operating restrictions, particularly if those costs are not fully recoverable from our customers, could have a material adverse effect on our results of operations.

     There are inherent risks in the operation of nuclear facilities, such as environmental, health and financial risks and the risk of terrorist attack.

     We have an ownership interest in and operate, on behalf of a group of owners, the Palo Verde Nuclear Generating Station (“Palo Verde”), which is the largest nuclear electric generating facility in the United States. Palo Verde is subject to environmental, health and financial risks such as the ability to dispose of spent nuclear fuel, the ability to maintain adequate reserves for decommissioning, potential liabilities arising out of the operation of these facilities, and the costs of securing the facilities against possible terrorist attacks and unscheduled outages due to equipment and other problems. We maintain nuclear decommissioning trust funds and external insurance coverage to minimize our financial exposure to some of these risks; however, it is possible that damages could exceed the amount of insurance coverage.

     The NRC has broad authority under federal law to impose licensing and safety-related requirements for the operation of nuclear generation facilities. In the event of noncompliance, the NRC has the authority to impose fines or shut down a unit, or both, depending upon its assessment of the severity of the situation, until compliance is achieved. In addition, although we have no reason to anticipate a serious nuclear incident at Palo Verde, if an incident did occur, it could materially and adversely affect our results of operations or financial condition. A major incident at a nuclear facility anywhere in the world could cause the NRC to limit or prohibit the operation or licensing of any domestic nuclear unit.

     The uncertain outcome regarding the creation of regional transmission organizations, or RTOs, may materially impact our operations, cash flows or financial position.

     In a December 1999 order, the FERC established characteristics and functions that must be met by utilities in forming and operating RTOs. The characteristics for an acceptable RTO include independence from market participants, operational control over a region large enough to support efficient and nondiscriminatory markets and exclusive authority to maintain short-term reliability. Additionally, in a pending notice of proposed rulemaking, the FERC is considering implementing a standard market design for wholesale markets. On October 16, 2001, we and other owners of electric transmission lines in the southwestern U.S. filed with the FERC a request for a declaratory order confirming that our proposal to form WestConnect RTO, LLC would satisfy the FERC’s requirements for the formation of an RTO. On October 10, 2002, the FERC issued an order finding that the WestConnect proposal, if modified to address specified issues, could meet the FERC’s RTO requirements and provide the basic framework for a standard market design for the southwestern U.S. Since that time, we have been evaluating a phased approach to RTO implementation in the desert Southwest. We are currently participating with other entities in the southwestern U.S. in a cost/benefit analysis of implementing the WestConnect RTO, the results of which are expected to be completed in 2005.

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

     Recent events in the energy markets that are beyond our control may have negative impacts on our business.

     As a result of the energy crisis in California during the summer of 2001, the recent volatility of natural gas prices in North America, the filing of bankruptcy by the Enron Corporation, and investigations by governmental authorities into energy trading activities, companies generally in the regulated and unregulated utility businesses have been under an increased amount of public and regulatory scrutiny. The capital markets and rating agencies also have increased their level of scrutiny. We believe that we are in material compliance with all applicable laws, but it is difficult or impossible to predict or control what effect these or related issues may have on our business or our access to the capital markets.

     Our results of operations can be adversely affected by milder weather.

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     Weather conditions directly influence the demand for electricity and affect the price of energy commodities. Electric power demand is generally a seasonal business. In Arizona, demand for power peaks during the hot summer months, with market prices also peaking at that time. As a result, our overall operating results fluctuate substantially on a seasonal basis. In addition, we have historically sold less power, and consequently earned less income, when weather conditions are milder. As a result, unusually mild weather could diminish our results of operations and harm our financial condition.

     If we are not able to access capital at competitive rates, our ability to implement our financial strategy will be adversely affected.

     We rely on access to short-term money markets, longer-term capital markets and the bank markets as a significant source of liquidity and for capital requirements not satisfied by the cash flow from our operations. We believe that we will maintain sufficient access to these financial markets based upon current credit ratings. However, certain market disruptions or a downgrade of our credit ratings may increase our cost of borrowing or adversely affect our ability to access one or more financial markets. Such disruptions could include:

• an economic downturn;

• capital market conditions generally;

• the bankruptcy of an unrelated energy company;

• increased market prices for electricity and gas;

• terrorist attacks or threatened attacks on our facilities or those of unrelated energy companies; or

• the overall health of the utility industry.

     Changes in economic conditions could result in higher interest rates, which would increase our interest expense on our debt and reduce funds available to us for our current plans. Additionally, an increase in our leverage could adversely affect us by:

• increasing the cost of future debt financing;

• increasing our vulnerability to adverse economic and industry conditions;

• requiring us to dedicate a substantial portion of our cash flow from operations to payments on our debt, which would reduce funds available to us for operations, future business opportunities or other purposes; and

• placing us at a competitive disadvantage compared to our competitors that have less debt.

     A significant reduction in our credit ratings could materially and adversely affect our business, financial condition and results of operations.

     We cannot be sure that any of our current ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances in the future so warrant. Any downgrade could increase our borrowing costs, which would diminish our financial results. We would likely be required to pay a higher interest rate in future financings, and our potential pool of investors and funding sources could decrease. In addition, borrowing costs under certain of our existing credit facilities depend on our credit ratings. A downgrade could also require us to provide additional support in the form of letters of credit or cash or other collateral to various counterparties. If our short-term ratings were to be lowered, it could limit our access to the commercial paper market. We note that the ratings from rating agencies are not recommendations to buy, sell or hold our securities and that each rating should be evaluated independently of any other rating.

     The use of derivative contracts in the normal course of our business and changing interest rates and market conditions could result in financial losses that negatively impact our results of operations.

     Our operations include managing market risks related to commodity prices and, subject to specified risk parameters, engaging in marketing and trading activities intended to profit from market price movements. We are exposed to the impact of market fluctuations in the price and transportation costs of electricity, natural gas, coal, and emissions allowances. We have established procedures to manage risks associated with these market fluctuations by

3

utilizing various commodity derivatives, including exchange-traded futures and options and over-the-counter forwards, options, and swaps. As part of our overall risk management program, we enter into derivative transactions to hedge purchases and sales of electricity, fuels, and emissions allowances and credits. The changes in market value of such contracts have a high correlation to price changes in the hedged commodity.

     We are exposed to losses in the event of nonperformance or nonpayment by counterparties. We use a risk management process to assess and monitor the financial exposure of all counterparties. Despite the fact that the majority of trading counterparties are rated as investment grade by the rating agencies, there is still a possibility that one or more of these companies could default, resulting in a material adverse impact on our earnings for a given period.

     Changing interest rates will affect interest paid on variable-rate debt and interest earned by our pension plan and nuclear decommissioning trust funds. Our policy is to manage interest rates through the use of a combination of fixed-rate and floating-rate debt. The pension plan is also impacted by the discount rate, which is the interest rate used to discount future pension obligations. Continuation of recent decreases in the discount rate would result in increases in pension costs, cash contributions, and charges to other comprehensive income. The pension plan and nuclear decommissioning trust funds also have risks associated with changing market values of equity investments. A significant portion of the pension costs and all of the nuclear decommissioning costs are recovered in regulated electricity prices.

     Actual results could differ from estimates used to prepare our financial statements.

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

• Regulatory Accounting — Regulatory accounting allows for the actions of regulators, such as the ACC and the FERC, to be reflected in our financial statements. Their actions may cause us to capitalize costs that would otherwise be included as an expense in the current period by unregulated companies. If future recovery of costs ceases to be probable, the assets would be written off as a charge in current period earnings. We had approximately $174 million of regulatory assets on our Condensed Balance Sheets at June 30, 2005.

• Pensions and Other Postretirement Benefit Accounting — Changes in our actuarial assumptions used in calculating our pension and other postretirement benefit liability and expense can have a significant impact on our earnings and financial position. The most relevant actuarial assumptions are the discount rate used to measure our liability and net periodic cost, the expected long-term rate of return on plan assets used to estimate earnings on invested funds over the long-term, and the assumed healthcare cost trend rates. We review these assumptions on an annual basis and adjust them as necessary.

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

4

EX-99.3

EXHIBIT 99.3

PINNACLE WEST CAPITAL CORPORATION
NON-GAAP MEASURE RECONCILIATION — OPERATING INCOME (GAAP MEASURE) TO GROSS MARGIN (NON-GAAP MEASURE)
(in thousands)

	THREE MONTHS ENDED				Pretax			After Tax
	JUNE 30,				Increase			Increase
	2005		2004		(Decrease)			(Decrease)
RECONCILIATION OF REGULATED ELECTRICITY SEGMENT GROSS MARGIN
Operating Income (closest GAAP measure)	$	178,627	$	123,167	$	55,460		$	33,703
Plus:
Operations and maintenance		153,097		138,595		14,502			8,813
Real estate segment operations		68,593		62,217		6,376			3,875
Depreciation and amortization		85,142		102,012		(16,870	)		(10,252	)
Taxes other than income taxes		34,638		32,308		2,330			1,416
Other expenses		17,556		7,575		9,981			6,065
Marketing and trading segment purchased power and fuel		57,593		88,067		(30,474	)		(18,519	)
Less:
Real estate segment revenues		84,753		66,084		18,669			11,345
Other revenues		20,259		9,414		10,845			6,591
Marketing and trading segment revenues		71,172		110,156		(38,984	)		(23,691	)
Regulated electricity segment gross margin	$	419,062	$	368,287	$	50,775		$	30,856
RECONCILIATION OF MARKETING AND TRADING SEGMENT GROSS MARGIN
Operating Income (closest GAAP measure)	$	178,627	$	123,167	$	55,460		$	33,703
Plus:
Operations and maintenance		153,097		138,595		14,502			8,813
Real estate segment operations		68,593		62,217		6,376			3,875
Depreciation and amortization		85,142		102,012		(16,870	)		(10,252	)
Taxes other than income taxes		34,638		32,308		2,330			1,416
Other expenses		17,556		7,575		9,981			6,065
Regulated electricity segment purchased power and fuel		160,590		151,642		8,948			5,438
Less:
Real estate segment revenues		84,753		66,084		18,669			11,345
Other revenues		20,259		9,414		10,845			6,591
Regulated electricity segment revenues		579,652		519,929		59,723			36,294
Marketing and trading segment gross margin	$	13,579	$	22,089	$	(8,510	)	$	(5,172	)

PINNACLE WEST CAPITAL CORPORATION
NON-GAAP MEASURE RECONCILIATION — OPERATING INCOME (GAAP MEASURE) TO GROSS MARGIN (NON-GAAP MEASURE)
(in thousands)

	SIX MONTHS ENDED				Pretax			After Tax
	JUNE 30,				Increase			Increase
	2005		2004		(Decrease)			(Decrease)
RECONCILIATION OF REGULATED ELECTRICITY SEGMENT GROSS MARGIN
Operating Income (closest GAAP measure)	$	270,981	$	207,445	$	63,536		$	38,611
Plus:
Operations and maintenance		308,181		275,981		32,200			19,568
Real estate segment operations		125,069		109,510		15,559			9,455
Depreciation and amortization		176,535		203,115		(26,580	)		(16,153	)
Taxes other than income taxes		69,203		62,638		6,565			3,990
Other expenses		25,930		16,325		9,605			5,837
Marketing and trading segment purchased power and fuel		128,402		155,832		(27,430	)		(16,669	)
Less:
Real estate segment revenues		156,809		116,547		40,262			24,467
Other revenues		30,394		20,319		10,075			6,123
Marketing and trading segment revenues		160,429		198,840		(38,411	)		(23,342	)
Regulated electricity segment gross margin	$	756,669	$	695,140	$	61,529		$	37,391
RECONCILIATION OF MARKETING AND TRADING SEGMENT GROSS MARGIN
Operating Income (closest GAAP measure)	$	270,981	$	207,445	$	63,536		$	38,611
Plus:
Operations and maintenance		308,181		275,981		32,200			19,568
Real estate segment operations		125,069		109,510		15,559			9,455
Depreciation and amortization		176,535		203,115		(26,580	)		(16,153	)
Taxes other than income taxes		69,203		62,638		6,565			3,990
Other expenses		25,930		16,325		9,605			5,837
Regulated electricity segment purchased power and fuel		239,013		240,253		(1,240	)		(754	)
Less:
Real estate segment revenues		156,809		116,547		40,262			24,467
Other revenues		30,394		20,319		10,075			6,123
Regulated electricity segment revenues		995,682		935,393		60,289			36,638
Marketing and trading segment gross margin	$	32,027	$	43,008	$	(10,981	)	$	(6,674	)

EX-99.4

EXHIBIT 99.4

ARIZONA PUBLIC SERVICE COMPANY
NON-GAAP MEASURE RECONCILIATION — OPERATING INCOME (GAAP MEASURE) TO GROSS MARGIN (NON-GAAP MEASURE)
(in thousands)

	THREE MONTHS ENDED				Pretax			After Tax
	JUNE 30,				Increase			Increase
	2005		2004		(Decrease)			(Decrease)
RECONCILIATION OF GROSS MARGIN
Operating Income (closest GAAP measure)	$	95,321	$	83,604	$	11,717		$	7,104
Plus:
Operations and maintenance		138,314		126,871		11,443			6,938
Depreciation and amortization		76,808		88,385		(11,577	)		(7,019	)
Income taxes		41,772		32,371		9,401			5,700
Other taxes		31,322		29,874		1,448			878
Gross margin	$	383,537	$	361,105	$	22,432		$	13,601

ARIZONA PUBLIC SERVICE COMPANY
NON-GAAP MEASURE RECONCILIATION — OPERATING INCOME (GAAP MEASURE) TO GROSS MARGIN (NON-GAAP MEASURE)
(in thousands)

	SIX MONTHS ENDED				Pretax			After Tax
	JUNE 30,				Increase			Increase
	2005		2004		(Decrease)			(Decrease)
RECONCILIATION OF GROSS MARGIN
Operating Income (closest GAAP measure)	$	154,064	$	150,654	$	3,410		$	2,067
Plus:
Operations and maintenance		280,608		252,783		27,825			16,870
Depreciation and amortization		159,022		177,233		(18,211	)		(11,041	)
Income taxes		58,152		49,733		8,419			5,104
Other taxes		62,767		57,454		5,313			3,221
Gross margin	$	714,613	$	687,857	$	26,756		$	16,221

EX-99.5

                                                                    EXHIBIT 99.5

                                                               EXECUTION VERSION

                               PURCHASE AGREEMENT

                                  BY AND AMONG

                        PINNACLE WEST CAPITAL CORPORATION

                        PINNACLE WEST ENERGY CORPORATION

                                       AND

                                  GENWEST, LLC,

                                   as Sellers,

                                       AND

                              NEVADA POWER COMPANY,

                                  as Purchaser

                                  JUNE 21, 2005

                             SILVERHAWK POWER PLANT

                              Clark County, Nevada



                               TABLE OF CONTENTS



                                                                                                                        PAGE
                                                                                                                        ----
                                                                                                                     
ARTICLE I DEFINITIONS; USAGE ..................................................................................           1
   Section 1.1    Definitions .................................................................................           1
   Section 1.2    Rules as to Usage ...........................................................................          20
   Section 1.3    Schedules and Exhibits ......................................................................          21
ARTICLE II SALE AND PURCHASE; PRICE; CLOSING ..................................................................          21
   Section 2.1    Sale and Purchase; Definition of Purchased Assets; Assumed Liability ........................          21
   Section 2.2    Purchase Price ..............................................................................          22
   Section 2.3    Allocation of Purchase Price ................................................................          25
   Section 2.4    The Closing .................................................................................          26
   Section 2.5    Further Assurances; Post-Closing Cooperation ................................................          28
ARTICLE III REPRESENTATIONS AND WARRANTIES ....................................................................          31
   Section 3.1    Representations and Warranties of Sellers ...................................................          31
   Section 3.2    Representations and Warranties of Purchaser .................................................          41
ARTICLE IV COVENANTS ..........................................................................................          42
   Section 4.1    Efforts to Close and Fulfillment of Conditions ..............................................          42
   Section 4.2    Operation and Maintenance of Purchased Assets ...............................................          47
   Section 4.3    Purchaser's Inspection Right ................................................................          49
   Section 4.4    Intentionally Omitted .......................................................................          49
   Section 4.5    Cooperation with Facility Takeover and Transition of Operations .............................          49
   Section 4.6    Interim PPA .................................................................................          50
   Section 4.7    Cooperation in Fault Current Upgrade Proceedings ............................................          50
   Section 4.8    Employees ...................................................................................          50
   Section 4.9    Risk of Loss ................................................................................          50
   Section 4.10   Interim Reports .............................................................................          50
ARTICLE V CONDITIONS TO CLOSING ...............................................................................          53
   Section 5.1    Purchaser's Conditions Precedent ............................................................          53
   Section 5.2    Sellers' Conditions Precedent ...............................................................          54
ARTICLE VI TERMINATION ........................................................................................          55
   Section 6.1    Termination Prior to Closing ................................................................          55
   Section 6.2    Effect of Termination or Breach Prior to Closing ............................................          56


                                       ii


                                                                                                                     
ARTICLE VII INDEMNIFICATION ...................................................................................         56
   Section 7.1    Indemnification by Sellers ..................................................................         56
   Section 7.2    Indemnification by Purchaser ................................................................         57
   Section 7.3    Method of Asserting Claims ..................................................................         57
   Section 7.4    Limitations of Liability ....................................................................         58
   Section 7.5    Indemnification in Case of Strict Liability or Indemnitee Negligence ........................         59
ARTICLE VIII TAX MATTERS ......................................................................................         60
   Section 8.1    Representations and Warranties ..............................................................         60
   Section 8.2    Transfer Taxes ..............................................................................         60
   Section 8.3    Property Taxes ..............................................................................         61
   Section 8.4    Sellers' Tax Indemnification ................................................................         61
   Section 8.5    Purchaser Tax Indemnification ...............................................................         61
   Section 8.6    Refunds .....................................................................................         61
   Section 8.7    Contests ....................................................................................         62
   Section 8.8    Assistance and Cooperation ..................................................................         62
   Section 8.9    Information .................................................................................         63
   Section 8.10   Tax Returns .................................................................................         63
   Section 8.11   Survival of Obligations .....................................................................         63
   Section 8.12   Adjustments to Purchase Price ...............................................................         63
ARTICLE IX SURVIVAL; NO OTHER REPRESENTATIONS .................................................................         63
   Section 9.1    Survival of Representations, Warranties, Covenants and Agreements ...........................         63
   Section 9.2    No Other Representations ....................................................................         64
ARTICLE X DISPUTE RESOLUTION ..................................................................................         64
   Section 10.1   Dispute Resolution ..........................................................................         64
   Section 10.2   Submission to Jurisdiction ..................................................................         64
ARTICLE XI LIMITED REMEDIES AND DAMAGES .......................................................................         65
   Section 11.1   Exclusive Remedies ..........................................................................         65
   Section 11.2   Limitation of Liability .....................................................................         65
   Section 11.3   Specific Performance ........................................................................         65
ARTICLE XII MISCELLANEOUS .....................................................................................         65
   Section 12.1   Notices .....................................................................................         65
   Section 12.2   Payments ....................................................................................         67
   Section 12.3   Entire Agreement ............................................................................         67



                                       iii


                                                                                                                     
Section 12.4  Expenses ......................................................................................           67
Section 12.5  Public Announcements ..........................................................................           67
Section 12.6  Confidentiality ...............................................................................           68
Section 12.7  Waivers .......................................................................................           68
Section 12.8  Amendment .....................................................................................           69
Section 12.9  No Construction Against Drafting Party ........................................................           69
Section 12.10 No Third Party Beneficiary ....................................................................           69
Section 12.11 Headings ......................................................................................           69
Section 12.12 Invalid Provisions ............................................................................           69
Section 12.13 Governing Law .................................................................................           69
Section 12.14 No Assignment; Binding Effect .................................................................           70
Section 12.15 Counterparts ..................................................................................           70
Section 12.16 Time of Essence ...............................................................................           70



                                       iv


SCHEDULES:

Schedule I     Assumed Agreements

                  Part A: Assumed Joint Facility Agreements
                  Part B: Assumed GenWest Agreements
                  Part C: Assumed PWCC Agreements
                  Part D: Assumed PWEC Agreements
                  Part E: Prorated Assumed Agreements

Schedule II    Materials and Equipment

                  Part A: Non-Shared Materials and Equipment
                  Part B: Shared Materials and Equipment
                  Part C: Stores and Inventory
                  Part D: Information to be Downloaded

Schedule III   Real Property

Schedule IV    Transferred Permits

                  Part A: Transferred Permits
                  Part B: Prorated Transferred Permits
                  Part C: Transferred Permits to be Transferred at Closing

Schedule V     Excluded Assets and Excluded Liabilities

                  Part A: Excluded Assets
                  Part B: Excluded Liabilities

Schedule VI    Sellers' Disclosure Schedule

                  Section 1.1.1(a): Contemplated Assumed Agreement Amendments

                  Section 1.1.1(b): Permitted Liens

                                        v


                  Section 1.1.1(c): Purchaser's Knowledge Persons

                  Section 1.1.1(d): Sellers' Knowledge Persons

                  Section 3.1.4: Consents and Actions

                  Section 3.1.5: Approvals and Filings

                  Section 3.1.6: Sellers' Known Liabilities

                  Section 3.1.8: Sellers' Legal Proceedings

                  Section 3.1.9: Compliance with Laws

                  Section 3.1.11 Part A: Real Property - Lease, assignment or
                  similar arrangement

                  Section 3.1.11 Part B: Real Property - Insurance notices

                  Section 3.1.11 Part C: Real Property - Licenses, easements and
                  rights of way

                  Section 3.1.11 Part D: Real Property - Compliance with
                  subdivision, zoning, land parcelization and local governmental
                  taxation or separate assessment requirements.

                  Section 3.1.11 Part E: Real Property - Commitments to or
                  agreements with any Governmental Authority affecting the use
                  or ownership of the Real Property.

                  Section 3.1.11 Part F: Real Property - Agreements for the
                  sale, exchange, encumbrance, lease or transfer of any of the
                  Real Property or any portion of the same.

                  Section 3.1.11 Part G: Real Property - Compliance with all
                  applicable conditions, covenants and restrictions that
                  encumber the Real Property.

                  Section 3.1.12 Part A: Location of Materials and Equipment

                  Section 3.1.12 Part B: Disposition of Assets

                  Section 3.1.13: Warranty Matters

                  Section 3.1.14 Part A: List of Facility Agreements

                                       vi


                  Section 3.1.14 Part B: Status of Assumed Agreements

                  Section 3.1.14 Part C: Non-Compliance under Assumed Agreements

                  Section 3.1.15 Part A: Facility Permits

                  Section 3.1.15 Part B: Permit Parties

                  Section 3.1.15 Part C: Accuracy of Facility Permit Application
                  Information.

                  Section 3.1.15 Part D: Modifications and Amendments to
                  Facility Permits

                  Section 3.1.15 Part E: Compliance with and Status of Facility
                  Permits

                  Section 3.1.15 Part F: Notices and Filings for Transfer of
                  Interests in Transferred Permits

                  Section 3.1.15 Part G: Modifications to Facility

                  Section 3.1.16: List of all insurance policies

                  Section 3.1.17 Part A: Environmental Reports, Studies and
                  Documents Provided

                  Section 3.1.17 Part B: Claims, Actions, Proceedings,
                  Investigations

                  Section 3.1.17 Part C: Environmental Permits

                  Section 3.1.17 Part D: Sufficiency of Facility Permits

                  Section 3.1.17 Part E: Renewal of Permits

                  Section 3.1.17 Part F: Failure to comply with applicable
                  Environmental Law

                  Section 3.1.17 Part G: Environmental Releases

                  Section 3.1.17 Part H: Facts and Circumstances

                  Section 3.1.18: Labor Matters

                                       vii


                  Section 3.1.21 Part A: Intellectual Property

                  Section 3.1.21 Part B: Sufficiency of Intellectual Property

                  Section 8.1: Tax Matters

Schedule VII   Purchaser's Disclosure Schedule

                  Section 1.1.1(b): Purchaser's Knowledge Persons

                  Section 3.2.6: Purchaser's Legal Proceedings

EXHIBITS:

               
Exhibit A         Form of Hamon Consent
Exhibit B         Form of Kern River Consent
Exhibit C         Form of Las Vegas Valley Water District Consent
Exhibit D         Form of Mirant Consent
Exhibit E         Form of Reliant Consent
Exhibit F         Form of SCE Consent
Exhibit G         Form of Siemens Consent
Exhibit H         Form of SNWA Consent
Exhibit I         Form of Assignment Agreement
Exhibit J         Form of Deed
Exhibit K         Form of Interim PPA



                                      viii


                               PURCHASE AGREEMENT
                             Silverhawk Power Plant

      THIS PURCHASE AGREEMENT is made and entered into effective as of June 21,
2005 (the "Effective Date"), by and among PINNACLE WEST CAPITAL CORPORATION, an
Arizona corporation ("PWCC"), PINNACLE WEST ENERGY CORPORATION, an Arizona
corporation ("PWEC"), GENWEST, LLC, a Delaware limited liability company
("GenWest"), and NEVADA POWER COMPANY, an electric utility organized under the
laws of the State of Nevada ("Purchaser"). PWCC, PWEC and GenWest are also each
referred to herein individually as a "Seller" and collectively as the "Sellers".
PWCC, PWEC and GenWest, on the one hand, and Purchaser, on the other hand, are
also each referred to herein as a "Party" and collectively as the "Parties".

                                    RECITALS

      A.    GenWest owns an undivided 75% interest in an operating natural
gas-fueled combined-cycle generation plant located at the APEX Industrial Park,
approximately 25 miles northeast of Las Vegas, Nevada, known as the Silverhawk
Power Plant. SNWA owns an undivided 25% interest in the Silverhawk Power Plant.

      B.    PWEC is a wholly owned subsidiary of PWCC. PWEC owns all the
outstanding membership interests in GenWest.

      C.    Purchaser desires to purchase substantially all the assets of
GenWest.

      D.    The Parties have determined to set forth in this Agreement the terms
and conditions of their agreements regarding the foregoing.

                                   AGREEMENTS

      For and in consideration of the Recitals set forth above, the respective
covenants and agreements of the Parties herein set forth, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the Parties, the Parties, intending to be legally bound, do
hereby agree as follows:

                                    ARTICLE I

                               DEFINITIONS; USAGE

      Section 1.1 Definitions. Unless the context shall otherwise require,
capitalized terms used in this Agreement shall have the meanings assigned to
them in this Section 1.1.



      "2003 Settlement Agreement" means the Settlement Agreement, dated as of
January 31, 2003, among Purchaser, SCE, Duke Energy Moapa, LLC, GenWest, Las
Vegas Cogeneration II, Mirant Las Vegas, LLC and Reliant Energy Bighorn, LLC, by
which they resolved issues set for hearing in FERC Docket No. ER02-2344-000 and
certain SCE-related issues set for hearing in FERC Docket Nos. ER02-1741-000 and
ER02-1742-000, 25% of the rights and obligations of GenWest under which were
assigned to and assumed by SNWA pursuant to the Bill of Sale.

      "2005 Settlement Agreement" means the settlement agreement filed with FERC
on May 23, 2005 among Purchaser, Purchaser's Chuck Lenzie Generating Station,
Valley Electric Association, Inc., SCE, GenWest, Las Vegas Cogeneration II,
Mirant Las Vegas, LLC, Reliant Energy Wholesale Generation, LLC and SNWA, which
attached the Amended and Restated 2003 Settlement Agreement and is intended to
resolve the issues set for hearing in FERC Docket Nos. ER02-1741-000 and
ER02-1742-000 that were not resolved in the 2003 Settlement Agreement, among
other issues.

      "Acquisition Proposal" shall mean any proposal or offer made by any Person
other than Purchaser to acquire all or a substantial part of the Project, the
assets owned solely by GenWest, any equity interest in GenWest, or any interest
of PWCC or PWEC in the Assumed Agreements.

      "Additional Pre-Closing Permitted Mechanics Liens" means any mechanics',
carriers', workers', repairers' and other similar Liens, other than liens
described in item (vii) of the definition of Permitted Liens, arising or
incurred in the ordinary course of business, and not in violation of the
Co-Tenancy Agreement or the O&M Agreement relating to obligations which are not
yet due and payable or the validity of which are being contested in good faith
by appropriate proceedings, which in all cases shall be removed prior to Closing
without any cost to or liability of Purchaser or adverse effect on the Purchased
Assets.

      "Adjustment Amount" has the meaning given to it in Section 2.2.4(a) of
this Agreement.

      "Adjustment Statement" has the meaning given to it in Section 2.2.4(a) of
this Agreement.

      "Affiliate" of any Person means any other Person directly or indirectly
Controlling, directly or indirectly Controlled by or under direct or indirect
common Control with such Person.

      "Agency Agreement" means the Agency Agreement, dated July 1, 2004, among
SNWA, GenWest and PWEC.

      "Agreement" means this Purchase Agreement by and between Sellers and
Purchaser.

      "Amended and Restated 2003 Settlement Agreement" means the amendment and
restatement of the 2003 Settlement Agreement, entered into among Purchaser,
Purchaser's Chuck Lenzie Generating Station, SCE, GenWest, Las Vegas
Cogeneration II, Mirant Las Vegas, LLC, Reliant Energy Wholesale Generation, LLC
and SNWA, which is attached to the 2005 Settlement Agreement and was filed with
FERC on May 23, 2005.

      "APS" means Arizona Public Service Company.

                                        2


      "APS Switchyard Agreement" means the Agreement for Engineering,
Procurement and Construction for Facility Switchyard (Agreement No. 760200017),
dated December 16, 2002, between GenWest and APS, 25% of the rights and
obligations under which were assigned to and assumed by SNWA pursuant to the
Bill of Sale, as amended by Change Order No. 1 dated December 12, 2003 and
Change Order No. 2 dated June 30, 2004.

      "Assignment Agreement" has the meaning given to it in Section 2.4.1(a)(iv)
of this Agreement.

      "Assumed Agreements" means the Assumed Joint Facility Agreements, the
Assumed GenWest Agreements, the Assumed PWCC Agreements, and the Assumed PWEC
Agreements.

      "Assumed GenWest Agreements" means those GenWest Agreements which are
listed on Schedule I, Part B attached hereto.

      "Assumed Joint Facility Agreements" means those Joint Facility Agreements
which are listed on Schedule I, Part A attached hereto and the Post-Effective
Date Assumed Joint Facility Agreements.

      "Assumed PWCC Agreements" means the Transmission Services Agreement and
the Reliant Agreement.

      "Assumed PWEC Agreements" means the TSA 100 Assignment Agreement, the TSA
101 Assignment Agreement, the O&M Agreement, and the Agency Agreement.

      "Bill of Sale" means the Bill of Sale, Assignment and Assumption
Agreement, dated May 17, 2004, between GenWest and SNWA.

      "BLM" means the Bureau of Land Management.

      "Books and Records" means all drafts of the Co-Tenancy Agreement, the O&M
Agreement and the Well Development Agreement that can be reasonably and
practically provided, books, records, files, documents, instruments, papers,
correspondence that can be reasonably and practically provided, journals, deeds,
licenses, supplier, contractor and subcontractor lists, supplier design
interface information, computer files and programs, other than PWCC's or APS'
enterprise-wide computer programs, retrieval programs, the information listed on
Part D of Schedule II of this Agreement to the extent in existence,
environmental studies, environmental reports, construction reports, annual
operating plans, monthly operating reports, operating logs, operations and
maintenance records, purchase orders, safety and maintenance manuals, incident
reports, injury reports, engineering design plans, blue prints and as-built
plans, records drawings, drawings, specifications, test reports, quality
documentation and reports, hazardous waste disposal records, procedures and
similar items, in each case, in all formats in which they are available,
including electronic; provided, however, that any such data currently contained
in computer systems shall be provided in electronic format as either fixed form
or character delimited data and shall include record descriptions, to the extent
the computer systems of Purchaser and the Sellers are compatible in allowing
such data provision, in each case excluding documents subject to attorney-client
privilege.

                                        3


      "Business Day" means any day except Saturday, Sunday or a weekday that
banks in Las Vegas, Nevada, Phoenix, Arizona or New York, New York are closed.

      "Closing" has the meaning given to it in Section 2.4 of this Agreement.

      "Closing Date" has the meaning given to it in Section 2.4 of this
Agreement.

      "Code" means the Internal Revenue Code of 1986, as amended.

      "Construction and Equipment Supply Contracts" means (i) the Equipment
Supply Agreement (Contract No. 750200136), dated February 16, 2001, between
GenWest and Siemens Westinghouse Power Corporation for Combustion Turbine
Equipment, as amended by Change Orders Nos. 1 through 8, 25% of the rights and
obligations under which were assigned to and assumed by SNWA pursuant to the
Bill of Sale; (ii) the Equipment Supply Agreement (Contract No. 760200010),
dated March 21, 2002, between GenWest and Alstom, as amended by Change Orders
Nos. 1 through 3 (the "Alstom Agreement"), 25% of the rights and obligations
under which were assigned to and assumed by SNWA pursuant to the Bill of Sale,
(iii) Contract (Contract No. 750200434), dated as of October 12, 2001, between
GenWest and General Electric Company, as amended by Change Orders Numbers 1
through 6, 25% of the rights and obligations under which were assigned to and
assumed by SNWA pursuant to the Bill of Sale, (iv) Agreement for Engineering,
Procurement and Construction of the Silverhawk Facility (Contract No.
760200009), dated as of June 11, 2002, between GenWest and LG Constructors,
Inc., as amended by Contract Amendment No. 1, dated March 13, 2003, Contract
Amendment No. 2, dated March 17, 2003, Contract Amendment No. 3, dated April 30,
2004, and by Change Orders Nos. 1 through 12, 25% of the rights and obligations
under which were assigned to and assumed by SNWA pursuant to the Bill of Sale,
(v) the APS Switchyard Agreement, and (vi) Silverhawk Combined Cycle Equipment
Supply Agreement (Contract No. 760200013), dated March 7, 2002, between GenWest
and Hamon Cooling Towers, Inc., as amended by Change Order No. 1 and the
Settlement Agreement dated May 12, 2004, 25% of the rights and obligations under
which were assigned to and assumed by SNWA pursuant to the Bill of Sale.

      "Contemplated Assumed Agreement Amendments" means the contemplated
amendments to certain Assumed Agreements, which are listed on Section 1.1.1(a)
of Sellers' Disclosure Schedule (i) substantially in the form provided to
Purchaser prior to the Effective Date, or (ii) otherwise within the relevant
scope described in Section 1.1.1(a) of Sellers' Disclosure Schedule and, in the
case of this clause (ii), will otherwise have no adverse effect on the rights or
obligations of Purchaser under such Assumed Agreements or on the other Purchased
Assets.

      "Continued Employee Books and Records" means the Books and Records related
to Project Employees that are to be hired by Purchaser following the Closing,
regarding skill and development training; seniority histories; disciplinary
histories; salary and benefit information; Occupational Safety and Health
Administration reports and records; and active medical restriction forms.

      "Control" of any Person means the possession, directly or indirectly, of
the power either to (a) vote fifty percent (50%) or more of the securities or
interests having ordinary voting power for the election of directors (or other
comparable controlling body) of such Person or (b) direct or

                                        4


cause the direction of management or policies of such Person, whether through
the ownership of voting securities or interests, by contract or otherwise,
excluding in each case, any secured lender of such Person.

      "Co-Tenancy Agreement" means the Silverhawk Power Plant Co-Tenancy
Agreement, dated January 17, 2002, by and between GenWest and SNWA.

      "Deed" has the meaning given to it in Section 2.4.1(b)(v) of this
Agreement.

      "Default Rate" has the meaning given to it in Section 12.2 of this
Agreement.

      "Designated Assumed Agreements" means each of the following Assumed
Agreements: the Co-Tenancy Agreement, the Kern River Contracts, the O&M
Agreement, the Reliant Agreement, the Water Supply Agreement, the Mirant Master
Agreement, and the Real Property Documents.

      "Dry Lake Documents" shall mean the Contemplated Assumed Agreement
Amendments in respect of the Real Property Purchase Agreement and the Well
Development Agreement.

      "Easements" shall mean (i) that certain Grant of Easement from HDL 8, LLC
to GenWest for the access road, recorded on July 23, 2002 in Book 20020723,
Instrument No. 02463 of the Official Records of Clark County, Nevada, (ii) that
certain Grant of Easement from GDL 7, LLC to GenWest for the access road,
recorded on July 24, 2002 in Book 20020724, Instrument No. 03124 of the Official
Records of Clark County, Nevada, and (iii) that certain Grant of Easement from
Mirant Las Vegas to GenWest for the access road, recorded on July 31, 2002 in
Book 20020731, Instrument No. 01299 of the Official Records of Clark County,
Nevada, 25% of the rights and obligations under each of which was assigned to
SNWA pursuant to the SNWA Deed.

      "Effective Date" has the meaning given to it in the preamble of this
Agreement.

      "Environmental Condition" means the presence or Release to the environment
of Hazardous Materials, including any migration of Hazardous Materials through
air, soil or water.

      "Environmental Law" means (i) the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. Section 9601 et seq., (ii) the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq., (iii)
the Federal Water Pollution Control Act, 33 U.S.C. Section 1251 et seq., (iv)
the Clean Air Act, 42 U.S.C. Section 7401 et seq., (v) the Hazardous Materials
Transportation Authorization Act of 1994, 49 U.S.C. Section 5101 et seq., (vi)
the Occupational Safety and Health Act, 29 U.S.C. Section 651 et seq., (vii) the
Toxic Substances Control Act, 15 U.S.C. Sections 2601 through 2629, (viii) the
Oil Pollution Act, 33 U.S.C. Section 2701 et seq., (ix) the Emergency Planning
and Community Right-to-Know Act, 42 U.S.C. Section 11001 et seq., (x) the Safe
Drinking Water Act, 42 U.S.C. Sections 300f through 300j, and (xi) and all other
Laws of any Governmental Authority having jurisdiction over the assets in
question addressing pollution or protection of human health, safety or the
environment.

      "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.

                                        5


      "ERISA Affiliate" means any entity that, together with any Seller would be
deemed a single employer within the meaning of Code Section 414 or ERISA Section
4001(b).

      "Estimated Adjustment" has the meaning given to it in Section 2.2.3 of
this Agreement.

      "Estimated Closing Statement" has the meaning given to it in Section 2.2.3
of this Agreement.

      "Estimated Hot Gas Path Parts Expenditures Amount" has the meaning given
to it in Section 2.2.3.

      "Estimated Post-April RRSU Payment Amount" has the meaning given to it in
Section 2.2.3 of this Agreement.

      "Estimated Post-September Capital Expenditures Amount" has the meaning
given to it in Section 2.2.3 of this Agreement.

      "Estimated Purchase Price" has the meaning given to it in Section 2.2.2 of
this Agreement.

      "Estimated Stores and Inventory Amount" has the meaning given to it in
Section 2.2.3 of this Agreement.

      "Excluded Assets" has the meaning given to it in Section 2.1.3 of this
Agreement.

      "Excluded Liabilities" has the meaning given to it in Section 2.1.4 of
this Agreement.

      "Existing Letters of Credit" mean (i) Letter of Credit No. NZS507752
issued by Wells Fargo Bank N.A. for benefit of GenWest, on behalf of CH2M Hill
Companies, Ltd., in the amount of $500,000, 25% of the rights and obligations
under which were assigned to and assumed by SNWA pursuant to the Bill of Sale,
and (ii) Letter of Credit No. SM206052W dated December 11, 2003, issued by
Wachovia Bank National Association, in the amount of $2,479,236, in favor of
GenWest, on behalf of Alstom Power Inc., 25% of the rights and obligations under
which were assigned to and assumed by SNWA pursuant to the Bill of Sale.

      "Facility" or "Silverhawk Power Plant" means the Silverhawk Power Plant
consisting of an operating natural gas-fired, combined cycle, electric
generation plant, and the pipeline interconnections, electrical interconnections
and all other related equipment and other associated property located within the
Site as described in Schedule II, Part B, Item 1.

      "Facility Agreements" means the GenWest Agreements and the Joint Facility
Agreements.

      "Facility Permits" has the meaning given to it in Section 3.1.15(a) of
this Agreement.

      "Fault Current Upgrade MOUs" means (i) the Revised MOU I, and (ii) the
Regional Required System Upgrades Western Memorandum of Understanding, dated
November 3, 2003, between Purchaser and GenWest, as amended by the Memorandum of
Understanding between

                                        6


Purchaser and GenWest, dated March 24, 2005, attached to the Western Settlement
Agreement and approved by FERC on June 1, 2005 (also known as MOU II).

      "Federal Power Act" means the Federal Power Act of 1935.

      "FERC" means the Federal Energy Regulatory Commission.

      "FERC Approval" means the final approval to be issued by FERC under
Section 203 of the Federal Power Act with respect to the transactions
contemplated hereby, provided that the terms of the approval imposing
obligations on a Party or in respect of its assets shall be satisfactory to such
Party in its sole discretion.

      "Financing" means financing which makes available funds to Purchaser in
connection with the acquisition of the Purchased Assets, on terms substantially
similar to those currently available in the capital markets to Purchaser on the
Effective Date and in a principal amount equal to the Purchase Price, and
otherwise on terms satisfactory to Purchaser, in its sole discretion.

      "GAAP" means generally accepted accounting principles in the United States
of America applied on a consistent basis.

      "GenWest" has the meaning given to it in the preamble to this Agreement.

      "GenWest Agreements" means any agreements, leases, licenses, indentures,
security agreements, deeds of trust or other contracts entered into by GenWest
for its own benefit, and not in common with or for the benefit of SNWA,
including in connection with GenWest's Interest in the Project, excluding any
agreements between GenWest and any of its Affiliates other than the O&M
Agreement and excluding any agreements that are fully performed except for
customary surviving provisions, including those relating to confidentiality,
indemnification, dispute resolution, audit rights, and limitation on
liabilities, in each case that do not have an adverse effect on the Purchased
Assets.

      "Governmental Authority" means any federal, state or local governmental
entity, authority or agency, court, tribunal, regulatory commission or other
body, whether legislative, judicial or executive (or a combination or
permutation thereof), provided; however, that SNWA shall not be considered a
Governmental Authority for purposes of this definition.

      "Hamon Consent" shall mean the consent obtained from Hamon Cooling Towers,
Inc., consenting to the assignment of the Silverhawk Combined Cycle Equipment
Supply Agreement (Contract No. 760200013), dated March 7, 2002, between GenWest
and Hamon Cooling Towers, Inc., 25% of the rights and obligations under which
were assigned to and assumed by SNWA pursuant to the Bill of Sale, as amended by
Change Order No. 1 and the Settlement Agreement dated May 12, 2004, in the form
attached hereto as Exhibit A or otherwise in form and substance reasonably
satisfactory to Purchaser and Sellers.

      "Hazardous Materials" means (i) any substance, emission or material
including asbestos, now or hereafter defined as, listed as or specified in a Law
as a "regulated substance," "hazardous substance," "toxic substance,"
"pesticide," "hazardous waste," "hazardous material"

                                        7


or any similar or like classification or categorization under any Law including
by reason of ignitability, corrosivity, reactivity, carcinogenicity or
reproductive or other toxicity of any kind, (ii) any products or substances
containing petroleum, asbestos, or polychlorinated biphenyls or (iii) any
substance, emission or material determined to be hazardous or harmful by a
Governmental Authority with appropriate jurisdiction.

      "HMH Letter" means the Letter from HMH, Inc. dated May 13, 2004, with the
following subject: "GBS from GENWEST, LLC to SOUTHERN NEVADA WATER AUTHORITY AT
APEX."

      "Hot Gas Path Parts Adjustment Amount" has the meaning given to it in
Section 2.2.4(a) of this Agreement.

      "Hot Gas Path Parts Expenditures Amount" means 75% of any expenditures for
the purchase of parts required for the hot gas path parts inspection scheduled
to take place during the spring and fall outages in 2007 under the Long Term
Maintenance Agreement.

      "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

      "Indemnified Party" has the meaning given in Section 7.3.1 of this
Agreement.

      "Indemnifying Party" has the meaning given in Section 7.3.1 of this
Agreement.

      "Independent Accounting Firm" means such nationally recognized,
independent accounting firm as is mutually appointed by Purchaser and Sellers
for purposes of this Agreement.

      "Intellectual Property" means (i) patents and industrial designs
(including any continuations, divisionals, continuations-in-part, renewals,
reissues, and applications for any of the foregoing), (ii) copyrights (including
any registrations and applications for any of the foregoing), (iii) software
(whether in source code or object code form), (iv) information technology and
information systems, or (v) technology, trade secrets or other confidential
information, know-how, proprietary processes, formulae, algorithms, models, or
methodologies, and licenses or other rights to the foregoing.

      "Interconnection and Operation Agreement" means the Interconnection and
Operation Agreement, Third Revised Service Agreement No. 02-00107 under Sierra
Pacific Resources Operating Companies' Open Access Transmission Tariff, dated
January 15, 2004 (effective from May 30, 2002), between GenWest and Purchaser,
25% of the rights and obligations under which were assigned to and assumed by
SNWA pursuant to the Bill of Sale.

      "Interconnection Contracts" means (i) the Interconnection and Operation
Agreement, (ii) the Fault Current Upgrade MOUs, (iii) the Settlement Agreements,
and (iv) the SCE Tax Agreement.

      "Interest" has the meaning assigned to it in the Co-Tenancy Agreement.

                                        8


      "Interim PPA" means the Power Purchase Agreement, dated as of the date
hereof, between GenWest and Purchaser.

      "Joint Facility Agreements" means any agreements, leases, licenses,
indentures, security agreements, deeds of trust or other contracts relating to
the development, construction, ownership, operation or maintenance of the
Facility entered into by GenWest or an Affiliate of GenWest, in each case for
the joint benefit of GenWest and SNWA, excluding any agreements that are fully
performed except for customary surviving provisions, including those relating to
confidentiality, indemnification, dispute resolution, audit rights, and
limitation on liabilities, in each case that do not have an adverse effect on
the Purchased Assets.

