Table of Contents

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  _________________________________ 
Form 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
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 file number 001-14206
El Paso Electric Company
(Exact name of registrant as specified in its charter)
Texas
 
74-0607870
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
Stanton Tower, 100 North Stanton, El Paso, Texas
 
79901
(Address of principal executive offices)
 
(Zip Code)
(915) 543-5711
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES   x     NO   o
Indicate by check mark whether the registrant submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES   x     NO   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer
x
Accelerated filer
o
 
 
 
 
 
 
Non-accelerated filer
o
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES   o     NO   x
As of April 30, 2014 , there were 40,310,281 shares of the Company’s no par value common stock outstanding.

 
 
 
 
 


Table of Contents

EL PASO ELECTRIC COMPANY
INDEX TO FORM 10-Q
 
 
 
Page No.
 
Item 1.
 
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 4.
Item 5.
Item 6.
 


 
( i )
 
Table of Contents

PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements

EL PASO ELECTRIC COMPANY
BALANCE SHEETS
 
 
March 31,
2014
 
December 31,
2013
 
(Unaudited)
 
 
 
 
 
ASSETS
(In thousands)
 
 
 
Utility plant:
 
 
 
Electric plant in service
$
3,086,015

 
$
3,076,549

Less accumulated depreciation and amortization
(1,219,479
)
 
(1,214,088
)
Net plant in service
1,866,536

 
1,862,461

Construction work in progress
304,619

 
282,647

Nuclear fuel; includes fuel in process of $39,681 and $48,492, respectively
200,454

 
188,185

Less accumulated amortization
(86,461
)
 
(75,820
)
Net nuclear fuel
113,993

 
112,365

Net utility plant
2,285,148

 
2,257,473

Current assets:
 
 
 
Cash and cash equivalents
13,392

 
25,592

Accounts receivable, principally trade, net of allowance for doubtful accounts of $1,828 and $2,261, respectively
58,750

 
65,350

Accumulated deferred income taxes
23,972

 
26,965

Inventories, at cost
45,300

 
45,942

Undercollection of fuel revenues
4,189

 
7,248

Prepayments and other
10,501

 
7,694

Total current assets
156,104

 
178,791

Deferred charges and other assets:
 
 
 
Decommissioning trust funds
217,509

 
214,095

Regulatory assets
96,603

 
101,050

Other
36,409

 
34,879

Total deferred charges and other assets
350,521

 
350,024

Total assets
$
2,791,773

 
$
2,786,288


See accompanying notes to financial statements.

 
1
 
Table of Contents

EL PASO ELECTRIC COMPANY
BALANCE SHEETS (Continued)
 
 
March 31,
2014
 
December 31,
2013
 
(Unaudited)
 
CAPITALIZATION AND LIABILITIES
(In thousands except for share data)
 
 
 
Capitalization:
 
 
 
Common stock, stated value $1 per share, 100,000,000 shares authorized, 65,642,538 and 65,639,091 shares issued, and 154,144 and 120,534 restricted shares, respectively
$
65,797

 
$
65,760

Capital in excess of stated value
315,177

 
314,443

Retained earnings
979,604

 
985,665

Accumulated other comprehensive income, net of tax
13,059

 
2,612

 
1,373,637

 
1,368,480

Treasury stock, 25,492,919 shares at cost
(424,647
)
 
(424,647
)
Common stock equity
948,990

 
943,833

Long-term debt
999,643

 
999,620

Total capitalization
1,948,633

 
1,943,453

Current liabilities:
 
 
 
Short-term borrowings under the revolving credit facility
45,951

 
14,352

Accounts payable, principally trade
46,597

 
61,795

Taxes accrued
22,107

 
25,206

Interest accrued
13,028

 
12,189

Overcollection of fuel revenues
—

 
1,048

Other
23,766

 
22,932

Total current liabilities
151,449

 
137,522

Deferred credits and other liabilities:
 
 
 
Accumulated deferred income taxes
455,535

 
449,925

Accrued pension liability
62,212

 
84,012

Accrued postretirement benefit liability
51,954

 
50,655

Asset retirement obligation
66,665

 
65,214

Regulatory liabilities
25,969

 
26,416

Other
29,356

 
29,091

Total deferred credits and other liabilities
691,691

 
705,313

Commitments and contingencies


 


Total capitalization and liabilities
$
2,791,773

 
$
2,786,288

See accompanying notes to financial statements.

 
2
 
Table of Contents

EL PASO ELECTRIC COMPANY
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except for share data)
 
 
Three Months Ended
 
Twelve Months Ended
 
March 31,
 
March 31,
 
2014
 
2013
 
2014
 
2013
Operating revenues
$
185,516

 
$
177,290

 
$
898,588

 
$
861,593

Energy expenses:
 
 
 
 
 
 
 
Fuel
51,586

 
44,399

 
233,955

 
196,041

Purchased and interchanged power
17,915

 
12,877

 
67,401

 
60,569

 
69,501

 
57,276

 
301,356

 
256,610

Operating revenues net of energy expenses
116,015

 
120,014

 
597,232

 
604,983

Other operating expenses:
 
 
 
 
 
 
 
Other operations
56,138

 
55,967

 
237,326

 
238,108

Maintenance
14,282

 
12,552

 
62,798

 
56,923

Depreciation and amortization
20,568

 
19,368

 
80,826

 
77,406

Taxes other than income taxes
15,362

 
12,782

 
60,327

 
56,585

 
106,350

 
100,669

 
441,277

 
429,022

Operating income
9,665

 
19,345

 
155,955

 
175,961

Other income (deductions):
 
 
 
 
 
 
 
Allowance for equity funds used during construction
2,906

 
2,663

 
10,251

 
10,134

Investment and interest income, net
4,241

 
1,231

 
10,043

 
4,730

Miscellaneous non-operating income
1,517

 
1

 
2,425

 
1,346

Miscellaneous non-operating deductions
(419
)
 
(471
)
 
(3,583
)
 
(2,002
)
 
8,245

 
3,424

 
19,136

 
14,208

Interest charges (credits):
 
 
 
 
 
 
 
Interest on long-term debt and revolving credit facility
14,579

 
14,596

 
58,618

 
55,665

Other interest
173

 
149

 
455

 
1,139

Capitalized interest
(1,246
)
 
(1,302
)
 
(5,243
)
 
(5,245
)
Allowance for borrowed funds used during construction
(1,684
)
 
(1,623
)
 
(6,116
)
 
(6,043
)
 
11,822

 
11,820

 
47,714

 
45,516

Income before income taxes
6,088

 
10,949

 
127,377

 
144,653

Income tax expense
1,473

 
3,315

 
41,813

 
49,517

Net income
$
4,615

 
$
7,634

 
$
85,564

 
$
95,136

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.11

 
$
0.19

 
$
2.13

 
$
2