      "Kern River Consent" shall mean the consent obtained from Kern River Gas
Transmission Company consenting to the assignment of the Kern River Contracts,
in the form attached hereto as Exhibit B or otherwise in form and substance
reasonably satisfactory to Purchaser and Sellers.

      "Kern River Contracts" shall mean: (i) Power Supply Agreement, dated
November 20, 2003, between Kern River Gas Transmission Company and GenWest, 25%
of the rights and obligations under which were assigned to and assumed by SNWA
pursuant to the Bill of Sale, (ii) the Facilities Agreement, dated March 13,
2003, between Kern River Gas Transmission Company and GenWest, as amended by
Revised Exhibit C, which was assigned to PWEC, as Operating Agent on June 6,
2005, and (iii) the Signal Letter Agreement, dated May 8, 2003, between Kern
River Gas Transmission Company and GenWest, 25% of the rights and obligations
under which were assigned to and assumed by SNWA pursuant to the Bill of Sale.

      "Las Vegas Valley Water District Consent" shall mean the consent obtained
from Las Vegas Valley Water District consenting to the assignment of the Water
Supply Agreement, in the form attached hereto as Exhibit C or otherwise in form
and substance reasonably satisfactory to Purchaser and Sellers.

      "Law" means any statute, law, treaty, rule, code, common law, ordinance,
regulation, permit, interpretation, certificate or order of any Governmental
Authority, or any judgment, decision, decree, injunction, writ, order or like
action of any court, arbitrator or other Governmental Authority including each
Environmental Law.

      "Liability" means any indebtedness, obligations and other liabilities of a
Person (whether absolute, accrued, contingent, fixed or otherwise, or whether
due or to become due).

      "Lien" shall mean any mortgage, pledge, deed of trust, hypothecation,
assignment, deposit arrangement, charge, security interest, encumbrance, defect
in title, lien (statutory or other), or preference, priority or other security
agreement of any kind or nature whatsoever, including without limitation any
conditional sale or other title retention agreement, any financing lease having
substantially the same effect as any of the foregoing, or the filing of any
financing statement or similar instrument under the Uniform Commercial Code as
in effect in any relevant jurisdiction or comparable Law of any jurisdiction,
domestic or foreign.

      "Long Term Maintenance Agreement" or "LTMA" means the Program Parts, Shop
Repairs and Scheduled Outage Services Contract for a 2X1 501F Combined Cycle
Project for the

                                        9


Silverhawk Power Plant Project (Contract No. 760200022), dated as of August 8,
2000, between PWEC, as Operating Agent, and Siemens Westinghouse Power
Corporation.

      "Loss" means any damage, fine, penalty, deficiency, Liability, loss or
expense (including interest, court costs, reasonable fees of attorneys,
accountants and other experts or other reasonable expenses of litigation or
other proceedings or of any claim, default or assessment).

      "Lube Oil Storage Facility" means the facility to be constructed for the
storage of lube oil pursuant to the Engineering, Procurement and Construction
Agreement for Construction of Pre-Engineered Steel Buildings (Agreement No.
760200205), dated December 2, 2004, between Gillard Construction, Inc. and PWEC,
as Operating Agent.

      "Lugo Capacitor Work" has the meaning given to it in Section 2.5.4(c).

      "Master Declaration" means Declaration of Covenants, Conditions and
Restrictions for APEX Industrial Park, dated April 6, 2001, and recorded on
April 10, 2001, in Book 20010410 as Document No. 01425 of Official Records of
Clark County, Nevada, as amended by the Second Amendment to the Declaration of
Covenants and Restrictions for APEX Industrial Park, recorded on July 9, 2002,
in Book 20020709 as Document No. 00078 of Official Records of Clark County,
Nevada.

      "Material Adverse Effect" means a material adverse effect on (i) the
Facility or the Purchased Assets or the operation or condition thereof, (ii) the
ability of Sellers to perform their obligations under this Agreement or any of
the other Transaction Agreements or (iii) the validity or enforceability of this
Agreement or any of the other Transaction Agreements, or the rights or remedies
of Purchaser hereunder or thereunder, provided, however, that the term Material
Adverse Effect shall not include (x) any change resulting from changes in
general international or national economic, financial or market conditions, or
(y) any effect having a disproportionate impact on the Facility compared to
other generating facilities in Purchaser's control area, to the extent resulting
from the voluntary action of Purchaser relating to the transmission of power
from the Facility.

      "Materials and Equipment" means the Non-Shared Materials and Equipment and
the Shared Materials and Equipment.

      "Mirant Back-Up Well Arrangements" shall mean the Contemplated Assumed
Agreement Amendment in respect of the Mirant Master Agreement.

      "Mirant Consent" shall mean the consent obtained from Mirant Las Vegas,
LLC consenting to the assignment of the Mirant Master Agreement, in the form
attached hereto as Exhibit D or otherwise in form and substance reasonably
satisfactory to Purchaser and Sellers.

      "Mirant Master Agreement" means the Master Project Development and
Operating Agreement, dated September 26, 2001, as amended on March 19, 2003,
between GenWest and Mirant Las Vegas, LLC (Contract No. 750200436), as
supplemented by Supplement Nos. 1 through 7, 25% of the rights and obligations
under which was assigned to and assumed by SNWA pursuant to the Bill of Sale.

                                       10


      "Moenkopi Capacitor Work" has the meaning given to it in Section 2.5.4(b).

      "New Warehouse" means the warehouse being constructed at the Site pursuant
to the Engineering, Procurement and Construction Agreement for Construction of
Pre-Engineered Steel Buildings (Agreement No. 760200205), dated December 2,
2004, between Gillard Construction, Inc. and PWEC, as Operating Agent.

      "Non-Shared Assets" means the Non-Shared Materials and Equipment,
Non-Shared Books and Records, Continued Employee Books and Records (to the
extent they may be provided to Purchaser in accordance with Law), Assumed
GenWest Agreements, Assumed PWCC Agreements, Assumed PWEC Agreements, Non-Shared
Intellectual Property, and all third-party warranties and related assignments
and other assets owned separately by GenWest and not in common with or for the
benefit of SNWA, whether or not located on the Real Property.

      "Non-Shared Books and Records" means Books and Records owned separately by
GenWest, and not in common with or for the benefit of SNWA, in connection with
GenWest's Interest in the Project, or by PWEC in connection with its role as
Operating Agent under the Co-Tenancy Agreement, excluding any such Non-Shared
Books and Records constituting or relating solely to Excluded Assets; provided,
however, that if such Non-Shared Books and Records contain information related
to the Purchased Assets and Excluded Assets, the portion relating to the
Excluded Assets may be redacted.

      "Non-Shared Intellectual Property" means Intellectual Property owned
separately by GenWest and not in common with or for the benefit of SNWA, in
connection with GenWest's Interest in the Project.

      "Non-Shared Materials and Equipment" shall include the equipment,
machinery, apparatus, furniture, computer hardware, vehicles, Stores and
Inventory, tools, dies, construction in progress, and other tangible personal
property, including such additional items of tangible personal property as
acquired prior to the Closing Date, owned separately by GenWest and not in
common with or for the benefit of SNWA, in connection with GenWest's Interest in
the Project, including the Non-Shared Materials and Equipment listed in Schedule
II, Part A.

      "O&M Agreement" means the Facility Operating and Maintenance Agreement,
dated as of April 18, 2002, among PWEC, as Operating Agent, and GenWest and SNWA
as Participants in the Silverhawk Power Plant.

      "Objectionable Survey Matters" has the meaning given to it in Section
4.1(g) of this Agreement.

      "Objectionable Title Matters" has the meaning given to it in Section
4.1(g) of this Agreement.

      "Operating Agent" has the meaning given to it in the Co-Tenancy Agreement.

      "Other Transfer Taxes" has the meaning given to it in Section 8.2 of this
Agreement.

                                       11


      "Overlap Period" has the meaning given to it in Section 8.4 of this
Agreement.

      "Overlap Period Taxes" has the meaning given to it in Section 8.4 of this
Agreement.

      "Participant" has the meaning given to it in the Co-Tenancy Agreement.

      "Party" or "Parties" has the meaning given to it in the preamble to this
Agreement.

      "Permits" means permits, licenses, approvals, certificates, letter
rulings, orders, decrees, judgments, writs, injunctions or similar actions of
any Governmental Authority.

      "Permitted Liens" means (i) those exceptions to title to the Purchased
Assets set forth in Section 1.1.1(b) of the Sellers' Disclosure Schedule, (ii)
zoning, entitlement, conservation restriction and other land use and
environmental regulations by any Governmental Authority, (iii) Liens for Taxes
not yet delinquent, (iv) items 3 through 25, and items 27 through 28 set forth
in Schedule B of that certain Title Report dated as of June 2, 2005, Order
Number 05-02-1673-CLB 2nd Amendment, of Nevada Title Company, (v) Liens created
under Section 3.6, Section 3.8.1, Section 3.8.2, Section 10.2, Section 11.3, and
Section 14.2(h) of the Co-Tenancy Agreement, (vi) any Lien expressly applying
only to SNWA's interest in the Project, (vii) mechanics', carriers', workers',
repairers' and other similar Liens arising or incurred under Assumed Agreements
in the ordinary course of business and not in violation of the Co-Tenancy
Agreement or the O&M Agreement relating to obligations (x) which are not yet due
and payable or (y) which do not exceed $500,000 in the aggregate and the
validity of which is being contested in good faith by appropriate proceedings,
and (viii) prior to Closing only, Additional Pre-Closing Permitted Mechanics
Liens.

      "Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust, limited liability company,
unincorporated organization, Governmental Authority or any other form of entity.

      "Post-April RRSU Payment Amount" means amounts of payments by GenWest
pursuant to the Fault Current Upgrade MOUs beginning on May 1, 2005 and ending
on the Closing Date, less (a) any refunds received by GenWest in respect of such
payments prior to Closing, and (b) any amounts paid by GenWest beginning on May
1, 2005 and ending on the Closing Date attributable to SNWA's Interest.

      "Post-Effective Date Assumed Joint Facility Agreements" has the meaning
given to it in Section 4.11(a) of this Agreement.

      "Post-Effective Date Permits" has the meaning given to it in Section
4.11(a) of this Agreement.

      "Post-September Capital Expenditures Adjustment Amount" has the meaning
given to it in Section 2.2.4(a) of this Agreement.

      "Post-September Capital Expenditures Amount" means 75% of the aggregate
amount of all funds expended on the following capital expenditures for the
Project, beginning on October 1, 2005 and ending on the Closing Date: (a)
capital expenditures made in the ordinary course of

                                      12


business, pursuant to the Co-Tenancy Agreement, and not exceeding $500,000 in
the aggregate, (b) unscheduled capital expenditures made with the prior written
consent of Purchaser, and (c) capital expenditures made at Purchaser's request,
but excluding in each case any expenditures for construction of the New
Warehouse or the Lube Oil Storage Facility, expenditures for Stores and
Inventory, Hot Gas Path Parts Expenditures and such capital expenditures
included in payments made by Purchaser under the Interim PPA.

      "Pre-Closing Books and Records" has the meaning given to it in Section
2.5.2 of this Agreement.

      "Pre-Closing Taxes" has the meaning given to it in Section 8.4 of this
Agreement.

      "Pre-Closing Tax Period" shall mean any taxable period ending on or before
the Closing Date, or with respect to any taxable period that begins on or before
the Closing Date and ends after the Closing Date, the portion of such taxable
period ending on the Closing Date.

      "Project" means the Facility and all Real Property, Shared Materials and
Equipment, Shared Books and Records, Assumed Joint Facility Agreements,
Transferred Permits, Shared Intellectual Property, and all third-party
warranties and related assignments and other assets owned jointly by GenWest and
SNWA or by either of GenWest or SNWA, in each case for their joint benefit,
whether or not located on the Real Property.

      "Project Employee Books and Records" means the Books and Records related
to Project Employees regarding skill and development training; seniority
histories, disciplinary histories, salary and benefit information, Occupational
Safety and Health Administration reports and records, and active medical
restriction forms.

      "Project Employees" means individuals employed by PWEC at the Facility.

      "Property Taxes" has the meaning given to it in Section 8.3 of this
Agreement.

      "PUCN" means the Public Utilities Commission of Nevada.

      "PUCN Approval" means the final order to be issued by PUCN approving (i)
Purchaser's acquisition of the Purchased Assets on terms consistent with this
Agreement, (ii) the Interim PPA in the form executed by Purchaser and GenWest,
(iii) the financing of the Purchased Assets, and (iv) any long-term firm gas
transportation arrangements and electric transmission and related upgrades
required in connection with such acquisition, in each case on terms satisfactory
to Purchaser, in its sole discretion.

      "Purchase Price" has the meaning given to it in Section 2.2.1 of this
Agreement.

      "Purchased Assets" has the meaning given to it in Section 2.1.1 of this
Agreement.

      "Purchaser" has the meaning given to it in the preamble of this Agreement.

                                       13


      "Purchaser Consent Representative" means the person appointed by Purchaser
and notified to Sellers with appropriate contact information for the purpose of
giving consents and receiving notices required pursuant to Section 4.2(f) of
this Agreement.

      "Purchaser Indemnified Party" has the meaning given to it in Section 7.1
of this Agreement.

      "Purchaser's Disclosure Schedule" means the schedule delivered to Sellers
by Purchaser herewith and dated as of the Effective Date, containing all lists,
descriptions, exceptions and other information and materials as are required to
be included therein by Purchaser pursuant to this Agreement, attached hereto as
Schedule VII.

      "Purchaser's Knowledge" means the actual knowledge of the Persons listed
on Section 1.1.1(c) of the Purchaser's Disclosure Schedule; provided, however,
each such Person shall be deemed to have knowledge of a matter of which such
Person has received written notice.

      "Purchaser's RRSU Refund Portion" has the meaning given to it in Section
2.5.4.

      "PWCC" has the meaning given to it in the preamble of this Agreement.

      "PWEC" has the meaning given to it in the preamble of this Agreement.

      "Real Property" means the Site (including all buildings, structures and
other improvements located thereon) and the Easements.

      "Real Property Documents" means (i) the Real Property Purchase Agreement,
(ii) the Easements, (iii) the Well Development Agreement, (iv) the Master
Declaration, (v) Grant of Easement from GenWest in favor of Kern River Gas
Transmission Company, for right of way easement, recorded December 20, 2002, in
Book 20021220 as Document No. 01148 of Official Records of Clark County, Nevada,
and (vi) the Grant of Easement from GenWest to Nevada Power Company and Central
Telephone Company, for electrical and communication facilities, recorded
September 25, 2003, in Book 20030925 as Document No. 00111 of Official Records
of Clark County, Nevada.

      "Real Property Purchase Agreement" means the Real Property Purchase
Agreement, dated August 23, 2001, between GDL 7, LLC and GenWest for the
purchase of the real property comprising the Site, 25% of the rights and
obligations under which were assigned to and assumed by SNWA pursuant to the
Bill of Sale.

      "Real Property Transfer Taxes" has the meaning given to it in Section 8.2
of this Agreement.

      "Related Person" means (i) with respect to Sellers and Purchaser, their
respective Affiliates, and the employees, officers, directors, agents,
representatives, licensees and invitees of Sellers, Purchaser and their
respective Affiliates, and (ii) with respect to Purchaser, the employees,
officers, directors, agents, representatives, licensees and invitees of its
lenders, advisors and subcontractors.

                                       14


      "Release" shall mean any release, spill, emission, discharge, leaking,
pumping, injection, deposit, disposal, discharge, dispersal, leaching or
migration into the indoor or outdoor environment (including, without limitation,
ambient air, surface water, groundwater, and surface or subsurface strata) or
into or out of any property, including the movement of Hazardous Materials
through or in air, soil, surface water, groundwater or property.

      "Reliant Agreement" means the Agreement Regarding Exchange and Assignment
of Transmission Services Agreements, dated August 26, 2002, between PWEC and
Reliant Energy Services, Inc., which was assigned to PWCC pursuant to the
Assignment and Assumption Agreement between PWEC and PWCC dated April 9, 2003.

      "Reliant Consent" shall mean the consent obtained from Reliant Energy
Services, Inc. consenting to the assignment of the Reliant Agreement, in the
form attached hereto as Exhibit E or otherwise in form and substance reasonably
satisfactory to Purchaser and Sellers.

      "Remediation" means actions undertaken to address a Release of Hazardous
Materials to the environment, including the following activities: (i)
monitoring, investigation, assessment, treatment, cleanup, containment, removal,
mitigation, response or restoration work, (ii) obtaining any Permits, consents,
approvals or authorizations of any Governmental Authority necessary to conduct
any such activity, (iii) preparing and implementing any plans or studies for any
such activity, (iv) obtaining a written notice from a Governmental Authority
that no material additional work is required by such Governmental Authority, (v)
the use, implementation, application, installation, operation or maintenance of
remedial technologies applied to the surface or subsurface soils, excavation and
treatment or disposal of soils at off-site locations, systems for long-term
treatment of surface water or groundwater, engineering controls or institutional
controls, and (vi) any other activities reasonably determined to be necessary or
appropriate or required under Environmental Laws to address a Release of
Hazardous Materials.

      "Required Consents" shall mean the following: the SNWA Consent, the Kern
River Consent, the Las Vegas Valley Water District Consent, the Siemens Consent,
the SCE Consent, the Reliant Consent, the Mirant Consent, the Hamon Consent, and
any other consents required pursuant to Section 4.11(a) of this Agreement.

      "Restrictions Declaration" means Use Restrictions Declaration dated as of
July 8, 2002, between GDL 7, LLC and GenWest, as recorded on July 9, 2002, in
Book 20020709 as Document No. 00079 of Official Records of Clark County, Nevada.

      "Retained Information" has the meaning given to it in Section 2.5.2(b) of
this Agreement.

      "Revised MOU I" means the Revised RRSU Memorandum of Understanding between
Purchaser and GenWest filed as Attachment B to the 2003 Settlement Agreement
("MOU I"), as amended by the revised memorandum of understanding between
Purchaser and GenWest entered into pursuant to the 2005 Settlement Agreement and
the Amended and Restated 2003 Settlement Agreement, conforming MOU I with the
revisions agreed to in the 2005 Settlement Agreement and the Amended and
Restated 2003 Settlement Agreement.

      "RRSU" means Regional Required System Upgrades.

                                       15


      "RRSU Adjustment Amount" has the meaning given to it in Section 2.2.4(a)
of this Agreement.

      "SCE" means Southern California Edison Company.

      "SCE Consent" shall mean the consent obtained from SCE consenting to the
assignment of the Settlement Agreements, excluding the Western Settlement
Agreement, and the SCE Tax Agreement in the form attached hereto as Exhibit F,
or otherwise in form and substance reasonably satisfactory to Purchaser and
Sellers.

      "SCE RRSU Refund" means any service credits and cash refunds provided by
SCE with respect to the payments made under the Revised MOU I and SCE Tax
Agreement relating to the Silverhawk Power Plant, pursuant to paragraphs 26
through 33 of the 2003 Settlement Agreement and the Amended and Restated 2003
Settlement Agreement.

      "SCE Tax Agreement" means the Tax Agreement, dated effective January 31,
2003, among GenWest, SCE and Purchaser, 25% of the rights and obligations under
which were assigned to and assumed by SNWA pursuant to the Bill of Sale, as such
is modified by the revised SCE Tax Agreement included as Attachment C to the
Amended and Restated 2003 Settlement Agreement.

      "Section 4.2(d) Action" has the meaning given to it in Section 4.2(c).

      "Seller" and "Sellers" each has the meaning given to it in the preamble to
this Agreement.

      "Sellers' Disclosure Schedule" means the schedule delivered to Purchaser
by Sellers herewith and dated as of the Effective Date, containing all lists,
descriptions, exceptions and other information and materials as are required to
be included therein by Sellers pursuant to this Agreement attached hereto as
Schedule VI.

      "Sellers' Indemnified Party" has the meaning given to it in Section 7.2 of
this Agreement.

      "Sellers' Knowledge" means the actual knowledge of the Persons listed on
Section 1.1.1(d) of the Sellers' Disclosure Schedule; provided, however, each
such Person shall be deemed to have knowledge of a matter of which such Person
received written notice.

      "Sellers' Releases" means releases to be sought by Sellers from (i) SNWA
under the Co-Tenancy Agreement, the O&M Agreement, and the Agency Agreement,
(ii) Reliant Energy Services, Inc. under the Reliant Agreement, (iii) Siemens
Westinghouse Power Corporation under the Long Term Maintenance Agreement, (iv)
Purchaser with respect to any obligations of SNWA under the Interconnection and
Operation Agreement, each of which releases shall be from all liability for
actions taken after the Closing Date, except for clause (iv), which shall be
from all liability for actions taken after the effective date of the Bill of
Sale.

      "Sellers' Releases Deadline" has the meaning given to it in Section
4.1(i).

      "Sellers' RRSU Refund Portion" has the meaning given to it in Section
2.5.4.

                                       16


      "Sellers' Support Obligations" means (i) the Irrevocable Letter of Credit
No. P-243249, dated November 26, 2003, issued by JPMorgan Chase Bank on behalf
of GenWest, (ii) the Irrevocable Letter of Credit No. P-226706, dated June 18,
2002, issued by JPMorgan Chase Bank on behalf of GenWest, (iii) the Irrevocable
Letter of Credit No. TS-07001845 dated January 2, 2002, issued by Credit Suisse
First Boston on behalf of PWEC, and (iv) the Irrevocable Letter of Credit No.
P-230876 dated October 11, 2002, issued by JPMorgan Chase Bank on behalf of
PWEC..

      "Settlement Agreements" means the 2003 Settlement Agreement, the Amended
and Restated 2003 Settlement Agreement, the 2005 Settlement Agreement, and the
Western Settlement Agreement.

      "Shared Books and Records" means Books and Records relating specifically
to the construction, ownership, operation or maintenance of the Facility that
are not Non-Shared Books and Records, excluding any such Shared Books and
Records constituting or relating solely to Excluded Assets; provided, however,
that if such Books and Records contain information related to the Purchased
Assets and Excluded Assets, the portion relating to the Excluded Assets may be
redacted.

      "Shared Intellectual Property" means Intellectual Property owned jointly
by GenWest and SNWA or by either of GenWest or SNWA, in each case for their
joint benefit.

      "Shared Materials and Equipment" shall include the equipment, machinery,
apparatus, furniture, computer hardware, vehicles, Stores and Inventory, tools,
dies, construction in progress, and other tangible personal property required,
including such additional items of tangible personal property as acquired prior
to the Closing Date, used, or to be used for or in the operation or maintenance
of the Facility that are not Non-Shared Materials and Equipment, including the
Shared Materials and Equipment listed in Schedule II, Part B, which schedule
does not include Stores and Inventory.

      "Siemens Consent" shall mean the consent obtained from Siemens
Westinghouse Power Corporation consenting to the assignment of (i) the Equipment
Supply Agreement (Contract No. 750200136), dated February 16, 2001, between
GenWest and Siemens Westinghouse Power Corporation for Combustion Turbine
Equipment, as amended by Change Orders Nos. 1 through 8, 25% of the rights and
obligations under which were assigned to and assumed by SNWA pursuant to the
Bill of Sale, (ii) the Contract, dated April 20, 2004, between Siemens
Westinghouse and PWEC, as Operating Agent, for water injection equipment, as
amended by Change Order No. 1, dated July 8, 2004, and (iii) the Long Term
Maintenance Agreement, in the form attached hereto as Exhibit G or otherwise in
form and substance reasonably satisfactory to Purchaser and Sellers.

      "Site" means that certain real property located in Clark County, Nevada,
upon which the Facility is located, within Lot 23 of the APEX Industrial Park,
as further described in Schedule III.

      "Site Description Error" means the errors in the legal description of the
Site, and in the legal description of the access road easement over a portion of
APEX Industrial Park, Assessor's

                                       17


Parcel Number 103-04-010-002, granted pursuant to that Grant of Easement, dated
July 23, 2002 by HDL 8, LLC to GenWest, which errors are to be corrected as
identified in the markups attached as Exhibit 2 and Exhibit 3 to Schedule III.

      "SNWA" means the Southern Nevada Water Authority.

      "SNWA Consent" shall mean the consent obtained from SNWA consenting to the
Transfer of GenWest's Interest and amending the Co-Tenancy Agreement and the O&M
Agreement, in the form attached hereto as Exhibit H or otherwise in form and
substance reasonably satisfactory to Purchaser and Sellers.

      "SNWA Deed" means the Grant, Bargain, Sale Deed dated May 14, 2004,
between GenWest and SNWA.

      "Stores and Inventory" means supplies, inventories, materials, lubricants,
chemicals, filters, fittings, connectors, seals, gaskets, repair and replacement
parts, which are located at the Site or in transit, or deliverable to the
Facility pursuant to the Assumed Agreements, as of the Closing Date, and used,
or to be used, in connection with the operation and maintenance of the Facility.
Certain items of Stores and Inventory as of the Effective Date are listed on
Schedule II, Part C.

      "Stores and Inventory Adjustment Amount" has the meaning given to it in
Section 2.2.4(a) of this Agreement.

      "Stores and Inventory Amount" means an amount equal to 75% of the value of
Stores and Inventory, which amount shall not exceed the Stores and Inventory Cap
Amount. For purposes of determining value, new Stores and Inventory shall be
valued at the original delivered cost, while used Stores and Inventory shall be
valued at a portion of the original delivered costs based on the remaining
useable life of such Stores and Inventory. In the case of used Stores and
Inventory that are supplied under the Long Term Maintenance Agreement, value
shall be determined by reference to the parts life list set forth in Exhibit B
of the Long Term Maintenance Agreement. The "Stores and Inventory Amount" (i)
shall include amounts for Stores and Inventory to the extent such Stores and
Inventory have been paid for before or after Closing by GenWest and SNWA and
(ii) shall exclude in all cases any amounts for Stores and Inventory included in
Post-September Capital Expenditures or included in payments made by Purchaser
under the Interim PPA and any amounts included in the Hot Gas Path Parts
Expenditures Amount.

      "Stores and Inventory Cap Amount" means an amount equal to $5,460,000.

      "Survey" has the meaning given to it in Section 4.1(g) of this Agreement.

      "Tax" or "Taxes" means any and all taxes, including any interest,
penalties, or other additions to tax that may become payable in respect thereof,
imposed by any federal, state or local government or any agency or political
subdivision of any such government, which taxes shall include all income taxes,
profits taxes, taxes on gains, alternative minimum taxes, estimated taxes,
payroll and employee withholding taxes, unemployment insurance taxes, social
security taxes, welfare taxes, disability taxes, severance taxes, license
charges, taxes on stock, sales and

                                       18


use taxes, ad valorem taxes, value added taxes, excise taxes, franchise taxes,
gross receipts taxes, business license taxes, occupation taxes, real or personal
property taxes, stamp taxes, environmental taxes, transfer taxes, workers'
compensation taxes, and other taxes, fees, duties, levies, customs, tariffs,
imposts, assessments, obligations and charges of the same or of a similar nature
to any of the foregoing.

      "Tax Claim" has the meaning given to it in Section 8.7 of this Agreement.

      "Tax Returns" means any return, report, information return, claim for
refund or other document (including any related or supporting information)
supplied to or required to be supplied to any Taxing Authority with respect to
Taxes, including any attachments, amendments and supplements thereto.

      "Taxing Authority" means, with respect to any Tax, the governmental entity
or political subdivision thereof that imposes such Tax, and the agency (if any)
charged with the collection of such Tax for such entity or subdivision.

      "Title Insurance Commitment" has the meaning given to it in Section 4.1(g)
of this Agreement.

      "Title Insurance Policy" has the meaning given to it in Section 4.1(g) of
this Agreement.

      "Transaction Agreements" means the following agreements:

      (a) this Agreement;

      (b) the Deed;

      (c) the Assignment Agreement;

      (d) the Interim PPA; and

      (e) the Required Consents.

      "Transfer" has the meaning assigned to it in the Co-Tenancy Agreement.

      "Transfer Taxes" has the meaning given to it in Section 8.2 of this
Agreement.

      "Transferred Intellectual Property" means the Non-Shared Intellectual
Property and GenWest's undivided seventy-five percent (75%) interest in the
Shared Intellectual Property.

      "Transferred Permits" means those Permits set forth in Schedule IV,
interests in which are to be conveyed by the Sellers to Purchaser as part of the
Purchased Assets.

      "Transmission Services Agreement" means the Service Agreement for
Long-Term Firm Point-To-Point Transmission Service, Service Agreement No. 101A,
dated December 12, 2002, as amended December 19, 2003, and effective July 31,
2003, between Purchaser and PWCC, which was originally assigned to PWEC by
Reliant Energy Services, Inc. pursuant to the TSA

                                       19


101 Assignment Agreement and later assigned to PWCC pursuant to the Assignment
and Assumption Agreement, dated April 9, 2003, between PWEC and PWCC.

      "TSA 100 Assignment Agreement" means the Assignment and Assumption
Agreement (TSA-100), dated as of September 17, 2002, between PWEC and Reliant
Energy Services, Inc.

      "TSA 101 Assignment Agreement" means the Assignment and Assumption
Agreement (TSA-101), dated as of September 17, 2002, between PWEC and Reliant
Energy Services, Inc.

      "Water Permit" means the Permanent Point of Diversion Permit for the
Facility to be issued by State of Engineer of Nevada, an application for which
was filed on May 12, 2005, as such application may be amended or modified as may
be agreed to by Purchaser and Sellers.

      "Water Supply Agreement" means the Water Supply Agreement, effective
August 7, 2001, between the Las Vegas Valley Water District and GenWest, 25% of
the rights and obligations under which were assigned to and assumed by SNWA
pursuant to the Bill of Sale.

      "Well Development Agreement" means the Well Development Agreement, dated
May 17, 2002, between GenWest and Dry Lake Water, LLC, 25% of the rights and
obligations under which were assigned to and assumed by SNWA pursuant to the
Bill of Sale.

      "Western Settlement Agreement" means the Settlement Agreement, dated as of
March 21, 2005, entered into among Purchaser, Valley Electric Association, Inc.,
Purchaser's Chuck Lenzie Generating Station, GenWest, Las Vegas Cogeneration II,
LLC, Mirant Las Vegas, LLC, Reliant Energy Wholesale Generation, LLC, and SNWA,
which resolves issues in FERC Docket No. ER04-152-000.

      Section 1.2 Rules as to Usage. Except as otherwise expressly provided
herein, the following rules shall apply to the usage of terms in this Agreement:

                  (a) The terms defined above have the meanings set forth above
for all purposes, and such meanings are equally applicable to both the singular
and plural forms of the terms defined. If a term is defined as one part of
speech (such as a noun), it shall have a corresponding meaning when used as
another part of speech (such as a verb).

                  (b) "Include," "includes" and "including" shall be deemed to
be followed by "without limitation" whether or not they are in fact followed by
such words or words of like import.

                  (c) "Writing," "written" and comparable terms refer to
printing, typing, and other means of reproducing in a visible form.

                  (d) Any Law defined or referred to herein means such Law as
from time to time amended, modified or supplemented, including by succession of
comparable successor Law and any rules and regulations promulgated thereunder.

                  (e) References to a Person are also to its permitted
successors and assigns.

                                       20


                  (f) Any term defined above by reference to any agreement,
instrument or Law has such meaning whether or not such agreement, instrument or
Law is in effect.

                  (g) "Hereof," "herein," "hereunder" and comparable terms
refer, unless otherwise expressly indicated, to the entire agreement or
instrument in which such terms are used and not to any particular article,
section or other subdivision thereof or exhibit or schedule or other attachment
thereto. References in an instrument to "Article," "Section," or another
subdivision or to an exhibit or schedule or other attachment are, unless the
context otherwise requires, to an article, section, subsection or subdivision of
or an exhibit or schedule or other attachment to such agreement or instrument.

                  (h) Pronouns, whenever used in any agreement or instrument
that is governed by this Agreement and of whatever gender, shall include all
Persons. References to any gender include, unless the context otherwise
requires, references to all genders.

                  (i) The word "or" will have the inclusive meaning represented
by the phrase "and/or." "Shall" and "will" have equal force and effect.

                  (j) Whenever the consent or approval of any Party is required
pursuant to this Agreement, unless expressly stated that such consent or
approval is to be given in the sole discretion of such Party, such consent or
approval shall not be unreasonably withheld or delayed.

                  (k) Whenever this Agreement refers to a number of days, such
number shall refer to calendar days unless Business Days are specified. Whenever
any action must be taken hereunder on or by a day that is not a Business Day,
then such action may be validly taken on or by the next day that is a Business
Day.

                  (l) All accounting terms used herein and not expressly defined
herein shall have the meanings given to them under GAAP.

      Section 1.3 Schedules and Exhibits. This Agreement consists of the
Articles contained herein and the Schedules and Exhibits attached hereto, all of
which comprise part of one and the same agreement with equal force and effect.

                                   ARTICLE II

                        SALE AND PURCHASE; PRICE; CLOSING

      Section 2.1 Sale and Purchase; Definition of Purchased Assets; Assumed
Liability.

            Section 2.1.1 Purchased Property. On the terms and subject to the
conditions set forth in this Agreement, at the Closing, the Sellers shall sell,
transfer, convey, assign and deliver to Purchaser, free and clear of all Liens
(other than Permitted Liens), and Purchaser or its designated Affiliate will
purchase and pay for (a) an undivided seventy-five percent (75%) interest in the
Project and (b) a 100% interest in the Non-Shared Assets, excluding the Excluded
Assets (sub-clauses (a) and (b) collectively, the "Purchased Assets").

                                       21


            Section 2.1.2 Assignment and Assumption of Assumed Agreements. On
the terms and subject to the conditions set forth in this Agreement, effective
as of the Closing, Sellers shall assign to Purchaser and Purchaser shall assume
all of Sellers' rights under the Assumed Agreements, and (a) in the case of
Assumed Agreements other than the Interconnection Contracts, all of Sellers'
obligations arising after the Closing under such Assumed Agreements, and (b) in
the case of Interconnection Contracts, all of Sellers' obligations under the
Interconnection Contracts, other than (x) any refund liability of GenWest in
connection with the proceedings on remand from the United States Court of
Appeals for the D.C. Circuit in FERC Docket No. ER02-1913 or a subsequent ruling
by FERC or a court on this issue, except for that portion of such liability for
which SNWA is responsible under the Co-Tenancy Agreement, and (y) any refund
liability of GenWest to SCE pursuant to paragraph 31 of the 2003 Settlement
Agreement and the Amended and Restated 2003 Settlement Agreement, with respect
to refunds received by GenWest, except for that portion of such liability for
which SNWA is responsible under the Co-Tenancy Agreement. For the avoidance of
doubt, (i) with respect to indemnity obligations under Assumed Agreements, other
than Interconnection Contracts as provided above, Purchaser shall only assume
liability for events that occur after the Closing, and (ii) Purchaser shall not
be deemed to assume any Liabilities of Sellers pursuant to this Agreement or the
transactions contemplated hereby, except as set forth in this Section 2.1.2.

            Section 2.1.3 Retention of Certain Assets. Sellers shall have no
obligation to transfer any interest or rights in those agreements, assets and
properties described in Schedule V, Part A attached hereto (the "Excluded
Assets") and Purchaser shall have no Liability with respect thereto. The Parties
acknowledge and agree that Sellers shall have the right on or prior to the
Closing Date to retain or to transfer and assign to one or more of Sellers'
Affiliates, their interests in the Excluded Assets.

            Section 2.1.4 Excluded Liabilities. On and after the Closing, and
without further Liability or obligation of Purchaser, Sellers or their
Affiliates, as the case may be, shall retain the duties, obligations and
Liabilities, direct or indirect, known or unknown, absolute or contingent, under
those agreements and other matters set forth in Schedule V, Part B attached
hereto (the "Excluded Liabilities").

      Section 2.2 Purchase Price.

            Section 2.2.1 Amount. In consideration of the sale, assignment,
conveyance, transfer and delivery to Purchaser as of the Closing of the Sellers'
right, title and interest in the Purchased Assets, Purchaser shall pay to
GenWest an amount equal to the sum of (a) $207,620,000, (b) the Stores and
Inventory Amount, (c) the Post-September Capital Expenditures Amount, (d) the
Post-April RRSU Payment Amount and (e) the Hot Gas Path Parts Expenditures
Amount (collectively, the "Purchase Price").

            Section 2.2.2 Payment of Estimated Purchase Price. At the Closing,
Purchaser shall pay or cause to be paid to GenWest an amount which shall be the
sum of the following (the "Estimated Purchase Price"): (i) $207,620,000, and
(ii) the undisputed portions of the Estimated Stores and Inventory Amount, the
Estimated Post-September Capital Expenditures Amount, the Estimated Post-April
RRSU Payment Amount, and the Estimated Hot Gas Path Parts Expenditures Amount.

                                       22


            Section 2.2.3 Estimated Adjustment. At least ten (10) Business Days
prior to the Closing Date, Sellers in consultation with Purchaser shall conduct
an inventory survey, which may be observed by Purchaser, and prepare and deliver
to Purchaser an estimated closing statement certified to be a good faith
estimate by a duly authorized officer of GenWest (the "Estimated Closing
Statement"). The Estimated Closing Statement shall set forth in reasonable
detail: (i) Sellers' best estimate of the Stores and Inventory Amount (the
"Estimated Stores and Inventory Amount"), which statement shall include a
description, part number, quantity on hand, average unit cost (adjusted for
remaining useable life, if used) and extended value (quantity times average unit
cost) with respect to each class of inventory, including the assumptions and
calculations used by Sellers in such estimate, (ii) Sellers' best estimate of
the Post-September Capital Expenditures Amount, including the assumptions and
calculations used by Sellers in such estimate (the "Estimated Post-September
Capital Expenditures Amount"), (iii) Sellers' best estimate of the Post-April
RRSU Payment Amount, including the assumptions and calculations used by Sellers
in such estimate (the "Estimated Post-April RRSU Payment Amount"), and (iv)
Sellers' best estimate of the Hot Gas Path Parts Expenditures Amount, including
the assumptions and calculations used by Sellers in such estimate (the
"Estimated Hot Gas Path Parts Expenditures Amount", together with the Estimated
Stores and Inventory Amount, the Estimated Post-September Capital Expenditures
Amount, and the Estimated Post-April RRSU Payment Amount, the "Estimated
Adjustment"). Within five (5) Business Days following the delivery of the
Estimated Closing Statement by Sellers to Purchaser, Purchaser may object in
good faith to the Estimated Adjustment in writing. If Purchaser objects to the
Estimated Adjustment, the Parties shall attempt to resolve their differences by
negotiation. If the Parties are unable to do so within two (2) Business Days
prior to the Closing Date (or if Purchaser does not object to the Estimated
Adjustment), the amount of the Estimated Adjustment not in dispute shall be
included in the Estimated Purchase Price. The disputed portion shall be paid as
a post-Closing adjustment to the extent required by Section 2.2.4.

            Section 2.2.4 Purchase Price Adjustment.

                  (a) Within 60 days after the Closing, Purchaser in
consultation with Sellers shall prepare and deliver to the Sellers a statement
(the "Adjustment Statement"), which reflects (i) the difference between (A) the
Stores and Inventory Amount as of the Closing Date, based on an inventory survey
conducted by Purchaser within 30 days after the Closing Date, which may be
observed by Sellers, and (B) the undisputed Estimated Stores and Inventory
Amount (such difference is referred to as the "Stores and Inventory Adjustment
Amount"), (ii) the difference between (A) the Post-September Capital
Expenditures Amount and (B) the undisputed Estimated Post-September Capital
Expenditures Amount (such difference is referred to as the "Post-September
Capital Expenditures Adjustment Amount"), (iii) the difference between (A) the
Post-April RRSU Payment Amount and (B) the undisputed Estimated Post-April RRSU
Payment Amount (such difference is referred to as the "RRSU Adjustment Amount"),
and (iv) the difference between (A) the Hot Gas Path Parts Expenditures Amount
and (B) the undisputed Estimated Hot Gas Path Parts Expenditures Amount (such
difference is referred to as the "Hot Gas Path Parts Adjustment Amount"). The
Stores and Inventory Adjustment Amount, the Post-September Capital Expenditures
Adjustment Amount, the RRSU Adjustment Amount, and the Hot Gas Path Parts
Adjustment Amount are referred to collectively as the "Adjustment Amount." The
Adjustment Statement shall be prepared using GAAP and the methodologies set
forth in the definition of Stores and Inventory Amount. The Parties agree to

                                       23


cooperate in connection with the preparation of the Adjustment Statement and
related information, and shall provide each other with such books, records and
information as may be reasonably requested from time to time in connection
therewith and in connection with Sellers' review thereof.

                  (b) Sellers may dispute the Adjustment Amount; provided,
however, that Sellers shall notify Purchaser in writing of the disputed amount,
and the basis of such dispute, within ten (10) Business Days of Sellers' receipt
of the Adjustment Statement. In the event of a dispute with respect to any part
of the Adjustment Amount, Purchaser and Sellers shall attempt to reconcile their
differences and any resolution by them as to any disputed amounts shall be
final, binding and conclusive on the Parties. If Purchaser and Sellers are
unable to reach a resolution of such differences within 30 days of receipt of
Sellers' written notice of dispute to Purchaser, Purchaser and Sellers shall
submit the amounts remaining in dispute for determination and resolution to the
Independent Accounting Firm, which shall be instructed to determine and report
to the Parties, within 30 days after such submission, and such report shall be
final, binding and conclusive on the Parties hereto with respect to the amounts
disputed. The fees and disbursements of the Independent Accounting Firm shall be
shared equally by Purchaser and Sellers.

                  (c) Within ten (10) Business Days after Sellers' receipt of
the Adjustment Statement, the Party owing the Adjustment Amount shall pay all
undisputed amounts. If there is a dispute with respect to any amount of the
Adjustment Statement, within five (5) Business Days after the final
determination of any amounts on the Adjustment Statement, the Party owing the
Adjustment Amount shall pay to the other Party an amount equal to the disputed
Adjustment Amount as finally determined to be payable with respect to the
Adjustment Statement. Any amount paid under this Section 2.2.4 shall be paid
with interest for the period from, and including, the Closing Date to, but
excluding, the date of payment, calculated at the lesser of (a) the prime rate
under "Money Rates" as reported in the Wall Street Journal on the first business
day of the month during which interest is payable plus two percent (2%) or (b)
the maximum rate of interest permitted to be charged by applicable Law.

            Section 2.2.5 Amounts in Respect of Mechanics' Liens.
Notwithstanding anything in this Section 2.2 or Section 2.4.1 to the contrary,
Purchaser may withhold from the Estimated Purchase Price an amount equal to the
value of all mechanics', carriers', workers', repairers' and other similar Liens
in existence at Closing on the Purchased Assets, other than those arising or
incurred under Assumed Agreements in the ordinary course of business, not in
violation of the Co-Tenancy Agreement or the O&M Agreement relating to
obligations which are not yet due and payable. To the extent such Liens are not
remedied by Sellers within 90 days after Closing or such earlier date notified
at least five (5) Business Days in advance by Purchaser to Sellers as is
reasonably necessary for Purchaser, Purchaser shall be entitled to apply the
portion of the Estimated Purchase Price so withheld to remedy any such Liens, in
satisfaction of payment to Sellers of such portion of the Purchase Price. Upon
all such Liens having been remedied by Sellers or by Purchaser pursuant to the
preceding sentence, Purchaser shall pay to GenWest any remaining amounts of the
Purchase Price retained by Purchaser under this Section 2.2.5.

                                       24


            Section 2.2.6 Method of Payment of Purchase Price. Payment of the
Estimated Purchase Price and the Adjustment Amount shall be made in United
States dollars, by wire transfer of immediately available federal funds to an
account located in the United States as GenWest or, if applicable, Purchaser may
specify by notice.

            Section 2.2.7 Proration.

                  (a) Purchaser and Sellers agree that the following items
relating to the Purchased Assets shall be prorated as of the Closing Date, with
Sellers liable to the extent such items relate to any time period through the
Closing Date, and Purchaser liable to the extent such items relate to periods
commencing after the Closing Date (measured in the same units used to compute
the item in question, otherwise measured by calendar days):

                        (i) any real and personal property ad valorem taxes
imposed on tangible or intangible property with respect to the Purchased Assets
as provided in Section 8.3, Section 8.4 and Section 8.5;

                        (ii) any costs or assessments imposed by the Master
Declaration or Restrictions Declaration;

                        (iii) any assessment by any Governmental Authority for
paving, roadways, sidewalk or other improvements or maintenance costs related to
the Site; and

                        (iv) any rent payments made after the Effective Date in
respect of BLM grants;

                        (v) any charges for water, telephone, electricity and
other utilities;

                        (vi) (1) any annual Permit, license and registration
fees with respect to the Transferred Permits listed on Part B of Schedule IV and
(2) any prepayments under the Assumed Agreements listed on Part E of Schedule I;
provided, however, that any payments owing by Purchaser with respect to the
prorated amounts under this Section 2.2.7(a)(vi)(2) shall not exceed $100,000 in
the aggregate.

                  (b) In connection with the prorations referred to in (a)
above, in the event that actual figures are not available at the Closing Date,
the proration shall be based upon the amounts accrued through the Closing Date
or paid for the most recent year (or other appropriate period) for which actual
amounts paid are available. Such prorated amounts shall be re-prorated and paid
to the appropriate Party within 60 days of the date that the previously
unavailable actual figures become available. Sellers and Purchaser agree to
furnish each other with such documents and other records as may be reasonably
requested in order to confirm all adjustment and proration calculations made
pursuant to this Section 2.2.7. Prorated amounts shall be based on GenWest's
share of the amount to be prorated, as determined under the O&M Agreement.

      Section 2.3 Allocation of Purchase Price. The Purchase Price shall be
allocated among the Purchased Assets as of the Closing Date in accordance with a
schedule to be prepared by Purchaser, subject to the consent of Sellers, using
the allocation method provided by Section

                                       25


1060 of the Code and the regulations thereunder. The Parties shall cooperate to
comply with all substantive and procedural requirements of Section 1060 of the
Code and the regulations thereunder, and except for any adjustment to the
Purchase Price, the allocation shall be adjusted only if and to the extent
necessary to comply with such requirements. Purchaser and Sellers agree that
they will not take nor will they permit any Affiliate to take, for Tax purposes,
any position inconsistent with such allocation; provided, however, that (i)
Purchaser's cost may differ from the total amount allocated hereunder to reflect
the inclusion in the total cost of items (for example, capitalized acquisition
costs) not included in the total amount so allocated, and (ii) the amount
realized by Sellers may differ from the amount allocated to reflect transaction
costs that reduce the amount realized for federal income Tax purposes.

      Section 2.4 The Closing. The closing of the transactions contemplated
herein (the "Closing") will take place at Purchaser's offices in Las Vegas,
Nevada, at 10:00 a.m. local time on the date as soon as practicable (but in no
event longer than ten (10) Business Days, subject to an additional ten (10)
Business Day extension at the election of Purchaser in the event of an amendment
or update to the Sellers' Disclosure Schedule pursuant to Section 4.11(b)(iii)
which occurs less than 10 days prior to the Closing Date) after the conditions
to the Closing set forth in Section 5.1 and Section 5.2 have been satisfied or
waived, or at such other place, time or date as Purchaser and Sellers mutually
agree (the "Closing Date"). The Closing shall be deemed effective as of 12:01
A.M. Las Vegas time on the day after the Estimated Purchase Price has been paid
to GenWest and the Deed and the Assignment Agreement have been executed and
delivered to Purchaser.

            Section 2.4.1 Closing.

                  (a) At the Closing, Purchaser will (x) pay to GenWest the
Estimated Purchase Price in accordance with Section 2.2 and (y) execute and
deliver (as applicable) the following items to Sellers:

                        (i) True and complete copies of the PUCN Approval;

                        (ii) True and complete copies of the FERC Approval;

                        (iii) True and complete copies of evidence of the
expiration or early termination of the waiting period under the HSR Act;

                        (iv) A bill of sale, assignment and assumption agreement
in the form of Exhibit I (the "Assignment Agreement");

                        (v) The originals of the Sellers' Support Obligations;

                        (vi) A State of Nevada Declaration of Value in the form
required by Nevada Revised Statutes Section 375.060;

                        (vii) A Certificate of Good Standing with respect to
Purchaser, as of a recent date, issued by the Secretary of State of the State of
Nevada;

                                       26


                        (viii) Copies, certified by the Secretary or Assistant
Secretary of Purchaser, of corporate resolutions authorizing the execution and
delivery of this Agreement and all of the other agreements and instruments, in
each case, to be executed and delivered by Purchaser in connection herewith;

                        (ix) A certificate of the Secretary or Assistant
Secretary of Purchaser identifying the name and title and bearing the signatures
of the officers of Purchaser authorized to execute and deliver this Agreement
and the other agreements and instruments contemplated hereby;

                        (x) A certificate addressed to Sellers dated the Closing
Date executed by the duly authorized officer of Purchaser to the effect that the
conditions set forth in Section 5.2.1 and Section 5.2.2 have been satisfied by
Purchaser; and

                        (xi) Any amounts for which Purchaser is liable pursuant
to Section 2.2.7 of this Agreement.

                  (b) At the Closing, Sellers will execute and deliver (as
applicable) to Purchaser the following items:

                        (i) The Required Consents;

                        (ii) True and complete copies of the FERC Approval;

                        (iii) True and complete copies of evidence of the
expiration or the early termination of the waiting period under the HSR Act;

                        (iv) The Assignment Agreement;

                        (v) A grant, bargain and sale deed (the "Deed") in the
form of Exhibit J and any memorandum of documents or other documents necessary
to convey title to the Real Property, including the indemnity described in
Section 4.1(g) hereto;

                        (vi) A certification of non-foreign status for PWEC in
the form and manner which complies with the requirements of Section 1445 of the
Code and the regulations promulgated thereunder;

                        (vii) A state of Nevada Declaration of Value in the form
required by Nevada Revised Statutes Section 375.060;

                        (viii) Certificates of Good Standing with respect to the
Sellers, as of a recent date, issued by the Secretary of State of the State of
Arizona in the case of PWCC and PWEC, and by the Secretary of State of the State
of Delaware in the case of GenWest;

                        (ix) Copies, certified by the Secretary or Assistant
Secretary of each Seller, of resolutions authorizing the execution and delivery
of this Agreement and all of the other agreements and instruments, in each case,
to be executed and delivered by Sellers in connection herewith;

                                       27


                        (x) A certificate of the Secretary or Assistant
Secretary of each Seller identifying the name and title and bearing the
signatures of the officers of each Seller authorized to execute and deliver this
Agreement and the other agreements and instruments contemplated hereby;

                        (xi) A certificate addressed to Purchaser dated the
Closing Date executed by the duly authorized officers of each Seller to the
effect that the conditions set forth in Section 5.1.1 and Section 5.1.2 have
been satisfied by Sellers;

                        (xii) updated record drawings that include the as-built
or redlined drawing changes reflecting the design of the Facility as of ten (10)
days prior to Closing;

                        (xiii) any amounts for which the Sellers are liable
pursuant to Section 2.2.7 and Section 4.2(b)(i)(z) of this Agreement; and

                        (xiv) letters of credit in favor of Purchaser replacing
the Existing Letters of Credit, to the extent such letters of credit are
required under the applicable Assumed Agreement.

                  (c) If requested by Purchaser or Sellers, the Closing shall be
consummated through an escrow with Purchaser's title company acting as escrow
holder, which may include delivery to the escrow holder of the items in Sections
2.4.1(a) and 2.4.1(b) of this Agreement and payment to the escrow holder of the
Estimated Purchase Price, Transfer Taxes and any amounts owing under Section
2.2.7 and Section 4.1(g), notwithstanding other provisions in this Agreement to
the contrary. Escrow shall close once all conditions to Closing have been
satisfied or waived and the escrow holder shall have recorded the Deed.

      Section 2.5 Further Assurances; Post-Closing Cooperation.

            Section 2.5.1 Further Assurances. Subject to the terms and
conditions of this Agreement, at any time or from time to time after the
Closing, at either Party's request and without further consideration, the other
Party shall execute and deliver to such Party such other instruments of sale,
transfer, conveyance, assignment and confirmation, provide such materials and
information and take such other actions as such Party may reasonably deem
necessary or desirable in order more effectively (a) to transfer, convey and
assign to Purchaser, and to confirm Purchaser's title to, the Purchased Assets,
(b) to effectuate the assumption by Purchaser of the Assumed Agreements, and (c)
otherwise to consummate the transactions contemplated by this Agreement.
Purchaser shall provide to GenWest all invoices and supporting documentation
received with respect to Assumed Agreements, which relate to any obligations
arising thereunder prior to the Closing Date or any other obligation that
remains with Sellers. In the event that either Party receives a payment from
SNWA due to the other Party, such Party will promptly remit such payment to the
other Party and advise SNWA thereof in writing.

            Section 2.5.2 Pre-Closing Books and Records.

            (a) Following Closing, each Party will afford the other Party, its
counsel and its accountants, during normal business hours, reasonable access to
the Shared Books and

                                       28


Records and the Non-Shared Books and Records with respect to periods prior to
Closing (the "Pre-Closing Books and Records") and the right to make copies and
extracts therefrom, to the extent that such access may be reasonably required by
the requesting Party in connection with (i) the preparation of Tax Returns, (ii)
compliance with the requirements of any Governmental Authority, (iii) any
Excluded Liabilities or (iv) any rights and obligations arising under Article
VII, Article VIII or Article X hereof; provided, however, that nothing in this
Agreement shall be deemed to obligate either Party to maintain the Pre-Closing
Books and Records.

                  (b) Purchaser acknowledges and consents to the retention by
Sellers of information made available to Purchaser relating to the Purchased
Assets (the "Retained Information"). From and after the Closing Date, Sellers
shall, and shall cause their representatives to, treat the Retained Information
as strictly confidential (except to the extent compelled to disclose by judicial
or administrative process or by other requirements of Law, any stock exchange or
any other self-regulatory organization); provided, however, that in no event
shall the foregoing restrict any Seller from using or disclosing any Retained
Information in connection with any claim arising under or in connection with
this Agreement or any Excluded Liabilities.

            Section 2.5.3 Delivery of Books and Records. No later than the
Closing Date (or in the case of Books and Records not immediately required for
the operation and maintenance of the Facility that cannot be reasonably and
practicably delivered at the Closing, as soon as reasonably practicable
thereafter, but no later than 30 days after the Closing Date), Sellers shall
deliver any Shared Books and Records, Non-Shared Books and Records, and
Continued Employee Books and Records (to the extent they may be provided to
Purchaser in accordance with Law) that are not located at the Site to Purchaser
at Purchaser's offices in Las Vegas, Nevada, the Site or another location as
designated by Purchaser in or near Las Vegas, Nevada. As soon as reasonably
practicable after the Closing, Sellers shall deliver to Purchaser updated record
drawings that include the as-built or redlined drawing changes reflecting the
design of the Facility as of the Closing.

            Section 2.5.4 RRSU Payments Refunds. At any time after Closing, in
the event any SCE RRSU Refund is received by any Party, Sellers shall be
entitled to receive the Sellers' RRSU Refund Portion of such SCE RRSU Refund,
and Purchaser shall be entitled to receive the Purchaser's RRSU Refund Portion
of such SCE RRSU Refund as set forth below:

                  (a) For any SCE RRSU Refund associated with the Eldorado 500kV
substation breaker upgrades, "Sellers' RRSU Refund Portion" shall be 75% and
"Purchaser's RRSU Refund Portion" shall be 25%, which portion Purchaser shall
pay to SNWA pursuant to the terms of the Co-Tenancy Agreement; provided,
however, that if at any time SCE shall separately remit to SNWA its portion of
any SCE RRSU Refund, the "Sellers' RRSU Refund Portion" shall be 100% with
respect to such SCE RRSU Refund.

                  (b) For any SCE RRSU Refund associated with the Moenkopi 500
kV series capacitor upgrades ("Moenkopi Capacitor Work"):

                        (i) "Sellers' RRSU Refund Portion" shall be equal to the
product of (1) the amount of the SCE RRSU Refund in respect of the Moenkopi
Capacitor Work,

                                       29


and (2) the amount of payments by GenWest under Revised MOU I prior to May 1,
2005 in respect of the Moenkopi Capacitor Work (other than amounts attributable
to SNWA's Interest prior to May 1, 2005), less any SCE RRSU Refunds received by
GenWest prior to Closing in connection with such payments, divided by the sum of
the payments made by GenWest or Purchaser under Revised MOU I before, on or
after May 1, 2005 in respect of the Moenkopi Capacitor Work (including amounts
attributable to SNWA's Interest), less any SCE RRSU Refunds received by GenWest
prior to Closing in connection with such payments made by it (including refunds
in respect of SNWA's Interest).

                        (ii) "Purchaser's RRSU Refund Portion" shall be equal to
the product of (1) the amount of the SCE RRSU Refund in respect of the Moenkopi
Capacitor Work, and (2) the sum of payments by GenWest or Purchaser under
Revised MOU I on or after May 1, 2005 in respect of the Moenkopi Capacitor Work
(including amounts attributable to SNWA's Interest), plus payments by GenWest
under Revised MOU I prior to May 1, 2005 in respect of the Moenkopi Capacitor
Work solely attributable to SNWA's Interest, less any SCE RRSU Refunds received
by GenWest prior to Closing in connection with any such payments made by it
(including refunds in respect of SNWA's Interest), divided by the sum of the
payments made by GenWest or Purchaser under Revised MOU I before, on or after
May 1, 2005 in respect of the Moenkopi Capacitor Work (including amounts
attributable to SNWA's Interest), less any SCE RRSU Refunds received by GenWest
prior to Closing in connection with such payments made by it (including refunds
in respect of SNWA's Interest). Sellers' RRSU Refund Portion and Purchaser's
RRSU Refund Portion shall be determined on the later of the Closing Date or the
date upon which refunds in respect of the Moenkopi Capacitor Work commence.

                  (c) For any SCE RRSU Refund associated with the Lugo 500 kV
series capacitor upgrades ("Lugo Capacitor Work"):

                        (i) "Sellers' RRSU Refund Portion" shall be equal to the
product of (1) the amount of the SCE RRSU Refund in respect of the Lugo
Capacitor Work, and (2) the amount of payments by GenWest under Revised MOU I
prior to May 1, 2005 in respect of the Lugo Capacitor Work (other than amounts
attributable to SNWA's Interest prior to May 1, 2005), less any SCE RRSU Refunds
received by GenWest prior to Closing in connection with such payments, divided
by the sum of the payments made by GenWest or Purchaser under Revised MOU I
before, on or after May 1, 2005 in respect of the Lugo Capacitor Work (including
amounts attributable to SNWA's Interest), less any SCE RRSU Refunds received by
GenWest prior to Closing in connection with such payments made by it (including
refunds in respect of SNWA's Interest).

                        (ii) "Purchaser's RRSU Refund Portion" shall be equal to
the product of (1) the amount of the SCE RRSU Refund in respect of the Lugo
Capacitor Work, and (2) the sum of payments by GenWest or Purchaser under
Revised MOU I on or after May 1, 2005 in respect of the Lugo Capacitor Work
(including amounts attributable to SNWA's Interest), plus payments by GenWest
under Revised MOU I prior to May 1, 2005 in respect of the Lugo Capacitor Work
solely attributable to SNWA's Interest, less any SCE RRSU Refunds received by
GenWest prior to Closing in connection with any such payments made by it
(including refunds in respect of SNWA's Interest), divided by the sum of the
payments made by GenWest or Purchaser under Revised MOU I before, on or after
May 1, 2005 in respect of the

                                       30


Lugo Capacitor Work (including amounts attributable to SNWA's Interest), less
any SCE RRSU Refunds received by GenWest prior to Closing in connection with
such payments made by it (including refunds in respect of SNWA's Interest).
Sellers' RRSU Refund Portion and Purchaser's RRSU Refund Portion shall be
determined on the later of the Closing Date or the date upon which refunds in
respect of the Lugo Capacitor Work commence.

                  (d) In the event that the SCE RRSU Refunds for the Moenkopi
Capacitor Work and the Lugo Capacitor Work are not separated as contemplated
above, the Parties shall cooperate in good faith to allocate the SCE RRSU
Refunds on the same principles as provided above. Each Party shall pay over to
the other Party a portion of the amount received by such Party to effect the
foregoing. Purchaser shall pay any refund received by it attributable to SNWA's
Interest to SNWA in accordance with the Co-Tenancy Agreement. Payments under
this Section 2.5.4 shall be made within ten (10) days of the receipt of such SCE
RRSU Refunds.

            Section 2.5.5 Site Description Error Indemnity. Sellers shall
indemnify Purchaser for any Losses incurred by Purchaser arising from or in
connection with any failure of Sellers to correct the Site Description Error
prior to Closing, and reimburse Purchaser for any costs incurred by Purchaser
following Closing in connection with remedying such failure. Purchaser shall
consult with Sellers about any remedial action to be taken by Purchaser in
connection with correcting the Site Description Error following Closing and
shall use commercially reasonable efforts to remedy the Site Description Error
in a cost-effective manner.

            Section 2.5.6 Drainage Encroachment Indemnity. Sellers shall
indemnify Purchaser for any Losses incurred by Purchaser arising from or in
connection with any failure of Sellers to correct the matters described in
Section 4.1(n) hereto prior to Closing, and reimburse Purchaser for any costs
incurred by Purchaser following Closing in connection with remedying such
failure. Purchaser shall consult with Sellers about any remedial action to be
taken by Purchaser in connection with correcting such matters following Closing
and shall use commercially reasonable efforts to remedy the matters in a
cost-effective manner.

                                   ARTICLE III

                         REPRESENTATIONS AND WARRANTIES

      Section 3.1 Representations and Warranties of Sellers. Except as
specifically set forth in the Sellers' Disclosure Schedule attached hereto as
Schedule VI, each of the Sellers, jointly and severally, represents and warrants
to Purchaser that all of the statements contained in this Section 3.1 with
respect to the Sellers are true and correct as of the Effective Date, and will
be true and correct as of the Closing Date as though made on and as of the
Closing Date. Each exception and other response to this Agreement set forth in
the Sellers' Disclosure Schedule is identified by reference to, or has been
grouped under a heading referring to, a specific individual section of this
Agreement, and, except as otherwise specifically stated with respect to such
exception, relates only to such section. The inclusion of an exception or other
response to this Agreement set forth in the Sellers' Disclosure Schedule does
not necessarily mean that such disclosure would otherwise constitute a breach of
this Agreement; rather, such disclosure is made for the purposes of
comprehensively informing Purchaser of matters it should consider in connection
with the purchase of the Purchased Assets.

                                       31


            Section 3.1.1 Existence. PWCC is a corporation duly formed, validly
existing and in good standing under the Laws of the State of Arizona. PWEC is a
corporation duly formed, validly existing and in good standing under the Laws of
the State of Arizona and is licensed to do business as a corporation in the
State of Nevada. GenWest is a limited liability company duly qualified, validly
existing and in good standing under the Laws of the State of Delaware, is
licensed to do business as a limited liability company in the State of Nevada,
and has full limited liability company power and authority to own and use the
Purchased Assets.

            Section 3.1.2 Authority. Each Seller has full corporate or limited
liability company power and authority to execute and deliver this Agreement and
the Transaction Agreements to which it is or will be a party, to perform its
obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby. The execution and delivery by each Seller of
this Agreement and the Transaction Agreements to which it is or will be a party,
and the performance by such Seller of its obligations hereunder and thereunder,
have been duly and validly authorized by all necessary corporate or company
action.

            Section 3.1.3 Binding Agreement. This Agreement and the Transaction
Agreements to which it is or will be a party have been or will be when delivered
duly executed and delivered by each Seller and, assuming due and valid
authorization, execution and delivery thereof by Purchaser and each other party
thereto, this Agreement and the Transaction Agreements to which it is or will be
a party are or will be when delivered valid and binding obligations of such
Seller enforceable against such Seller in accordance with their terms, except
(i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance and other similar Laws of general application affecting
enforcement of creditors' rights generally, and (ii) general equitable
principles, including that the availability of the remedy of specific
performance or injunctive or other forms of equitable relief may be subject to
equitable defenses and would be subject to the discretion of the court before
which any proceeding therefor may be brought.

            Section 3.1.4 No Conflicts. Subject to the receipt of the Required
Consents, FERC Approval, the expiration or early termination of the waiting
period under the HSR Act, and receipt of the other consents and actions listed
in Section 3.1.5 of Sellers' Disclosure Schedule, the execution and delivery by
each Seller of this Agreement do not, and the execution and delivery by such
Seller of the Transaction Agreements to which it is or will be a party, the
performance by such Seller of its obligations under this Agreement and such
Transaction Agreements and the consummation of the transactions contemplated
hereby and thereby shall not:

                  (a) Conflict with or result in a violation or breach of any of
the terms, conditions or provisions of such Seller's organizational documents;

                  (b) Result in a default (or give rise to any right of
termination, cancellation or acceleration) under any of the terms, conditions or
provisions of any Assumed Agreement, note, bond, deed of trust, indenture,
license, agreement, lease or other instrument or obligation to which such Seller
is party or by which such Seller, or any of the Purchased Assets may be bound,
except for such defaults (or rights of termination, cancellation or
acceleration) as

                                       32


to which requisite waivers or consents have been obtained in writing (true and
correct copies of which waivers or consents have been furnished to Purchaser);

                  (c) Conflict with or result in a violation or breach of any
term or provision of any Law applicable to such Seller or the Purchased Assets;
or

                  (d) Result in the imposition or creation of any Lien upon any
of the Purchased Assets, other than in favor of Purchaser.

            Section 3.1.5 Approvals and Filings. Except for the Required
Consents, FERC Approval and expiration or early termination of the waiting
period under the HSR Act and as set forth in Section 3.1.5 of Sellers'
Disclosure Schedule, no consent or approval of, filing with or notice to any
Governmental Authority or other Person by any Seller is required in connection
with the execution, delivery and performance by any Seller of this Agreement or
any of the Transaction Agreements to which it is a party or the consummation of
the transactions contemplated hereby or thereby.

            Section 3.1.6 Sellers' Known Liabilities. Except as set forth in
Section 3.1.6 of Sellers' Disclosure Schedule, to Sellers' Knowledge none of the
Sellers has any Liability that has, or could be reasonably likely to have, a
Material Adverse Effect.

            Section 3.1.7 Reports. Since the date of its formation and except
with respect to electronic quarterly reporting of its transactions to FERC,
GenWest has filed or caused to be filed with the applicable state or local
utility commissions or regulatory bodies and the FERC, all material forms,
statements, reports and documents (including all exhibits, amendments and
supplements thereto) required to be filed by it with respect to the Project
under each of the applicable state public utility laws and the Federal Power Act
and the respective rules and regulations thereunder.

            Section 3.1.8 Legal Proceedings. Except as set forth in Section
3.1.8 to Sellers' Disclosure Schedule, there are no actions or proceedings
(including orders, judgments and writs), and to Sellers' Knowledge, no claims or
investigations, outstanding or pending in any Governmental Authority to which a
Seller is a party or, to Sellers' Knowledge, (a) outstanding or pending in any
Governmental Authority to which any counterparty to a Designated Assumed
Agreement is a party, or (b) threatened against a Seller or any of its assets
and properties, in each case which could be reasonably expected to (x) result in
the issuance of an order restraining, enjoining or otherwise prohibiting or
making illegal the consummation of the transactions contemplated by this
Agreement or any of the Transaction Agreements, (y) adversely affect the
ownership, construction, operation or maintenance of the Facility or the use of
the Real Property, or (z) individually or in the aggregate, have a Material
Adverse Effect.

            Section 3.1.9 Compliance with Laws. Each of the Sellers, and to
Sellers' Knowledge, its contractors, agents and representatives, is not in
violation of or in default under any Law applicable to it, the Project or the
Purchased Assets, the effect of which, individually or in the aggregate, could
be reasonably expected to have a Material Adverse Effect. Except as set forth in
Section 3.1.9 of Sellers' Disclosure Schedule, none of the Sellers has received
notification alleging that it is in violation of any Law, in the case of
GenWest, applicable to it,

                                       33


the Project or the Purchased Assets, and in the case of PWCC and PWEC,
applicable to the Project or the Purchased Assets.

            Section 3.1.10 Title to Personal Property. GenWest owns, possesses
and will be conveying good and valid title to all the Purchased Assets (tangible
and intangible) constituting personal property, free and clear of all Liens,
except Permitted Liens.

            Section 3.1.11 Real Property.

                  (a) Schedule III contains a legal description of the Real
Property subject to the errors described in the HMH Letter. GenWest owns,
possesses and will be conveying good, valid and marketable fee title to an
undivided seventy-five percent (75%) interest in the Site, free and clear of all
Liens other than Permitted Liens. GenWest holds good and valid title to an
undivided seventy-five percent (75%) interest in the Easements, free and clear
of all Liens other than (i) encumbrances of record or that would be revealed by
an accurate survey and (ii) Permitted Liens.

                  (b) Neither the whole nor any portion of the Real Property is
subject to any governmental decree or order to be sold or is being condemned,
expropriated or otherwise taken by any public authority with or without payment
of compensation therefor, nor, to Sellers' Knowledge, has any such condemnation,
expropriation or taking been proposed. Except as provided in the agreements
listed in Section 3.1.11 Part A of Sellers' Disclosure Schedule, none of the
Sellers is a party to any lease, assignment or similar arrangement under which
any of the Sellers is a lessor, assignor or otherwise makes available for use by
any third party any portion of the Real Property. Except as set forth in Section
3.1.11 Part B of Sellers' Disclosure Schedule, none of the Sellers has received
any notice of, or other writing referring to, any requirements or
recommendations by any insurance company that has issued a policy covering any
part of the Real Property or by any board of fire underwriters or other body
exercising similar functions, requiring or recommending any repairs or work to
be done on any part of the Real Property, which repair or work has not been
completed and accepted. Sellers have not consented to the lease of, or creation
of any Lien on, any of the Project by SNWA, except as described in clause
(v) of the definition of Permitted Liens.

                  (c) Except as set forth in Section 3.1.11 Part C of Sellers'
Disclosure Schedule, Sellers have obtained all real estate licenses, easements
and rights of way, including proofs of dedication, required to use the Real
Property in the manner in which the Real Property is currently being used and
required for the ownership, construction, operation and maintenance of the
Facility.

                  (d) To Sellers' Knowledge, there is no action, proceeding or
litigation pending or threatened (i) to modify the zoning of, or other
governmental rules or restrictions applicable to, the Real Property or the use
or development thereof, or (ii) for any street widening or changes in highway or
traffic lanes or patterns in the immediate vicinity of the Real Property, in
each case, except for such actions, proceedings or litigations which,
individually or in the aggregate, could not be reasonably likely to have a
Material Adverse Effect.

                                       34


                  (e) The parcels constituting the Site are assessed separately
from all other adjacent property not constituting the Site for purposes of real
property taxes assessed to, or paid by, GenWest. Except as set forth in Section
3.1.11 Part D of Sellers' Disclosure Schedule, to Sellers' Knowledge, the Site
complies with all applicable subdivision, zoning, land parcelization and local
governmental taxation or separate assessment requirements.

                  (f) Other than Permitted Liens and as set forth in Section
3.1.11 Part E of Sellers' Disclosure Schedule, there are no commitments to or
agreements by Sellers with any Governmental Authority affecting the use or
ownership of the Real Property and to Sellers' Knowledge, there are no
commitments to or agreements with any Governmental Authority by any other party
affecting the use or ownership of the Real Property.

                  (g) Except as set forth in Section 3.1.11 Part F of Sellers'
Disclosure Schedule, none of the Sellers is a party to any agreement for the
sale, exchange, encumbrance, lease or transfer of any of the Real Property or
any portion of the same.

                  (h) Except as set forth in Section 3.1.11 Part G of Sellers'
Disclosure Schedule, Sellers are in compliance with all applicable conditions,
covenants and restrictions that encumber the Real Property.

            Section 3.1.12 Condition of Materials and Equipment. Except as set
forth in Section 3.1.12 Part A of Sellers' Disclosure Schedule, all Materials
and Equipment are currently located on the Real Property and no Materials and
Equipment intended for the Facility are being held by third parties pending
payment by Sellers. To Sellers' Knowledge, Sellers have not failed to disclose
to Purchaser any fact relating to the operation or condition of the Facility or
the Site that could be reasonably likely to have a Material Adverse Effect. To
the Sellers' Knowledge, the Facility has been operated in accordance with Good
Electric Operating Practices as such term is defined in the O&M Agreement.
Except for the Excluded Assets, the Purchased Assets are sufficient to own,
operate and maintain the Project as currently owned, operated and maintained by
the Sellers. Except as listed in Section 3.1.12 Part B of Sellers' Disclosure
Schedule and except for the Excluded Assets and assets replaced by assets of
comparable or superior quality and value, to Sellers' Knowledge, none of the
Sellers have sold, transferred or otherwise disposed of any assets used by any
of the Sellers solely in the operation or maintenance of the Facility.

            Section 3.1.13 Warranty Matters. Section 3.1.13 of the Sellers'
Disclosure Schedule identifies all warranties by any vendor, materialman,
supplier, contractor or subcontractor relating to the Purchased Asset or any
component thereof with a value of $50,000 or more and specifies the following
information with respect to each such warranty: (a) each of the Purchased Assets
or any component thereof to which the warranty is applicable but only to the
extent such item has a value of $50,000 or more, (b) the contract or agreement
pursuant to which the warranty was given or made (a true and complete copy of
each such contract or agreement has been provided to Purchaser), (c) a
description of any warranty work done under the applicable warranty, the date
thereof and the applicable warranty period for the warranty work, and (d)
whether such warranty is transferable to Purchaser. To Sellers' Knowledge, there
are no events that have occurred or conditions applicable that constitute or may
constitute a defense to the continuing effectiveness of each such warranty.

                                       35


            Section 3.1.14 Facility Agreements; Assumed Agreements. Section
3.1.14 Part A of Sellers' Disclosure Schedule contains a list of all Facility
Agreements in effect, true and complete copies of which (together with all
amendments, supplements, schedules and exhibits) have heretofore been furnished
to Purchaser, other than item 40b on Schedule I. Except as set forth in Section
3.1.14 Part B of Sellers' Disclosure Schedule, each Assumed Agreement is in full
force and effect and constitutes a legal, valid and binding agreement of the
applicable Seller and to Sellers' Knowledge, of each other party thereto,
enforceable in accordance with its terms (subject to applicable bankruptcy,
insolvency or other similar Laws relating to or affecting the enforcement of
creditors' rights generally and to general principles of equity), and no
material term or condition thereof has been amended from the form thereof
delivered to Purchaser or waived. Except as set forth in Section 3.1.14 Part C
of Sellers' Disclosure Schedule and except with respect to Assumed Agreements to
which Purchaser is party, (a) none of Sellers is in violation or breach of or
default under, or with notice or lapse of time or both, would be in violation or
breach of or default under, any Assumed Agreement and, (b) to Sellers'
Knowledge, no other party to any Assumed Agreement with a contingent liability
or payment obligation in excess of $1,000, is in violation or breach of or
default under, or with notice or lapse of time or both, would be in violation or
breach of or default under, any such Assumed Agreement. Other than the Required
Consents, FERC Approval, the expiration or early termination of the waiting
period under the HSR Act, or as set forth in Section 3.1.5 of Sellers'
Disclosure Schedules, no consent or approval of, filing with or notice to any
Governmental Authority or other Person by any Seller is required which has not
been duly obtained or made for the assignment of the Assumed Agreements to
Purchaser as contemplated hereby, true and correct copies of such consents have
been provided to Purchaser.

            Section 3.1.15 Permits.

                  (a) Section 3.1.15 Part A of the Sellers' Disclosure Schedule
sets forth all Permits that Sellers are required to obtain under applicable Law
in connection with the ownership, operation, maintenance or use of the Facility
(the "Facility Permits").

                  (b) Except as set forth in Section 3.1.15 Part B of Sellers'
Disclosure Schedule, Facility Permits are properly in the name of the Facility,
GenWest, GenWest and SNWA jointly, or PWEC. Except as set forth in Section
3.1.15 Part C of Sellers' Disclosure Schedule, the information set forth in each
application submitted by or on behalf of any of the Sellers and, to Sellers'
Knowledge, any other Person, in connection with each such Facility Permit was
accurate and complete in all material respects at the time of the last
submission. Except as set forth in Section 3.1.15 Part D of Sellers' Disclosure
Schedule, all modifications to Facility Permits required to remain in compliance
with Law have been made for the ownership, operation, maintenance or use of the
Facility. Except as set forth in Section 3.1.15 Part E of Sellers' Disclosure
Schedule, GenWest and PWEC are in full compliance with each Facility Permit and
each Facility Permit (i) is in full force and effect, (ii) is not subject to any
legal proceeding or to any unsatisfied condition that (x) is not reasonably
expected to be satisfied or (y) could reasonably be expected to allow material
modification or revocation thereof, and (iii) is final and all applicable appeal
periods have expired or terminated.

                  (c) Except for the approvals, notices and filings set forth in
Section 3.1.15 Part F of Sellers' Disclosure Schedule, GenWest's and PWEC's
interests in each Transferred

                                       36


Permit may be transferred to Purchaser or Purchaser as Operating Agent, as the
case may be, as contemplated by this Agreement without the consent or approval
of, filing with or notice to any Governmental Authority or other Person by any
of the Sellers other than those that have been duly obtained or made, true and
correct copies of which have been provided to Purchaser. Upon the effectiveness
of the notices and other filings set forth in Section 3.1.15 Part F of Sellers'
Disclosure Schedule and as otherwise set forth in such Section 3.1.15 Part F of
Sellers' Disclosure Schedule, (i) Purchaser's interest in each Transferred
Permit will be properly in the name of Purchaser or Purchaser as Operating
Agent, as the case may be, (ii) each Transferred Permit will be in full force
and effect, (iii) each Transferred Permit will not be subject to any legal
proceeding or to any unsatisfied condition that (x) is not reasonably expected
to be satisfied or (y) could reasonably be expected to allow material
modification or revocation thereof, and (iv) each Transferred Permit will be
final and have all applicable appeal periods expired or terminated. Upon the
effectiveness of the notices and other filings set forth in Section 3.1.15 Part
F of the Sellers' Disclosure Schedule, the transfer of GenWest's or PWEC's
interests in each Transferred Permit to Purchaser or Purchaser as Operating
Agent, as the case may be, shall not breach the terms thereof or result in the
forfeiture or impairment of any rights thereunder.

                  (d) Other than as provided in Section 3.1.15 Part G of
Sellers' Disclosure Schedule, Sellers have not made any modifications, and are
not aware of any modifications to the Facility by any Person, that could
reasonably be expected to cause the Facility to violate any applicable Law or
Permit.

            Section 3.1.16 Insurance. Section 3.1.16 of Sellers' Disclosure
Schedule sets forth a true and complete list and description of all insurance
policies in force on the Effective Date with respect to the Purchased Assets,
together with a statement of the aggregate amount of claims paid out and claims
pending, under each such insurance policy, in each case relating to the
Purchased Assets. All policies are in full force and effect, all premiums due
thereon have been paid and the Sellers are otherwise in compliance in all
material respects with the terms and provisions of such policies. Furthermore,
as they relate to the Purchased Assets, (a) Sellers have not received any notice
of cancellation or non-renewal of any such policy nor is the termination of any
such policies threatened, (b) there is no claim pending under any of such
policies as to which coverage has been questioned, denied or disputed by the
underwriters of such policies, (c) Sellers have not received any notice from any
of its insurance carriers that any insurance premiums in respect of such
policies will be increased in the future or that any insurance coverage
presently provided for will not be available to the Sellers in the future on
substantially the same terms as now in effect, and (d) Sellers have not received
notice that the Facility or any Materials and Equipment or the operation thereof
will not be insurable or will be subject to exclusions arising from actual or
potential defects in the Purchased Assets.

            Section 3.1.17 Environmental Matters.

                  (a) Sellers have made available to Purchaser all of the
environmental site assessment reports and studies that were obtained by or in
the possession of Sellers, which relate to environmental matters in connection
with ownership, construction, operation or maintenance of the Facility. All such
reports and studies are listed in Section 3.1.17 Part A of Sellers' Disclosure
Schedule.

                                       37


                  (b) Except for the Facility Permits, none of the Sellers has
entered into or agreed to any judicial or administrative consent decree or
order, and is not subject to any outstanding judgment, decree, or judicial or
administrative order relating to compliance with any Environmental Law or to
investigation or cleanup of Hazardous Materials under any Environmental Law, in
each case relating to the Facility or the Real Property.

                  (c) Except as disclosed in Section 3.1.17 Part B of Sellers'
Disclosure Schedule, there are no claims, actions, proceedings (including
orders, judgments and writs) or investigations pending in any Governmental
Authority to which a Seller is a party and with respect to such claims and
investigations, of which a Seller has Knowledge or, to Sellers' Knowledge, (x)
outstanding or pending in any Governmental Authority to which any counterparty
to a Designated Assumed Agreement is a party or (y) threatened against a Seller
or any of its assets and properties, under any Environmental Law relating to the
Facility or the Real Property.

                  (d) All Permits related to the Purchased Assets issued to any
Seller and in effect under any Environmental Law are set forth in Section 3.1.17
Part C of Sellers' Disclosure Schedule. Except as set forth in Section 3.1.17
Part D of Sellers' Disclosure Schedule, Sellers and, to Sellers' Knowledge,
their contractors, agents or representatives have obtained all Permits required
under the Environmental Laws for the ownership, construction, operation,
maintenance or use of the Facility, all such Permits are in effect to the extent
required under any Environmental Law, no appeal nor any other action is pending
to revoke any such Permit and Sellers and, to Sellers' Knowledge, their
contractors, agents and representatives are in full compliance with all terms
and conditions of all such Permits. Except as set forth in Section 3.1.17 Part E
of Sellers' Disclosure Schedule, Sellers, and to Sellers' Knowledge, their
contractors, agents and representatives, have filed for a renewal on a timely
basis of any Facility Permits required pursuant to applicable Environmental Law.

                  (e) Except as set forth in Section 3.1.17 Part F of Sellers'
Disclosure Schedule, Sellers, and to Sellers' Knowledge, their contractors,
agents and representatives, have been and are in compliance with all applicable
Environmental Laws with respect to the Facility or the Real Property. To
Sellers' Knowledge, except for matters described in the reports listed in
Section 3.1.17 Part A of Sellers' Disclosure Schedule, any former owners of or
tenants on the Real Property, and their contractors, agents or representatives,
did not violate applicable Environmental Laws with respect to their ownership,
construction, operation or maintenance of the Facility or the Real Property.

                  (f) Except as set forth in Section 3.1.17 Part G of Sellers'
Disclosure Schedule, none of the Sellers, or to Sellers' Knowledge, its
contractors, agents or representatives, or to Sellers' Knowledge, any other
Person, has Released, discharged, or otherwise disposed, of any Hazardous
Materials on, beneath or adjacent to the Real Property, except for Releases of
Hazardous Materials that could not reasonably be expected to result in a claim
or a requirement to engage in a material Remediation.

                  (g) Except as set forth in Section 3.1.17 Part H of the
Sellers' Disclosure Schedule, to Sellers' Knowledge, there are no facts,
circumstances or conditions related to the Facility that exist now or as of the
Closing Date that would make it reasonably likely that the

                                       38


Facility will not be able to comply with applicable Environmental Law, including
but not limited to, the terms and conditions of Permits issued with respect to
the Facility pursuant to applicable Environmental Law.

            Section 3.1.18 Labor Matters. Except as specifically set forth in
Section 3.1.18 of Sellers' Disclosure Schedule:

                  (a) All of the Project Employees are employees of PWEC.

                  (b) GenWest is neither party to, nor bound by, any labor
agreement, collective bargaining agreement, work rules or practices, or any
other labor-related agreements or arrangements with any labor union or labor
organization. There are no labor agreements, collective bargaining agreements,
work rules or practices, or any other labor-related agreements or arrangements
that pertain to any Project Employee and no Project Employee is represented by
any labor organization.

                  (c) No labor union, labor organization, Project Employees or
group of employees of GenWest has made a pending demand for recognition or
certification, and there are no representation or certification proceedings or
petitions seeking a representation proceeding presently pending or threatened in
writing to be brought or filed with the National Labor Relations Board or any
other labor relations tribunal or authority. To Sellers' Knowledge, there have
been no labor union organizing activities with respect to any Project Employees
or any employees of GenWest.

                  (d) From May 17, 2004, there has been no actual or, to
Sellers' Knowledge, threatened, arbitrations, grievances, labor disputes,
strikes, lockouts, slowdowns or work stoppages against or affecting GenWest or
the Project.

                  (e) With respect to the Project Employees, none of Sellers, or
their respective employees, agents or representatives have committed any
material unfair labor practice as defined in the National Labor Relations Act.

                  (f) With respect to the Project Employees, Sellers are in
compliance in all material respects with all applicable Laws relating to
employment and employment practices, including, without limitation, all Laws
respecting terms and conditions of employment, health and safety, wages and
hours, child labor, immigration, employment discrimination, disability rights or
benefits, equal opportunity, plant closures and layoffs, affirmative action,
workers' compensation, labor relations, employee leave issues and unemployment
insurance.

                  (g) With respect to the Project Employees, none of the Sellers
are or have been: (i) a "contractor" or "subcontractor" (as defined by Executive
Order 11246), (ii) required to comply with Executive Order 11246, or (iii)
required to maintain an affirmative action plan.

                  (h) With respect to the Project Employees, Sellers are and
have been in compliance in all material respects with all notice and other
requirements under the Workers' Adjustment and Retraining Notification Act and
any similar state or local law relating to plant closings and layoffs.

                                       39


            Section 3.1.19 Employee Matters. No claim is pending, or to Sellers'
Knowledge threatened, in which any individual or Governmental Authority asserts,
or in the case of any threatened claim, may assert, that any individual is or
was an employee of GenWest. Neither Purchaser nor any of its Affiliates will
incur any Liability under or otherwise in respect of any employee compensation
or benefit plan, program, agreement or arrangement (including any employee
benefit plan within the meaning of ERISA Section 3(3)) established or maintained
by Sellers or their ERISA Affiliates. Each such plan, program, agreement or
arrangement maintained in respect of any individual performing services in
respect of the Facility or otherwise in respect of the Purchased Assets has been
maintained substantially in accordance with its terms and applicable Law,
including ERISA and the Code.

            Section 3.1.20 Brokers. All negotiations relative to this Agreement
and the transactions contemplated hereby have been carried out by Sellers
directly with Purchaser without the intervention of any Person on behalf of
Sellers in such manner as to give rise to any valid claim by any Person against
Purchaser for a finder's fee, brokerage commission or similar payment.

            Section 3.1.21 Intellectual Property. Section 3.1.21 Part A of
Sellers' Disclosure Schedule sets forth a complete list of all Shared
Intellectual Property and all Non-Shared Intellectual Property. GenWest owns all
interest or has non-exclusive use rights in the Non-Shared Intellectual Property
and an undivided 75% interest in such ownership in or rights to the Shared
Intellectual Property. Except as set forth in Section 3.1.21 Part B of Sellers'
Disclosure Schedule, none of the Sellers owns or otherwise has, and has not
acquired specifically for the purposes of the Facility or the Purchased Assets,
any right to use any Intellectual Property that is used in or is necessary,
required or in the case of GenWest, beneficial for the ownership, operation or
maintenance of the Facility as currently owned, operated and maintained, other
than such as may be included in the Purchased Assets. Except as set forth in
Section 3.1.21 of Sellers' Disclosure Schedule and except for the Excluded
Assets that constitute Intellectual Property, the Intellectual Property conveyed
to Purchaser pursuant hereto ("Transferred Intellectual Property") includes any
and all Intellectual Property necessary for the ownership, operation or
maintenance of the Facility as currently owned, operated and maintained. To
Sellers' Knowledge, the ownership, operation and maintenance of the Facility as
currently owned, operated and maintained does not infringe upon, misappropriate,
or otherwise violate either directly or indirectly (such as through contributory
infringement or inducement to infringe) any Intellectual Property rights of any
third Person, and the Sellers have not received written notice by any Person of
any pending or threatened claims, suits, actions, mediations, arbitrations,
orders or other adversarial proceedings (a) alleging infringement,
misappropriation or other violation by the Sellers of Intellectual Property
rights of any Person or (b) challenging the Sellers' ownership or use of, or the
validity, enforcement, registrability or maintenance of, any Transferred
Intellectual Property. To Sellers' Knowledge, except as provided in the Assumed
Agreements, none of the Sellers has entered into any consents, judgments,
orders, indemnifications, forbearances to sue, settlement agreements, licenses
or other arrangements which (i) restrict GenWest's right to use any Transferred
Intellectual Property, (ii) restrict the transfer or licensing by GenWest of the
Transferred Intellectual Property, (iii) restrict GenWest's business as it
pertains to the Facility in order to accommodate a third Person's Intellectual
Property rights, or (iv) permit any third Person to use any Transferred
Intellectual Property. The intended use by the Sellers of any Transferred
Intellectual Property is in accordance with any and all applicable

                                       40


grants, licenses, agreements, instruments or other arrangements pursuant to
which the Sellers acquired the right to use such Transferred Intellectual
Property. Service and all other fees to be paid by Sellers with respect to the
Transferred Intellectual Property have been paid as required to any Person.

      Section 3.2 Representations and Warranties of Purchaser. Except as
specifically set forth in the Purchaser's Disclosure Schedule attached hereto as
Schedule VII, Purchaser hereby represents and warrants to Sellers that all of
the statements contained in this Section 3.2 are true and correct as of the
Effective Date (unless another date is expressly indicated), and will be true
and correct as of the Closing Date as though made on and as of the Closing Date.
Each exception and other response to this Agreement set forth in the Purchaser's
Disclosure Schedule is identified by reference to, or has been grouped under a
heading referring to, a specific individual section of this Agreement, and,
except as otherwise specifically stated with respect to such exception, relates
only to such section.

            Section 3.2.1 Existence. Purchaser is a corporation, duly formed,
validly existing and in good standing under the Laws of the State of Nevada and
has full power and authority to conduct its business as it is now being
conducted and to own, lease and operate its assets and properties.

            Section 3.2.2 Authority. Purchaser has full power and authority to
execute and deliver this Agreement and the Transaction Agreements to which it is
or will be a party, to perform its obligations hereunder and thereunder and to
consummate the transactions contemplated hereby and thereby. The execution and
delivery by Purchaser of this Agreement and the Transaction Agreements to which
it is or will be a party, and the performance by Purchaser of its obligations
hereunder and thereunder, have been duly and validly authorized by all necessary
corporate action.

            Section 3.2.3 Binding Agreement. This Agreement and the Transaction
Agreements to which Purchaser is or will be a party have been or will be when
delivered duly and validly executed and delivered by Purchaser and, assuming due
and valid authorization, execution and delivery thereof by Sellers and each
other party thereto, this Agreement and the Transaction Agreements to which
Purchaser is or will be a party are or will be when delivered valid and binding
obligations of Purchaser enforceable against Purchaser in accordance with their
terms, except (a) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance and other similar Laws of
general application affecting enforcement of creditors' rights generally and,
(b) general equitable principles, including that the availability of the remedy
of specific performance or injunctive or other forms of equitable relief may be
subject to equitable defenses and would be subject to the discretion of the
court before which any proceeding therefor may be brought.

            Section 3.2.4 No Conflicts. Subject to the receipt of the Required
Consents, PUCN Approval, FERC Approval, and the expiration or early termination
of the waiting period under the HSR Act, the execution and delivery by Purchaser
of this Agreement do not, and the execution and delivery by Purchaser of the
Transaction Agreements to which it is or will be a party, the performance by
Purchaser of its obligations under this Agreement and such

                                       41


Transaction Agreements and the consummation of the transactions contemplated
hereby and thereby shall not:

                  (a) Conflict with or result in a violation or breach of any of
the terms, conditions or provisions of Purchaser's articles of incorporation and
by-laws;

                  (b) Result in a default (or give rise to any right of
termination, cancellation or acceleration) under any of the terms, conditions or
provisions of any note, bond, deed of trust, indenture, license, agreement,
lease or other instrument or obligation to which Purchaser or any of its
Affiliates is a party or by which any of their respective assets and properties
may be bound, except for such defaults (or rights of termination, cancellation
or acceleration) as to which requisite waivers or consents have been obtained in
writing (true and correct copies of which waivers and consents have been
furnished to Sellers); or

                  (c) Conflict with or result in a violation or breach of any
term or provision of any Law applicable to Purchaser or any of its Affiliates or
any of their respective assets and properties.

            Section 3.2.5 Approvals and Filings. Except for the Required
Consents, PUCN Approval, FERC Approval, and the expiration or early termination
of the waiting period under the HSR Act, no consent or approval of, filing with
or notice to any Governmental Authority or other Person is required in
connection with the execution, delivery and performance by Purchaser of this
Agreement or any of the Transaction Agreements to which it is a party or the
consummation by Purchaser of the transactions contemplated hereby or thereby.

            Section 3.2.6 Legal Proceedings. Except as set forth in Section
3.2.6 of Purchaser's Disclosure Schedule, there are no actions or proceedings
(including orders, judgments and writs), and to Purchaser's Knowledge, no claims
or investigations, outstanding or pending in any Governmental Authority to which
Purchaser is a party or, to Purchaser's Knowledge, threatened against Purchaser
or any of its assets and properties, which would be reasonably expected to
result in the issuance of an order restraining, enjoining or otherwise
prohibiting or making illegal the consummation of the transactions contemplated
by this Agreement or any of the Transaction Agreements.

            Section 3.2.7 Brokers. All negotiations relative to this Agreement
and the transactions contemplated hereby have been carried out by Purchaser
directly with Sellers without the intervention of any Person on behalf of
Purchaser in such manner as to give rise to any valid claim by any Person
against Sellers for a finder's fee, brokerage commission or similar payment.

                                   ARTICLE IV

                                    COVENANTS

      Section 4.1 Efforts to Close and Fulfillment of Conditions. After the
Effective Date and prior to Closing:

                                       42


                  (a) Each Party shall use commercially reasonable efforts and
proceed diligently and in good faith to take, or cause to be taken, all actions,
and to do, or cause to be done, all things necessary, proper or advisable under
Law to consummate and make effective the purchase, sale, assignment, conveyance,
transfer and delivery of the Purchased Assets, the assumption of the Assumed
Agreements pursuant to this Agreement, and the effectiveness of the Interim PPA.
Such actions shall include each Party using its commercially reasonable efforts
to ensure satisfaction of the conditions precedent to its obligations hereunder,
as soon as practicable after the Effective Date.

                  (b) Each Party shall provide reasonable cooperation to the
other Party in obtaining consents, approvals or actions of, making all filings
with and giving all notices to Governmental Authorities or other Persons
required of the other Party to consummate the transactions contemplated hereby
and by the Transaction Agreements. The Parties shall use their commercially
reasonable efforts to respond promptly and accurately to any requests for
additional information made by any such Governmental Authority. The Parties
agree that they shall consult with each other with respect to the transfer to
Purchaser or the obtaining by Purchaser or the Sellers of FERC Approval, PUCN
Approval, Permits, consents, approvals and authorizations of all third parties
and Governmental Authorities, including the HSR Act filing.

                  (c) As promptly as practicable and, in any event, within 30
days after the Effective Date, Purchaser shall file with the PUCN all documents
reasonably required to obtain the PUCN Approval. Purchaser shall use its
commercially reasonable efforts to respond promptly and accurately to any
requests for additional information made by the PUCN, and Sellers shall use its
commercially reasonable efforts to cooperate with Purchaser in connection
therewith. Purchaser shall consult with Sellers on all principal filings
submitted by Purchaser to the PUCN in connection with the PUCN Approval. For the
avoidance of doubt, Sellers shall not be entitled to receive any proprietary
data related to current and forecasted operations of Purchaser, including
production models, operating costs, and other similar information in connection
with the preparation of the filing to the PUCN. Each Party shall bear its own
costs and expenses of the preparation of such filing.

                  (d) At a time mutually agreed between Purchaser and Sellers,
the Parties shall file with the FERC all documents reasonably required to obtain
the FERC Approval. Each Party will bear its own costs and expenses of the
preparation of such filing.

                  (e) At a time mutually agreed between Purchaser and Sellers,
the Parties shall file or cause to be filed with the Federal Trade Commission
and the United States Department of Justice all notifications required to be
filed under the HSR Act and the rules and regulations promulgated thereunder, as
amended from time to time, with respect to the transactions contemplated hereby.
Each Party will bear its own costs and expenses of the preparation of such
filing.

                  (f) Purchaser shall use commercially reasonable efforts to
obtain the Financing. After the Effective Date and prior to Closing, Sellers
shall use commercially reasonable efforts to assist Purchaser in connection with
Purchaser's efforts to secure the Financing as follows: (i) by making all
engineering and design materials related to the Facility or the Real Property
available to Purchaser and its Related Persons as Purchaser reasonably

                                       43


requests, (ii) by providing Purchaser and its Related Parties with access to the
Facility, the Real Property, the Shared Books and Records and the Non-Shared
Books and Records at all reasonable times, (iii) by making Sellers' personnel
available to Purchaser and its Related Parties to provide information related to
the Facility or the Real Property, including responding to questions and
attending meetings as reasonably requested by Purchaser or its Related Parties,
and (iv) by providing Purchaser and its Related Parties reasonable support with
Sellers' suppliers, vendors and contractors to resolve technical and scope of
supply issues related to the Facility by providing to Purchaser, when requested
to do so by Purchaser, such existing information in connection with this
Agreement and the Facility as may be reasonably required for any potential
lender to Purchaser under a proposed financing arrangement; provided, however,
that (A) any investigation shall be conducted after reasonable advance notice to
Sellers and in such a manner as not to interfere unreasonably with the operation
of the Purchased Assets, (B) Purchaser shall require each Person conducting or
participating in any such investigation, including any Related Person, to comply
with reasonably adopted procedures relating to safety and security, (C)
Purchaser shall be required to indemnify Sellers for any damage to property or
persons resulting from any such investigation to the extent that is the result
of gross negligence or willful misconduct of Purchaser or its Related Persons
and is not covered by insurance, (D) Sellers shall be entitled to have a
representative present during the course of any such investigation, (E) the
Sellers shall not be required to take any action which would constitute a waiver
of the attorney-client privilege, and (F) Purchaser shall reimburse Sellers for
any reasonable, out-of-pocket costs pre-approved by Purchaser and demonstrated
to Purchaser's reasonable satisfaction that are incurred by Sellers in providing
such assistance.

                  (g) Purchaser, at the cost and expense of the Sellers, in an
amount not to exceed $350,000, shall use commercially reasonable efforts to
receive (i) on or before 30 days before the Closing Date, from the title company
of Purchaser's choice a commitment for title insurance reasonably satisfactory
to Purchaser (the "Title Insurance Commitment") and an ALTA/ACSM survey (the
"Survey") of the Site prepared by a licensed professional surveyor selected by
Purchaser, and (ii) on the Closing Date, a prepaid title insurance policy
reasonably satisfactory to Purchaser (the "Title Insurance Policy"). Purchaser
shall be responsible for the cost of the Title Insurance Commitment, resulting
Title Insurance Policy, and the Survey in excess of such amount. Sellers shall
remove or rectify prior to Closing as requested by Purchaser (i) any exceptions
that appear in the Title Insurance Commitment (other than Permitted Liens and
the standard pre-printed exceptions) that adversely affect the title to, or the
proposed use and enjoyment of, the Site (the "Objectionable Title Matters"), or
(ii) any easements, rights-of-way, encroachments, or other matters affecting the
Site as shown by the Survey (other than Permitted Liens as shown by the Survey)
that adversely affect the title to, or the proposed use and enjoyment of, the
Site ("Objectionable Survey Matters"), which request must be provided within 15
Business Days of the later of the receipt of the Title Insurance Commitment or
the Survey and be accompanied by the Title Insurance Commitment, the Survey and
copies of any Objectionable Title Matters. In removing or rectifying such
Objectionable Title Matters or Objectionable Survey Matters, Sellers shall not
be obligated to expend an aggregate amount in excess of $20,000,000 less the
amount of any indemnities paid or payable by Sellers pursuant to Sections
4.2(d), 4.2(e) and 4.11(b)(iii); provided, however, that if the cost of removing
or rectifying such Objectionable Title Matters or Objectionable Survey Matters
exceeds $20,000,000 less the amount of Losses described in Sections 4.2(d),
4.2(e) and 4.11(b)(iii) and such Objectionable Title Matters or Objectionable
Survey Matters are not

                                       44


removed or rectified, Sellers shall provide notice to Purchaser of such fact and
Purchaser shall have the right to terminate this Agreement upon notice to
Sellers, which right must be exercised within 20 Business Days following
Purchaser's receipt of such notice from Sellers. Sellers agree to provide an
indemnity in favor of Purchaser's title company for any Liens first appearing in
public record or attaching subsequent to the effective date of the Title
Insurance Commitment or related preliminary report which are caused by Sellers
or within Sellers' Knowledge.

                  (h) Sellers shall use commercially reasonable efforts to
obtain certificates, acknowledgements or undertakings reasonably requested by
Purchaser from the following counterparties to the Assumed Agreements: SNWA,
Kern River Transmission Company; Las Vegas Valley Water District; Siemens
Westinghouse Power Corporation; Reliant Energy Services, Inc.; LG Constructors,
Inc.; CH2M Hill Companies, Inc.; Southern California Edison Company; General
Electric Company; Alstom Power, Inc.; Hamon Cooling Towers, Inc.; Hamon & Cie,
S.A.; APS; Dry Lake Water, LLC; Mirant Las Vegas, LLC, and Gillard Construction,
Inc. and any counterparty to a Post-Effective Date Assumed Joint Facility
Agreement having a value exceeding $100,000. Purchaser shall reimburse Sellers
for any reasonable, out-of-pocket costs pre-approved by Purchaser and
demonstrated to Purchaser's reasonable satisfaction that are incurred by Sellers
in making such efforts.

                  (i) Sellers shall use commercially reasonable efforts to
secure the Sellers' Releases as promptly as practicable after the Effective
Date, but in any event within 45 days after the Effective Date ("Sellers'
Releases Deadline"). If Sellers have not obtained the Sellers' Releases by the
Sellers' Releases Deadline, Sellers shall have the right to terminate this
Agreement by notice to Purchaser, which right must be exercised within 20
Business Days after the Sellers' Releases Deadline or it shall be deemed to be
waived. If the Sellers' Releases are included in the Required Consents delivered
at Closing, Purchaser shall not object to the Required Consents on the basis of
such inclusion.

                  (j) Sellers shall use commercially reasonable efforts to
execute the Dry Lake Documents as promptly as practicable after the Effective
Date. If Sellers have not executed the Dry Lake Documents within 45 days after
the Effective Date, Purchaser shall have the right to terminate this Agreement
by notice to Sellers, which right must be exercised within 20 Business Days
after the 45 days after the Effective Date, or it shall be deemed to be waived.

                  (k) Sellers shall use commercially reasonable efforts to
obtain the SNWA Consent by September 30, 2005. If the SNWA Consent is not
obtained by September 30, 2005, either Party shall have the right to terminate
this Agreement by notice to the other Party, which right must be exercised
within 20 Business Days after September 30, 2005 or it shall be deemed to be
waived.

                  (l) Sellers, at the sole cost and expense of Sellers, shall
use commercially reasonable efforts to obtain an ALTA/ACSM survey of the Site
prepared by a licensed professional surveyor selected by Sellers as promptly as
practicable following the Effective Date. The Parties shall consult with one
another to determine whether a mutually acceptable surveyor could be used for
such survey to also satisfy Purchaser's requirement to obtain a Survey pursuant
to Section 4.1(g)(ii). If, following Sellers' review of such survey, Sellers
conclude that the cost of removing or rectifying any easements, rights-of-way,
encroachments, or other matters

                                       45


affecting the Site that adversely affect the title to, or the proposed use and
enjoyment of, the Site is reasonably expected by Sellers to exceed $5,000,000,
Sellers shall have the right to terminate this Agreement by notice to Purchaser,
which right must be exercised within 60 days after the Effective Date. During
such 60-day period, the Parties will consult regarding the extent of, and the
potential remedies associated with, any adverse title matters reflected on the
survey. The matters disclosed in the letter from HMH, Inc. dated May 13, 2004,
attached as Exhibit 1 to Schedule III, shall be permitted exceptions to the
survey obtained pursuant to this Section 4.1(1), as well as to the Survey to be
obtained pursuant to Section 4.1(g)(ii), and shall not be deemed to be
Objectionable Title Matters or Objectionable Survey Matters.

                  (m) Sellers shall use commercially reasonable efforts to
correct the Site Description Error prior to Closing.

                  (n) To the extent that any portion of the as-built drainage
improvements or rip-rap relating to the drainage improvements on the Site made
pursuant to that certain Grant of Public Underground Drainage Easement in favor
of County of Clark, recorded August 6, 2002, in Book 20020806 as Document No.
01065 of Official Records, is outside the Real Property, Sellers shall use
commercially reasonable efforts to obtain an easement or other appropriate
authorization for the same or to remove the encroachment. To the extent that any
portion of such as-built drainage improvements or rip-rap within the Easements
is not permitted by the Easements, Sellers shall use commercially reasonable
efforts to either amend the Easements or to obtain new easements or other
appropriate authorization to allow the as-built drainage improvements or rip-rap
to remain within the Easements.

                  (o) Sellers shall use commercially reasonable efforts to
execute the cover letter to BLM and submit to BLM the Request for Assignment of
BLM Right of Way Grant Serial No. N-75607, issued by the BLM to GenWest on May
9, 2002 and BLM Right of Way Grant Serial No. N-75840, issued by BLM to GenWest
on May 9, 2002, as soon as reasonably practicable after the Effective Date, in a
form mutually agreed to by the Parties.

                  (p) Each Party shall give notice to the other promptly after
becoming aware of (i) the occurrence or non-occurrence of any event whose
occurrence or non-occurrence would be likely to cause any representation or
warranty contained in this Agreement to be untrue or inaccurate in any material
respect at any time from the Effective Date to the Closing Date and (ii) any
failure of a Party to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it hereunder; provided, however,
that the delivery of any notice pursuant to this section shall not limit or
otherwise affect the remedies available hereunder to the Party receiving such
notice.

                  (q) Each of the Sellers and Purchaser agree to use reasonable
endeavors to refrain from taking any action which could reasonably be expected
to materially delay the consummation of the transactions contemplated by this
Agreement.

                  (r) No separate consent by Purchaser under any agreement to
which Purchaser and any Seller is party that is required to consummate the
transactions contemplated by this Agreement and the assignment and assumption of
the Assumed Agreements shall be required from Purchaser and by its execution and
delivery of this Agreement, Purchaser hereby

                                       46


grants each such consent. To the extent that at the Closing Purchaser assumes
obligations of Sellers to Purchaser under Assumed Agreements to which Purchaser
is a counterparty, Purchaser hereby releases Sellers from such obligations
effective as of the Closing.

      Section 4.2 Operation and Maintenance of Purchased Assets.

                  (a) After the Effective Date and prior to Closing, the Sellers
shall operate and maintain the Facility in accordance with Sections 4.1, 4.2,
4.3, 4.5.2, 4.6, and 9.1 of the Co-Tenancy Agreement and otherwise in the
ordinary course, consistent with past practices, methods, techniques and
standards; provided, however, that with respect to Section 4.3.1 and Section
4.5.2 of the Co-Tenancy Agreement, the Sellers shall only be required to comply
in all material respects.

                  (b) After the Effective Date and prior to Closing, the Sellers
shall not, without the written consent of Purchaser:

                        (i) dispose of or assign any of the Purchased Assets,
except to the extent permitted by the Co-Tenancy Agreement and the O&M
Agreement; provided, however, that (y) the original value of such Purchased
Assets, other than such Purchased Assets suffering loss, damage, other casualty
or breakage, to which Section 4.9 applies, and other than assets replaced as
part of routine maintenance or under the Long Term Maintenance Agreement by
assets of comparable or superior quality and value, does not exceed $6,000,000
in the aggregate and (z) Sellers' share of any consideration received by the
Sellers in connection with such disposition or assignment shall be paid to
Purchaser at Closing;

                        (ii) incur or permit to exist any Lien on any of the
Purchased Assets, other than the Permitted Liens and Liens on the Easements
permitted by Section 3.1.11(a);

                        (iii) enter into, amend, modify, terminate, grant any
waiver under or give any consent or settle or compromise any claim with respect
to (A) any Designated Assumed Agreement except for amendments constituting the
Contemplated Assumed Agreement Amendments, or (B) any other Facility Agreements,
except in the case of this clause (B), for any agreements, amendments,
modifications, terminations, waivers, consents, settlements or compromises (w)
necessary or appropriate to close out and settle any matters under the
Construction and Equipment Supply Contracts, including any release or reduction
in the Existing Letters of Credit, to the extent consistent with the Co-Tenancy
Agreement and the O&M Agreement, other than any modification of paragraphs SC3
and SC4 in the Supplemental Terms and Conditions to the Alstom Agreement, (x)
required by Law, in which event Section 4.2(e) shall apply, (y) entered into or
made in the ordinary course of business, consistent with past practices, the
Co-Tenancy Agreement and the O&M Agreement and that (1) do not require payments
or have contingent liabilities, other than customary indemnity obligations,
after Closing in the aggregate in excess of $100,000, or (2) are terminated by
the Sellers prior to Closing without any cost to or Liability of Purchaser or
adverse effect on the Purchased Assets, or (z) with respect to modifications to
GenWest Agreements existing as of the Effective Date, other than Assumed GenWest
Agreements, entered into or made in the ordinary course of business and that do
not adversely affect the Purchased Assets;

                                       47


                        (iv) permit to lapse any rights to any Transferred
Intellectual Property, except to the extent such rights are not required to
fulfill Sellers' obligations pursuant to this Section 4.2;

                        (v) make any material modification to the Facility or
the Real Property;

                        (vi) adopt a plan of complete or partial liquidation,
dissolution, merger or consolidation, or with respect to PWCC and GenWest, sell
or convey all or substantially all of its assets to any Person or with respect
to PWCC and PWEC transfer its interest in GenWest; provided, however, that PWCC
or PWEC may merge or consolidate with, and PWCC may sell or convey all or
substantially all of their assets to any Person, provided that PWCC or PWEC, as
the case may be, shall be the continuing corporation, or the successor
corporation (if other than PWCC or PWEC, as the case may be) or the purchaser or
assignee of all or substantially all of PWCC's assets shall be an entity
organized and existing under the Laws of the United States of America or a state
thereof, or the District of Columbia and such entity shall expressly assume the
due and punctual performance and observance of all of the covenants and
conditions to be performed by PWCC or PWEC, as the case may be, hereunder, by
supplemental agreement in form reasonably satisfactory to Purchaser;

                        (vii) settle or compromise any litigation which could
result in any cost to or liability of Purchaser or adverse effect on the
Purchased Assets;

                        (viii) make any material change in the levels of Stores
and Inventory maintained at the Facility for the applicable time of the year,
except in the ordinary course of business, consistent with past practices and
pursuant to the Co-Tenancy Agreement and the O&M Agreement; provided, however,
that nothing in this provision shall require Sellers to maintain Stores and
Inventory with a cost in excess of the Stores and Inventory Cap Amount;

                        (ix) modify or amend any Transferred Permit except as
required by Law, in which event Section 4.2(e) shall apply; or

                        (x) enter into any agreement to do or engage in any of
the foregoing.

                  (c) Notwithstanding anything in Section 4.2(b), Sellers may
take any action (x) required to comply with the Co-Tenancy Agreement and the O&M
Agreement or (y) that in Sellers' reasonable judgment is required or appropriate
in connection with the ownership, operation and maintenance of the Project and
that is in accordance with the Co-Tenancy Agreement and the O&M Agreement. With
respect to any such actions taken outside the ordinary course of business or
which may result in any non-compliance with Section 4.2(a) or (b) or any other
provision of this Agreement (each a "Section 4.2(d) Action"), the provisions of
Section 4.2(d) shall apply. Subject to compliance with Section 4.2(d), no action
taken in accordance with this Section 4.2(c) shall be deemed to be a breach of
this Agreement, including for purposes of Section 5.1.2.

                  (d) If Sellers take any Section 4.2(d) Action, Sellers shall
promptly give notice thereof to Purchaser, which notice shall describe the
action taken in detail. Sellers shall

                                       48


indemnify Purchaser for all Losses including any adverse impact on, or any
diminution in value of, the Purchased Assets attributable to such Section 4.2(d)
Action, up to an aggregate amount equal to $20,000,000 less any amounts paid or
payable by Sellers pursuant to Sections 4.1(g), 4.2(e) and 4.11(b)(iii). If
Purchaser reasonably expects such Losses, including such adverse impact or
diminution in value, to exceed an amount equal to $20,000,000 less the amount of
Losses described in Sections 4.1(g), 4.2(e) and 4.11(b)(iii), Purchaser shall
have the right to terminate this Agreement, which right must be exercised within
20 Business Days of receipt of notice of such action from the Sellers or such
right shall be deemed waived.

                  (e) If any action is taken by Sellers which is expressly
permitted by Section 4.2(b)(iii)(B)(x), or Section 4.2(b)(ix), Sellers shall
promptly give notice thereof to Purchaser, which notice shall describe the
action taken in detail. Sellers shall indemnify Purchaser for all Losses
including any adverse impact on, or any diminution in value of, the Purchased
Assets attributable to such action, up to an aggregate amount equal to
$10,000,000 less any amounts paid or payable by Sellers pursuant to Sections
4.1(g), 4.2(d) and 4.11(b)(iii). If Purchaser reasonably expects such Losses,
including such adverse impact or diminution in value, to exceed an amount equal
to $10,000,000 less the amount of Losses described in Sections 4.1(g), 4.2(d)
and 4.11(b)(iii), Purchaser shall have the right to terminate this Agreement
upon notice to Sellers, which right must be exercised within 20 Business Days of
receipt of notice of such action from the Sellers or such right shall be deemed
waived.

                  (f) All notices of Sellers and requests by Sellers for consent
or other action by Purchaser pursuant to this Section 4.2, other than pursuant
to Section 4.2(d) and 4.2(e), and all responses of Purchaser pursuant thereto
shall be made in writing to or by a Purchaser Consent Representative.

      Section 4.3 Purchaser's Inspection Right. After the Effective Date and
prior to Closing, Purchaser and its Related Persons shall have access, upon
reasonable prior notice, to the Site and, if requested, to the Shared Books and
Records and the Non-Shared Books and Records, all for purposes of inspection and
review; provided, however, that (a) any investigation shall be conducted in such
manner as not to interfere unreasonably with the operation of the Purchased
Assets and with reasonable advance notice to Sellers, (b) Purchaser shall
require each Person conducting or participating in any such investigation to
comply with reasonably adopted procedures relating to safety and security, (c)
Purchaser shall indemnify Sellers for any damage to property or persons
resulting from any such investigation that is the result of gross negligence or
willful misconduct of Purchaser or its Related Person and is not covered by
insurance, (d) Sellers shall be entitled to have a representative present during
the course of any such investigation, (e) the Sellers shall not be required to
take any action that would constitute a waiver of the attorney-client privilege,
and (f) Purchaser shall reimburse Sellers for the reasonable out-of-pocket costs
pre-approved by Purchaser and demonstrated to Purchaser's reasonable
satisfaction that are incurred by Sellers in providing such assistance.

      Section 4.4 Intentionally Omitted.

      Section 4.5 Cooperation with Facility Takeover and Transition of
Operations. Within 30 days after the Effective Date, Purchaser shall deliver to
Sellers a list of its proposed representatives to the joint transition team.
Sellers will add its representatives to such team

                                       49


within five Business Days after receipt of Purchaser's list. Such team will be
responsible for preparing as soon as reasonably practicable after the Effective
Date, and timely implementing, a transition plan which will identify and
describe substantially all of the various transition activities that the Parties
will cause to occur before and after the Closing and any other transfer of
control matters that any Party reasonably believes should be addressed in such
transition plan. Purchaser and Sellers shall use commercially reasonable efforts
to cause their representatives on such transition team to cooperate in good
faith and take all reasonable steps necessary to develop a mutually acceptable
transition plan no later than 60 days after the Effective Date.

      Section 4.6 Interim PPA. Concurrent with the execution and delivery of
this Agreement, GenWest and Purchaser shall enter into the Interim PPA,
substantially in the form of Exhibit K.

      Section 4.7 Cooperation in Fault Current Upgrade Proceedings. During the
period after the Effective Date and until Closing, Sellers shall consult with
Purchaser regarding positions taken in proceedings involving the Fault Current
Upgrade MOUs, including in FERC Dockets TX03-1, ER02-1741, ER02-1742, ER04-152,
ER04-424, and ER02-2344.

      Section 4.8 Employees. Purchaser may, but shall not be required to, offer
employment to some, all or none of the Project Employees effective immediately
after the Closing on terms and conditions determined by Purchaser in its sole
discretion. Sellers shall provide Purchaser and its representatives reasonable
access to the Project Employees to assist Purchaser in determining to which
Project Employees, if any, it shall make such offers of employment, and, not
less than 30 days before the Closing, to the extent permitted by applicable Law,
Sellers shall provide Purchaser with the Project Employee Books and Records (to
the extent they may be provided to Purchaser in accordance with Law and with
respect to such Project Employees who consent thereto) to assist Purchaser in
such determination.

      Section 4.9 Risk of Loss. Prior to the effectiveness of Closing, all risk
of loss, damage or other casualty to the Purchased Assets shall be borne by
Sellers and Sellers shall promptly notify Purchasers of any such loss, damage or
casualty or any other change in condition of the Purchased Assets that may lead
to such loss, damage or other casualty. Sellers shall repair prior to the
Closing Date to the previous condition of the Purchased Assets any such damage,
loss or casualty to the Purchased Assets, or breakage of any component or
components of the Purchased Assets in an aggregate amount up to $20,000,000 less
the amount of any indemnities paid or payable by Sellers under Section
4.11(b)(iii); provided, however, that any such event of damage, loss, casualty,
or breakage less than $500,000 shall not be counted towards such limit; provided
further, however that if the aggregate amount of such damage, loss or breakage
exceeds $6,000,000 or an amount equal to $20,000,000 less the amount of any
indemnities paid or payable by Sellers under Section 4.11(b)(iii), and the
Parties are unable to reach an agreement on a remedy for such damage, loss or
breakage after 30 days of the occurrence of such loss, damage or breakage,
Purchaser shall have the right to terminate this Agreement upon notice to
Sellers, which right must be exercised within 20 Business Days of the end of
such 30 day period or such right shall be deemed waived.

      Section 4.10 Interim Reports. In connection with the continuing operation
of the Facility, the Sellers shall use reasonable endeavors between the
Effective Date and Closing to

                                       50


consult in good faith on a regular and frequent basis with Purchaser and its
representatives to report material operational developments and the general
status of ongoing operations pursuant to procedures reasonably requested by
Purchaser or such representatives. The Sellers acknowledge that any such
consultation shall not constitute a waiver by Purchaser of any rights it may
have under this Agreement or any other Transaction Agreement, and that Purchaser
shall not have any Liability or responsibility for any actions of any Seller, or
any of their respective officers, directors, employees or agents with respect to
matters that are the subject of such consultations.

      Section 4.11 Notification of Actions Taken; Update of Schedules.

                  (a) Sellers shall promptly notify Purchaser in the event
Sellers enter into, amend, modify, terminate, grant any waiver under or give any
consent or settle or compromise any claim with respect to any Facility Agreement
or Permit after the Effective Date. Sellers shall provide Purchaser with copies
of any such revised Facility Agreements or Permits as requested by Purchaser.
Each Facility Agreement or amendment thereto that (i) is executed after the
Effective Date, (ii) meets the requirements of Section 4.2(b)(iii)(A), Section
4.2(b)(iii)(B)(w), (x), or (y) or Section 4.2(c), (iii) has a term extending
beyond the Closing Date, and (iv) constitutes a Joint Facility Agreement shall
be an Assumed Agreement (the "Post-Effective Date Assumed Joint Facility
Agreements"); provided, however, that Sellers shall pay prior to Closing, to the
extent reasonably practicable, or otherwise as soon as reasonably practicable
after Closing, for any Materials and Equipment purchased and delivered or
services rendered prior to Closing. Any consent required to assign any such
Post-Effective Date Assumed Joint Facility Agreement to Purchaser shall be a
Required Consent. Sellers shall provide Purchaser with any new Permit obtained
by Sellers after the Effective Date (the "Post-Effective Date Permits") promptly
after receipt thereof. Each such Permit that (i) is entered into for the joint
benefit of GenWest and SNWA and (ii) is requested by Purchaser to be transferred
or is required by Law shall be a Transferred Permit to the extent permitted by
Law. Prior to Closing or upon the request of either Party, the Parties shall
update Schedule I (Assumed Agreements), Schedule II (Materials and Equipment)
and Schedule IV (Transferred Permits) to reflect any changes in Assumed
Agreements, Materials and Equipment and Transferred Permits pursuant to this
Section 4.11.

                  (b) If Sellers become aware at any time before the Closing
Date that a Sellers' Disclosure Schedule previously delivered by Sellers was
inaccurate or incomplete when delivered or has become inaccurate or incomplete
as a result of subsequent events, Sellers shall promptly deliver to Purchaser no
later than 10 Business Days after such discovery an amendment or supplement to
such schedule and any related documents; provided, however, that:

                        (i) if such amendment or supplement is based on events
or matters that arose on or before the Effective Date, such amendment or
supplement shall not be given effect for the purposes of determining the
fulfillment of the condition precedent set forth in Section 5.1.1 or liability
as set forth in Section 7.1(a) and (b) and the Sellers' Disclosure Schedule
shall not be read for any purposes as so amended or supplemented;

                        (ii) if such amendment or supplement is based on events
or matters that arise after the Effective Date and that are expressly permitted
to occur under Section 4.2(b), or Section 4.2(c), such amendment or supplement
shall be given effect for the purposes of

                                       51


determining the fulfillment of the condition precedent set forth in Section
5.1.1 or determining liability as set forth in Section 7.1(a) and (b) and the
Sellers' Disclosure Schedule shall be read for all purposes as so amended or
supplemented;

                        (iii) if such amendment or supplement is based on events
or matters that arise after the Effective Date, such events or matters are not
expressly permitted under Section 4.2(b), or Section 4.2(c), and such events or
matters result in Losses to the Purchaser Indemnified Parties, including any
adverse impact on, or diminution in value of, the Purchased Assets, equal to or
less than an aggregate amount equal to $20,000,000 less any amounts paid or
payable by Sellers pursuant to Sections 4.1(g), 4.2(d), 4.2(e), and 4.9, Sellers
shall indemnify the Purchaser Indemnified Parties for all such Losses with
respect to such events or matters and such amendment or supplement shall be
given effect for purposes of determining the fulfillment of the condition
precedent set forth in Section 5.1.1 or determining liability as set forth in
Section 7.1(a) and (b) and the Sellers' Disclosure Schedule shall be read for
all purposes as so amended or supplemented; provided, however, that if the
amount of such Loss exceeds or is reasonably expected by Purchaser to exceed an
aggregate amount equal to $20,000,000 less the amount of Losses described in
Sections 4.1(g), 4.2(d), 4.2(e) and 4.9, Purchaser shall have the right to
terminate this Agreement upon notice to Sellers, which right must be exercised
within 20 Business Days of receipt of such amendment or supplement from the
Sellers or such right shall be deemed waived; provided further, if such right is
waived, Sellers shall indemnify the Purchaser Indemnified Parties for all such
Losses with respect to such events or matters, up to an amount equal to
$20,000,000 less any amounts paid or payable by Sellers pursuant to Sections
4.1(g), 4.2(d), 4.2(e) and 4.9, and such amendment or supplement shall be given
effect for purposes of determining the fulfillment of the condition precedent
set forth in Section 5.1.1 or determining liability as set forth in Section
7.1(a) and (b) and the Sellers' Disclosure Schedule shall be read for all
purposes as so amended or supplemented.

      Section 4.12 Exercise of Discretion. Promptly upon receipt of the PUCN
Approval and the FERC Approval, but in each case no later than 15 Business Days
after such receipt, Purchaser or Sellers, as applicable, shall give notice to
the other of its approval or disapproval of the PUCN Approval or the terms of
the FERC Approval that impose obligations on such Party or in respect of its
assets, as the case may be. If no notice of disapproval is given within the time
period specified above, Purchaser or Sellers, as applicable, will be deemed to
have approved the PUCN Approval or the FERC Approval, as the case may be. In the
event that any such Party shall give notice of disapproval of any such matter,
as applicable, either Party hereto may give notice of the termination of this
Agreement within ten (10) Business Days after such notice of disapproval is
received.

      Section 4.13 Cure of Material Adverse Effect. If a Material Adverse Effect
shall have occurred and Sellers shall give notice to Purchaser that such
Material Adverse Effect has been cured, Purchaser shall have 20 Business Days to
determine whether such Material Adverse Effect has been cured to its sole
satisfaction. If Purchaser has not given written notice to Sellers of its
dissatisfaction with such cure within the time period specified above, Purchaser
shall be deemed to be satisfied with such cure.

      Section 4.14 No Solicitation of Competing Transaction. After the Effective
Date and prior to Closing, Sellers shall not, directly or indirectly, solicit,
initiate or participate in

                                       52


discussions or negotiations with, any Person or group (other than Purchaser, any
of its Affiliates or representatives) concerning any Acquisition Proposal. The
Sellers shall not, and shall cause each Affiliate not to, enter into any
agreement with respect to any Acquisition Proposal. The Sellers shall
immediately notify, and shall cause the Affiliates to notify, Purchaser of any
unsolicited proposal or inquiry, or amendment to any existing proposal or
inquiry, received by Sellers and the Sellers shall immediately communicate to
Purchaser, or cause the Affiliates to communicate to Purchaser, the terms of any
unsolicited proposal or inquiry, or amendment to any existing proposal or
inquiry, which any of them may receive in connection with such unsolicited
proposal or inquiry or amendment to such existing proposal or inquiry.

                                    ARTICLE V

                              CONDITIONS TO CLOSING

      Section 5.1 Purchaser's Conditions Precedent. The obligations of Purchaser
hereunder to execute or deliver the items it is required to deliver pursuant to
Section 2.4.1(a) are subject to the fulfillment to the reasonable satisfaction
of Purchaser, at or before the Closing, of each of the following conditions (all
or any of which may be waived in whole or in part by Purchaser in its sole
discretion):

            Section 5.1.1 Representations and Warranties. Each of the
representations and warranties made by Sellers in this Agreement and qualified
by materiality or Sellers' Knowledge, shall be true and correct on and as of the
Closing Date as though made on and as of the Closing Date. Each of the
representations and warranties made by Sellers in this Agreement and not
qualified by materiality or Sellers' Knowledge shall be true in all material
respects on and as of the Closing Date as though made on and as of the Closing
Date.

            Section 5.1.2 Performance. Sellers shall have performed and complied
with the agreements, covenants and obligations required by this Agreement to be
so performed or complied with by Sellers at or before the Closing.

            Section 5.1.3 Law. There shall not be in effect on the Closing Date
any Law restraining, enjoining or otherwise prohibiting or making illegal the
consummation of the transactions contemplated by this Agreement.

            Section 5.1.4 PUCN Approval; FERC Approval; HSR Act Filing. The PUCN
Approval and the FERC Approval shall have been duly obtained, made or given and
shall be in full force and effect, and all terminations or expirations of the
waiting period under the HSR Act necessary for the consummation of the
transactions contemplated by this Agreement shall have occurred.

            Section 5.1.5 Required Consents. The Required Consents shall have
been duly obtained, made or given and shall be in full force and effect.

            Section 5.1.6 Deliveries. Sellers shall have executed and delivered
to Purchaser, or shall be standing ready to execute and deliver to Purchaser at
the Closing the items set forth in Section 2.4.1(b) of this Agreement.

                                       53


            Section 5.1.7 Financing. On or before the Closing Date, Purchaser
shall have obtained Financing.

            Section 5.1.8 Material Adverse Effect. No Material Adverse Effect
shall have occurred, which has not been cured by Sellers prior to the Closing
Date to Purchaser's sole satisfaction.

            Section 5.1.9 Title Insurance, Survey and Title Insurance Policy.
Purchaser shall have received the Title Insurance Commitment, the Survey, and
the Title Insurance Policy as contemplated by Section 4.1(g) and Sellers shall
have remedied all Objectionable Title Matters and all Objectionable Survey
Matters to Purchaser's satisfaction.

            Section 5.1.10 Transferred Permits. Sellers shall have taken all
actions to properly transfer to Purchaser their interest in the Transferred
Permits, and Sellers' interests in the Transferred Permits listed on Part C of
Schedule IV shall have been transferred to Purchaser. None of the Transferred
Permits shall be subject to any conditions or stipulations that did not exist as
of the Effective Date which could reasonably be expected to have an adverse
effect on Purchaser or the ownership, operation or maintenance of the Facility
or the Real Property.

            Section 5.1.11 Mirant Back-Up Well Arrangements. The Sellers and
Mirant Las Vegas, LLC shall have executed the Mirant Back-Up Well Arrangements.

            Section 5.1.12 Water Permit. The Water Permit shall have been duly
obtained if the Closing Date occurs after June 16, 2006.

      Section 5.2 Sellers' Conditions Precedent. The obligations of Sellers
hereunder to execute or deliver the items they are required to deliver pursuant
to Section 2.4.1(b) of this Agreement are subject to the fulfillment, to the
reasonable satisfaction of Sellers at or before the Closing, of each of the
following conditions (all or any of which may be waived in whole or in part by
Sellers in their sole discretion):

            Section 5.2.1 Representations and Warranties. Each of the
representations and warranties made by Purchaser in this Agreement and qualified
by materiality or Purchaser's Knowledge, shall be true and correct on and as of
the Closing Date as though made on and as of the Closing Date. Each of the
representations and warranties made by Purchaser in this Agreement and not
qualified by materiality or Purchaser's Knowledge shall be true in all material
respects on and as of the Closing Date as though made on and as of the Closing
Date.

            Section 5.2.2 Performance. Purchaser shall have performed and
complied with the agreements, covenants and obligations required by this
Agreement to be so performed or complied with by Purchaser at or before the
Closing.

            Section 5.2.3 Law. There shall not be in effect on the Closing Date
any Law restraining, enjoining or otherwise prohibiting or making illegal the
consummation of the transactions contemplated by this Agreement.

            Section 5.2.4 PUCN Approval; FERC Approval; HSR Act Filing. The PUCN
Approval and the FERC Approval shall have been duly obtained, made or given and
shall be in

                                       54


full force and effect, and all terminations or expirations of waiting period
imposed under the HSR Act necessary for the consummation of the transactions
contemplated by this Agreement shall have occurred.

            Section 5.2.5 Required Consents. The Required Consents shall have
been duly obtained, made or given and shall be in full force and effect.

            Section 5.2.6 Deliveries. Purchaser shall have executed and
delivered to Sellers, or shall be standing ready to execute and deliver to
Sellers at the Closing, the items set forth in Section 2.4.1(a) of this
Agreement.

                                   ARTICLE VI

                                   TERMINATION

      Section 6.1 Termination Prior to Closing. This Agreement may be
terminated, and the transactions contemplated hereby may be abandoned:

                  (a) At any time before the Closing, by Sellers or Purchaser
upon notice to the other Party, in the event that any non-appealable Law becomes
effective restraining, enjoining, or otherwise prohibiting or making illegal the
consummation of the transactions contemplated by this Agreement;

                  (b) At any time before Closing as provided in Section 4.1(g),
Section 4.1(i), Section 4.1(j), Section 4.1(k), Section 4.1(l), Section 4.2(d),
Section 4.2(e), Section 4.9, Section 4.11(b)(iii), or Section 4.12;

                  (c) At any time before the Closing, by Sellers or Purchaser
upon notice to the other Party, in the event (i) of a breach hereof by the
non-terminating Party which gives rise to (A) a Material Adverse Effect or (B) a
material adverse effect on (1) the ability of Purchaser to perform its
obligations under this Agreement or (2) the validity or enforceability of the
rights and remedies of any Seller under this Agreement or under any of the other
Transaction Agreements if, in the case of both clause (A) and (B), the
non-terminating Party fails to cure such breach within 30 days following
notification thereof by the terminating Party; provided, however, that if, at
the end of such 30-day period, the non-terminating Party is endeavoring in good
faith, and proceeding diligently, to cure such breach, the non-terminating Party
shall have an additional 30 days in which to effect such cure; or (ii) that any
condition to such Party's obligations under this Agreement (other than the
payment of money to the other Party) becomes impossible or impracticable to
satisfy with the use of commercially reasonable efforts if such impossibility or
impracticability is not caused by a breach hereof by such Party; provided,
however, that if it is reasonably possible that the circumstances giving rise to
the impossibility or impracticality may be removed prior to the expiration of
the time period provided in this Section 6.1(c) of this Agreement, then such
notification may not be given until such time as the removal of such
circumstances is no longer reasonably possible within such time period;

                  (d) At any time following September 30, 2006, by Sellers or
Purchaser upon notice to the other Party if the Closing shall not have occurred
on or before such date and

                                       55


such failure to consummate is not caused by a breach of this Agreement by the
terminating Party; or

                  (e) At any time following November 1, 2005, by Sellers or
Purchaser upon notice to the other Party if the PUCN Approval has not been
obtained permitting the Service Term (as defined in the Interim PPA) of the
Interim PPA to commence.

      Section 6.2 Effect of Termination or Breach Prior to Closing.

                  (a) If this Agreement is validly terminated pursuant to
Section 6.1(a), Section 6.1(b), Section 6.1(c)(ii), Section 6.1(d), or Section
6.1(e) of this Agreement, there shall be no liability or obligation on the part
of Sellers or Purchaser (or any of their respective Related Persons), except
that the provisions of clause (C) of Section 4.1(f), clause (c) of Section 4.3,
ARTICLE X (Dispute Resolution), ARTICLE XI (Limited Remedies and Damages),
Section 12.1 (Notices), Section 12.2 (Payments), Section 12.3 (Entire
Agreement), Section 12.4 (Expenses), Section 12.5 (Public Announcements),
Section 12.6 (Confidentiality), Section 12.9 (No Construction Against Drafting
Party), Section 12.10 (No Third Party Beneficiary), Section 12.11 (Headings),
Section 12.12 (Invalid Provisions), Section 12.13 (Governing Law), Section 12.14
(No Assignment; Binding Effect), and this Section 6.2 shall continue to apply
following any such termination.

                  (b) If this Agreement is validly terminated pursuant to
Section 6.1(c)(i) of this Agreement, by Purchaser or Sellers as a result of a
breach by the non-terminating Party, such termination shall be the sole remedy
of the terminating Party; provided that if such breach results from a material
and willful breach by the non-terminating Party of this Agreement, then subject
to Section 11.2 and notwithstanding any other provision of this Agreement to the
contrary, the non-terminating Party and the terminating Party shall be entitled
to all rights and remedies available to it.

                                   ARTICLE VII

                                 INDEMNIFICATION

      Section 7.1 Indemnification by Sellers. Subject to the limitations set
forth in Section 6.2 (Effect of Termination or Breach Prior to Closing), Section
7.4 (Limitations of Liability), Section 8.4 (Sellers' Tax Indemnification),
Section 9.1 (Survival), and Section 11.2 (Limitation of Liability) of this
Agreement, Sellers agree to indemnify and hold Purchaser and its Related Persons
specified in clause (i) of the definition of such term (each, a "Purchaser
Indemnified Party"), harmless from and against (and to reimburse each Purchaser
Indemnified Party as the same are incurred for) any and all Losses incurred by
any Purchaser Indemnified Party resulting from any of the following:

                  (a) any inaccuracy or breach of a representation or warranty
made by Sellers in this Agreement;

                  (b) the breach by Sellers of, or default in the performance by
Sellers of, any covenant, agreement or obligation to be performed by Sellers
pursuant to this Agreement or any of the other Transaction Agreements; or

                                       56


                  (c) the Excluded Assets or the Excluded Liabilities.

      Section 7.2 Indemnification by Purchaser. Subject to the limitations set
forth in Section 6.2 (Effect of Termination or Breach Prior to Closing), Section
7.4 (Limitations of Liability), Section 8.5 (Purchaser's Tax Indemnification),
Section 9.1 (Survival), and Section 11.2 (Limitation of Liability) of this
Agreement, Purchaser hereby agrees to indemnify and hold Sellers and their
Related Persons (each, a "Sellers' Indemnified Party"), harmless from and
against (and to reimburse each Sellers' Indemnified Party as the same are
incurred for) any and all Losses incurred by any Sellers' Indemnified Party
resulting from any of the following:

                  (a) any inaccuracy or breach of a representation or warranty
made by Purchaser in this Agreement;

                  (b) the breach by Purchaser of, or default in the performance
by Purchaser of, any covenant, agreement or obligation to be performed by
Purchaser pursuant to this Agreement or any of the other Transaction Agreements;
or

                  (c) liability assumed by Purchaser under Assumed Agreements
pursuant to Section 2.1.2.

      Section 7.3 Method of Asserting Claims.

            Section 7.3.1 Notification of Claims. If any Purchaser Indemnified
Party or Sellers' Indemnified Party (each, an "Indemnified Party") asserts that
a Party has become obligated to the Indemnified Party pursuant to Section
4.1(f)(C), Section 4.2(d), Section 4.2(e), Section 4.3(c), Section 4.11(b)(iii),
Section 7.1 or Section 7.2 (as so obligated, an "Indemnifying Party"), or if any
suit, action, investigation, claim or proceeding is begun, made or instituted as
a result of which the Indemnifying Party may become obligated to the Indemnified
Party hereunder, the Indemnified Party shall notify the Indemnifying Party
promptly and shall cooperate with the Indemnifying Party, at the Indemnifying
Party's expense, to the extent reasonably necessary for the resolution of such
claim or in the defense of such suit, action or proceeding, including making
available any information, documents and things in the possession of the
Indemnified Party. Notwithstanding the foregoing notice requirement, the right
to indemnification hereunder shall not be affected by any failure to give, or
delay in giving, notice unless, and only to the extent that, the rights and
remedies of the Indemnifying Party shall have been materially prejudiced as a
result of such failure or delay. Any assertion by an Indemnified Party that an
Indemnifying Party is liable to the Indemnified Party for indemnification
pursuant to Section 7.1 or Section 7.2 above must be delivered to the
Indemnifying Party prior to the expiration date (if applicable) of the
representation, warranty, covenant, or agreement giving rise to such
indemnification obligation, as provided in Section 9.1.

            Section 7.3.2 Defense of Claims. In fulfilling its obligations under
this Section 7.3, after the Indemnifying Party has provided each Indemnified
Party with a written notice of its agreement to indemnify each Indemnified Party
under this Section 7.3, as between such Indemnified Party and the Indemnifying
Party, the Indemnifying Party shall have the right to investigate, defend,
settle or otherwise handle, with the aforesaid cooperation, any claim, suit,
action or proceeding, brought by a third party in such manner as the
Indemnifying Party may

                                       57


reasonably deem appropriate; provided, that (i) counsel retained by the
Indemnifying Party is reasonably satisfactory to the Indemnified Party, (ii) the
Indemnifying Party will not consent to any settlement or entry of judgment
imposing any obligations on any Indemnified Parties, other than financial
obligations for which such Person will be indemnified hereunder, unless such
Person has consented in writing to such settlement or judgment (which consent
may be given or withheld in its sole discretion), and (iii) the Indemnifying
Party will not consent to any settlement or entry of judgment unless, in
connection therewith, the Indemnifying Party obtains a full and unconditional
release of the Indemnified Party from all liability with respect to such suit,
action, investigation, claim or proceeding. Notwithstanding the Indemnifying
Party's election to assume the defense or investigation of such claim, action or
proceeding, the Indemnified Party shall have the right to employ separate
counsel and to participate in the defense or investigation of such claim, action
or proceeding, which participation shall be at the expense of the Indemnifying
Party, if (a) on the advice of counsel to the Indemnified Party use of counsel
of the Indemnifying Party's choice could reasonably be expected to give rise to
a material conflict of interest, (b) the Indemnifying Party shall not have
employed counsel reasonably satisfactory to the Indemnified Party to represent
the Indemnified Party within a reasonable time after notice of the assertion of
any such claim or institution of any such action or proceeding, (c) if the
Indemnifying Party shall authorize the Indemnified Party to employ separate
counsel at the Indemnifying Party's expense, or (d) such action shall seek
relief other than monetary damages against the Indemnified Party.

            Section 7.3.3 Real Property Title Claims. Purchaser shall join the
title insurance company and the title insurance underwriter providing insurance
with respect to the Purchased Assets in any claim, action or proceeding against
the Sellers with respect to the Sellers' indemnification obligations arising in
connection with Section 3.1.11(a) (Real Property); provided, however, that
Purchaser, in its sole discretion, shall have a claim against said title
insurance company and title insurance underwriter.

      Section 7.4 Limitations of Liability.

            Section 7.4.1 Claim Threshold. Notwithstanding anything to the
contrary contained in this Agreement, (a) Sellers shall have no liability for
their obligations under Section 4.2(d), Section 4.2(e), Section 4.11(b)(iii) or
Section 7.1 until the aggregate amount of all Losses incurred by the Purchaser
Indemnified Parties equals or exceeds $500,000 (the "Claim Threshold"), in which
event Sellers shall be liable for all such Losses in excess of the Claim
Threshold; it being understood and agreed that the Claim Threshold shall not
apply in the event of fraud, gross negligence or willful misconduct or to (i)
claims for indemnification relating to Excluded Liabilities or Excluded Assets,
or (ii) claims for indemnification relating to Section 3.1.1 (Existence),
Section 3.1.2 (Authority), Section 3.1.3 (Binding Agreement), Section 3.1.4 (No
Conflicts), Section 3.1.5 (Approvals and Filings), Section 3.1.10 (Title to
Personal Property), Section 3.1.11(a) (Real Property), or Section 3.1.20
(Brokers), in each case for which Sellers shall be responsible from dollar one,
whether or not the Claim Threshold has been reached, and (b) Purchaser shall
have no liability for its obligations under Section 4.1(f)(C), Section 4.3(c),
or Section 7.2 until the aggregate amount of all Losses incurred by the Sellers'
Indemnified Parties equals or exceeds the Claim Threshold, in which event
Purchaser shall be liable for all such Losses in excess of the Claim Threshold;
it being understood and agreed that the foregoing Claim Threshold shall not
apply in the event of fraud, gross negligence or willful

                                       58


misconduct or to (i) claims for indemnification relating to Liabilities assumed
by Purchaser under Section 2.1.2, or (ii) claims for indemnification relating to
Section 3.2.1 (Existence), Section 3.2.2 (Authority), Section 3.2.3 (Binding
Agreement), Section 3.2.4 (No Conflicts), Section 3.2.5 (Approvals and Filings)
or Section 3.2.7 (Brokers), in each case for which Purchaser shall be
responsible from dollar one, whether or not the Claim Threshold has been
reached.

            Section 7.4.2 Cap Amount. In no event shall (i) Sellers' aggregate
liability arising out of their indemnification obligations under Section 4.2(d),
Section 4.2(e), Section 4.11(b)(iii), Section 6.2(b), or Section 7.1 exceed 50%
of the Purchase Price; it being understood and agreed that the foregoing
limitation shall not apply in the event of fraud or willful misconduct, or to
claims for indemnification relating to Excluded Liabilities or Excluded Assets
or arising under any of Section 3.1.1 (Existence), Section 3.1.2 (Authority),
Section 3.1.3 (Binding Agreement), Section 3.1.4 (No Conflicts), Section 3.1.5
(Approvals and Filings), Section 3.1.10 (Title to Personal Property), Section
3.1.11(a) (Real Property), or Section 3.1.20 (Brokers), and any such excluded
indemnifiable Losses shall not be deemed to count against or otherwise reduce
such limitation on Sellers' aggregate liability; and (ii) Purchaser's aggregate
liability arising out of its indemnification obligations under Section
4.1(f)(C), Section 4.3(c), Section 6.2(b), or Section 7.2 exceed 50% of the
Purchase Price; it being understood and agreed that the foregoing limitation
shall not apply in the event of fraud or willful misconduct or to (a) claims for
indemnification relating to Liabilities assumed by Purchaser under Section
2.1.2, or (b) claims for indemnification arising under any of Section 3.2.1
(Existence), Section 3.2.2 (Authority), Section 3.2.3 (Binding Agreement),
Section 3.2.4 (No Conflicts), Section 3.2.5 (Approvals and Filings) or Section
3.2.7 (Brokers), and any such excluded indemnifiable Losses shall not be deemed
to count against or otherwise reduce such limitation on Purchaser's aggregate
liability. For the avoidance of doubt, Sellers aggregate obligations under
Sections 4.1(g), 4.2(d), 4.2(e), 4.9, and 4.11(b)(iii) shall not exceed
$20,000,000.

      Section 7.5 Indemnification in Case of Strict Liability or Indemnitee
Negligence. THE INDEMNIFICATION PROVISIONS IN ARTICLE IV, ARTICLE VIII AND IN
THIS ARTICLE VII SHALL BE ENFORCEABLE REGARDLESS OF WHETHER THE LIABILITY IS
BASED ON PAST, PRESENT OR FUTURE ACTS, CLAIMS OR LAWS (INCLUDING ANY PAST,
PRESENT OR FUTURE ENVIRONMENTAL LAW, FRAUDULENT TRANSFER ACT, OCCUPATIONAL
SAFETY AND HEALTH LAW, OR PRODUCTS LIABILITY, SECURITIES OR OTHER LAW), AND
REGARDLESS OF WHETHER ANY PERSON (INCLUDING THE PERSON FROM WHOM INDEMNIFICATION
IS SOUGHT) ALLEGES OR PROVES THE SOLE, JOINT, CONCURRENT, CONTRIBUTORY OR
COMPARATIVE NEGLIGENCE OF THE PERSON SEEKING INDEMNIFICATION, OR THE SOLE,
JOINT, OR CONCURRENT STRICT LIABILITY IMPOSED ON THE PERSON SEEKING
INDEMNIFICATION.

                                       59


                                  ARTICLE VIII

                                   TAX MATTERS

      Section 8.1 Representations and Warranties. Sellers represent and warrant
to Purchaser, except as set forth in Section 8.1 of Sellers' Disclosure Schedule
that:

                  (a) (i) GenWest has filed or will file when due all Tax
Returns that are required to be filed on or before the Closing Date and paid or
will pay in full all Taxes required to be paid; (ii) PWEC has filed or will file
when due all Tax Returns that are required to be filed on or before the Closing
Date, which filings, if not so made, could reasonably be expected to have an
adverse effect on the Purchased Assets, and has paid or will pay in full all
Taxes on such returns required to be paid; and (iii) such Tax Returns were
prepared or will be prepared in the manner required by applicable Laws. Neither
GenWest nor, with respect to the Purchased Assets, PWEC has received any notice
that any Taxes relating to any period prior to Closing are owing that have not
been paid.

                  (b) True and complete copies of all Tax Returns (other than
Federal and State income and franchise tax returns) and all schedules thereto
filed by, or on behalf of, GenWest and copies of all written communications to
or from any Taxing Authority for all prior taxable years have been made
available to Purchaser for inspection.

                  (c) Since the date of its inception, GenWest has qualified as
and been treated as a disregarded entity for U.S. federal income Tax purposes.

                  (d) Neither GenWest nor PWEC has extended or waived the
application of any statute of limitations of any jurisdiction regarding the
assessment or collection of any Tax of GenWest or, with respect to the Purchased
Assets, PWEC.

                  (e) There are no audits, claims, assessments, levies,
administrative or judicial proceedings pending, or to Sellers' Knowledge,
threatened, proposed or contemplated against GenWest or with respect to the
Purchased Assets by any Taxing Authority.

                  (f) Each of GenWest and, with respect to the Purchased Assets,
PWEC and PWCC has withheld and paid all Taxes required to have been withheld and
paid in connection with amounts paid or owing to any employee, independent
contractor, creditor, member or other third party.

                  (g) Neither GenWest nor, with respect to the Purchased Assets,
PWEC is a party to any joint venture, partnership or other arrangement or
contract which is or has been qualified as, and treated as, a partnership for
United States federal and state income Tax purposes.

      Section 8.2 Transfer Taxes. Other than the Tax on transfers of real
property under chapter 375 of the Nevada Revenue and Taxation Code ("Real
Property Transfer Taxes"), which shall be borne 50% by Purchaser and 50% by
Sellers, Sellers shall bear all sales, use, transfer, and other similar taxes
and fees ("Other Transfer Taxes"), if any, arising out of or in connection with
the sale of the Purchased Assets by Sellers pursuant to this Agreement. GenWest
shall file

                                       60


all necessary documentation and Tax Returns with respect to the Other Transfer
Taxes and the Real Property Transfer Taxes (collectively, the "Transfer Taxes")
and cause such Taxes, if any, to be paid to the relevant Taxing Authorities on
or prior to the Closing Date. The Parties shall cooperate to comply with all Tax
Return requirements for any and all Transfer Taxes and shall provide such
documentation and take such other reasonable actions as may be necessary to
minimize the amount of any Transfer Taxes.

      Section 8.3 Property Taxes. Real and personal property ad valorem taxes
with respect to the Purchased Assets ("Property Taxes") for the taxable period
that includes the Closing Date shall be prorated on a daily basis to the Closing
Date. Sellers shall be liable only for the portion of such Property Taxes
attributable to the portion of such taxable period ending on the Closing Date.
Following the Closing, Sellers and Purchaser shall cooperate and consult with
each other with respect to the determination of such Property Taxes and Sellers
shall have the right to participate in any proceedings or disputes with the
applicable Taxing Authority concerning the determination of the amount of such
Property Taxes (including the determination of the value of the property with
respect to which such Property Taxes are assessed).

      Section 8.4 Sellers' Tax Indemnification. Sellers shall indemnify and hold
harmless Purchaser from and against (a) any and all Taxes imposed on or incurred
in respect of the income, business, assets and properties or operations of
GenWest or PWEC with respect to the Purchased Assets, attributable to any
taxable period ending on or prior to the Closing Date ("Pre-Closing Taxes"), (b)
with respect to any taxable period beginning before and ending after the Closing
Date (the "Overlap Period"), any and all Taxes imposed on or incurred in respect
of the income, business, assets and properties or the operations of GenWest or
PWEC with respect to the Purchased Assets, attributable to the period ending on
the Closing Date ("Overlap Period Taxes"), (c) any and all Transfer Taxes for
which Sellers are responsible pursuant to Section 8.2 of this Agreement, and (d)
any Liabilities arising from a breach by Sellers of their covenants in this
Article VIII. For purposes of the Overlap Period, Taxes shall be attributable to
the period ending on the Closing Date: (A) in the case of Taxes imposed on a
periodic basis or otherwise measured by the level of any item, deemed to be the
amount of such Taxes for the entire period (or, in the case of such Taxes
determined on an arrears basis, the amount of such Taxes for the immediately
preceding period), multiplied by a fraction the numerator of which is the number
of days in the Pre-Closing Tax Period and the denominator of which is the number
of days in the entire taxable period; and (B) in the case of all other Taxes, to
the extent of any Taxes that would be payable if the taxable year ended on the
Closing Date. Notwithstanding anything to the contrary in this agreement, no
claim for Taxes shall be permitted under this Section 8.4 unless such claim is
first made not later than 30 days after the expiration of the applicable statute
of limitations (including extensions) with respect to such Taxes.

      Section 8.5 Purchaser Tax Indemnification. Purchaser shall indemnify and
hold harmless Sellers from and against (a) any Taxes with respect to the
Purchased Assets attributable to the time period after the Closing Date, (b) any
and all Transfer Taxes for which Purchaser is responsible pursuant to Section
8.2 of this Agreement, and (c) any liability arising from a breach by Purchaser
of its covenants set forth in this Article VIII.

      Section 8.6 Refunds. If, after the Closing Date, Purchaser receives a
refund or utilizes a credit of any Tax attributable to a Pre-Closing Tax Period
or an Overlap Period, Purchaser shall

                                       61


pay to GenWest within 15 Business Days after such receipt or utilization an
amount equal to such refund received or credit utilized (or so much of such
refund or credit as relates to the portion of the taxable period ending on or
before Closing Date), together with any interest received or credited thereon.
Purchaser shall take such action to obtain a refund or credit attributable to a
Pre-Closing Tax Period or to mitigate, reduce or eliminate any Taxes that could
be imposed for a Pre-Closing Tax Period (including with respect to the
transactions contemplated hereby) as is reasonably requested by Sellers. Sellers
shall reimburse Purchaser for any reasonable, out-of-pocket costs pre-approved
by Sellers and demonstrated to Sellers' reasonable satisfaction that are
incurred by Purchaser in providing such assistance.

      Section 8.7 Contests. In the event Purchaser or Sellers receives written
notice of any examination, claim, settlement, proposed adjustment,
administrative or judicial proceeding, or other matter ("Tax Claim") related to
any Pre-Closing Taxes, Transfer Taxes or Overlap Period Taxes, Purchaser or
Sellers, as the case may be, shall notify the other Parties in writing as soon
as reasonably practical (but in no event more than ten (10) Business Days) after
receipt of such notice. If Sellers notify Purchaser in writing within thirty
(30) Business Days following receipt of such written notice they intend to
exercise their rights pursuant to this Section 8.7, they shall be entitled to
control the defense, prosecution, settlement or compromise of such Tax Claim, at
their own expense. Purchaser shall take such action in contesting such Tax Claim
as Sellers shall reasonably request from time to time, including the selection
of counsel and experts and execution of powers of attorney. Purchaser shall (a)
not make any payments of such Tax Claim for at least thirty (30) days (or such
shorter period as may be required by applicable Law) after giving the notice
required by this Section 8.7, (b) give the Sellers any information requested
relating to such Tax Claim, (c) give any Tax Authority any information requested
by Sellers relating to such Tax Claim, and (d) otherwise cooperate with and make
internal resources available to the Sellers in good faith in order to
effectively contest any such Tax Claim. Sellers shall reimburse Purchaser for
any reasonable, out-of-pocket costs pre-approved by Sellers and demonstrated to
Sellers' reasonable satisfaction that are incurred by Purchaser in providing
such assistance. Purchaser shall not settle or otherwise compromise any such Tax
Claim with any Taxing Authority or prosecute such contest to a determination in
court or other tribunal or initial or appellate jurisdiction unless instructed
to do so by the Sellers. Any of the Sellers may settle or otherwise compromise
any such Tax Claim without Purchaser's prior written consent, except that if as
a result of such settlement or compromise the Taxes payable by Purchaser would
be materially increased, none of Sellers may settle or compromise such matter
without Purchaser's prior written consent, which consent shall not be
unreasonably withheld. In connection with any proceeding taken with respect to
such matters, (i) Sellers shall keep Purchaser informed of all material
developments and events relating to such matters if involving a material
liability for Taxes and (ii) Purchaser shall have the right, at its sole
expense, to participate in any such proceedings. Purchaser shall cooperate with
Sellers by giving them and their representatives, on prior reasonable notice,
reasonable access and cooperation during normal business hours to all
information, books and records pertaining to Transfer Taxes, Pre-Closing Taxes
and Overlap Period Taxes. Sellers shall reimburse Purchaser for any reasonable,
out-of-pocket costs pre-approved by Sellers and demonstrated to Sellers'
reasonable satisfaction that are incurred by Purchaser in providing such
assistance.

      Section 8.8 Assistance and Cooperation. After the Closing Date, each of
Sellers and Purchaser shall (and shall cause their respective Affiliates to) (i)
assist the other Party in

                                       62


preparing any Tax Returns which such other Party is responsible for preparing
and filing in accordance with the terms of this Agreement, and (ii) cooperate
fully in preparing for any audits of, or disputes with any Taxing Authority
regarding, any Tax Returns of GenWest, PWEC or PWCC, or with respect to the
Purchased Assets.

      Section 8.9 Information. After the Closing, Sellers and Purchaser will
make available to each other as reasonably requested, all information, records,
or documents relating to liability or potential liability for Pre-Closing Taxes,
Overlap Taxes and Transfer Taxes and will preserve such information, records or
documents until 30 days after the expiration of the applicable statute of
limitations (including extensions) with respect to such Taxes.

      Section 8.10 Tax Returns. Sellers shall be responsible for preparing and
filing all Tax Returns with respect to the Purchased Assets relating to Tax
periods ending on or prior to the Closing Date. Purchaser shall be responsible
for preparing and filing all Tax Returns with respect to the Purchased Assets
relating to Tax periods ending after the Closing Date.

      Section 8.11 Survival of Obligations. The obligations of the Parties set
forth in this Article VIII shall be unconditional and absolute and shall remain
in effect until 30 days after expiration of the applicable statutes of
limitation (giving effect to any extensions or waivers thereof) relating to the
Tax or Tax Return in question.

      Section 8.12 Adjustments to Purchase Price. The Parties hereby agree that
any and all indemnity payments made pursuant to this Agreement shall, to the
maximum extent permitted by applicable Law, be treated for all Tax purposes as
an adjustment to the Purchase Price.

                                   ARTICLE IX

                       SURVIVAL; NO OTHER REPRESENTATIONS

      Section 9.1 Survival of Representations, Warranties, Covenants and
Agreements. The representations, warranties, covenants and agreements of Sellers
and Purchaser contained in this Agreement shall survive the Closing and shall
expire two (2) years from the Closing Date. Notwithstanding the preceding
sentence, (i) the representations and warranties contained in Section 3.1.1
(Existence), Section 3.1.2 (Authority), Section 3.1.3 (Binding Agreement),
Section 3.1.10 (Title to Personal Property), Section 3.1.11(a) (Real Property),
Section 3.1.20 (Brokers), Section 3.2.1 (Existence), Section 3.2.2 (Authority),
Section 3.2.3 (Binding Agreement), Section 3.2.4 (No Conflicts), Section 3.2.5
(Approvals and Filings) and Section 3.2.7 (Brokers), the covenants in Section
2.1.2 (Assignment and Assumption of Agreements), Section 2.1.4 (Excluded
Liabilities), Section 2.5.2(a) (Pre-Closing Books and Records), Section 2.5.5
(Site Description Error), and Section 2.5.6 (Drainage Encroachment Indemnity)
shall survive indefinitely after the Closing, (ii) the covenants in Section
2.5.2(b) (Pre-Closing Books and Records), with respect to Retained Information,
shall survive for so long as Sellers retain the Retained Information, (iii) the
covenants in Section 2.5.4, with respect to SCE RRSU Refunds, shall survive
until all SCE RRSU Refunds have been paid, (iv) the representations, warranties,
covenants and agreements contained in Article VIII (Tax Matters) and Section
12.6

                                       63


(Confidentiality) shall be governed solely by the terms therein, (v) the
representations and warranties contained in Section 3.1.17 (Environmental
Matters) shall survive the Closing and shall expire on the date that is five (5)
years after the Closing Date, and (vi) the representations and warranties
contained in Section 3.1.21 (Intellectual Property) shall survive the Closing
and shall expire on the date that is seven (7) years after the Closing Date.

      Section 9.2 No Other Representations. NOTWITHSTANDING ANYTHING TO THE
CONTRARY CONTAINED IN THIS AGREEMENT, IT IS THE EXPLICIT INTENT OF EACH PARTY
HERETO THAT NONE OF THE PARTIES IS MAKING ANY REPRESENTATION OR WARRANTY
WHATSOEVER, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY IMPLIED
REPRESENTATION OR WARRANTY AS TO CONDITION, MERCHANTABILITY, USAGE, SUITABILITY
OR FITNESS FOR ANY PARTICULAR PURPOSE WITH RESPECT TO THE FACILITY, OR ANY PART
THEREOF, EXCEPT THOSE REPRESENTATIONS AND WARRANTIES CONTAINED IN ARTICLE III
AND ARTICLE VIII OF THIS AGREEMENT OR IN ANY CERTIFICATE, INSTRUMENT OR DOCUMENT
EXECUTED AND DELIVERED PURSUANT TO THIS AGREEMENT.

                                    ARTICLE X

                               DISPUTE RESOLUTION

      Section 10.1 Dispute Resolution. Any dispute or claims arising under this
Agreement which is not resolved in the ordinary course of business shall be
referred to a panel consisting of a senior executive (President or a Vice
President) of Purchaser and PWCC, with authority to decide or resolve the matter
in dispute, for review and resolution. Such senior executives shall meet and in
good faith attempt to resolve the dispute within 30 days. If the Parties are
unable to resolve a dispute pursuant to this Section 10.1, either Party may
enforce its rights at law or in equity subject to the provisions of this
Agreement, including Section 10.2 below.

      Section 10.2 Submission to Jurisdiction. Each Party hereto irrevocably
submits to the exclusive jurisdiction of the federal court in the State of
Nevada for the purposes of any action arising out of or based upon this
Agreement or relating to the subject matter hereof. If, for any reason, the
Parties fail to qualify for the jurisdiction of the federal court in the State
of Nevada, then each Party hereto irrevocably submits to the exclusive
jurisdiction of the state courts of the State of Nevada for the purposes of any
action arising out of or based on this Agreement or relating to the subject
matter hereof. Each Party hereto irrevocably and unconditionally waives any
objection to the laying of venue of any action, suit or proceeding in the state
or federal court in Nevada, and hereby further irrevocably and unconditionally
waives and agrees not to plead or claim in any such court that any such action,
suit or proceeding brought in any such court has been brought in an inconvenient
forum. Each of GenWest and PWEC hereby appoints PWCC as its agent for service of
process.

                                       64


                                   ARTICLE XI

                          LIMITED REMEDIES AND DAMAGES

      Section 11.1 Exclusive Remedies. THE EXPRESS REMEDIES AND MEASURES OF
DAMAGES PROVIDED FOR IN THIS AGREEMENT SHALL BE THE SOLE AND EXCLUSIVE REMEDIES
FOR A PARTY HEREUNDER AND ALL OTHER REMEDIES OR DAMAGES AT LAW OR IN EQUITY ARE
WAIVED. IF NO REMEDY OR MEASURE OF DAMAGES IS EXPRESSLY HEREIN PROVIDED, A PARTY
MAY, SUBJECT TO THE LIMITATIONS OF SECTION 7.4 AND SECTION 11.2, PURSUE SUCH
REMEDIES, INCLUDING DAMAGES AND FEES AND EXPENSES OF ATTORNEYS AS MAY BE
AVAILABLE AT LAW OR IN EQUITY.

      Section 11.2 Limitation of Liability. NOTWITHSTANDING THE FOREGOING,
HOWEVER, NO PARTY SHALL, UNDER ANY CIRCUMSTANCES, BE LIABLE FOR SPECIAL,
INDIRECT, CONSEQUENTIAL, INCIDENTAL, PUNITIVE OR EXEMPLARY DAMAGES, WHETHER BY
STATUTE, IN TORT OR CONTRACT OR OTHERWISE. THE LIMITATIONS HEREIN IMPOSED ON
REMEDIES AND THE MEASURE OF DAMAGES SHALL BE WITHOUT REGARD TO THE CAUSE OR
CAUSES RELATED THERETO, INCLUDING THE NEGLIGENCE OF ANY PARTY. THIS PROVISION
SHALL SURVIVE ANY TERMINATION, CANCELLATION OR SUSPENSION OF THIS AGREEMENT.

      Section 11.3 Specific Performance. EACH PARTY AGREES THAT DAMAGE REMEDIES
SET FORTH IN THIS AGREEMENT MAY BE DIFFICULT OR IMPOSSIBLE TO CALCULATE OR
OTHERWISE INADEQUATE TO PROTECT ITS INTERESTS AND THAT IRREPARABLE DAMAGE MAY
OCCUR IN THE EVENT THAT PROVISIONS OF THIS AGREEMENT ARE NOT PERFORMED BY THE
PARTIES IN ACCORDANCE WITH THE SPECIFIC TERMS OF THIS AGREEMENT. ANY PARTY MAY
SEEK TO REQUIRE THE PERFORMANCE OF ANY OTHER PARTY'S OBLIGATIONS UNDER THIS
AGREEMENT THROUGH AN ORDER OF SPECIFIC PERFORMANCE RENDERED BY THE FEDERAL COURT
IN THE STATE OF NEVADA OR THE STATE COURTS IN THE STATE OF NEVADA AS PROVIDED IN
SECTION 10.2 OF THIS AGREEMENT.

                                   ARTICLE XII

                                  MISCELLANEOUS

      Section 12.1 Notices.

            Section 12.1.1 Notice Addresses. Unless this Agreement specifically
requires otherwise, any notice, demand or request provided for in this
Agreement, or served, given or made in connection with it, shall be in writing
and shall be deemed properly served, given or made if delivered in person or
sent by fax or sent by registered or certified mail, postage prepaid, or by a
nationally recognized overnight courier service that provides a receipt of
delivery, in each case, to a Party at its address specified below:

                                       65


If to Purchaser, to:

Nevada Power
P.O. Box 98910, Las Vegas, NV 89151
Facsimile No.: (702) 367-5869
Attn: Corporate Senior Vice President,
Generation and Energy Supply

with a copy to:

Nevada Power
P.O. Box 98910, Las Vegas, NV 89151
Facsimile No.: (702) 367-5869
Attn: General Counsel

If to Sellers, to:

GenWest, LLC
400 North Fifth Street
Mail Station: 9068
Phoenix, Arizona 85004
Facsimile No.: (602) 250-3002
Attn: Secretary
Pinnacle West Capital Corporation
400 North Fifth Street
Mail Station: 9042
Phoenix, Arizona 85004
Facsimile No.: (602) 250-3002
Attn: Chief Financial Officer

Pinnacle West Energy Corporation
400 North Fifth Street
Mail Station: 9068
Phoenix, Arizona 85004
Facsimile No.: (602) 250-3002
Attn: Secretary

with a copy to:

Diane Wood, Senior Attorney
Pinnacle West Capital Corporation
Law & Business Practices Department
400 North Fifth Street
Mail Station: 8695
Phoenix, Arizona 85004
Facsimile No.: (602) 250-3393

                                       66


with a copy to:

Snell & Wilmer L.L.P.
One Arizona Center
Phoenix, AZ 85004
Facsimile No.: (602) 382-6070
Attn: Matthew P. Feeney

            Section 12.1.2 Effective Time. Notice given by personal delivery,
mail or overnight courier pursuant to this Section 12.1 shall be effective upon
physical receipt. Notice given by fax pursuant to this Section 12.1 shall be
effective as of (i) the date of confirmed delivery if delivered before 5:00 p.m.
local time on any Business Day, or (ii) the next succeeding Business Day if
confirmed delivery is after 5:00 p.m. local time on any Business Day or during
any non-Business Day.

      Section 12.2 Payments. Except for Payments due at Closing, if either Party
is required to make any payment under this Agreement on a day other than a
Business Day, the date of payment shall be extended to the next Business Day. In
the event a Party does not make any payment required or approved by the Parties
under this Agreement on or before the due date, interest on the unpaid amount
shall be due and paid at a rate that is the lesser of (a) the prime rate under
"Money Rates" as reported in the Wall Street Journal on the first business day
of the month during which interest is payable plus two percent (2%) or (b) the
maximum rate of interest permitted to be charged by applicable Law (such lesser
rate, the "Default Rate") from the date such payment is due until the date such
payment is made in full. Any payment of such interest at the Default Rate
pursuant to this Agreement shall not excuse or cure any default hereunder. All
payments shall first be applied to the payment of accrued but unpaid interest.

      Section 12.3 Entire Agreement. This Agreement and the Transaction
Agreements supersede all prior discussions and agreements between the Parties
with respect to the subject matter hereof and thereof, including, in each case,
all schedules and exhibits thereto, and contain the sole and entire agreement
between the Parties hereto with respect to the subject matter hereof and
thereof.

      Section 12.4 Expenses. Except as otherwise expressly provided in this
Agreement, whether or not the transactions contemplated hereby are consummated,
each Party will pay its own costs and expenses incurred in connection with the
negotiation, execution and performance under this Agreement and the Transaction
Agreements and the transactions contemplated hereby and thereby.

      Section 12.5 Public Announcements. Prior to the Closing, Sellers and
Purchaser will not issue or make any press releases or similar public
announcements concerning the transactions contemplated hereby without the
consent of the other. If either Party is unable to obtain the approval of its
press release or similar public statement from the other Party and such press
release or similar public statement is, in the opinion of legal counsel to such
Party, required by Law in order to discharge such Party's disclosure
obligations, then such Party may make or issue the legally required press
release or similar public statement and promptly furnish the other Party

                                       67


with a copy thereof. Sellers and Purchaser will also obtain the other Party's
prior approval of any press release to be issued immediately following the
execution of this Agreement or the Closing announcing either the execution of
this Agreement or the consummation of the transactions contemplated by this
Agreement.

      Section 12.6 Confidentiality. Each Party hereto will hold, and will use
commercially reasonable efforts to cause its Related Persons to hold, in strict
confidence from any Person (other than any such Related Persons), unless (i)
compelled to disclose by judicial or administrative process (including in
connection with obtaining the necessary approvals of this Agreement and the
transactions contemplated hereby of Governmental Authorities) or by other
requirements of Law or necessary or desirable to disclose in order to obtain the
PUCN Approval, the FERC Approval, or in connection with the HSR Act filing, or
(ii) disclosed in an action or proceeding brought by a Party hereto in pursuit
of its rights or in the exercise of its remedies hereunder, all documents and
information concerning the other Party or any of its Related Persons furnished
to it by the other Party or such other Party's Related Persons in connection
with this Agreement or the transactions contemplated hereby and in the case of
Purchaser, any information relating to the Purchased Assets, except to the
extent that such documents or information can be shown to have been (a)
previously known by the Party receiving such documents or information, (b) in
the public domain (either prior to or after the furnishing of such documents or
information hereunder) through no fault of such receiving Party or (c) later
acquired by the receiving Party from another source if the receiving Party is
not aware after reasonable inquiry that such source is under an obligation to
another Party hereto to keep such documents and information confidential. In the
event this Agreement is terminated, upon the request of the other Party, each
Party hereto will, and will use commercially reasonable efforts to cause its
Related Persons to, promptly (and in no event later than five (5) Business Days
after such request) destroy or cause to be destroyed all copies of confidential
documents and information furnished by the other Party in connection with this
Agreement or the transactions contemplated hereby and destroy or cause to be
destroyed all notes, memoranda, summaries, analyses, compilations and other
writings related thereto or based thereon prepared by the Party furnished such
documents and information or its Related Persons. The obligations contained in
this Section 12.6 shall not survive Closing or, if this Agreement is terminated
pursuant to ARTICLE VI, such obligations shall survive for one (1) year
following the termination of this Agreement. The obligations in this Section
12.6 shall supersede the provisions of the Mutual Confidentiality Agreement,
dated February 1, 2005, between Sierra Pacific Resources and Pinnacle West
Energy, Inc (which party the Parties hereby acknowledge was intended to have
been PWEC). Notwithstanding Section 12.10, this Section 12.6 is for the benefit
of Sierra Pacific Resources.

      Section 12.7 Waivers.

            Section 12.7.1 Grant of Waivers. Any term or condition of this
Agreement may be waived at any time by the Party that is entitled to the benefit
thereof, but no such waiver shall be effective unless set forth in a written
instrument duly executed by or on behalf of the Party waiving such term or
condition. No waiver by any Party of any term or condition of this Agreement, in
any one or more instances, shall be deemed to be or construed as a waiver of the
same or any other term or condition of this Agreement on any future occasion.
All remedies,

                                       68


either under this Agreement or by Law or otherwise afforded, will be cumulative
and not alternative.

            Section 12.7.2 Exercise of Remedies. No failure or delay of any
Party, in any one or more instances, (i) in exercising any power, right or
remedy (other than failure or unreasonable delay in giving notice of default)
under this Agreement or (ii) in insisting upon the strict performance by the
other Party of such other Party's covenants, obligations or agreements under
this Agreement, shall operate as a waiver, discharge or invalidation thereof,
nor shall any single or partial exercise of any such right, power or remedy or
insistence on strict performance, or any abandonment or discontinuance of steps
to enforce such a right, power or remedy or to enforce strict performance,
preclude any other or future exercise thereof or insistence thereupon or the
exercise of any other right, power or remedy. The covenants, obligations, and
agreements of a defaulting Party and the rights and remedies of the other Party
upon a default shall continue and remain in full force and effect with respect
to any subsequent breach, act or omission.

      Section 12.8 Amendment. This Agreement may be amended, supplemented or
modified only by a written instrument duly executed by or on behalf of each
Party hereto.

      Section 12.9 No Construction Against Drafting Party. The language used in
this Agreement is the product of both Parties' efforts, and each Party hereby
irrevocably waives the benefits of any rule of contract construction that
disfavors the drafter of a contract or the drafter of specific words in a
contract.

      Section 12.10 No Third Party Beneficiary. Except as provided in Section
12.6, the terms and provisions of this Agreement are intended solely for the
benefit of each Party hereto and their respective successors or permitted
assigns, and it is not the intention of the Parties to confer third-party
beneficiary rights upon any other Person.

      Section 12.11 Headings. The headings used in this Agreement have been
inserted for convenience of reference only and do not define or limit the
provisions hereof.

      Section 12.12 Invalid Provisions. If any provision of this Agreement is
held to be illegal, invalid or unenforceable under any present or future Law,
and if the rights or obligations of any Party hereto under this Agreement will
not be materially and adversely affected thereby, (a) such provision will be
fully severable, (b) this Agreement will be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part hereof,
(c) the remaining provisions of this Agreement will remain in full force and
effect and will not be affected by the illegal, invalid or unenforceable
provision or by its severance herefrom and (d) Purchaser and Sellers shall
negotiate an equitable adjustment in the provisions of the Agreement with a view
toward effecting the purposes of the Agreement, and the validity and
enforceability of the remaining provisions, or portions or applications thereof,
shall not be affected thereby.

      Section 12.13 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEVADA APPLICABLE TO A
CONTRACT EXECUTED AND PERFORMED IN SUCH STATE, WITHOUT GIVING EFFECT TO THE
CONFLICTS OF LAWS PRINCIPLES THEREOF.

                                       69


      Section 12.14 No Assignment; Binding Effect. Neither this Agreement nor
any right, interest or obligation hereunder may be assigned by any Party hereto
without the prior written consent of the other Party hereto and any attempt to
do so will be void, except for assignments and transfers by operation of Law.
This Agreement is binding upon, inures to the benefit of and is enforceable by
the Parties and their respective successors and assigns.

      Section 12.15 Counterparts. This Agreement may be executed in any number
of counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.

      Section 12.16 Time of Essence. Time is of the essence with respect to all
obligations of the Parties hereunder.

                            [Signature Page Follows.]

                                       70


      IN WITNESS WHEREOF, this Purchase Agreement has been executed by the
Parties as of the Effective Date.

                                    PINNACLE WEST CAPITAL CORPORATION

                                    By: /s/ Donald E. Brandt
                                       ____________________________________
                                    Name: Donald E. Brandt
                                    Title: Executive Vice President and Chief
                                    Financial Officer

                                    PINNACLE WEST ENERGY CORPORATION

                                    By: /s/ James M. Levine
                                       ____________________________________
                                    Name: James M. Levine
                                    Title: President

                                    GENWEST, LLC

                                    By: /s/ Warren C. Kotzmann
                                       ____________________________________
                                    Name: Warren C. Kotzmann
                                    Title: Vice President

                                    NEVADA POWER COMPANY

                                    By: /s/ Roberto R. Denis
                                       ____________________________________
                                    Name: Roberto R. Denis
                                    Title: Corporate Senior Vice President,
                                    Generation and Energy Supply

EX-99.6

                                                                    EXHIBIT 99.6

                                                                  EXECUTION COPY

                              AMENDED AND RESTATED

                             REIMBURSEMENT AGREEMENT

                                      among

                         ARIZONA PUBLIC SERVICE COMPANY

                             THE BANKS PARTY HERETO

                           JPMORGAN CHASE BANK, N.A.,
                  as Administrative Agent and Issuing Bank and

                               BARCLAYS BANK PLC,
                              as Syndication Agent

                            dated as of May 19, 2005

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

                J.P. Morgan Securities Inc. and Barclays Capital,
                   Joint Lead Arrangers and Joint Bookrunners



                                TABLE OF CONTENTS



                                                                                                
Section 1.  Definitions; Accounting Terms......................................................     2
Section 2.  Reimbursement......................................................................    13
Section 3.  Amendment and Restatement of Letter of Credit; Conditions to Effectiveness;
       Transitional Provisions.................................................................    18
Section 4.  Adjustment of Maximum Drawing Amount; Terms of Drawing.............................    21
Section 5.  Obligations Absolute...............................................................    21
Section 6.  Representations and Warranties of the Company......................................    21
Section 7.  Affirmative Covenants..............................................................    25
Section 8.  Negative Covenants.................................................................    30
Section 9.  Reimbursement Events of Default....................................................    32
Section 10.  Amendments and Waivers............................................................    35
Section 11.  Notices...........................................................................    35
Section 12.  No Waiver; Remedies...............................................................    37
Section 13.  Waiver of Right of Setoff.........................................................    37
Section 14.  Participations of the Banks.......................................................    38
Section 15.  Assignees; Participants...........................................................    40
Section 16.  Continuing Obligation; Binding Effect.............................................    41
Section 17.  Extension of the Letter of Credit.................................................    41
Section 18.  Limited Liability of the Banks....................................................    42
Section 19.  Cost, Expenses and Taxes..........................................................    42
Section 20.  Administrative Agent; Issuing Bank................................................    43
Section 21.  Indemnification...................................................................    44
Section 22.  Confidentiality...................................................................    46
Section 23.  Severability......................................................................    46
Section 24.  Governing Law; Consent to Jurisdiction............................................    46
Section 25.  Headings..........................................................................    47
Section 26.  Counterparts; Integration.........................................................    47
Section 27.  WAIVER OF JURY TRIAL..............................................................    47


SCHEDULE I - Letter of Credit Commission Rates

SCHEDULE II - Participation Amounts and Participation Percentages

EXHIBIT A Form of Amended and Restated Letter of Credit

             THE TABLE OF CONTENTS IS NOT A PART OF THIS AGREEMENT.

                                       i


                  AMENDED AND RESTATED REIMBURSEMENT AGREEMENT

      AMENDED AND RESTATED REIMBURSEMENT AGREEMENT among ARIZONA PUBLIC SERVICE
COMPANY, JPMORGAN CHASE BANK, N.A. (successor to JPMORGAN CHASE BANK ("JPMC")),
as Administrative Agent and as Issuing Bank, and the BANKS listed on the
signature pages hereto, as amended and restated as of May 19, 2005. (Unless
otherwise indicated, all capitalized terms used herein have the meanings
referred to or set forth in Section 1.)

      WHEREAS, the Company has entered into a Participation Agreement dated as
of August 1, 1986 (as amended and in effect on May 19, 2005, the "PARTICIPATION
AGREEMENT") among the Company, U.S. Bank National Association (as successor to
State Street Bank and Trust Company, as successor to The First National Bank of
Boston), for itself and as Owner Trustee (together with its successors in such
capacity, the "OWNER TRUSTEE"), JPMorgan Chase Bank, N.A. (as successor to
Chemical Bank), for itself and as Indenture Trustee (together with its
successors in such capacity, the "INDENTURE TRUSTEE"), PVNGS Funding Corp.,
Inc., PVNGS II Funding Corp., Inc. and Emerson Finance LLC, as Equity
Participant (together with its successors and assigns, the "EQUITY
PARTICIPANT"), relating to the acquisition of an undivided interest in Unit 2 of
the Palo Verde Nuclear Generating Station through a trust for the benefit of the
Equity Participant which interest has been leased to the Company pursuant to a
lease dated as of August 1, 1986 between the Owner Trustee and the Company (as
amended and in effect on May 19, 2005, the "FACILITY LEASE");

      WHEREAS, pursuant to Section 10(b)(3)(ix) of the Participation Agreement,
the Company has agreed to maintain at all times during the Basic Lease Term (as
defined in the Participation Agreement) an irrevocable letter of credit for the
benefit of the Equity Participant;

      WHEREAS, in order to comply with the requirements of Section 10(b)(3)(ix)
of the Participation Agreement, the Company entered into a Reimbursement
Agreement dated as of August 1, 1986 (as amended and restated thereafter from
time to time prior to July 22, 2002, further amended and restated as of July 22,
2002 and in effect immediately prior to May 19, 2005, the "EXISTING
REIMBURSEMENT AGREEMENT") between the Company and JPMC, pursuant to which JPMC
issued to the Equity Participant its irrevocable transferable letter of credit
(such letter of credit, as amended and restated and in effect from time to time
before May 19, 2005, as further amended and restated as of May 19, 2005, and as
the same may be amended in accordance with this Agreement and in effect from
time to time thereafter, and any successor Letter of Credit as provided in such
Letter of Credit, being referred to herein as the "LETTER OF CREDIT"), to secure
the payment of Rent (as defined in the Participation



Agreement) by the Company under the Facility Lease to the extent of the amount
available to be drawn from time to time under the Letter of Credit;

      WHEREAS, the Letter of Credit will expire on July 22, 2005, if not
extended; and

      WHEREAS, pursuant to Section 17 of the Existing Reimbursement Agreement,
the Company has requested that the Letter of Credit be amended and restated,
that the term of the Letter of Credit be extended for five years, and that
certain provisions of the Existing Reimbursement Agreement be amended, and the
Banks are willing to comply with such requests on the terms and conditions set
forth below;

      NOW, THEREFORE, in consideration of the premises and in order to induce
the Banks to agree to the amendment and restatement of the Letter of Credit, the
extension of the term of the Letter of Credit and the amendment of certain
provisions of the Existing Reimbursement Agreement, the parties hereto agree
that, upon satisfaction of the conditions set forth in Section 3(b) below and
subject to Section 3(c) below, the Existing Reimbursement Agreement will,
without any further action by the parties hereto, be amended and restated to
read in full as follows:

      Section 1 Definitions; Accounting Terms. (a) Definitions. Capitalized
terms used herein and not otherwise defined herein have the respective meanings
assigned thereto in Appendix A to the Facility Lease. The following terms as
used herein have the following respective meanings:

      "ACC" means the Arizona Corporation Commission or any successor thereto.

      "ADMINISTRATIVE AGENT" means JPMorgan Chase Bank, N.A., in its capacity as
administrative agent for the Banks hereunder, and its successors in such
capacity.

      "ADMINISTRATIVE QUESTIONNAIRE" means, with respect to each Bank, an
administrative questionnaire in the form prepared by the Administrative Agent
and submitted to the Administrative Agent (with a copy to the Company) duly
completed by such Bank.

      "AFFILIATE" means, as to any Person, any other Person that, directly or
indirectly, controls, is controlled by or is under common control with such
Person or is a director or officer of such Person.

      "AGENT PARTIES" has the meaning given in Section 11(d).

                                        2


      "AGREEMENT" means, when used with reference to this Agreement, this
Reimbursement Agreement as originally executed as of August 1, 1986, as amended
or amended and restated from time to time before May 19, 2005, as amended and
restated as of May 19, 2005, and as the same may be amended in accordance with
its terms from time to time thereafter.

      "AMENDED AND RESTATED LETTER OF CREDIT" means the Amended and Restated
Irrevocable Transferable Letter of Credit No. 010152 (formerly numbered as
S-1002), dated as of May 19, 2005, amending the Existing Letter of Credit,
substantially in the form of Exhibit A hereto.

      "AMENDMENT AND RESTATEMENT" means the Amendment and Restatement dated as
of May 19, 2005, amending and restating the Existing Reimbursement Agreement.

      "APPLICABLE BOOKING OFFICE" means, as to each Bank, its office, branch or
affiliate located at its address set forth in its Administrative Questionnaire
(or identified in its Administrative Questionnaire as its Applicable Booking
Office) or such other office, branch or affiliate of such Bank as it may
hereafter designate as its Applicable Booking Office by notice to the Company
and the Administrative Agent.

      "ASSIGNEE" has the meaning set forth in Section 15(a).

      "AUTHORIZED OFFICER" means the chairman of the board, chief executive
officer, president, chief financial officer, chief operating officer, treasurer,
controller, any vice president or any assistant treasurer of the Company.

      "BANK" means (i) each bank or financial institution listed on the
signature pages hereof, each Assignee that becomes a Bank pursuant to Section
15(a), and their respective successors, and (ii) the Issuing Bank with respect
to its Participation.

      "BASE RATE" means, for any day, a rate per annum equal to the higher of
(i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal
Funds Rate for such day.

      "BUSINESS DAY" means any day except a Saturday, Sunday or other day on
which commercial banks in New York, New York, Chicago, Illinois or the State of
California or, for purposes of Sections 2(a), 2(g) and 9(i) only, Phoenix,
Arizona, are authorized by law to close.

      "CAPITAL LEASE OBLIGATIONS" means as to any Person, the obligations of
such Person to pay rent or other amounts under a lease of (or other agreement
conveying the right to use) real and/or personal property, which obligations are

                                        3


required to be classified and accounted for as a capital lease on the balance
sheet of such Person under generally accepted accounting principles and, for the
purposes of this Agreement, the amount of such obligations shall be the
capitalized amount thereof, determined in accordance with generally accepted
accounting principles.

      "CODE" means the Internal Revenue Code of 1986, as amended, or any
successor statute.

      "COMPANY" means Arizona Public Service Company, an Arizona corporation,
and its successors and permitted assigns.

      "COMPANY MATERIALS" has the meaning given in Section 7(g).

      "CONFIDENTIAL INFORMATION" means information that the Company furnishes to
any other party hereto in a writing designated as confidential, or that such
party obtains pursuant to its rights under Section 7(e), but does not include
any such information that (a) is or becomes generally available to the public
other than as a result of a breach by such party of its obligations hereunder,
(b) was available to such party on a nonconfidential basis prior to its
disclosure to such party by the Company or any of its Affiliates or (c) is or
becomes available to such party from a source other than the Company that is
not, to the knowledge of such party, acting in violation of a confidentiality
agreement with the Company.

      "CONSOLIDATED CAPITALIZATION" has the meaning set forth in Section 8(e).

      "CONSOLIDATED CASH COVERAGE RATIO" means, with respect to the Company and
its Consolidated Subsidiaries, for each twelve-month period ending on the last
day of each fiscal quarter (determined as of the last day of such fiscal
quarter), the ratio of:

      (a) an amount equal to:

            (i) consolidated net income of the Company and its Consolidated
      Subsidiaries for such period, plus

            (ii) all material non-recurring items which decreased said net
      income for such period, minus

            (iii) all material non-recurring items which increased said net
      income for such period, plus

            (iv) income taxes deducted in determining said net income for such
      period, plus

                                        4


            (v) total "Interest Charges", as defined in clause (b) below, of the
      Company and its Consolidated Subsidiaries for such period, plus

            (vi) depreciation and amortization, and nuclear fuel amortization
      for such period, minus

            (vii) allowance for equity and borrowed funds used during
      construction for such period, minus

            (viii) deferrals as described in Financial Accounting Standards
      Board Statement No. 71 for such period, plus or minus

            (ix) other significant noncash items for such period as may be
      specified under Financial Accounting Standards Board Statements or other
      accounting guidelines, to

      (b) without duplication of any item, an amount equal to the sum (such
amount being the "INTEREST CHARGES") of:

            (i) interest on long-term debt for such period as reported in the
      consolidated income statement for such period, plus

            (ii) interest on short-term debt for such period as reported in the
      consolidated income statement for such period, plus

            (iii) imputed interest on the Sale Leaseback Obligation Bonds for
      such period, such amount being equal to the product of (A) the principal
      amount of Sale Leaseback Obligation Bonds outstanding during such period
      and (B) the rate of interest applicable to such Sale Leaseback Obligation
      Bonds during such period, plus

            (iv) all rental payments in respect of operating leases (excluding
      any portion of such rental payments attributable to operating expenses and
      excluding any payments in respect of Sale Leaseback Obligation Bonds) with
      respect to which the payment obligations of the Company or a Consolidated
      Subsidiary of the Company have a present value of at least $25,000,000.

      "CONSOLIDATED INDEBTEDNESS" has the meaning set forth in Section 8(e).

      "CONSOLIDATED NET WORTH" has the meaning set forth in Section 8(e).

      "CONSOLIDATED SUBSIDIARY" means at any date any Subsidiary or other entity
the accounts of which would be consolidated with those of the Company in its
consolidated financial statements if such statements were prepared as of such
date.

                                        5


      "DATE OF EARLY TERMINATION" has the meaning set forth in the Letter of
Credit.

      "ELIGIBLE INSTITUTION" means (i) a commercial bank or a savings and loan
association having a net worth in excess of $250,000,000 (or the equivalent in
any other currency), (ii) a Bank or an affiliate of a Bank or (iii) any other
Person which the Company designates as an Eligible Institution with the consent
of the Administrative Agent.

      "EQUITY PARTICIPANT" has the meaning set forth in the first recital
hereto.

      "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the regulations promulgated and rulings issued
thereunder.

      "ERISA AFFILIATE" means any corporation or trade or business which is a
member of the same controlled group of corporations (within the meaning of
Section 414(b) of the Code) as the Company or is under common control (within
the meaning of Section 414(c) of the Code) with the Company.

      "EXISTING LETTER OF CREDIT" means the Letter of Credit, as amended and in
effect immediately prior to May 19, 2005.

      "EXISTING REIMBURSEMENT AGREEMENT" has the meaning set forth in the third
recital hereto.

      "FACILITY LEASE" has the meaning set forth in the first recital hereto.

      "FEDERAL FUNDS RATE" means, for any day, the rate per annum (rounded
upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Business Day next
succeeding such day, provided that (i) if such day is not a Business Day, the
Federal Funds Rate for such day shall be such rate on such transactions on the
next preceding Business Day as so published on the next succeeding Business Day,
and (ii) if no such rate is so published on such next succeeding Business Day,
the Federal Funds Rate for such day shall be the average rate quoted to JPMorgan
Chase Bank, N.A. on such day as determined by the Administrative Agent.

      "FEE LETTER" means the Fee Letter dated as of April 14, 2005, among the
Company, JPMorgan Chase Bank, N.A., J.P. Morgan Securities Inc., Barclays Bank
PLC and Barclays Capital, the investment banking division of Barclays Bank PLC.

                                        6


      "FINANCIAL INFORMATION" means (i) the annual report of the Company on Form
10-K for the year ended December 31, 2004, as filed with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended,
(ii) the Company's quarterly report on Form 10-Q for the fiscal quarter of the
Company ended March 31, 2005, as so filed, and (iii) the Company's current
reports on Form 8-K filed January 28, 2005, March 1, 2005, March 29, 2005, April
13, 2005, April 26, 2005 and May 19, 2005, as so filed.

      "GUARANTEE" means as to any Person, any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Indebtedness
of any other Person or in any manner providing for the payment of any
Indebtedness of any other Person or otherwise protecting the holder of such
Indebtedness against loss (whether by virtue of partnership arrangements,
agreements to keep well, to purchase assets, goods, securities or services, or
to take-or-pay or otherwise), provided that the term "Guarantee" shall not
include endorsements for collection or deposit in the ordinary course of
business. The term "GUARANTEE" used as a verb has a corresponding meaning.

      "INDEBTEDNESS" means as to any Person at any date (without duplication):
(a) indebtedness created, issued, incurred or assumed by such Person for
borrowed money or evidenced by bonds, debentures, notes or similar instruments;
(b) all obligations of such Person to pay the deferred purchase price of
property or services, excluding, however, trade accounts payable (other than for
borrowed money) arising in, and accrued expenses incurred in, the ordinary
course of business of such Person so long as such trade accounts payable are
paid within 180 days of the date incurred; (c) all Indebtedness secured by a
lien on any asset of such Person, to the extent such Indebtedness has been
assumed by, or is a recourse obligation of, such Person; (d) all Guarantees by
such Person; (e) all Capital Lease Obligations of such Person; and (f) the
amount of all reimbursement obligations of such Person (whether contingent or
otherwise) in respect of letters of credit, bankers' acceptances, surety or
other bonds and similar instruments in support of Indebtedness.

      "INDENTURE TRUSTEE" has the meaning set forth in the first recital hereto.

      "ISSUING BANK" means JPMorgan Chase Bank, N.A. and its successors in their
capacity as issuer of the Letter of Credit.

      "LETTER OF CREDIT" has the meaning set forth in the third recital hereto.

      "LETTER OF CREDIT COMMISSION RATE" means a rate per annum determined in
accordance with Schedule I hereto.

      "LIEN" means any lien, security interest or other charge or encumbrance of
any kind, including, without limitation, the lien or retained security title of
a

                                        7


conditional vendor and any easement, right of way or other encumbrance on title
to real property.

      "MATERIAL SUBSIDIARY" means, at any time, a Subsidiary of the Company
which as of such time meets the definition of a "significant subsidiary"
included as of May 19, 2005 in Regulation S-X of the Securities and Exchange
Commission or whose assets at such time exceed 10% of the assets of the Company
and the Subsidiaries (on a consolidated basis).

      "MAXIMUM CREDIT AMOUNT" means, at any date, the Maximum Credit Amount, as
defined in the Letter of Credit.

      "MAXIMUM DRAWING AMOUNT" means, at any date, the Maximum Drawing Amount,
as defined in the Letter of Credit.

      "MULTIEMPLOYER PLAN" means a plan defined as such in Section 3(37) of
ERISA to which contributions have been made by the Company or any ERISA
Affiliate within any of the preceding five plan years and which is covered by
Title IV of ERISA.

      "1986 ORDER" means Decision No. 55120, dated July 24, 1986, of the ACC.

      "OTHER TAXES" has the meaning set forth in Section 2(e).

      "OWNER TRUSTEE" has the meaning set forth in the first recital hereto.

      "PARENT" means, as to any Bank, any Person controlling such Bank.

      "PARTICIPANT" has the meaning set forth in Section 15(b).

      "PARTICIPATION" means a participating interest of a Bank in the credit
represented by the Letter of Credit including, without limitation, the interest
therein retained by the Issuing Bank after giving effect to all participating
interests therein granted by it pursuant to Section 14(a), but prior to giving
effect to any interest therein granted to any Participant pursuant to Section
15(b).

      "PARTICIPATION AGREEMENT" has the meaning set forth in the first recital
hereto.

      "PARTICIPATION AMOUNT" means, with respect to any Bank, the amount set
forth in Schedule II hereto opposite the name of such Bank therein, as such
amount may be changed by reason of an assignment by or to such Bank in
accordance with Section 15(a). Such amount shall be reduced from time to time by
such Bank's ratable share of each reduction of the Maximum Credit Amount.

                                        8


      "PARTICIPATION PERCENTAGE" means, with respect to any Bank at any time,
the percentage equivalent of a fraction (i) the numerator of which is the
Participation Amount of such Bank at such time and (ii) the denominator of which
is the Maximum Credit Amount at such time.

      "PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.

      "PERMITTED LIEN" of the Company or any Material Subsidiary means any of
the following:

            (i) Liens for taxes, assessments or other governmental charges or
      levies not at the time delinquent or thereafter payable without penalty or
      being contested in good faith by appropriate proceedings and for which
      adequate reserves in accordance with generally accepted accounting
      principles shall have been made;

            (ii) Liens of carriers, warehousemen, mechanics, materialmen and
      landlords incurred in the ordinary course of business, including, without
      limitation, landlord's liens arising under Arizona law under leases
      entered into by the Company in the 1986 sale and leaseback transactions
      with respect to Unit 2, including without limitation the Facility Lease,
      and securing the payment of rent under such leases, to the extent such
      leases are properly treated as operating leases, in each case, for sums
      not overdue or being contested in good faith by appropriate proceedings
      and for which adequate reserves in accordance with generally accepted
      accounting principles shall have been made;

            (iii) Liens incurred in the ordinary course of business in
      connection with worker's compensation, unemployment insurance or other
      forms of governmental insurance or benefits or other similar statutory
      obligations;

            (iv) Liens to secure obligations on surety or appeal bonds;

            (v) rights of setoff and banker's Liens with respect to funds on
      deposit in a financial institution in the ordinary course of business;

            (vi) easements, restrictions and other minor defects of title that
      are not, in the aggregate, material to the use of such property;

            (vii) Liens securing claims against any Person other than the
      Company or any Subsidiary of the Company neither assumed nor guaranteed by
      the Company or any Subsidiary of the Company nor on which the Company or
      any Subsidiary of the Company customarily pays

                                        9


      interest, existing upon real estate or rights in or relating to real
      estate acquired by the Company or any Subsidiary of the Company for
      substation, transmission line, transportation line, distribution line or
      right of way purposes;

            (viii) rights reserved to or vested in any municipality or public
      authority by the terms of any right, power, franchise, grant, license or
      permit or by any provision of law, to terminate such right, power,
      franchise, grant, license or permit, or to purchase or recapture or to
      designate a purchaser of any of the property of the Company;

            (ix) rights reserved to or vested in others to take or receive any
      part of the power pursuant to firm power commitment contracts, purchased
      power contracts and similar agreements, gas, oil or other minerals or
      timber generated, developed, manufactured or produced by, or grown on, or
      acquired with, any property of the Company;

            (x) rights reserved to or vested in any municipality or public
      authority to control or regulate any property of the Company, or to use
      such property in a manner that does not materially impair the use of such
      property for the purposes for which it is held by the Company;

            (xi) security interests granted in favor of the Unit 2 sale
      leaseback transaction lessors in the Company's Decommissioning Trust
      Agreement (PVNGS Unit 2) dated as of January 31, 1992 (such agreement, as
      amended or otherwise modified from time to time, being the "Unit 2 Trust
      Agreement") to secure the Company's obligations in respect of the
      decommissioning of Unit 2 or related facilities;

            (xii) Liens that may exist with respect to the Unit 2 Trust
      Agreement (other than as described in clause (xi) above), or with respect
      to either of the Company's Decommissioning Trust Agreement (PVNGS Unit 1)
      or Decommissioning Trust Agreement (PVNGS Unit 3), each dated as of July
      1, 1991, as amended or otherwise modified from time to time, relating to
      the Company's obligation to set aside funds for the decommissioning and
      retirement from service of such Units;

            (xiii) pledges of pollution control bonds and related rights to
      secure the Company's reimbursement obligations in respect of letters of
      credit and bond insurance supporting pollution control bond transactions,
      provided that such pollution control bonds are not secured by any other
      assets of the Company or any Material Subsidiary;

            (xiv) Liens established on specified bank accounts of the Company to
      secure the Company's reimbursement obligations in respect

                                       10


      of letters of credit supporting commercial paper issued by the Company and
      similar arrangements for collateral security with respect to refinancings
      or replacements of the same;

            (xv) interests of other participants under agreements governing
      jointly-owned electric generating facilities and transmission facilities
      and transfers of operational or other control of facilities to a regional
      transmission organization or other similar body and Liens on such
      facilities to cover expenses, fees and other costs of such an organization
      or body;

            (xvi) rights of transmission users or any regional transmission
      organizations or similar entities in transmission facilities;

            (xvii) Liens on property of the Company sold in a transaction
      permitted by Section 8(a) hereof to another Person pursuant to a
      conditional sales agreement where the Company retains title; and

            (xviii) any Liens securing a claim (other than in respect of
      Indebtedness) in an amount less than $10,000,000;

provided, however, that no Lien in favor of the PBGC shall, in any event, be a
Permitted Lien.

      "PERSON" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.

      "PLAN" means an employee benefit plan within the meaning of Section 3(3)
of ERISA established or maintained by the Company or any ERISA Affiliate which
is covered by Title IV of ERISA, other than a Multiemployer Plan.

      "PLATFORM" has the meaning given in Section 7(g).

      "PRIME RATE" means the rate of interest publicly announced by JPMorgan
Chase Bank, N.A. in New York City from time to time as its Prime Rate.

      "PVNGS" means the Palo Verde Nuclear Generating Station.

      "PWCC" means Pinnacle West Capital Corporation, an Arizona corporation and
its successors.

      "REIMBURSEMENT DEFAULT" means any event or condition which constitutes a
Reimbursement Event of Default or which with the giving of notice or the lapse
of time or both would, unless cured or waived, become a Reimbursement Event of
Default.

                                       11


      "REIMBURSEMENT EVENT OF DEFAULT" has the meaning set forth in Section 9.

      "REQUIRED BANKS" means, at any time, Banks with Participation Percentages
aggregating more than 50% at such time.

      "RESTATEMENT EFFECTIVE DATE" has the meaning set forth in Section 3(b).

      "SALE LEASEBACK OBLIGATION BONDS" means PVNGS II Funding Corp. Inc.'s (i)
7.39% Secured Lease Obligation Bonds, Series 1993, due 2005; (ii) 8.00% Secured
Lease Obligation Bonds, Series 1993, due 2015; (iii) any other bonds issued by
the Company in connection with a sale/leaseback transaction; and (iv) any
refinancing or refunding of the obligations specified in clauses (i) through
(iii) above.

      "STATED TERMINATION DATE" means May 19, 2010 or such later date to which
such Stated Termination Date shall have been extended pursuant to Section 17.

      "SUBSEQUENT ORDER" means any decision, order or ruling of the ACC issued
after May 19, 2005 that amends, supersedes or otherwise modifies the 1986 Order
or any successor decision, order or ruling.

      "SUBSIDIARY" of any Person means any corporation of which more than 50% of
the issued and outstanding capital stock having ordinary voting power to elect a
majority of the Board of Directors of such corporation (irrespective of whether
at the time capital stock of any other class or classes of such corporation
shall or might have voting power upon the occurrence of any contingency) is at
the time directly or indirectly owned or controlled by such Person, such Person
and one or more of its other Subsidiaries, or one or more of such Person's other
Subsidiaries.

      "TAXES" has the meaning set forth in Section 2(e).

      "TERMINATION DATE" means the earliest of (i) the date on which the Issuing
Bank pays a drawing under the Letter of Credit for the lesser of the Maximum
Drawing Amount and the Maximum Credit Amount, (ii) if a drawing is not requested
by the Equity Participant after a notice of termination is given under the
Letter of Credit, the Date of Early Termination, (iii) if a drawing is requested
by the Equity Participant after a notice of termination is given under the
Letter of Credit, the date on which the Issuing Bank pays such drawing, (iv) the
date on which the Company delivers a certificate to the Issuing Bank certifying
that the Company has paid the amounts due under Section 9(c) of the Facility
Lease (so long as the Equity Participant shall have acknowledged such payment by
its express confirmation thereof in, and its countersignature to, such
certificate),

                                       12


(v) the date on which the Company delivers a certificate to the Issuing Bank
certifying that the Company has paid the amounts due under Section 9(d) of the
Facility Lease (so long as the Equity Participant shall have acknowledged such
payment by its express confirmation thereof in, and its countersignature to,
such certificate), and (vi) the latest of (x) the Stated Termination Date, (y)
if a draft and certificate all in strict conformity with the terms and
conditions of the Letter of Credit are presented on the Stated Termination Date
at such time and at such office as specified in the fifth paragraph of the
Letter of Credit, the date on which the Issuing Bank is required to honor the
draft in accordance with the provisions of such paragraph pursuant to such
presentation, and (z) if a corrected draft and certificate all in strict
conformity with the terms and conditions of the Letter of Credit are presented
on the date specified in, and in accordance with, the provisions of the sixth
paragraph of the Letter of Credit, the date on which the Issuing Bank is
required to honor the draft in accordance with the provisions of such paragraph
pursuant to such presentation.

      "TOTAL ASSETS" means the aggregate of all assets properly appearing on the
most recent balance sheet of the Company and its Consolidated Subsidiaries
furnished pursuant to Section 6(f) or Section 7(g).

      "UNITED STATES" means the United States of America, including the States
and the District of Columbia, but excluding its territories and possessions.

      "WHOLLY-OWNED SUBSIDIARY" of any Person means any corporation of which all
shares of the issued and outstanding capital stock (other than any director's
qualifying shares) having ordinary voting power to elect a majority of the Board
of Directors of such corporation (irrespective of whether at the time capital
stock of any other class or classes of such corporation shall or might have
voting power upon the occurrence of any contingency) is at the time directly or
indirectly owned or controlled by such Person, such Person and one or more of
its other Subsidiaries, or one or more of such Person's other Subsidiaries.

      (b) Accounting Terms. Unless otherwise specified herein, all accounting
terms used herein shall be interpreted, all accounting determinations hereunder
shall be made, and all financial statements required to be delivered hereunder
shall be prepared, in accordance with generally accepted accounting principles
as in effect from time to time, applied on a basis consistent (except for
changes concurred in by the Company's independent public accountants) with the
most recent audited consolidated financial statements of the Company delivered
to the Agent.

      Section 2 Reimbursement. (a) The Company agrees to pay to the
Administrative Agent for the account of the Issuing Bank (i) not later than 2:00
p.m., New York City time, on the fifth Business Day after the Issuing Bank shall
have paid any draft under the Letter of Credit a sum equal to the amount so paid

                                       13


under the Letter of Credit, (ii) interest on each amount paid by the Issuing
Bank under the Letter of Credit from and including the date such amount is paid
by the Issuing Bank under the Letter of Credit until but excluding the earlier
of (x) the date the Issuing Bank shall have received from the Company the
amounts due under clause (i) above and this clause (ii) and (y) the fifth
Business Day after the Issuing Bank shall have paid the relevant draft, payable
on demand, at a rate per annum equal to the Base Rate, and (iii) interest on any
amount not paid by the Company when due under clauses (i) and (ii) above from
and including the fifth Business Day after the relevant draft is paid by the
Issuing Bank under the Letter of Credit until such overdue amount is paid in
full, payable on demand, at a rate per annum equal to 2% per annum above the
Base Rate; provided that such interest rate shall in no event be higher (with
respect to each amount due and payable hereunder, from the date such amount is
due and payable until the date such amount is paid in full) than the maximum
rate permitted by applicable law.

      (b) The Company agrees to pay to the Administrative Agent for the account
of the Banks ratably in proportion to their Participation Percentages a letter
of credit commission computed at the Letter of Credit Commission Rate on the
Maximum Credit Amount of the Letter of Credit from and including the Restatement
Effective Date to, but excluding, the Termination Date. Such commission accrued
through and including the last day of March, June, September and December of
each year shall be payable in arrears on the third Business Day following such
last day, commencing on the first such date to occur after the Restatement
Effective Date.

      (c) The Company agrees to pay to the Administrative Agent for the account
of the Issuing Bank a fronting fee at the rate per annum heretofore mutually
agreed by the Company and the Issuing Bank pursuant to the Fee Letter, on the
Maximum Credit Amount of the Letter of Credit from and including the Restatement
Effective Date to, but excluding, the Termination Date. Such fronting fee
accrued through and including the last day of March, June, September and
December of each year shall be payable in arrears on the third Business Day
following such last day, commencing on the first such date to occur after the
Restatement Effective Date.

      (d) (i) If after May 19, 2005 the adoption of any applicable law, rule or
regulation, or any change therein, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by any Bank with any request or directive (whether or not having the force of
law) of any such authority, central bank or comparable agency shall impose,
modify or deem applicable any reserve, special deposit or similar requirement
(including, without limitation, any such requirement imposed by the Board of
Governors of the Federal Reserve System) against letters of credit issued by or
assets held by, deposits with or for the account of, or credit extended by, any
Bank or shall

                                       14


impose on any Bank any other condition regarding this Agreement or the Letter of
Credit or its Participation therein, and the result of any of the foregoing is
to increase the cost to such Bank of the issuance or maintenance of the Letter
of Credit or its Participation therein, or to reduce the amount of any sum
received or receivable by such Bank under this Agreement with respect thereto,
by an amount deemed by such Bank to be material, then within 15 days after
demand by such Bank (with a copy to the Administrative Agent), the Company shall
pay to the Administrative Agent for the account of such Bank such additional
amount or amounts as will compensate such Bank for such increased cost or
reduction.

            (ii) If any Bank shall have determined that, after May 19, 2005, the
      adoption of any applicable law, rule or regulation regarding capital
      adequacy, or any change in any such law, rule or regulation, or any change
      in the interpretation or administration thereof by any governmental
      authority, central bank or comparable agency charged with the
      interpretation or administration thereof, or any request or directive
      regarding capital adequacy (whether or not having the force of law) of any
      such authority, central bank or comparable agency, has or would have the
      effect of reducing the rate of return on capital of such Bank (or its
      Parent) as a consequence of such Bank's obligations hereunder to a level
      below that which such Bank (or its Parent) could have achieved but for
      such adoption, change, request or directive (taking into consideration its
      policies with respect to capital adequacy) by an amount deemed by such
      Bank to be material, then from time to time, within 15 days after demand
      by such Bank (with a copy to the Administrative Agent), the Company shall
      pay to such Bank such additional amount or amounts as will compensate such
      Bank (or its Parent) for such reduction.

            (iii) Each Bank will notify the Company and the Administrative Agent
      of any event of which it has knowledge, occurring after May 19, 2005 which
      will entitle such Bank to compensation pursuant to clause (i) or (ii) of
      this Section 2(d) as promptly as practicable, but in any event within 90
      days after such Bank obtains knowledge thereof; provided that, if such
      Bank fails to give such notice within 90 days after it obtains knowledge
      of such an event, such Bank shall, with respect to compensation payable in
      respect of any costs resulting from such event, only be entitled to
      payment for costs incurred on and after the date that such Bank does give
      such notice. A certificate of any Bank claiming compensation under this
      Section 2(d) and setting forth the additional amount or amounts to be paid
      to it hereunder shall be conclusive in the absence of demonstrable error.
      In determining such amount, such Bank may use any reasonable averaging and
      attribution methods.

      (e) (i) For the purposes of this Section 2(e), the following terms have
the following meanings:

                                       15


      "TAXES" means any and all present or future taxes, duties, levies,
imposts, deductions, charges or withholdings with respect to any payment by the
Company pursuant to this Agreement, and all liabilities with respect thereto,
excluding (i) in the case of each Bank and the Administrative Agent, taxes
imposed on its net income, and franchise or similar taxes imposed on it, by the
United States, or by the jurisdiction under the laws of which such Bank or the
Administrative Agent (as the case may be) is organized or in which its principal
executive office is located or, in the case of each Bank, in which its
Applicable Booking Office is located and (ii) in the case of each Bank, any
United States withholding tax imposed with respect to any payment by the Company
pursuant to this Agreement, but only up to the rate (if any) at which United
States withholding tax would apply to such payments to such Bank at the time
such Bank first becomes a party to this Agreement.

      "OTHER TAXES" means any present or future stamp or documentary taxes and
any other excise or property taxes, or similar charges or levies, which arise
from any payment made pursuant to this Agreement or from the execution or
delivery of, or otherwise with respect to, this Agreement or the Letter of
Credit.

            (ii) Any and all payments by the Company to or for the account of
      any Bank or the Administrative Agent hereunder shall be made without
      deduction for any Taxes or Other Taxes; provided that, if the Company
      shall be required by law to deduct any Taxes or Other Taxes from any such
      payments, (A) the sum payable shall be increased as necessary so that
      after making all required deductions for any Taxes or Other Taxes
      (including deductions applicable to additional sums payable under this
      Section) such Bank or the Administrative Agent (as the case may be)
      receives an amount equal to the sum it would have received had no such
      deductions been made, (B) the Company shall make such deductions, (C) the
      Company shall pay the full amount deducted to the relevant taxation
      authority or other authority in accordance with applicable law and (D) the
      Company shall furnish to the Administrative Agent the original or a
      certified copy of a receipt evidencing payment thereof.

            (iii) The Company agrees to indemnify each Bank and the
      Administrative Agent for the full amount of Taxes or Other Taxes
      (including, without limitation, any Taxes or Other Taxes imposed or
      asserted by any jurisdiction on amounts payable under this Section) paid
      by such Bank or the Administrative Agent (as the case may be) and any
      liability (including penalties, interest and expenses) arising therefrom
      or with respect thereto. This indemnification shall be paid within 30 days
      after such Bank or the Administrative Agent (as the case may be) makes
      demand therefor. Such demand shall be made as promptly as practicable, but
      in any event within 90 days after such Bank obtains actual knowledge of
      such event; provided, however, that if any Bank fails to make such

                                       16


      demand within 90 days after such Bank obtains knowledge of such event,
      such Bank shall, with respect to compensation payable in respect of such
      event, not be entitled to compensation in respect of the costs and losses
      incurred between the 90th day after such Bank obtains actual knowledge of
      such event and the date such Bank makes such demand.

            (iv) Each Bank organized under the laws of a jurisdiction outside
      the United States shall provide the Company and the Administrative Agent
      with Internal Revenue Service Form W-8BEN, W-8ECI, or other type of W-8,
      as appropriate, or any successor form prescribed by the Internal Revenue
      Service: (i) on or prior to the date of its execution and delivery of this
      Agreement in the case of each Bank listed on the signature pages hereof
      and on or prior to the date on which it becomes a Bank in the case of each
      other Bank, (ii) before the end of each third calendar year thereafter,
      and (iii) at any time that a change of circumstances occurs that makes any
      information on the form so provided incorrect, certifying that such Bank
      is entitled to benefits under an income tax treaty to which the United
      States is a party which exempts such Bank from United States withholding
      tax or reduces the rate of withholding tax on payments under this
      Agreement or certifying that the income receivable pursuant to this
      Agreement is effectively connected with the conduct of a trade or business
      in the United States. Further, each such Bank that is not an exempt
      recipient listed in Section 6049(b)(4) of the Code shall provide the
      Company and the Administrative Agent with Internal Revenue Service Form
      W-8 or W-9, as appropriate, or other successor form prescribed by the
      Internal Revenue Service, certifying that it is exempt from United States
      back-up withholding.

            (v) For any period with respect to which a Bank has failed to
      provide the Company or the Administrative Agent with the appropriate forms
      pursuant to Section 2(e)(iv) (unless such failure is due to a change in
      treaty, law or regulation occurring subsequent to the date on which such
      form originally was required to be provided), such Bank shall not be
      entitled to indemnification under Section 2(e)(ii) or (iii) with respect
      to Taxes imposed by the United States; provided that if a Bank, which is
      otherwise exempt from or subject to a reduced rate of withholding tax,
      becomes subject to Taxes because of its failure to deliver a form required
      hereunder, the Company shall take such steps as such Bank shall reasonably
      request to assist such Bank to recover such Taxes.

            (vi) If the Company is required to pay additional amounts to or for
      the account of any Bank pursuant to this Section, then such Bank will
      change the jurisdiction of its Applicable Booking Office if, in the
      judgment of such Bank, such change (A) will eliminate or reduce any such

                                       17


      additional payment which may thereafter accrue and (B) is not otherwise
      disadvantageous to such Bank.

      (f) If the payments claimed by any such Bank pursuant to Section 2(d) or
Section 2(e) are substantially in excess, as reasonably determined by the
Company, relative to the amount of such Bank's Participation, of the payments
claimed by the other Banks pursuant to such Sections, the Company shall have the
right, with the assistance of the Administrative Agent, to seek one or more
mutually satisfactory substitute Eligible Institutions to assume all of the
rights and obligations of such Bank in respect of its Participation pursuant to
an assignment and assumption agreement in form and substance satisfactory to the
Administrative Agent; provided that the aggregate amount of the Participation so
assigned to each such Eligible Institution (together with any Participation then
held by such Eligible Institution) shall not be less than $5,000,000.

      (g) The Company shall make each payment hereunder to the Administrative
Agent at 270 Park Avenue, New York, New York 10017, not later than 2:00 p.m.
(New York City time) on the date when due in lawful money of the United States
of America and in Federal or other funds immediately available in New York City.
Whenever any payment under this Section 2 shall be due on a day which is not a
Business Day, the date for payment thereof shall be extended to the next
succeeding day that is a Business Day. If the date for any payment of principal
is extended by operation of law or otherwise, interest thereon shall be payable
for such extended time.

      (h) Computations of the letter of credit commission, the fee referred to
in Section 2(c), and interest based on the Prime Rate shall be made by the
Administrative Agent on the basis of a year of 365 or 366 days, as the case may
be, for the actual number of days (including the first day but excluding the
last day) elapsed. Computations of all other interest hereunder shall be made by
the Administrative Agent on the basis of a year of 360 days for the actual
number of days (including the first day but excluding the last day) elapsed.

      Section 3. Amendment and Restatement of Letter of Credit; Conditions to
Effectiveness; Transitional Provisions. (a) On the terms and conditions herein
set forth, the Issuing Bank agrees to execute and deliver to the Equity
Participant on the Restatement Effective Date, or, if all of the conditions
precedent to the effectiveness of this Amendment and Restatement shall not have
been satisfied by 3:00 p.m., New York City time, on the Restatement Effective
Date, on the next succeeding Business Day, the Amended and Restated Letter of
Credit substantially in the form of Exhibit A hereto, amending and restating the
Existing Letter of Credit.

                                       18


      (b) This Amendment and Restatement shall become effective on the date (the
"RESTATEMENT EFFECTIVE DATE") on which all of the following conditions shall
have been satisfied (or waived in accordance with Section 10):

            (i) receipt by the Administrative Agent of a counterpart of this
      Amendment and Restatement signed by each party hereto;

            (ii) receipt by the Administrative Agent of fees payable by the
      Company on or before the Restatement Effective Date in such amounts and
      for the accounts of such parties as heretofore mutually agreed pursuant to
      the Fee Letter;

            (iii) receipt by the Administrative Agent of evidence to its
      satisfaction that all amounts accrued and unpaid under the Existing
      Reimbursement Agreement to (but not including) the Restatement Effective
      Date payable by any party thereto have been paid;

            (iv) receipt by the Administrative Agent of an opinion of Snell &
      Wilmer L.L.P., special counsel for the Company, dated the Restatement
      Effective Date, in form and substance satisfactory to the Administrative
      Agent;

            (v) receipt by the Administrative Agent of an opinion of Davis Polk
      & Wardwell, special counsel for the Administrative Agent, dated the
      Restatement Effective Date, in form and substance satisfactory to the
      Administrative Agent;

            (vi) receipt by the Administrative Agent of copies, certified by the
      Secretary, an Associate Secretary or an Assistant Secretary of the
      Company, of the resolutions of the Board of Directors of the Company
      authorizing the execution, delivery and performance of this Amendment and
      Restatement and the transactions contemplated hereby;

            (vii) receipt by the Administrative Agent of a certificate of the
      Secretary, an Associate Secretary or an Assistant Secretary of the
      Company, dated the Restatement Effective Date, certifying the names and
      true signatures of the officers of the Company authorized to sign this
      Amendment and Restatement;

            (viii) receipt by the Administrative Agent of a certificate, dated
      the Restatement Effective Date, signed by the chief financial officer,
      vice president, finance, or treasurer of the Company to the effect that
      (x) (A) no Default or Event of Default; (B) no Reimbursement Default (as
      defined in the Existing Reimbursement Agreement) and (C) no Reimbursement
      Default (as defined in this Amendment and Restatement) shall have

                                       19


      occurred and be continuing on the Restatement Effective Date or would
      result from the amendment and restatement of the Letter of Credit pursuant
      to subsection (a) of this Section 3; and (y) that the representations and
      warranties of the Company set forth in Section 6 of this Amendment and
      Restatement shall be true and correct on and as of the Restatement
      Effective Date as though made on and as of such date;

            (ix) receipt by the Administrative Agent of certified copies of all
      approvals, authorizations, orders or consents of, or notices to or
      registrations with, any governmental body or agency, if any, required for
      the Company to enter into this Amendment and Restatement;

            (x) receipt by the Administrative Agent of such other approvals,
      opinions or documents as the Administrative Agent may reasonably request;
      and

            (xi) receipt by the Administrative Agent of all documents the
      Administrative Agent may reasonably request relating to the existence of
      the Company, the corporate authority for and the validity of this
      Amendment and Restatement and any other matters relevant hereto;

provided that all documents (or copies thereof) to be delivered to the
Administrative Agent on or before the Restatement Effective Date shall be
provided to each Bank and shall be in form and substance satisfactory to the
Required Banks.

      (c) Promptly after this Amendment and Restatement becomes effective, the
Administrative Agent shall give notice thereof and of the Restatement Effective
Date to each party hereto. Immediately upon the effectiveness of this Amendment
and Restatement, the Issuing Bank will be obligated to extend the Letter of
Credit as provided in subsection (a) of this Section 3 and each party hereto
will be bound by the provisions of this subsection (c). The rights and
obligations of the parties hereto on and after the Restatement Effective Date
shall be governed by the provisions of this Amendment and Restatement and as the
same may be further amended and in effect from time to time thereafter. The
rights and obligations of the parties hereto with respect to the period prior to
the Restatement Effective Date will continue to be governed by the provisions of
this Agreement as in effect prior to the Restatement Effective Date.

      (d) Each of the parties hereto (other than Citibank, N.A. and KBC Bank
NV), together comprising all of the parties to the Existing Reimbursement
Agreement and their successors in such capacity, hereby agrees that by its
execution hereof, it is deemed to have provided each written consent or
agreement required on its part under Sections 10 and 17 of the Existing
Reimbursement Agreement to the extension and amendment of the Existing Letter of
Credit and

                                       20


the amendment and restatement of the Existing Reimbursement Agreement on the
terms provided herein.

      Section 4. Adjustment of Maximum Drawing Amount; Terms of Drawing. The
Maximum Drawing Amount shall be modified as specified in the third paragraph of
the Letter of Credit and drawings under the Letter of Credit shall be subject to
the other terms and conditions set forth in the Letter of Credit.

      Section 5. Obligations Absolute. The payment obligations of the Company
under this Agreement shall be absolute, unconditional and irrevocable, and shall
be performed strictly in accordance with the terms of this Agreement under all
circumstances whatsoever, including, without limitation, the following
circumstances:

            (i) any lack of validity or enforceability of the Letter of Credit
      or any of the Transaction Documents or Financing Documents;

            (ii) any amendment or waiver of or any consent to departure from all
      or any of the Transaction Documents or Financing Documents;

            (iii) the existence of any claim, set-off, defense or other rights
      which the Company may have at any time against the Equity Participant, the
      Owner Trustee or any transferee of the Letter of Credit (or any persons or
      entities for whom any of the foregoing may be acting), the Administrative
      Agent, any Bank, any Participant or any other person or entity, whether in
      connection with this Agreement, the Transaction Documents or Financing
      Documents, the transactions contemplated hereby or thereby or any
      unrelated transaction; provided that nothing herein shall prevent the
      assertion of such claim by separate suit or compulsory counterclaim;

            (iv) any statement or any other document presented under the Letter
      of Credit proving to be forged, fraudulent, invalid or insufficient in any
      respect or any statement therein being untrue or inaccurate in any respect
      whatsoever;

            (v) payment by the Issuing Bank under the Letter of Credit against
      presentation of a draft or certificate which does not comply with the
      terms of the Letter of Credit; or

            (vi) any other circumstance or happening whatsoever, whether or not
      similar to any of the foregoing.

      Section 6. Representations and Warranties of the Company. The Company
represents and warrants as of the Restatement Effective Date as follows:

                                       21


      (a) Corporate Existence. Each of the Company and each Material Subsidiary:
(i) is a corporation duly organized and validly existing under the laws of the
jurisdiction of its incorporation; (ii) has all requisite corporate power
necessary to own its assets and carry on its business as presently conducted;
(iii) has all governmental licenses, authorizations, consents and approvals
necessary to own its assets and carry on its business as presently conducted,
unless the failure to have any such license, authorization, consent or approval
would not have a material adverse effect on the financial condition or financial
prospects of the Company and its Consolidated Subsidiaries, taken as a whole,
and except as disclosed in the Financial Information or by written notice
delivered to the Banks more than five Business Days prior to the execution and
delivery of this Amendment and Restatement; and (iv) is qualified to do business
in all jurisdictions in which the nature of the business conducted by it makes
such qualification necessary and where failure so to qualify would have a
material adverse effect on the financial condition or financial prospects of the
Company and its Consolidated Subsidiaries, taken as a whole. All of the issued
and outstanding common stock of the Company is owned by PWCC.

      (b) Noncontravention, Etc. The execution, delivery, and performance by the
Company of this Agreement are within the Company's corporate powers, have been
duly authorized by all necessary corporate action, and do not (i) contravene the
Company's charter or by-laws or (ii) contravene any Applicable Law or any
contractual restriction binding on or affecting the Company. The execution,
delivery, and performance by the Company of this Agreement do not cause the
creation or imposition of any Lien upon the assets of the Company or any
Material Subsidiary, except as it may be necessary for the Company to grant a
Lien to the Administrative Agent for the benefit of the Banks pursuant to
Section 8(c).

      (c) Approvals. No authorization or approval or other action by, and no
notice to or filing or registration with, any governmental authority or
regulatory body is required for the due execution, delivery and performance by
the Company of this Agreement, except for (w) the 1986 Order which has been duly
issued by the ACC and is in full force and effect in the form originally issued,
(x) such other Governmental Actions as have been duly obtained, given or
accomplished, (y) the filing with the ACC of a copy of this Agreement within
five days of the execution hereof, in accordance with the 1986 Order and (z) as
may be required under Applicable Law not now in effect. The execution, delivery,
and performance by the Company of this Agreement do not require the consent or
approval of the Equity Participant or the Owner Trustee (except as specified in
this Agreement) or PWCC or any trustee or holder of any indebtedness or other
obligation of the Company, other than such consents and approvals as have been
duly obtained, given or accomplished. No Governmental Action by any Federal,
Arizona or New York Governmental Authority relating to the Securities Act, the
Securities Exchange Act, the Trust Indenture Act, the Federal Power Act, the
Atomic

                                       22


Energy Act, the Nuclear Waste Act, the Holding Company Act, the Arizona Public
Utility Act, energy or nuclear matters, public utilities, the environment,
health and safety or Unit 2 is or will be required in connection with the
participation by the Administrative Agent, any Bank or any Participant in the
consummation of the transactions contemplated by this Agreement, except such
Governmental Actions (A) as have been, duly obtained, given or accomplished or
(B) as may be required by Applicable Law not now in effect.

      (d) Binding Agreement. This Agreement is a legal, valid and binding
obligation of the Company enforceable against the Company in accordance with its
terms, subject, however, to the application by a court of general principles of
equity and to the effect of any applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally.

      (e) Litigation. There is no pending or (to the knowledge of the Company)
threatened action or proceeding affecting the Company or any of its Subsidiaries
before any court, governmental agency or arbitrator, that, if adversely
determined, could have a material adverse effect on the financial condition or
financial prospects of the Company and its Consolidated Subsidiaries, taken as a
whole, except as disclosed in the Financial Information or by written notice
delivered to the Banks more than five Business Days prior to the execution and
delivery of this Amendment and Restatement.

      (f) Financial Statements. The balance sheet of the Company and its
Consolidated Subsidiaries as of December 31, 2004 and the related statements of
income and cash flows of the Company and its Consolidated Subsidiaries for the
fiscal year then ended, copies of which have been furnished to the Banks, fairly
present in all material respects the financial condition of the Company and its
Consolidated Subsidiaries as of such date and the results of operations and cash
flows of the Company and its Consolidated Subsidiaries for such fiscal year, all
in accordance with generally accepted accounting principles consistently applied
(except as disclosed therein). The balance sheet of the Company and its
Consolidated Subsidiaries as of March 31, 2005 and the related statements of
income and cash flows of the Company and its Consolidated Subsidiaries for the
quarter then ended, copies of which have been furnished to the Banks, fairly
present in all material respects the financial condition of the Company and its
Consolidated Subsidiaries as of such date and the results of operations and cash
flows of the Company and its Consolidated Subsidiaries for the quarter then
ended, all in accordance with generally accepted accounting principles
consistently applied (except as disclosed therein and subject to normal year-end
audit adjustments). Since March 31, 2005, there has been no material adverse
change in the financial condition or financial prospects of the Company and its
Consolidated Subsidiaries, taken as a whole.

                                       23


      (g) ERISA. The Company and the ERISA Affiliates have fulfilled their
respective obligations under the minimum funding standards of ERISA and the Code
with respect to each Plan and are in compliance in all material respects with
the presently applicable provisions of ERISA and the Code, and have not incurred
any liability to the PBGC or any Plan or Multiemployer Plan, other than
liability to the PBGC for premiums prior to the due date for such premiums and
liability to any Plan maintained by the Company or an ERISA Affiliate or to any
Multiemployer Plan for contributions prior to the due date for such
contributions which shall be paid in accordance with the provisions of the
minimum funding standards of ERISA and the Code.

      (h) Taxes. The Company and its Subsidiaries have filed all United States
Federal income tax returns and all other material tax returns which are required
to be filed by them and have paid all taxes due pursuant to such returns or
pursuant to any assessment received by the Company or any of its Subsidiaries,
except to the extent that (i) such taxes are being contested in good faith and
by appropriate proceedings and appropriate reserves for the payment thereof have
been maintained by the Company and its Subsidiaries in accordance with generally
accepted accounting principles or (ii) the failure to make such filings or such
payments is not likely to have a material adverse effect on the financial
condition or the financial prospects of the Company and its Consolidated
Subsidiaries, taken as a whole. The charges, accruals and reserves on the books
of the Company and its Material Subsidiaries as set forth in the most recent
financial statements of the Company delivered to the Banks pursuant to Section
6(f) or Section 7(g)(i) or Section 7(g)(ii) hereof in respect of taxes and other
governmental charges are, in the opinion of the Company, adequate.

      (i) Environmental. The operations and properties of the Company and its
Subsidiaries comply in all material respects with all environmental laws, the
noncompliance with which would have a material adverse effect on the financial
condition or financial prospects of the Company and its Consolidated
Subsidiaries taken as a whole, except as disclosed in the Financial Information
or by written notice delivered to the Banks more than five Business Days prior
to the execution and delivery of this Amendment and Restatement.

      (j) Investment Company. The Company is not an "investment company", or a
company "controlled" by an "investment company", within the meaning of the
Investment Company Act of 1940, as amended.

      (k) No Material Misstatements or Omissions. The Financial Information did
not, and any documents to be filed with the Securities and Exchange Commission
and delivered to the Banks pursuant to Section 7(g)(i) or Section 7(g)(ii) after
December 31, 2004 will not, as of the date furnished, contain any untrue
statement of a material fact or omit to state any material fact necessary

                                       24


to make the statements made therein, in the light of the circumstances under
which they were or shall be made, not misleading.

      (l) No Amendments. Except as provided to the Banks prior to the
Restatement Effective Date, there has been no amendment or waiver of, or consent
with respect to, the payment obligations of the Company under any Transaction
Document or Financing Document since March 17, 1993.

      Section 7. Affirmative Covenants. So long as a drawing is available under
the Letter of Credit or the Company shall have any obligation to pay any amount
hereunder to or for the account of the Administrative Agent or any Bank, the
Company will, unless the Required Banks shall otherwise consent in writing:

      (a) Preservation of Corporate Existence, Business, Etc. (i) Preserve and
maintain its corporate existence and all rights and privileges (other than
"franchises" as described in Arizona Revised Statutes, Section 40-283 or any
successor provision) reasonably necessary in the normal conduct of its business,
unless the failure to maintain such rights and privileges would not have a
material adverse effect on the financial condition or financial prospects of the
Company and its Consolidated Subsidiaries taken as a whole, and use its best
efforts to preserve and maintain such franchises reasonably necessary in the
normal conduct of its business, except that (A) the Company from time to time
may make minor extensions of its lines, plants, services or systems prior to the
time a related franchise, certificate of convenience and necessity, license or
permit is procured, (B) from time to time communities served by the Company may
become incorporated and considerable time may elapse before such a franchise is
procured, (C) certain such franchises may have expired prior to the
renegotiation thereof, (D) certain minor defects and exceptions may exist which,
individually and in the aggregate, are not material and (E) certain franchises,
certificates, licenses and permits may not be specific as to their geographical
scope.

            (ii) Continue to conduct the same general type of business conducted
      on May 19, 2005.

      (b) Compliance with Laws, Etc. (i) Comply, and cause each Material
Subsidiary to comply, in all material respects with all applicable laws, rules,
regulations and orders of governmental or regulatory authorities if the failure
to comply would have a material adverse effect on the financial condition or
financial prospects of the Company and its Consolidated Subsidiaries, taken as a
whole.

            (ii) Comply at all times with the 1986 Order and any Subsequent
      Order, unless the failure to so comply could not affect the validity or
      enforceability of the indebtedness of the Company pursuant to this
      Agreement.

                                       25


      (c) Payment of Taxes and Claims. Pay and discharge, and cause each of its
Subsidiaries to pay and discharge, before the same shall become delinquent, all
taxes, assessments and governmental charges or levies imposed on it or its
property; provided that neither the Company nor any of its Subsidiaries shall be
required to pay or discharge any such tax, assessment, charge or levy (i) that
is being contested in good faith and by proper proceedings and as to which
adequate reserves are being maintained in accordance with generally accepted
accounting principles or (ii) if the failure to pay such tax, assessment, charge
or levy is not likely to have a material adverse effect on the financial
condition or financial prospects of the Company and its Consolidated
Subsidiaries, taken as a whole.

      (d) Maintenance of Insurance. Maintain, and cause each Material Subsidiary
to maintain, insurance, either with responsible and reputable insurance
companies or associations, or through its own program of self-insurance, in such
amounts and covering such risks as is usually carried by companies engaged in
similar businesses and owning similar properties in the same general areas in
which the Company or such Material Subsidiary operates.

      (e) Visitation Rights. Permit, and cause each of its Subsidiaries to
permit, at any reasonable time and from time to time, any Bank or any of its
agents or representatives to examine and make copies of and abstracts from the
records and books of account of, and visit the properties of, the Company and
any of its Subsidiaries, and to discuss the affairs, finances and accounts of
the Company and any of its Subsidiaries with any of their respective officers or
directors; provided that the Company and its Subsidiaries reserve the right to
restrict access to any of its properties in accordance with reasonably adopted
procedures relating to safety and security; and provided further that the costs
and expenses incurred by any Bank or its agents or representatives in connection
with any such examinations, copies, abstracts, visits or discussions shall be,
upon the occurrence and during the continuation of a Reimbursement Default, for
the account of the Company and, in all other circumstances, for the account of
such Bank.

      (f) Maintenance of Property. Keep, and cause each Material Subsidiary to
keep, all property useful and necessary in its business in good working order
and condition (ordinary wear and tear excepted), it being understood that this
covenant relates only to the working order and condition of such properties and
shall not be construed as a covenant not to dispose of properties.

      (g) Reporting Requirements. Furnish to each of the Banks:

            (i) as soon as available and in any event within 60 days after the
      end of each of the first three fiscal quarters of each fiscal year of the
      Company, (A) for each such fiscal quarter of the Company, statements of
      income and cash flows of the Company and its Consolidated Subsidiaries
                                       26


      for such fiscal quarter and the related balance sheet of the Company and
      its Consolidated Subsidiaries as at the end of such fiscal quarter,
      setting forth in each case in comparative form the corresponding figures
      for the corresponding fiscal quarter in the preceding fiscal year and (B)
      for the period commencing at the end of the previous fiscal year and
      ending with the end of such fiscal quarter, statements of income and cash
      flows of the Company and its Consolidated Subsidiaries for such period
      setting forth in each case in comparative form the corresponding figures
      for the corresponding period in the preceding fiscal year; provided that
      so long as the Company remains subject to the reporting requirements of
      the Securities Exchange Act of 1934, as amended, the Company may provide,
      in satisfaction of the requirements of this first sentence of this Section
      7(g)(i), its report on Form 10-Q for such fiscal quarter. Each set of
      financial statements provided under this Section 7(g)(i) shall be
      accompanied by a certificate of an Authorized Officer, which certificate
      shall state that said financial statements fairly present in all material
      respects the financial condition and results of operations and cash flows
      of the Company and its Consolidated Subsidiaries in accordance with
      generally accepted accounting principles, consistently applied (except as
      disclosed therein), as at the end of, and for, such period (subject to
      normal year-end audit adjustments);

            (ii) as soon as available and in any event within 90 days after the
      end of each fiscal year of the Company, statements of income, changes in
      common stock equity and cash flows of the Company and its Consolidated
      Subsidiaries for such year and the related balance sheets of the Company
      and its Consolidated Subsidiaries as at the end of such year, setting
      forth in each case in comparative form the corresponding figures for the
      preceding fiscal year; provided that, so long as the Company remains
      subject to the reporting requirements of the Securities Exchange Act of
      1934, as amended, the Company may provide, in satisfaction of the
      requirements of this first sentence of this Section 7(g)(ii), its report
      on Form 10-K for such fiscal year. Each set of financial statements
      provided pursuant to this Section 7(g)(ii) shall be accompanied by an
      opinion thereon of independent certified public accountants of recognized
      national standing, which opinion shall state that said financial
      statements fairly present in all material respects the financial condition
      and results of operations and cash flows of the Company and its
      Consolidated Subsidiaries as at the end of, and for, such fiscal year, in
      accordance with generally accepted accounting principles consistently
      applied (except as disclosed therein);

            (iii) as soon as possible and in any event within ten days after an
      Authorized Officer knows of the occurrence of any Reimbursement Default
      continuing on the date of such statement, a statement of an

                                       27


      Authorized Officer setting forth details of such Reimbursement Default and
      the action which the Company has taken and proposes to take with respect
      thereto;

            (iv) as soon as possible, and in any event within ten days after an
      Authorized Officer knows that any of the events or conditions specified
      below with respect to any Plan or Multiemployer Plan have occurred or
      exist, a statement signed by an Authorized Officer setting forth details
      respecting such event or condition and the action, if any, which the
      Company or its ERISA Affiliate proposes to take with respect thereto (and
      a copy of any report or notice required to be filed with or given to the
      PBGC by the Company or an ERISA Affiliate with respect to such event or
      condition):

                  (A) any reportable event, as defined in Section 4043 of ERISA
            and the regulations issued thereunder, with respect to a Plan, as to
            which the PBGC has not by regulation or other ruling or notice of
            general applicability waived the requirement of Section 4043(a) of
            ERISA that it be notified within 30 days of the occurrence of such
            event; provided that a failure to meet the minimum funding standard
            of Section 412 of the Code or Section 302 of ERISA shall be a
            reportable event regardless of the issuance of any waivers in
            accordance with Section 412(d) of the Code;

                  (B) the filing under Section 4041(c) of ERISA of a notice of
            intent to terminate any Plan in a distress termination or the
            termination of any Plan in a distress termination;

                  (C) the institution by the PBGC of proceedings under Section
            4042 of ERISA for the termination of, or the appointment of a
            trustee to administer, any Plan, or the receipt by the Company or
            any ERISA Affiliate of a notice from a Multiemployer Plan that such
            action has been taken by the PBGC with respect to such Multiemployer
            Plan:

                  (D) the complete or partial withdrawal by the Company or any
            ERISA Affiliate under Part 1 of Subtitle E of Title IV of ERISA from
            a Multiemployer Plan, or the receipt by the Company or any ERISA
            Affiliate of notice from a Multiemployer Plan that it is in
            reorganization or insolvency pursuant to Section 4241 or 4245 of
            ERISA or that it intends to terminate or has terminated under
            Section 4041A of ERISA; and

                                       28


                  (E) the institution of a proceeding by a fiduciary of any
            Multiemployer Plan against the Company or any ERISA Affiliate to
            enforce Section 515 of ERISA, which proceeding is not dismissed
            within 45 days;

            (v) promptly after (A) any amendment or modification of the 1986
      Order or (B) the promulgation, amendment or modification of any Subsequent
      Order by the ACC, a copy thereof;

            (vi) promptly after the sending or filing thereof, copies of all
      reports which the Company sends to its public security holders as a group,
      and copies of all reports and registration statements which the Company or
      any of its Subsidiaries files with the Securities and Exchange Commission
      or any national securities exchange;

            (vii) as soon as practicable and in any event within 30 days after
      the execution thereof, a copy of each amendment, waiver or consent
      relating to the payment obligations of the Company under any Transaction
      Document or Financing Document; and

            (viii) such other information respecting the condition or
      operations, financial or otherwise, of the Company or any of its
      Subsidiaries as the Administrative Agent at the request of any Bank may
      from time to time reasonably request.

      The Company will furnish to the Banks, at the time it furnishes each set
of financial statements pursuant to Section 7(g)(i) or 7(g)(ii) above, a
certificate of an Authorized Officer (x) to the effect that no Reimbursement
Default has occurred and is continuing (or, if any Reimbursement Default has
occurred and is continuing, describing the same in reasonable detail and
describing the action that the Company has taken and proposes to take with
respect thereto) and (y) setting forth in reasonable detail the computations
necessary to determine whether the Company is in compliance with Sections 7(h)
and 8(e) as of the end of the relevant fiscal quarter or fiscal year.

      Financial statements required to be delivered pursuant to clause (i) or
(ii) of Section 7(g) or reports and registration statements required to be
delivered pursuant to clause (vi) of Section 7(g) (to the extent any such
documents are included in materials otherwise filed with the Securities and
Exchange Commission) may be delivered electronically and if so delivered, shall
be deemed to have been delivered on the date (i) on which the Company posts such
documents, or provides a link thereto on the Company's website on the Internet
at the website address at
http://www.pinnaclewest.com/main/pnw/investors/financials/filings/default.html;
or (ii) on which such documents are posted on the Company's behalf on an

                                       29


Internet or intranet website, if any, to which each Bank and the Administrative
Agent have access (whether a commercial, third-party website or whether
sponsored by the Administrative Agent); provided that: (x) the Company shall
deliver paper copies of such documents to any Bank that requests the Company to
deliver such paper copies until a written request to cease delivering paper
copies is given by such Bank and (y) the Company shall notify each Bank (which
notice may be given by telecopier or electronic mail) of the posting of any such
documents and provide to each Bank by electronic mail electronic versions (i.e.,
soft copies) of such documents. Notwithstanding anything contained herein, in
every instance the Company shall be required to provide to the Banks paper
copies of certificates of Authorized Officers required under Section 7(g). The
Company hereby acknowledges that the Administrative Agent may make available to
the Banks materials and/or information provided by or on behalf of the Company
hereunder (collectively, "COMPANY MATERIALS") by posting the Company Materials
on IntraLinks or another similar electronic system (the "PLATFORM"); provided,
however, that to the extent such Company Materials constitute Confidential
Information, they shall be treated as set forth in Section 22.

      (h) Consolidated Cash Coverage Ratio. Maintain for each twelve-month
period ending on the last day of each fiscal quarter (determined as of the last
day of such fiscal quarter) a Consolidated Cash Coverage Ratio of no less than
2.0:1.0.

      (i) Filing with ACC. File a copy of this Amendment and Restatement, as
executed by each of the parties hereto, with the ACC within five days of the
execution hereof.

      Section 8 . Negative Covenants. So long as a drawing is available under
the Letter of Credit or the Company shall have any obligation to pay any amount
hereunder to or for the account of the Administrative Agent or any Bank, the
Company will not, without the written consent of the Required Banks:

      (a) Sale of Assets. Permit the Company nor any Material Subsidiary to, in
one or a series of transactions after December 31, 2004, sell, lease, transfer
or otherwise dispose of assets to any Person other than the Company or any
Subsidiary of the Company (excluding individual dispositions occurring in the
ordinary course of business which involve assets with a book value not exceeding
$5,000,000) if, immediately after giving effect to such transaction, the
aggregate book value of the assets disposed of in all such transactions after
December 31, 2004, would equal or exceed 30% of the total of all assets properly
appearing on the December 31, 2004 balance sheet of the Company and its
Consolidated Subsidiaries included in its annual report on Form 10-K for the
year ended December 31, 2004. No Lien on any asset will be considered a sale,
lease, transfer or disposition under this provision, but will be governed
exclusively under Section 8(c).

                                       30


      (b) Mergers, Etc. Merge or consolidate with or into any Person, or permit
any Material Subsidiary to do so, except that:

            (i) any Material Subsidiary may merge with any Wholly-Owned
      Subsidiary of the Company;

            (ii) any Material Subsidiary may merge into the Company; and

            (iii) the Company may merge with, and any Material Subsidiary may
      merge with, any other Person;

provided that, in each case, immediately after giving effect to such proposed
transaction, no Reimbursement Default would exist; and provided further that, in
the case of any such merger to which the Company is a party, the Company is the
surviving corporation and in the case of any such merger to which any Material
Subsidiary and any other Person are the parties, such Material Subsidiary is the
surviving corporation.

      (c) Negative Pledge. Permit the aggregate amount of all claims secured by
Liens (other than Permitted Liens) upon or with respect to any of its assets or
the assets of any of its Material Subsidiaries, whether now owned or hereafter
acquired, to exceed 55% of Total Assets, unless the Company shall simultaneously
(i) grant to the Administrative Agent, for the benefit of the Banks, Liens on
its assets as collateral for its obligations under this Agreement in a form and
on terms satisfactory to the Administrative Agent and the Required Banks in
their sole and absolute discretion and (ii) obtain the consent of the Equity
Participant thereto.

      (d) Assignment of Transaction Documents or Financing Documents. Enter into
any assignment of the Company's obligations under any of the Transaction
Documents or Financing Documents.

      (e) Indebtedness. Permit Consolidated Indebtedness to exceed 65% of
Consolidated Capitalization at any time.

      "CONSOLIDATED CAPITALIZATION" means, at any date, the sum as of such date
of Consolidated Indebtedness and Consolidated Net Worth.

      "CONSOLIDATED INDEBTEDNESS" means, at any date, the Indebtedness of the
Company and its Consolidated Subsidiaries determined on a consolidated basis as
of such date.

      "CONSOLIDATED NET WORTH" means, at any date, the sum as of such date of
(a) the par value (or value stated on the books of the Company) of all classes
of capital stock of the Company and its Subsidiaries, excluding the Company's
capital stock owned by the Company and/or its Subsidiaries, plus (or minus in
the

                                       31


case of a surplus deficit) (b) the amount of the consolidated surplus, whether
capital or earned, of the Company, determined in accordance with generally
accepted accounting principles as of the end of the most recent calendar month
(excluding (x) cumulative charges of up to $300 million to consolidated surplus
resulting from, or in anticipation of, discontinuation of Financial Accounting
Standards Board Statement No. 71, accounting for all or part of the business and
(y) the effect on the Company's accumulated other comprehensive income/loss of
the ongoing application of Financial Accounting Standards Board Statement No.
133).

      Section 9 . Reimbursement Events of Default. If any of the following
events ("REIMBURSEMENT EVENTS OF DEFAULT") shall occur and be continuing:

            (i) The Company shall fail to pay when due any amount payable under
      Section 2(a) or fail to pay any other amount payable under Section 2
      within five Business Days after the same becomes due and payable; or

            (ii) The Company shall fail to perform or observe (A) any term,
      covenant or agreement contained in Section 7(a)(ii), 7(g)(iv), 7(h), 8(a),
      8(b), 8(c), 8(e), or (B) any term, covenant or agreement contained in this
      Agreement (other than those covered by clause (i) above or subclause (A)
      of this clause (ii) or Section 7(e) or Section 19) on its part to be
      performed or observed if the failure to perform or observe such term,
      covenant or agreement shall remain unremedied for 30 days after written
      notice thereof shall have been given to the Company by the Administrative
      Agent; or

            (iii) Any representation or warranty made by the Company herein or
      by the Company (or any of its officers) in any certificate delivered in
      connection with this Agreement shall prove to have been false or
      misleading in any material respect when made; or

            (iv) Any material provision of this Agreement shall at any time for
      any reason cease to be valid and binding upon the Company, or shall be
      declared to be null and void, or the validity or enforceability thereof
      shall be contested by the Company or any governmental agency or authority,
      or the Company shall deny that it has any or further liability or
      obligation under this Agreement; or

            (v) The Company shall fail to pay any principal of or premium or
      interest on any Indebtedness which is outstanding in a principal amount of
      at least $5,000,000 (but excluding Indebtedness owing hereunder) of the
      Company, when the same becomes due and payable (whether by scheduled
      maturity, required prepayment, acceleration, demand or

                                       32


      otherwise), and such failure shall continue after the applicable grace
      period, if any, specified in the agreement or instrument relating to such
      Indebtedness; or the Company shall fail to perform or comply with any
      other term or covenant in any agreement or instrument relating to any such
      Indebtedness and such failure shall continue after the applicable grace
      period, if any, specified in such agreement or instrument, if the effect
      of such failure is to accelerate, or to permit the acceleration of, the
      maturity of such Indebtedness; or

            (vi) The Company shall fail to pay any principal of or premium or
      interest in respect of any operating lease in respect of which the payment
      obligations of the Company have a present value of at least $25,000,000,
      when the same becomes due and payable (whether by scheduled maturity,
      required prepayment, acceleration, demand or otherwise), and such failure
      shall continue after the applicable grace period, if any, specified in
      such operating lease, if the effect of such failure is to terminate, or to
      permit the termination of, such operating lease; or

            (vii) The Company shall generally not pay its debts as such debts
      become due, or shall admit in writing its inability to pay its debts
      generally, or shall make a general assignment for the benefit of
      creditors; or any proceeding shall be instituted by or against the Company
      seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation,
      winding up, reorganization, arrangement, adjustment, protection, relief,
      or composition of it or its debts under any law relating to bankruptcy,
      insolvency or reorganization or relief of debtors, or seeking the entry of
      an order for relief or the appointment of a receiver, trustee, custodian
      or other similar official for it or for any substantial part of its
      property and, in the case of any such proceeding instituted against it
      (but not instituted by it), either such proceeding shall remain
      undismissed or unstayed for a period of 60 days, or any of the actions
      sought in such proceeding (including, without limitation, the entry of an
      order for relief against, or the appointment of a receiver, trustee,
      custodian or other similar official for, it or for any substantial part of
      its property) shall occur; or the Company shall take any corporate action
      to authorize any of the actions set forth above in this clause (vii); or

            (viii) Any Material Subsidiary shall generally not pay its debts as
      such debts become due, or shall admit in writing its inability to pay its
      debts generally, or shall make a general assignment for the benefit of
      creditors; or any proceeding shall be instituted by or against any
      Material Subsidiary seeking to adjudicate it a bankrupt or insolvent, or
      seeking liquidation, winding up, reorganization, arrangement, adjustment,
      protection, relief, or composition of it or its debts under any law
      relating to bankruptcy, insolvency or reorganization or relief of debtors,
      or seeking

                                       33


      the entry of an order for relief or the appointment of a receiver,
      trustee, custodian or other similar official for it or for any substantial
      part of its property and, in the case of any such proceeding instituted
      against it (but not instituted by it), either such proceeding shall remain
      undismissed or unstayed for a period of 60 days, or any of the actions
      sought in such proceeding (including, without limitation, the entry of an
      order for relief against, or the appointment of a receiver, trustee,
      custodian or other similar official for it or for any substantial part of
      its property) shall occur; or any Material Subsidiary shall take any
      corporate action to authorize any of the actions set forth above in this
      clause (viii) and, in each case, the Required Banks determine that such
      circumstances could have a material adverse effect on the financial
      condition or financial prospects of the Company and its Consolidated
      Subsidiaries, taken as a whole; or

            (ix) Any judgment or order for the payment of money that exceeds any
      applicable insurance coverage by more than $5,000,000 shall be rendered
      against the Company and such judgment or order shall remain unsatisfied or
      unstayed for a period of 30 days; or

            (x) Any judgment or order for the payment of money that exceeds any
      applicable insurance coverage by more than $25,000,000 shall be rendered
      against any Material Subsidiary; such judgment or order shall remain
      unsatisfied or unstayed for 30 days; and the Required Banks determine that
      such judgment or order could have a material adverse effect on the
      financial condition or financial prospects of the Company and its
      Consolidated Subsidiaries, taken as a whole; or

            (xi) An event or condition specified in Section 7(g)(iv) shall occur
      or exist with respect to any Plan or Multiemployer Plan and, as a result
      of such event or condition, together with all other such events or
      conditions, the Company or any ERISA Affiliate shall incur or in the
      opinion of the Required Banks shall be reasonably likely to incur a
      liability to a Plan, a Multiemployer Plan or the PBGC (or any combination
      of the foregoing) which is, in the determination of the Required Banks,
      material in relation to the financial condition or the financial prospects
      of the Company and its Consolidated Subsidiaries, taken as a whole; or

            (xii) any change in Applicable Law or any Governmental Action shall
      occur which has the effect of making the transactions contemplated by the
      Transaction Documents unauthorized, illegal or otherwise contrary to
      Applicable Law; or

            (xiii) any event specified in subsection (vii), (viii) or (x) of
      Section 15 of the Facility Lease shall occur; or

                                       34


            (xiv) the Company shall fail to make, or cause to be made, any
      payment specified in Section 15(i) of the Facility Lease equal to or
      exceeding $1,000,000 within the periods specified in that Section.

then, in every such event the Issuing Bank may, and if instructed to do so by
the Required Banks the Issuing Bank shall, by notice to the Company and the
Equity Participant, terminate the Letter of Credit as provided therein. The
Administrative Agent shall give notice to the Company under Section 9(ii)
promptly upon being requested to do so by the Required Banks and will promptly
notify each Bank of any such notice given at the request of the Required Banks.

      Section 10 . Amendments and Waivers. No modification, amendment or waiver
of any provision of this Agreement or the Letter of Credit or any consent to the
assignment of the Company's obligations under any of the Transaction Documents
or the Financing Documents shall be effective unless the same shall be in
writing and signed by (or with the written consent of) the Company and the
Required Banks (and, if the rights or duties of the Issuing Bank or the
Administrative Agent are affected thereby, by it); provided that no such
modification, amendment, waiver or consent shall, unless signed by (or with the
written consent of) each Bank affected thereby, (i) increase the Maximum Credit
Amount or Maximum Drawing Amount or subject any Bank to any additional
obligation under this Agreement or the Letter of Credit, (ii) reduce the
principal of or rate of interest on any reimbursement obligation or reduce the
letter of credit commission payable under Section 2(b), (iii) postpone the date
fixed for any payment of principal of or interest on any reimbursement
obligation or any payment of such letter of credit commission, (iv) extend the
Stated Termination Date or the Termination Date or (v) change the definition of
Required Banks or the provisions of this Section 10 or any provision of this
Agreement that requires action by all the Banks. Any waiver of any provision of
this Agreement or the Letter of Credit shall be effective only in the specific
instance and for the specific purpose for which given.

      Section 11 . Notices. (a) All notices, requests, demands and other
communications provided for hereunder shall, unless otherwise stated herein, be
in writing (including facsimile transmission, electronic transmission (subject
to Section 11(c) below), or similar transmission) and mailed, sent or delivered:

            (i) if to the Company, in the case of deliveries, to its street
      address at 400 North Fifth Street, Phoenix, Arizona 85004; in the case of
      mailings, to its mailing address at P.O. Box 53999, Phoenix, Arizona
      85072-3999, and in the case of facsimile transmission, to telecopy no.
      (602) 250-5640, in each case to the attention of the Treasurer; and in the
      case of electronic mail, to Barbara.Gomez@pinnaclewest.com;

                                       35


            (ii) if to the Administrative Agent, in the case of deliveries or
      mailings, to its address at 1111 Fannin Street, 10th Floor, Houston, Texas
      77002, and in the case of facsimile transmission, to telecopy no.
      713-427-6307, in each case to the attention of Kelly Collins, Loan and
      Agency Services; and in the case of electronic mail, to
      kelly.collins@jpmchase.com;

            (iii) if to the Issuing Bank, in the case of deliveries or mailings,
      to its address at JPMorgan Chase Bank, N.A., c/o JPMorgan Treasury
      Services, 10420 Highland Manor Drive, 4th Floor, Tampa, Florida 33610, and
      in the case of facsimile transmission, to telecopy no. 813-432-5161, in
      each case to the attention of James Alonzo, Standby Letter of Credit
      Manager - Immediate Action Required; and in the case of electronic mail,
      to james.alonzo@chase.com;

            (iv) if to any other Bank, at such address, electronic mail address,
      or telecopy number as shall be designated by it in its Administrative
      Questionnaire;

or, as to each party, to such other person and/or to such other address or
number as shall be designated by such party in a written notice to each other
party. All such notices, requests, demands and other communications shall be
effective when mailed or sent, addressed as aforesaid (subject to Section 11(c)
below in the case of electronic communications), except that notices to the
Administrative Agent shall not be effective until received by the Administrative
Agent and any notice to the Equity Participant pursuant to Section 9 shall not
be effective until received by the Equity Participant. Notices of any
Reimbursement Default shall be sent by the Company to the Administrative Agent
by facsimile transmission.

      (b) As promptly as practicable after receipt by the Administrative Agent
of any notice or other communication delivered hereunder by the Company, the
Administrative Agent shall furnish a copy thereof to each Bank, to the extent
such notice or other communication is not otherwise required by the terms
thereof to be delivered by the Company to each Bank.

      (c) Notices and other communications to the Banks hereunder may be
delivered or furnished by electronic communications pursuant to procedures
approved by the Administrative Agent (including electronic mail and Internet
websites); provided that the foregoing shall not apply to notices pursuant to
Sections 2, 14 or 17 unless otherwise agreed by the Administrative Agent and the
applicable Bank. The Administrative Agent and the Company may, each in its
discretion, agree to accept notices and other communications to it hereunder by
electronic communications pursuant to procedures approved by it; provided that
approval of such procedures may be limited to particular notices or
communications. Notices and other communications sent to an electronic mail

                                       36


address shall be deemed received upon the sender's receipt of an acknowledgement
from the intended recipient (such as by the "return receipt requested" function,
as available, return electronic mail or other written acknowledgement); provided
that (x) if such notice or other communication is not sent during the normal
business hours of the recipient, such notice or communication shall be deemed to
have been sent at the opening of business on the next business day for the
recipient, and (y) notices or communications posted to an Internet website shall
be deemed received upon the deemed receipt by the intended recipient at its
electronic mail address as described in immediately foregoing clause (x) of
notification that such notice or communication is available and identifying the
website address therefor.

      (d) The Platform is provided "as is" and "as available." The Agent Parties
(as defined below) do not warrant the accuracy or completeness of the Company
Materials or the adequacy of the Platform, and expressly disclaim any liability
for errors in or omissions from the Company Materials. No warranty of any kind,
express or implied or statutory, is made by any Agent Party in connection with
the Company Materials or the Platform. In no event shall the Administrative
Agent, its Affiliates, or any partners, directors, officers, employees, agents
and advisors of the Administrative Agent or of its Affiliates (collectively, the
"AGENT PARTIES") have any liability to the Company, any Bank or any other Person
for losses, claims, damages, liabilities or expenses of any kind (whether in
tort, contract or otherwise) arising out of the Company's or the Administrative
Agent's transmission of Company Materials through the Internet, except to the
extent that such losses, claims, damages, liabilities or expenses are determined
by a court of competent jurisdiction by a final and nonappealable judgment to
have resulted from the gross negligence or willful misconduct of such Agent
Party; provided, however, that in no event shall any Agent Party have any
liability to the Company, any Bank, or any other Person for indirect, special,
incidental, consequential or punitive damages (as opposed to direct or actual
damages).

      Section 12 . No Waiver; Remedies. No failure on the part of the
Administrative Agent or any Bank to exercise, and no delay in exercising, any
right, power, or privilege hereunder shall operate as a waiver thereof; nor
shall any single or partial exercise of any right hereunder preclude any other
or further exercise thereof or the exercise of any other right. The remedies
herein provided are cumulative and not exclusive of any remedies provided by
law.

      Section 13 . Waiver of Right of Setoff. The Administrative Agent and each
Bank hereby waive any right to set off and apply any and all deposits (general
or special, time or demand, provisional or final) and collateral at any time
held and other indebtedness at any time owing by it to or for the credit or the
account of the Company if there shall be a drawing under the Letter of Credit at
any time during the pendency of any proceeding by or against the Company seeking
to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up,
reorganization,

                                       37


arrangement, adjustment, protection, relief or composition of it or its debts
under any law relating to bankruptcy, insolvency or reorganization or relief of
debtors, or seeking the entry of an order for relief or the appointment of a
receiver, custodian, trustee or other similar official for it or for any
substantial part of its property (collectively the "BANKRUPTCY EVENTS"), against
any and all of the obligations of the Company now or hereafter existing in
respect of any reimbursement obligation of the Company set forth in Section
2(a), provided that any such waiver shall be deemed ineffective as and to the
extent that the Administrative Agent and each Bank receive, after any of the
bankruptcy events occur, an unqualified opinion of nationally-recognized counsel
with bankruptcy law experience (which counsel shall be mutually satisfactory to
the Administrative Agent and the Equity Participant, each of which shall use its
best efforts to agree on such counsel), that non-waiver would not, as a result
of the application of bankruptcy or similar laws as then in effect, lead to the
Administrative Agent or any Bank being refused, prevented, permanently enjoined
or restrained from or delayed in fulfilling its obligation under the Letter of
Credit. This Section 13 shall not constitute a waiver of any right of setoff if
there shall be a drawing under the Letter of Credit at any time other than that
described in this Section 13.

      Section 14 . Participations of the Banks. (a) The Issuing Bank hereby
sells to each other Bank, and each Bank hereby severally purchases from the
Issuing Bank, as of the Restatement Effective Date, a Participation in an amount
equal to such Bank's Participation Percentage of the Letter of Credit and in
each drawing thereunder, all on the terms and conditions set forth herein.

      (b) If at any time on or after the Restatement Effective Date the Company
shall fail to reimburse a drawing under the Letter of Credit in accordance with
Section 2(a), the Administrative Agent shall promptly (but in any event no later
than 1:00 p.m., New York City time, on the date payment is due from the Banks
under this Section 14(b)) advise each Bank thereof and of the amount due from
the Company and the amount of such Bank's Participation therein, and each Bank
shall pay, no later than 4:00 p.m. (New York City time) on such date such Bank's
Participation Percentage of such amount by transferring the same in immediately
available funds to the Administrative Agent for the account of the Issuing Bank
at the Administrative Agent's address specified in Section 11. With respect to
any such drawing, each Bank agrees that the Issuing Bank shall have no
responsibility to the Banks other than obtaining the draft and certificates
referred to in the Letter of Credit and notifying each Bank thereof. The
Administrative Agent shall promptly credit each Bank's account with such Bank's
Participation Percentage of (i) all amounts representing principal of, or
interest on, any reimbursement obligations, in each case in respect of drawings
under the Letter of Credit of which such Bank has funded its Participation
Percentage in accordance with the foregoing provisions of this Section 14(b) and
(ii) letter of credit commissions payable to each Bank pursuant to Section 2(b)
of this

                                       38


Agreement and accruing on and after the Restatement Effective Date, but, in the
case of both clause (i) and clause (ii), only if, when and to the extent
received by the Administrative Agent from the Company. All such payments shall
be made if, when and to the extent the Administrative Agent receives payment
from the Company in respect of reimbursement for drawings under the Letter of
Credit and of the letter of credit commission pursuant to Section 2(b) of this
Agreement, and in the same funds in which such amounts are received, by credit
to an account at a bank located in the United States of America as each Bank
shall designate in writing to the Administrative Agent.

      (c) If the Administrative Agent should for any reason make any payment to
any Bank in anticipation of the receipt of funds from the Company and such funds
are not received by the Administrative Agent from the Company on the date
payment is due, then such Bank shall, on demand by the Administrative Agent,
forthwith return to the Administrative Agent any such amounts transferred to
such Bank by the Administrative Agent in respect of such Bank's Participation
plus interest thereon from the day such amounts were transferred by the
Administrative Agent to such Bank to but not including the day such amounts are
returned by such Bank at a rate per annum equal to the Federal Funds Rate. If
the Administrative Agent is required at any time to return to the Company or to
a trustee, receiver, liquidator, custodian or other similar official any portion
of the payments made by the Company to the Administrative Agent for the account
of any Bank, then such Bank shall, on demand by the Administrative Agent,
forthwith return to the Administrative Agent any such payments transferred to
such Bank by the Administrative Agent in respect of such Bank's Participation,
but without interest on such payments (unless the Administrative Agent is
required to pay interest on such amounts to the Person recovering such
payments).

      (d) Each Bank agrees that if it should receive any amount due to it under
this Agreement in respect of its Participation other than from the
Administrative Agent, such Bank will remit all of the same to the Administrative
Agent to distribute to the Banks pursuant to this Agreement, and such Bank's
Participation shall be adjusted to reflect such remittance. Each Bank further
agrees to send the Administrative Agent a copy of any notice sent by such Bank
to the Company hereunder.

      (e) Each Bank acknowledges and represents that it has made its own
independent appraisal of the Company, and the business, affairs and financial
condition of the Company, based on such documents and information as such Bank
has deemed appropriate, and each Bank will continue to be responsible for making
its own independent appraisal of such matters, based on such documents and
information as such Bank shall deem appropriate at the time, and has not relied
upon and will not hereafter rely upon the Administrative Agent or any other Bank
or any information prepared, distributed or otherwise made available by the

                                       39


Administrative Agent for such appraisal or other assessment or review of the
Company. Each Bank represents, and in granting a Participation to such Bank it
is specifically understood and agreed, that such Bank is acquiring its
Participation in the Letter of Credit for its own account in the ordinary course
of its commercial banking business and not with a view to, or for sale in
connection with, any distribution thereof.

      Section 15 . Assignees; Participants. (a) Each Bank shall have the right,
with the prior written consent of the Company (which shall not be unreasonably
withheld, and shall not be required if a Reimbursement Event of Default has
occurred and is continuing) and the prior written consent of the Administrative
Agent, to assign all or a pro rata portion of all of its rights and obligations
under its Participation at any time and from time to time to one or more
Eligible Institutions (each an "ASSIGNEE"); provided that (i) each such Assignee
shall assume such rights and obligations and agree, for the benefit of each
other party hereto, to be bound by the provisions of, and perform the
obligations of a Bank under, this Agreement, pursuant to an assignment and
assumption agreement in form and substance satisfactory to the Administrative
Agent and (ii) the aggregate amount of the Participation or Participations
assigned to each such Assignee pursuant to this Section 15(a) shall not be less
than $5,000,000. Each Bank shall give prompt notice to the Administrative Agent
and the Company of each such assignment made by it.

      (b) (i) Each Bank shall also have the right, without the consent of the
Company, to grant participating interests in its Participation at any time and
from time to time to one or more other financial institutions or other entities
(each a "PARTICIPANT"); provided that (A) such Bank's obligations under this
Agreement shall remain unchanged, (B) such Bank shall remain solely responsible
to the other parties hereto for the performance of such obligations and (C) the
Company, the Administrative Agent and the other Banks shall continue to deal
solely and directly with such Bank in connection with such Bank's rights and
obligations under this Agreement. Each such participation granted by a Bank
shall be evidenced by a participation agreement in form acceptable to such Bank.
Each such participation agreement shall provide that such Bank shall retain the
sole right to exercise its rights under this Agreement and to enforce the
obligations owed to it hereunder pursuant to its Participation including,
without limitation, the right to consent to any modification, amendment or
waiver of any provision of this Agreement or the Letter of Credit or any
assignment of the Company's obligations under any of the Transaction Documents
or the Financing Documents; provided that any such participation agreement may
provide that such Bank will not, without the consent of the Participant, consent
to any modification, amendment or waiver of this Agreement or the Letter of
Credit that (w) increases the Maximum Credit Amount or Maximum Drawing Amount or
subjects such Bank to any additional obligation under this Agreement or the
Letter of Credit, (x) reduces the principal of or rate of interest on any
reimbursement obligation or

                                       40


reduces the letter of credit commission payable under Section 2(b), (y)
postpones the date fixed for any payment of principal of or interest on any
reimbursement obligation or any payment of such letter of credit commission or
(z) extends the Stated Termination Date or the Termination Date.

            (i) Subject to clause (iii) below, the Company agrees that each
      Participant shall be entitled to the benefits of Sections 2(d) and 2(e) to
      the same extent as if it were a Bank and had acquired its interest by
      assignment pursuant to Section 15(a).

            (ii) A Participant shall not be entitled to receive any greater
      payment under Section 2(d) or 2(e) than the applicable Bank would have
      been entitled to receive with respect to the participating interest
      granted to such Participant, unless the granting of such interest to such
      Participant is made with the Company's prior written consent. A
      Participant organized under the laws of a jurisdiction outside the United
      States shall not be entitled to the benefits of Section 2(d) or 2(e)
      unless the Company is notified of the participating interest granted to
      such Participant and such Participant agrees, for the benefit of the
      Company, to comply with Section 2(d) or 2(e) as though it were a Bank.

      Section 16 . Continuing Obligation; Binding Effect. The obligations of the
Company under this Agreement shall continue until the later of (i) the
Termination Date and (ii) the date upon which all amounts due and owing to the
Administrative Agent or any Bank hereunder shall have been paid in full. This
Agreement shall be binding upon and inure to the benefit of each of the parties
hereto and their respective successors. The Company shall not have the right to
assign its rights hereunder or any interest herein to any Person without the
prior written consent of the Issuing Bank and each Bank. The Issuing Bank shall
not have the right to assign its rights as the Issuing Bank hereunder without
the prior written consent of the Company (which shall not be unreasonably
withheld) and each Bank.

      Section 17 . Extension of the Letter of Credit. At least 105 days but not
more than 180 days before the Stated Termination Date, the Company may request
the Administrative Agent in writing (each such request being irrevocable and
binding), with a copy to each Bank, to extend for not less than three years, nor
more than eight years, the Stated Termination Date, specifying the terms and
conditions, including fees, to be applicable to such extension. Within 45 days
after receiving such extension request (or such later date as the Company may
authorize in writing, but in no event later than 60 days before the Stated
Termination Date), each Bank shall notify the Company of its consent or
nonconsent to such extension request, and if any Bank shall give no such notice,
it shall be deemed not to have consented to such extension request. No such
requested extension shall be effective without the consent of all the Banks. The

                                       41


consent of any Bank shall be in its sole discretion and shall be conditional
upon the preparation, execution and delivery of legal documentation in form and
substance satisfactory to such Bank and its counsel, incorporating substantially
the terms and conditions contained in the extension request as the same may be
modified by agreement among the Company, and the Banks, and evidence
satisfactory to it of the due authorization and validity thereof.

      Section 18 . Limited Liability of the Banks. The Company assumes all risks
of the acts or omissions of the Equity Participant and any beneficiary or
transferee of the Letter of Credit with respect to its use of the Letter of
Credit. None of the Administrative Agent and the Banks, nor their respective
Affiliates nor any officer or director of any of the foregoing shall be liable
or responsible for: (a) the use which may be made of the Letter of Credit or any
acts or omissions of the Equity Participant or any beneficiary or transferee in
connection therewith; (b) the validity, sufficiency or genuineness of documents,
or of any endorsement thereon, even if such documents shall prove to be in any
or all respects invalid, insufficient, fraudulent or forged; (c) payment by the
Issuing Bank against presentation of documents which do not comply with the
terms of the Letter of Credit, including failure of any documents to bear any
reference or adequate reference to the Letter of Credit; or (d) any other
circumstances whatsoever in making or failing to make payment under the Letter
of Credit, except that the Company shall have a claim against the Issuing Bank,
and the Issuing Bank shall be liable to the Company, to the extent, but only to
the extent, of any direct, as opposed to consequential, damages suffered by the
Company which the Company proves were caused by (i) the willful misconduct or
gross negligence of the Issuing Bank in determining whether a draft or
certificate presented under the Letter of Credit complied with the terms of the
Letter of Credit or (ii) the Issuing Bank's willful failure to make lawful
payment under the Letter of Credit after the presentation to it by the Equity
Participant of a draft and certificate strictly complying with the terms and
conditions of the Letter of Credit. In furtherance and not in limitation of the
foregoing, the Issuing Bank may accept documents that appear on their face to be
in order, without responsibility for further investigation, regardless of any
notice or information to the contrary unless the Equity Participant and the
Company have notified the Issuing Bank in writing prior to a drawing under the
Letter of Credit that such documents do not comply with the Letter of Credit.

      Section 19 . Cost, Expenses and Taxes. The Company agrees to pay not later
than 30 days after demand therefor all reasonable costs and expenses in
connection with the preparation, execution, delivery, filing, recording and
administration of this Agreement and any other documents which may be delivered
in connection with this Agreement and any waiver or consent under, or amendment
of, this Agreement or any of the Transaction Documents or Financing Documents,
including, without limitation, the reasonable fees and out-of-pocket expenses of
counsel for the Administrative Agent, and local counsel who may be

                                       42


retained by said counsel, with respect thereto and with respect to advising the
Administrative Agent as to its rights and responsibilities under this Agreement;
all costs and expenses (including counsel fees and expenses) in connection with
(i) the enforcement of this Agreement and such other documents which may be
delivered in connection with this Agreement or (ii) any action or proceeding
relating to a court order, injunction or other process or decree restraining or
seeking to restrain the Issuing Bank from paying any amount under the Letter of
Credit; and all costs and expenses (including reasonable counsel fees and
expenses) in connection with each transfer of the Letter of Credit in accordance
with its terms. In addition, the Company shall pay any and all stamp,
documentary, filing, recording or other similar taxes and fees payable or
determined to be payable in connection with the execution, delivery, filing and
recording of this Agreement and such other documents, and agrees to save the
Administrative Agent and each Bank harmless from and against any and all
liabilities with respect to or resulting from any delay in paying or omission to
pay such taxes and fees, provided that the Administrative Agent and each Bank
agree promptly to notify the Company of any such taxes and fees which are
incurred by the Administrative Agent or such Bank.

      Section 20 . Administrative Agent; Issuing Bank. (a) Each Bank irrevocably
appoints and authorizes the Administrative Agent to take such action as agent on
its behalf and to exercise such powers under this Agreement as are delegated to
the Administrative Agent by the terms hereof, together with all such powers as
are reasonably incidental thereto.

      (b) The Administrative Agent and its Affiliates may accept deposits from,
make loans or otherwise extend credit to, and generally engage in any kind of
business with, the Company, the Equity Participant and their respective
Subsidiaries and Affiliates and receive payment on such loans or extensions of
credit and otherwise act with respect thereto freely and without accountability
in the same manner as if this Agreement and the transactions contemplated hereby
were not in effect.

      (c) The Administrative Agent may consult with legal counsel (who may be
counsel for the Company), independent public accountants and other experts as it
may select and shall not be liable for any action taken or omitted to be taken
by it in good faith in accordance with the advice of such counsel, accountants
or experts.

      (d) It is understood that the Issuing Bank will exercise and give the same
care and attention to the Letter of Credit as it gives to its other letters of
credit and loans for its own account and that the Issuing Bank shall have no
obligation to the Company or any other Bank and no duty or responsibility with
respect to this Agreement or the Letter of Credit, except as expressly provided
herein and in the Letter of Credit. Without limiting the generality of the

                                       43


foregoing, neither the Administrative Agent nor the Issuing Bank shall be
required to take any action with respect to any Reimbursement Default, except as
expressly provided in Section 9 hereof. Neither the Administrative Agent nor the
Issuing Bank shall be liable for any action taken or not taken at the request or
with the approval of the Required Banks (or all the Banks, as applicable) or for
the performance or non-performance of the obligations of any other party under
this Agreement or any Transaction Document or Financing Document or any other
document contemplated thereby. It is further understood that: (i) except as
expressly limited by the provisions of this Agreement, the Issuing Bank retains
the sole right to exercise its rights and enforce the obligations of the Company
under this Agreement, and the Issuing Bank may use its sole discretion with
respect to exercising or refraining from exercising any rights or taking or
refraining from taking any actions which may be vested in it or which it may be
entitled to take or assert under this Agreement or any of the Transaction
Documents or Financing Documents (including, without limitation, the giving of
any notice to any Person of any Reimbursement Event of Default under this
Agreement except as provided in Section 9); and (ii) the Issuing Bank shall not,
in the absence of gross negligence or willful misconduct, be under any liability
to any other Bank with respect to anything which the Issuing Bank may do or
refrain from doing in the exercise of its best judgment or which it may deem to
be necessary or desirable. Neither the Administrative Agent nor the Issuing Bank
shall incur any liability by acting in reliance upon any written communication
or any telephone conversation which it reasonably believes to be genuine and
correct or to have been signed, sent or made by the proper Person. Neither the
Administrative Agent nor the Issuing Bank shall have any obligation to make any
claim on, or assert any lien upon, or assert any setoff against, any property
held by it and, if it elects to do so, it may in its discretion apply the same
against indebtedness of the Company other than the Company's obligations under
this Agreement; provided that, to the extent any funds received pursuant to any
of the foregoing are applied to the obligations of the Company under Section
2(a) or 2(b) hereof, each Bank shall be entitled to receive its pro rata share
thereof in accordance with Section 14(b) above. Any such setoff or other action
in respect of any reimbursement obligation of the Company set forth in Section
2(a) will be subject to Section 13.

      Section 21 . Indemnification. (a) The Company indemnifies and holds
harmless the Administrative Agent, each Bank, and their respective officers,
directors, agents, affiliates and employees from and against any and all claims,
damages, losses, liabilities, costs or expenses whatsoever which the
Administrative Agent or such Bank may incur (or which may be claimed against the
Administrative Agent or such Bank by any Person whatsoever):

            (i) by reason of any inaccuracy in any material respect, or any
      untrue statement or alleged untrue statement of any material fact
      contained or incorporated by reference in any offering document
      distributed by or on

                                       44


      behalf of the Company in connection with obtaining purchasers of the
      Company's undivided interest in Unit 2 of the Palo Verde Nuclear
      Generating Station, or in any supplement or amendment to either thereof,
      or by reason of the omission or alleged omission to state therein a
      material fact necessary to make such statements, in the light of the
      circumstances under which they are or were made, not misleading;

            (ii) by reason of or in connection with the execution, delivery and
      performance of the Transaction Documents and Financing Documents, or any
      transaction contemplated by the Transaction Documents or the Financing
      Documents; or

            (iii) by reason of or in connection with the execution and delivery
      or transfer of, or payment or failure to make lawful payment under, the
      Letter of Credit; provided that the Company shall not be required to
      indemnify the Administrative Agent or any Bank pursuant to this Section 21
      for any claims, damages, losses, liabilities, costs or expenses to the
      extent, but only to the extent, caused by (A) the willful misconduct or
      gross negligence of the Issuing Bank in determining whether a draft or
      certificate presented under the Letter of Credit complied with the terms
      of the Letter of Credit or (B) the Issuing Bank's willful failure to make
      lawful payment under the Letter of Credit after the presentation to it by
      the Equity Participant of a draft and certificate strictly complying with
      the terms and conditions of the Letter of Credit.

Nothing in this Section 21(a) is intended to limit the Company's obligations
contained in Section 2. Without prejudice to the survival of any other
obligation of the Company hereunder, the indemnities and obligations of the
Company contained in this Section 21(a) shall survive the payment in full of all
amounts payable pursuant to Section 2 and the termination of the Letter of
Credit.

      (b) To the extent that the Administrative Agent or the Issuing Bank is not
reimbursed and indemnified by the Company under this Agreement, each Bank will
reimburse and indemnify the Administrative Agent and the Issuing Bank on demand
for and against such Bank's Participation Percentage of any and all claims,
demands, liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements (including fees and
disbursements of counsel) of any kind or nature whatsoever which may be imposed
on, incurred by, or asserted against the Administrative Agent or the Issuing
Bank in any way relating to or arising out of this Agreement, the Letter of
Credit, or any of the Transaction Documents or Financing Documents or any action
taken or omitted to be taken by the Administrative Agent or the Issuing Bank
hereunder or thereunder, or the transactions contemplated hereby and thereby or
the enforcement of any of the terms hereof and thereof; provided that such Bank
shall not be liable for any portion of such claims, demands, liabilities,

                                       45


obligations, losses, damages, penalties, actions, judgments, suits, costs,
out-of-pocket expenses or disbursements resulting from the gross negligence or
willful misconduct of the Administrative Agent or the Issuing Bank or which are
expressly excluded from the indemnification by the Company by the proviso to
Section 21(a)(iii) of this Agreement. Each Bank's obligations under this Section
21(b) shall survive the termination of this Agreement and the Letter of Credit.
If the Administrative Agent or the Issuing Bank is reimbursed by the Company for
any amounts previously received from any Bank pursuant to this Section 21(b), it
will promptly pay to such Bank its proportionate share of any amounts so
received.

      Section 22 . Confidentiality. Neither the Administrative Agent nor any
Bank shall disclose any Confidential Information to any Person without the
consent of the Company, other than (a) to the Administrative Agent's or such
Bank's respective Affiliates or any officer, director, employee, accountant and
advisor of any of the foregoing, and to actual or prospective Assignees and
Participants, and then only on a confidential basis, (b) as required by any law,
rule or regulation or judicial process and (c) as requested or required by any
state, federal or foreign authority or examiner regulating banks or banking or
otherwise regulating the business of the Administrative Agent or such Bank, as
the case may be.

      Section 23 . Severability. Any provision of this Agreement which is
prohibited, unenforceable or not authorized in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition,
unenforceability or non-authorization without invalidating the remaining
provisions hereof or affecting the validity, enforceability or legality of such
provision in any other jurisdiction.

      Section 24 . Governing Law; Consent to Jurisdiction. (a) This Agreement
shall be governed by, and construed in accordance with, the laws of the State of
New York.

      (b) Each party hereto submits, for itself and its property, to the
non-exclusive jurisdiction of the Supreme Court of the State of New York sitting
in New York County and of the United States District Court of the Southern
District of New York, and any appellate court from any thereof, in any action or
proceeding arising out of or relating to this Agreement or for recognition or
enforcement of any judgment, and each party hereto hereby agrees, to the fullest
extent permitted by law, that all claims in respect of any such action or
proceeding may be heard and determined in such New York State or, to the extent
permitted by law, in such Federal court. Each of the parties hereto agrees that
a final judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this Agreement shall affect any right that any party

                                       46


hereto may otherwise have to bring action or proceeding relating to this
Agreement in the courts of any jurisdiction.

      Section 25 . Headings. Section headings in this Agreement are included
herein for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose.

      Section 26 . Counterparts; Integration. This Amendment and Restatement may
be signed in any number of counterparts, each of which shall be an original,
with the same effect as if the signatures thereto and hereto were upon the same
instrument. This Agreement and that certain Letter Agreement dated as of July
22, 2002 between the Issuing Bank and the Company constitute the entire
agreement and understanding among the parties hereto and, subject to Section
3(c), supersede any and all prior agreements and understandings, oral or
written, relating to the subject matter hereof.

      Section 27 . WAIVER OF JURY TRIAL. EACH OF THE COMPANY, THE BANKS AND THE
ADMINISTRATIVE AGENT HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY
JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.

                             Signature Pages Follow

                                       47


      IN WITNESS WHEREOF, the parties hereto have caused this Amendment and
Restatement to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first above written.

                                     ARIZONA PUBLIC SERVICE COMPANY

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



      IN WITNESS WHEREOF, the parties hereto have caused this Amendment and
Restatement to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first above written.

                                     JPMORGAN CHASE BANK, N.A.,
                                       as Administrative Agent and Issuing Bank

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



      IN WITNESS WHEREOF, the parties hereto have caused this Amendment and
Restatement to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first above written.

                                     BARCLAYS BANK PLC

                                     By: /s/ Gary B. Wenslow
                                         ------------------------------------
                                         Name:  Gary B. Wenslow
                                         Title: Associate Director



      IN WITNESS WHEREOF, the parties hereto have caused this Amendment and
Restatement to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first above written.

                                              BANK HAPOALIM B.M.

                                              By: /s/ Marc Bosc
                                                  -----------------------------
                                                  Name:  Marc Bosc
                                                  Title: Vice President

                                              By: /s/ Lenroy Hackett
                                                  -----------------------------
                                                  Name:  Lenroy Hackett
                                                  Title: First Vice President



      IN WITNESS WHEREOF, the parties hereto have caused this Amendment and
Restatement to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first above written.

                                              CITIBANK, N.A.

                                              By: /s/ Dhaya Ranganathan
                                                  --------------------------
                                                  Name:  Dhaya Ranganathan
                                                  Title: Director


      IN WITNESS WHEREOF, the parties hereto have caused this Amendment and
Restatement to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first above written.

                                              UNION BANK OF CALIFORNIA, N.A.

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



      IN WITNESS WHEREOF, the parties hereto have caused this Amendment and
Restatement to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first above written.

                                              KBC BANK NV

                                              By: /s/ Rik Scheerlinck
                                                  -----------------------------
                                                  Name:  Rik Scheerlinck
                                                  Title: Sr. Vice President &
                                                         General Manager

                                              By: /s/ Eric Raskin
                                                  -----------------------------
                                                  Name:  Eric Raskin
                                                  Title: Vice President



                                                                      SCHEDULE I

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



    Status         Level I    Level II    Level III    Level IV    Level V    Level VI
- ---------------    -------    --------    ---------    --------    -------    --------
                                                            
Letter of Credit     50.0       60.0        70.0         87.5       112.5      137.5
Commission Rate


      For purposes of this Schedule, the following terms have the following
meanings:

      "LEVEL I STATUS" exists at any date if, at such date, the higher of the
two Ratings is:

      A- or higher by S&P or A3 or higher by Moody's.

      "LEVEL II STATUS" exists at any date if, at such date, (i) Level I Status
does not exist and (ii) the higher of the two Ratings is:

      BBB+ or higher by S&P or Baa1 or higher by Moody's.

      "LEVEL III STATUS" exists at any date if, at such date, (i) neither Level
I Status nor Level II Status exists and (ii) the higher of the two Ratings is:

      BBB or higher by S&P or Baa2 or higher by Moody's.

      "LEVEL IV STATUS" exists at any date if, at such date, (i) none of Level I
Status, Level II Status and Level III Status exists and (ii) the higher of the
two Ratings is:

      BBB- or higher by S&P or Baa3 or higher by Moody's.

      "LEVEL V STATUS" exists at any date if, at such date, (i) none of Level I
Status, Level II Status, Level III Status or Level IV Status exists, and (ii)
the higher of the two Ratings is:

      BB+ or higher by S&P or Ba1 or higher by Moody's.

      "LEVEL VI STATUS" exists at any date if, at such date, no other Status
exists.

      "MOODY'S" means Moody's Investors Service, Inc.

                                  Schedule I-1



      "RATING AGENCIES" means Moody's and S&P.

      "RATINGS" means the credit ratings assigned to the senior unsecured
long-term debt securities of the Company without third-party credit enhancement
by the Rating Agencies. If there is no rating assigned to debt securities, the
corporate credit rating will be used. Any rating assigned to any other debt
security of the Company shall be disregarded. The rating in effect at any date
is that in effect at the close of business on such date. In the case of split
ratings from S&P or Moody's, the rating to be used to determine which pricing
level applies is the higher of the two (e.g., BBB+/Baa2 results in Level II
Status); provided that if the split is more than one full rating category, the
rating category immediately above the lower of the two rating categories will be
used (e.g., BBB+/Baa3 results in Level III Status, as does A-/Baa3).

      "S&P" means Standard & Poor's Ratings Services, a division of the
McGraw-Hill Companies, Inc.

      "STATUS" refers to the determination of which of Level I Status, Level II
Status, Level III Status, Level IV Status, Level V Status or Level VI Status
exists at any date.

                                  Schedule I-2


                                                                     SCHEDULE II



          BANK                       PARTICIPATION PERCENTAGE       PARTICIPATION AMOUNT
- ------------------------------       ------------------------       --------------------
                                                              
JPMorgan Chase Bank, N.A.                  18.9256646%              $      10,448,412.70
Barclays Bank PLC                          18.9256646%              $      10,448,412.70
Bank Hapoalim B.M.                         17.3247282%              $       9,564,573.47
Citibank, N.A.                             14.9413142%              $       8,248,746.86
Union Bank of California, N.A.             14.9413142%              $       8,248,746.86
KBC Bank NV                                14.9413142%              $       8,248,746.86


                                   Schedule II


                                                                       EXHIBIT A

                 [Form of Amended and Restated Letter of Credit]

                                 [SEE ATTACHED]



                              AMENDED AND RESTATED
                    IRREVOCABLE TRANSFERABLE LETTER OF CREDIT
                                  No. P-010152
                          (formerly numbered as S-1002)

                                               Originally Issued August 18, 1986
                                               Reissued May 19, 2005

Emerson Finance LLC
8000 W. Florissant Avenue
P.O. Box 4100
St. Louis, Missouri 63136

Attention: President

Dear Sirs:

      We hereby establish, at the request of Arizona Public Service Company (the
"COMPANY"), in your favor, our Irrevocable Transferable Letter of Credit No.
P-010152 (formerly numbered as S-1002) (the "LETTER OF CREDIT"), in a maximum
amount at any date (the "MAXIMUM CREDIT AMOUNT") equal to the amount shown
opposite the period including such date in the Table of Maximum Credit Amounts
attached hereto as Schedule II-A, effective immediately and expiring at 5:00
p.m. (New York City time) on the Termination Date. Capitalized terms used herein
and in Schedules II-A, II-B and III and Exhibits 1, 2, 3 and 4 hereto shall have
the meanings set forth in Schedule I hereto. This Letter of Credit is issued in
connection with the leasing of an undivided interest in Unit 2 of the Palo Verde
Nuclear Generating Station to the Company pursuant to a Facility Lease dated as
of August 1, 1986 (the "FACILITY LEASE") as amended and in effect on the date
hereof, between the Company and State Street Bank and Trust Company (as
successor to The First National Bank of Boston), as Owner Trustee under a trust
agreement with you.

      We hereby irrevocably authorize you to draw on us, in accordance with the
terms and conditions hereinafter set forth, an amount not in excess of the
amount shown opposite the period including the date of such drawing (the "DATE
OF DRAWING") in the Table of Maximum Drawing Amounts attached hereto as Schedule
II-B as such amounts are modified from time to time in accordance with the next
paragraph. Such amounts, as modified in accordance with the next

                            Letter of Credit - Page 1


paragraph, are hereinafter referred to collectively as the "MAXIMUM DRAWING
AMOUNTS" and individually as the "MAXIMUM DRAWING AMOUNT". A drawing in respect
of a payment hereunder honored by us shall not exceed the lesser of the Maximum
Drawing Amount applicable on the Date of Drawing and the Maximum Credit Amount
applicable on the Date of Drawing. All payments hereunder shall be made from our
own general funds.

      The Maximum Drawing Amounts shall be modified from time to time as
follows:

      (a) upon payment by the Issuing Bank of each drawing under the Letter of
Credit, the Maximum Drawing Amounts applicable to each Date of Drawing
subsequent to such payment shall be automatically reduced by an amount equal to
the amount of the drawing so paid and shall not be reinstated; and

      (b) if adjustments are made to Modified Special Casualty Values,
corresponding adjustments shall be made to the Maximum Drawing Amounts shown in
Schedule II-B, (as theretofore reduced pursuant to clause (a) above), provided
that if any such adjustment of Modified Special Casualty Values would cause the
Maximum Drawing Amount for any period to exceed the Maximum Credit Amount for
such period (minus the amount of any drawing theretofore honored by us
hereunder), such Maximum Credit Amount (as so reduced) shall apply for such
period and provided further that adjustments pursuant to this clause (b) shall
be effective automatically upon receipt by us of a notice from you in the form
of Exhibit 1 hereto.

      Upon surrender of this Letter of Credit together with a notice in the form
of Exhibit 1 hereto, we will promptly issue an irrevocable transferable letter
of credit containing a revised Schedule II-B reflecting the adjustments
contained in such notice and in all other respects identical to this Letter of
Credit.

      Funds under this Letter of Credit are available to you against
presentation on or prior to the Termination Date of (a) your draft in the form
of Exhibit 2 attached hereto and (b) a completed certificate signed by you in
the form of Exhibit 3 attached hereto. Such draft and certificate shall be dated
the date of its presentation and shall be presented at our Tampa, Florida office
specified below, or at our Brooklyn, New York office specified below (or at any
other office in New York City which may be designated by us by written notice
(given in the manner set forth in the next paragraph) delivered to you at least
15 days prior to the applicable Date of Drawing). If we receive such draft and
certificate at our Tampa, Florida office specified below, all in strict
conformity with the terms and conditions of this Letter of Credit, prior to
10:00 a.m. (New York City time) on any Business Day, we will honor the draft on
the same Business Day. If we receive such draft and certificate at our Tampa,
Florida office specified below on

                            Letter of Credit - Page 2


or after 10:00 a.m. and prior to 5:00 p.m. (New York City time) on any Business
Day, or if we receive such draft and certificate at our Brooklyn, New York
office specified below prior to 5:00 p.m. (New York City time) on any Business
Day, in each case all in strict conformity with the terms and conditions of this
Letter of Credit, we will honor the draft on the next Business Day. If requested
by you, payment under this Letter of Credit may be made by wire transfer of
federal funds to your account with any bank located in the United States of
America or by deposit of immediately available funds into a designated account
that you maintain with us.

      Notwithstanding any provisions of Articles 13(b) and 14(d)(i) of the
Uniform Customs and of Section 5-108(b) of the New York Uniform Commercial Code
to the contrary, which provisions are hereby expressly waived, if the
presentation of such draft and certificate are not in strict conformity with the
terms and conditions of this Letter of Credit, we will give you prompt notice
prior to the time we would have been obliged to make payment as set forth in the
preceding paragraph by facsimile transmission addressed to you at the fax number
set forth in the next succeeding paragraph, effective upon confirmation, that we
have refused such non-conforming draft and certificate, and stating all
discrepancies in respect of which the Issuing Bank refuses such non-conforming
draft and certificate. If you correct such non-conforming demand by presentation
of the draft and certificate corrected to be in strict conformity with the terms
and conditions of the Letter of Credit within two Business Days of your receipt
of our notice of refusal, then we will honor the draft and make payment in
accordance with the terms provided herein based upon the time such corrected
draft and certificate are presented, provided that you may make only one such
corrected demand with respect to any such non-conforming demand, and provided
further that for purposes of determining whether the draft and certificate have
been timely presented, the corrected draft and certificate shall be deemed to
have been presented on the date the non-conforming draft and certificate were
presented.

      Notwithstanding any other provision of this Letter of Credit, we shall
have the right, upon the occurrence of any of the events listed in Schedule III
hereto, to terminate this Letter of Credit by delivering to you a written notice
indicating the date of such termination (the "DATE OF EARLY TERMINATION"),
provided that on or before the Date of Early Termination you will have the right
to draw once an amount not in excess of the lesser of the Maximum Credit Amount
and the Maximum Drawing Amount in accordance with the procedures described
herein. The written notice referred to in the preceding sentence shall be given
by facsimile transmission addressed to you at Emerson Finance LLC, 8000 W.
Florissant Avenue, P.O. Box 4100, St. Louis, Missouri 63136; Attention:
President; Fax: 314-553-2463 (or to such other address or facsimile number
designated by you by written notice delivered to us at least 15 days prior to
the notice of early termination) and shall be effective upon receipt of the
appropriate confirmation of the facsimile transmission. We will also forward a
copy of such

                            Letter of Credit - Page 3


notice by overnight delivery service to the address set forth above. The Date of
Early Termination specified in such written notice shall be:

      (a) in the case of events specified in paragraphs A and G of Schedule III,
not earlier than ten days after such notice is given, and

      (b) in the case of all other events specified in Schedule III, not earlier
than 30 days after such notice is given.

      Except as set forth herein, this Letter of Credit shall be governed by the
Uniform Customs and Practice for Documentary Credits (1993 Revision)
International Chamber of Commerce Publication No. 500, other than the provisions
of Article 48 thereof. This Letter of Credit shall be deemed to be a contract
made under the laws of the State of New York and shall, as to matters not
governed by the Uniform Customs, be governed by and construed in accordance with
the laws of such State.

      All demands for payment, notices and other communications to us in respect
of this Letter of Credit shall be in writing, specifically referring to the
number of this Letter of Credit, and addressed and presented to us (and all
courier or physical deliveries should be addressed to us) at JPMorgan Chase
Bank, N.A., c/o JP Morgan Treasury Services, Standby Letter of Credit Manager -
Immediate Action Required, 4th Floor, 10240 Highland Manor Drive, Tampa, Florida
33610. Although we prefer physical presentations be made to our Tampa, Florida
location, our location at 4 Chase Metrotech Center, 10th Floor, Brooklyn, New
York 11245 is also available for your physical presentations. Should you use our
4 Chase Metrotech Center location for physical presentations, documents must be
directed to: Governmental Agency Unit, Attention: Global Trade.

      Notwithstanding Article 48 of the Uniform Customs and Practice for
Documentary Credits referred to above, this Letter of Credit may be transferred
in its entirety more than once, but in each case only to the successor Equity
Participant under the Trust Agreement dated as of August 1, 1986 between
yourself and State Street Bank and Trust Company as successor to The First
National Bank of Boston. Upon receipt by us at the address for presentation of
documents set forth above of a copy of the instrument effecting such transfer,
signed by the transferor and by the transferee, in the form of Exhibit 4 hereto
(which shall be conclusive evidence of such transferee's authority without any
inquiry by us into the terms of the Trust Agreement) then, in such case, we
will, upon surrender of this Letter of Credit (and amendments thereto, if any),
issue an irrevocable transferable letter of credit in the name of the transferee
and providing for notices to be sent to the transferee at the address set forth
therein and in all other respects identical to this Letter of Credit and the
transferee, instead of the transferor, shall, without necessity of further act,
be entitled to all the benefits of, and rights under, this Letter of Credit in
the transferor's place.

                            Letter of Credit - Page 4


      We hereby notify you of our agreement to the terms and conditions of
Section 13 of the Reimbursement Agreement.

      This Letter of Credit sets forth in full our undertaking, and such
undertaking shall not in any way be modified, amended, amplified or limited by
reference to any document, instrument or agreement referred to herein, except
only Schedules I, II-A, II-B and III and Exhibits 1, 2, 3 and 4 hereto and the
notices referred to herein; and any such reference shall not be deemed to
incorporate herein by reference any document, instrument or agreement except as
set forth above.

                            Letter of Credit - Page 5


      This Letter of Credit No. P-010152 (formerly numbered as S-1002) amends
and restates our Letter of Credit No. S-1002 dated as of August 15, 1986, as
heretofore amended.

                                             JPMORGAN CHASE BANK, N.A.

                                             By: ______________________________
                                                 Name:
                                                 Title:

                     LETTER OF CREDIT NO. P-010152 (FORMERLY NUMBERED AS S-1002)
                                             ISSUED BY JPMORGAN CHASE BANK, N.A.
                                                                  SIGNATURE PAGE



                                                                       EXHIBIT 1
                                                             TO LETTER OF CREDIT

JPMorgan Chase Bank, N.A.
[c/o JP Morgan Treasury Services
Standby Letter of Credit Manager -
Immediate Action Required
4th Floor
10240 Highland Manor Drive
Tampa, Florida 33610]

[Governmental Agency Unit
4 Chase Metrotech Center
10th Floor
Brooklyn, New York 11245
Attention: Global Trade]

Dear Sirs:

      Reference is made to that certain amended and restated irrevocable
transferable Letter of Credit bearing Letter of Credit No. P-010152 (formerly
numbered as S-1002) dated May 19, 2005, which has been established by you in
favor of Emerson Finance LLC (the "EQUITY PARTICIPANT").

      The undersigned, a duly authorized representative of the Equity
Participant, hereby certifies that Modified Special Casualty Values have been
adjusted and the amounts shown on Schedule II-B to the Letter of Credit should
be modified, in accordance with the terms of clauses (a) and (b) of the third
paragraph of the Letter of Credit, to the amounts shown in Appendix A hereto.

      The Letter of Credit is returned herewith and we request that you issue an
irrevocable transferable letter of credit with the revised Schedule II-B
attached and in all other respects identical to the Letter of Credit.

      Capitalized terms used herein and not otherwise defined herein shall have
the meanings given to them in the Letter of Credit.

                                           ____________________________________
                                           [Name of Equity Participant]

                                           ____________________________________
                                           [Name and Title of Authorized
                                           Representative of Equity Participant]

                          Letter of Credit - Exhibit 1



                                                                       EXHIBIT 2
                                                             TO LETTER OF CREDIT

                                                                         [Place]

                                                                    [Date], 20__

      ON [Business Day on which payment is required in accordance with the
provisions o f the fifth paragraph of the Letter of Credit]

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

FOR VALUE RECEIVED AND CHARGE TO ACCOUNT OF LETTER OF

CREDIT NO. P-010152 (formerly numbered as S-1002)

OF

      JPMorgan Chase Bank, N.A.
      [c/o JP Morgan Treasury Services
      Standby Letter of Credit Manager -
      Immediate Action Required
      4th Floor
      10240 Highland Manor Drive
      Tampa, Florida 33610]

      [Governmental Agency Unit
      4 Chase Metrotech Center
      10th Floor
      Brooklyn, New York 11245
      Attention: Global Trade]

                                        [Name and address of Equity Participant]

                                        By: ____________________________________
                                            [Authorized Representative]

                          Letter of Credit - Exhibit 2



                                                                       EXHIBIT 3
                                                             TO LETTER OF CREDIT

                                   CERTIFICATE

      The undersigned, a duly authorized representative of Emerson Finance LLC
(the "EQUITY PARTICIPANT"), as beneficiary under that certain amended and
restated irrevocable transferable Letter of Credit No. P-010152 (formerly
numbered as S-1002) dated May 19, 2005, established by JPMorgan Chase Bank, N.A.
(the "ISSUING BANK") and issued pursuant to that certain Amended and Restated
Reimbursement Agreement dated as of May 19, 2005 between Arizona Public Service
Company (the "COMPANY"), the Issuing Bank and the other Banks named therein,
hereby certifies as follows:

      1. An Event of Default under the Facility Lease has occurred and is
continuing.

      2. The amount of the accompanying draft does not exceed the Maximum
Drawing Amount available under the Letter of Credit on the date hereof, as
determined in accordance with the terms of the Letter of Credit.

      Capitalized terms used herein and not otherwise defined herein shall have
the meanings given to them in the Letter of Credit.

      IN WITNESS WHEREOF, the undersigned has executed this Certificate as of ,
20__ .

                                      __________________________________________
                                      [Name of Equity Participant]

                                      __________________________________________
                                      [Name and Title of Authorized
                                      Representative of Equity Participant]

                          Letter of Credit - Exhibit 3



                                                                       EXHIBIT 4
                                                             TO LETTER OF CREDIT

JPMorgan Chase Bank, N.A.
[c/o JP Morgan Treasury Services
Standby Letter of Credit Manager -
Immediate Action Required
4th Floor
10240 Highland Manor Drive
Tampa, Florida 33610]

[Governmental Agency Unit
4 Chase Metrotech Center
10th Floor
Brooklyn, New York 11245
Attention: Global Trade]

Dear Sirs:

      Reference is made to the certain amended and restated irrevocable
transferable Letter of Credit bearing Letter of Credit No. P-010152 (formerly
numbered as S-1002) dated May 19, 2005 (the "LETTER OF CREDIT"), which has been
established by you in favor of [name of Equity Participant (the "TRANSFEROR")].

      The Transferor has transferred (and hereby confirms to you said transfer)
all of its rights in and under said Letter of Credit to [name of Transferee (the
"TRANSFEREE")] and confirms that the Transferor no longer has any rights under
or interest in said Letter of Credit.

      The Letter of Credit is returned herewith and we request that you issue an
irrevocable transferable letter of credit in the name of the Transferee and
providing for notices to be sent to the Transferee at the address set forth
below and in all other respects identical to the Letter of Credit.

      Transferee hereby certifies that it is a duly authorized transferee under
the terms of said Letter of Credit and is accordingly entitled, upon
presentation of the drafts and certificates called for therein, to receive
payments thereunder. Notices under the Letter of Credit should be sent to the
Transferee as follows: [Name], [Address], [Facsimile Number], Attention: -.

                                     ___________________________________________
                                     [Name of Transferor]

                                     ___________________________________________

                      Letter of Credit - Exhibit 4 - Page 1



                                     ___________________________________________
                                     [Name and Title of Authorized
                                     Representative of Transferor]

                                     ___________________________________________
                                     [Name of Transferee]

                                     ___________________________________________
                                     [Name and Title of Authorized
                                     Representative of Transferee]

                      Letter of Credit - Exhibit 4 - Page 2


                                                                      SCHEDULE I
                                                             TO LETTER OF CREDIT

      The following terms have the following meanings for purposes of the Letter
of Credit and the Schedules and Exhibits thereto. Terms defined in the Letter of
Credit have the meanings given to them therein. Terms defined by reference to
the Facility Lease have the meanings assigned to them therein from time to time.

      "ADMINISTRATIVE AGENT" means JPMorgan Chase Bank, N.A., in its capacity as
administrative agent for the Banks under the Reimbursement Agreement, and its
successors in such capacity.

      "APPLICABLE LAW" has the meaning assigned to it in the Facility Lease.

      "BANK" means (i) each bank or financial institution listed on the
signature pages of the Reimbursement Agreement, each Assignee that becomes a
Bank pursuant to Section 15(a) of the Reimbursement Agreement, and their
respective successors, and (ii) the Issuing Bank with respect to its
Participation.

      "BUSINESS DAY" means any day except a Saturday, Sunday or other day on
which commercial banks in New York, New York, Chicago, Illinois or the State of
California are authorized by law to close.

      "CAPITAL LEASE OBLIGATIONS" means as to any Person, the obligations of
such Person to pay rent or other amounts under a lease of (or other agreement
conveying the right to use) real and/or personal property, which obligations are
required to be classified and accounted for as a capital lease on the balance
sheet of such Person under generally accepted accounting principles and, for the
purposes of this Agreement, the amount of such obligations shall be the
capitalized amount thereof, determined in accordance with generally accepted
accounting principles.

      "CODE" means the Internal Revenue Code of 1986, as amended, or any
successor statute.

      "EQUITY PARTICIPANT" means Emerson Finance LLC, as Equity Participant, and
its successors and assigns.

      "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the regulations promulgated and rulings issued
thereunder.

      "ERISA AFFILIATE" means any corporation or trade or business which is a
member of the same controlled group of corporations (within the meaning of

                     Letter of Credit - Schedule I - Page 1


Section 414(b) of the Code) as the Company or is under common control (within
the meaning of Section 414(c) of the Code) with the Company.

      "GOVERNMENTAL ACTION" has the meaning assigned to it in the Facility
Lease.

      "GUARANTEE" means as to any Person, any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Indebtedness
of any other Person or in any manner providing for the payment of any
Indebtedness of any other Person or otherwise protecting the holder of such
Indebtedness against loss (whether by virtue of partnership arrangements,
agreements to keep well, to purchase assets, goods, securities or services, or
to take-or-pay or otherwise), provided that the term "Guarantee" shall not
include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.

      "INDEBTEDNESS" means as to any Person at any date (without duplication):
(a) indebtedness created, issued, incurred or assumed by such Person for
borrowed money or evidenced by bonds, debentures, notes or similar instruments;
(b) all obligations of such Person to pay the deferred purchase price of
property or services, excluding, however, trade accounts payable (other than for
borrowed money) arising in, and accrued expenses incurred in, the ordinary
course of business of such Person so long as such trade accounts payable are
paid within 180 days of the date incurred; (c) all Indebtedness secured by a
lien on any asset of such Person, to the extent such Indebtedness has been
assumed by, or is a recourse obligation of, such Person; (d) all Guarantees by
such Person; (e) all Capital Lease Obligations of such Person; and (f) the
amount of all reimbursement obligations of such Person (whether contingent or
otherwise) in respect of letters of credit, bankers' acceptances, surety or
other bonds and similar instruments in support of Indebtedness.

      "ISSUING BANK" means JPMorgan Chase Bank, N.A., and its successors in
their capacity as issuer of the Letter of Credit.

      "MATERIAL SUBSIDIARY" means, at any time, a Subsidiary of the Company
which as of such time meets the definition of a "significant subsidiary"
included as of May 19, 2005 in Regulation S-X of the Securities and Exchange
Commission or whose assets at such time exceed 10% of the assets of the Company
and the Subsidiaries (on a consolidated basis).

      "MODIFIED SPECIAL CASUALTY VALUE" has the meaning assigned to it in the
Facility Lease.

      "MULTIEMPLOYER PLAN" means a plan defined as such in Section 3(37) of
ERISA to which contributions have been made by the Company or any ERISA

                     Letter of Credit - Schedule I - Page 2


Affiliate within any of the preceding five plan years and which is covered by
Title IV of ERISA.

      "PARTICIPANT" has the meaning set forth in Section 15(b) of the
Reimbursement Agreement.

      "PARTICIPATION" means a participating interest in the credit represented
by the Letter of Credit including, without limitation, the interest therein
retained by the Issuing Bank after giving effect to all participating interests
therein granted by it pursuant to Section 14(a) of the Reimbursement Agreement,
but prior to giving effect to any interest therein granted to any Participant
pursuant to Section 15(b) of the Reimbursement Agreement.

      "PARTICIPATION AMOUNT" means, with respect to any Bank, the amount set
forth in Schedule II to the Reimbursement Agreement opposite the name of such
Bank therein, as such amount may be changed by reason of an assignment by or to
such Bank in accordance with Section 15(a). Such amount shall be reduced from
time to time by such Bank's ratable share of each reduction of the Maximum
Credit Amount.

      "PARTICIPATION PERCENTAGE" means, with respect to any Bank at any time,
the percentage equivalent of a fraction (i) the numerator of which is the
Participation Amount of such Bank at such time and (ii) the denominator of which
is the Maximum Credit Amount at such time.

      "PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.

      "PERSON" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.

      "PLAN" means an employee benefit plan within the meaning of Section 3(3)
of ERISA established or maintained by the Company or any ERISA Affiliate which
is covered by Title IV of ERISA, other than a Multiemployer Plan.

      "REIMBURSEMENT AGREEMENT" means the Reimbursement Agreement as originally
executed as of August 1, 1986, as amended or amended and restated from time to
time before May 19, 2005, as amended and restated as of May 19, 2005 among
Arizona Public Service Company, the Banks party thereto, and JPMorgan Chase
Bank, N.A., as Administrative Agent and Issuing Bank, and as the same may be
amended and restated from time to time thereafter.

      "REQUIRED BANKS" means, at any time, Banks holding Participation
Percentages aggregating more than 50% at such time.

                     Letter of Credit - Schedule I - Page 3


      "STATED TERMINATION DATE" means May 19, 2010 or such later date to which
such Stated Termination Date shall have been extended pursuant to Section 17 of
the Reimbursement Agreement.

      "SUBSIDIARY" of any Person means any corporation of which more than 50% of
the issued and outstanding capital stock having ordinary voting power to elect a
majority of the Board of Directors of such corporation (irrespective of whether
at the time capital stock of any other class or classes of such corporation
shall or might have voting power upon the occurrence of any contingency) is at
the time directly or indirectly owned or controlled by such Person and one or
more of its other Subsidiaries or by one or more of such Person's other
Subsidiaries.

      "TERMINATION DATE" means the earliest of (i) the date on which the Issuing
Bank pays a drawing under the Letter of Credit for the lesser of the Maximum
Drawing Amount and the Maximum Credit Amount, (ii) if a drawing is not requested
by the Equity Participant after a notice of termination is given under the
Letter of Credit, the Date of Early Termination, (iii) if a drawing is requested
by the Equity Participant after a notice of termination is given under the
Letter of Credit, the date on which the Issuing Bank pays such drawing, (iv) the
date on which the Company delivers a certificate to the Issuing Bank certifying
that the Company has paid the amounts due under Section 9(c) of the Facility
Lease (so long as the Equity Participant shall have acknowledged such payment by
its express confirmation thereof in, and its countersignature to, such
certificate), (v) the date on which the Company delivers a certificate to the
Issuing Bank certifying that the Company has paid the amounts due under Section
9(d) of the Facility Lease (so long as the Equity Participant shall have
acknowledged such payment by its express confirmation thereof in, and its
countersignature to, such certificate), and (vi) the latest of (x) the Stated
Termination Date, (y) if a draft and certificate all in strict conformity with
the terms and conditions of the Letter of Credit are presented on the Stated
Termination Date at such time and at such office as specified in the fifth
paragraph of the Letter of Credit, the date on which the Issuing Bank is
required to honor the draft in accordance with the provisions of such paragraph
pursuant to such presentation, and (z) if a corrected draft and certificate all
in strict conformity with the terms and conditions of the Letter of Credit are
presented on such date as specified in, and in accordance with the provisions
of, the sixth paragraph of the Letter of Credit, the date on which the Issuing
Bank is required to honor the draft in accordance with the provisions of such
paragraph pursuant to such presentation.

      "TRANSACTION DOCUMENTS" means the Participation Agreement, the Refinancing
Agreement, the Indemnity Agreement, the Escrow Deposit Agreement, the Facility
Lease, the Trust Agreement, the Indenture, the Decommissioning Trust Agreement,
the Tax Indemnification Agreement, the Mortgage Release, the Assignment and
Assumption, the Purchase Documents,

                     Letter of Credit - Schedule I - Page 4


any ground lease contemplated by Section 10(b)(3)(xvii) of the Participation
Agreement and the Notes, each as defined in the Facility Lease.

                     Letter of Credit - Schedule I - Page 5


                                                                   SCHEDULE II-A
                                                             TO LETTER OF CREDIT

                         TABLE OF MAXIMUM CREDIT AMOUNTS
                               EMERSON FINANCE LLC



            APPLICABLE PERIOD                       MAXIMUM CREDIT AMOUNT
- -------------------------------------------         ---------------------
                                                 
From May 19, 2005 through July 10, 2005                $ 55,207,639.45
From July 11, 2005 through January 10, 2006            $ 54,073,073.44
From January 11, 2006 through July 10, 2006            $ 51,520,058.76
From July 11, 2006 through January 10, 2007            $ 50,939,589.19
From January 11, 2007 through July 10, 2007            $ 47,820,443.92
From July 11, 2007 through January 10, 2008            $ 47,088,800.23
From January 11, 2008 through July 10, 2008            $ 43,631,504.04
From July 11, 2008 through January 10, 2009            $ 42,847,098.46
From January 11, 2009 through July 10, 2009            $ 39,198,185.36
From July 11, 2009 through January 10, 2010            $ 38,352,436.54
From January 11, 2010 through May 19, 2010             $ 34,494,359.44


                        Letter of Credit - Schedule II-A



                                                                   SCHEDULE II-B
                                                             TO LETTER OF CREDIT

                        TABLE OF MAXIMUM DRAWING AMOUNTS
                               EMERSON FINANCE LLC



             APPLICABLE PERIOD                      MAXIMUM DRAWING AMOUNT
- -------------------------------------------         ----------------------
                                                 
From May 19, 2005 through July 10, 2005                $ 55,207,639.45
From July 11, 2005 through January 10, 2006            $ 54,073,073.44
From January 11, 2006 through July 10, 2006            $ 51,520,058.76
From July 11, 2006 through January 10, 2007            $ 50,939,589.19
From January 11, 2007 through July 10, 2007            $ 47,820,443.92
From July 11, 2007 through January 10, 2008            $ 47,088,800.23
From January 11, 2008 through July 10, 2008            $ 43,631,504.04
From July 11, 2008 through January 10, 2009            $ 42,847,098.46
From January 11, 2009 through July 10, 2009            $ 39,198,185.36
From July 11, 2009 through January 10, 2010            $ 38,352,436.54
From January 11, 2010 through May 19, 2010             $ 34,494,359.44


                        Letter of Credit - Schedule II-B



                                                                    SCHEDULE III
                                                             TO LETTER OF CREDIT

      The Issuing Bank shall have the right upon the occurrence of any of the
events listed below to terminate the Letter of Credit in accordance with the
terms of the Letter of Credit:

      (A) The Company shall fail to pay when due any amount payable under
Section 2(a) of the Reimbursement Agreement or fail to pay any other amount
payable under Section 2 of the Reimbursement Agreement within five Business Days
after the same becomes due and payable; or

      (B) The Company shall fail to perform or observe (i) any term, covenant or
agreement contained in Section 7(a)(ii), 7(g)(iv), 7(h), 8(a), 8(b), 8(c) or
8(e) of the Reimbursement Agreement, or (ii) any term, covenant or agreement
contained in the Reimbursement Agreement (other than those covered by clause (A)
above or subclause (i) of this clause (B) or Section 7(e) or Section 19 of the
Reimbursement Agreement) on its part to be performed or observed if the failure
to perform or observe such term, covenant or agreement shall remain unremedied
for 30 days after written notice thereof shall have been given to the Company by
the Administrative Agent; or

      (C) Any representation or warranty made by the Company in the
Reimbursement Agreement or by the Company (or any of its officers) in any
certificate delivered in connection with the Reimbursement Agreement shall prove
to have been false or misleading in any material respect when made; or

      (D) Any material provision of the Reimbursement Agreement shall at any
time for any reason cease to be valid and binding upon the Company, or shall be
declared to be null and void, or the validity or enforceability thereof shall be
contested by the Company or any governmental agency or authority, or the Company
shall deny that it has any or further liability or obligation under the
Reimbursement Agreement; or

      (E) The Company shall fail to pay any principal of or premium or interest
on any Indebtedness which is outstanding in a principal amount of at least
$5,000,000 (but excluding Indebtedness owing under the Reimbursement Agreement)
of the Company, when the same becomes due and payable (whether by scheduled
maturity, required prepayment, acceleration, demand or otherwise), and such
failure shall continue after the applicable grace period, if any, specified in
the agreement or instrument relating to such Indebtedness; or the Company shall
fail to perform or comply with any other term or covenant in any agreement or
instrument relating to any such Indebtedness and such failure shall continue
after the applicable grace period, if any, specified in such agreement or
instrument,

                    Letter of Credit - Schedule III - Page 1


if the effect of such failure is to accelerate, or to permit the acceleration
of, the maturity of such Indebtedness; or

      (F) The Company shall fail to pay any principal of or premium or interest
in respect of any operating lease in respect of which the payment obligations of
the Company have a present value of at least $25,000,000, when the same becomes
due and payable (whether by scheduled maturity, required prepayment,
acceleration, demand or otherwise), and such failure shall continue after the
applicable grace period, if any, specified in such operating lease, if the
effect of such failure is to terminate, or to permit the termination of, such
operating lease; or

      (G) The Company shall generally not pay its debts as such debts become
due, or shall admit in writing its inability to pay its debts generally, or
shall make a general assignment for the benefit of creditors; or any proceeding
shall be instituted by or against the Company seeking to adjudicate it a
bankrupt or insolvent, or seeking liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief, or composition of it or its debts
under any law relating to bankruptcy, insolvency or reorganization or relief of
debtors, or seeking the entry of an order for relief or the appointment of a
receiver, trustee, custodian or other similar official for it or for any
substantial part of its property and, in the case of any such proceeding
instituted against it (but not instituted by it), either such proceeding shall
remain undismissed or unstayed for a period of 60 days, or any of the actions
sought in such proceeding (including, without limitation, the entry of an order
for relief against, or the appointment of a receiver, trustee, custodian or
other similar official for, it or for any substantial part of its property)
shall occur; or the Company shall take any corporate action to authorize any of
the actions set forth above in this clause (G) or

      (H) Any Material Subsidiary shall generally not pay its debts as such
debts become due, or shall admit in writing its inability to pay its debts
generally, or shall make a general assignment for the benefit of creditors; or
any proceeding shall be instituted by or against any Material Subsidiary seeking
to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up,
reorganization, arrangement, adjustment, protection, relief, or composition of
it or its debts under any law relating to bankruptcy, insolvency or
reorganization or relief of debtors, or seeking the entry of an order for relief
or the appointment of a receiver, trustee, custodian or other similar official
for it or for any substantial part of its property and, in the case of any such
proceeding instituted against it (but not instituted by it), either such
proceeding shall remain undismissed or unstayed for a period of 60 days, or any
of the actions sought in such proceeding (including, without limitation, the
entry of an order for relief against, or the appointment of a receiver, trustee,
custodian or other similar official for it or for any substantial part of its
property) shall occur; or any Material Subsidiary shall take any corporate
action to authorize any of the actions set forth above in this clause (H) and,
in each case,

                    Letter of Credit - Schedule III - Page 2


the Required Banks determine that such circumstances could have a material
adverse effect on the financial condition or financial prospects of the Company
and its consolidated Subsidiaries, taken as a whole; or

      (I) Any judgment or order for the payment of money that exceeds any
applicable insurance coverage by more than $5,000,000 shall be rendered against
the Company and such judgment or order shall remain unsatisfied or unstayed for
a period of 30 days; or

      (J) Any judgment or order for the payment of money that exceeds any
applicable insurance coverage by more than $25,000,000 shall be rendered against
any Material Subsidiary; such judgment or order shall remain unsatisfied or
unstayed for 30 days; and the Required Banks determine that such judgment or
order could have a material adverse effect on the financial condition or
financial prospects of the Company and its consolidated Subsidiaries, taken as a
whole; or

      (K) An event or condition specified in Section 7(g)(iv) of the
Reimbursement Agreement shall occur or exist with respect to any Plan or
Multiemployer Plan and, as a result of such event or condition, together with
all other such events or conditions, the Company or any ERISA Affiliate shall
incur or in the opinion of the Required Banks shall be reasonably likely to
incur a liability to a Plan, a Multiemployer Plan or the PBGC (or any
combination of the foregoing) which is, in the determination of the Required
Banks, material in relation to the financial condition or the financial
prospects of the Company and its consolidated Subsidiaries, taken as a whole; or

      (L) any change in Applicable Law or any Governmental Action shall occur
which has the effect of making the transactions contemplated by the Transaction
Documents unauthorized, illegal or otherwise contrary to Applicable Law; or

      (M) any event specified in Sections 15(vii), (viii) or (x) of the Facility
Lease shall occur; or

      (N) the Company shall fail to make, or cause to be made, any payment
specified in Section 15(i) of the Facility Lease equal to or exceeding
$1,000,000 within the periods specified in that Section.

      Capitalized terms used herein and not otherwise defined herein shall have
the meanings given to them in the Letter of Credit.

                    Letter of Credit - Schedule III - Page 3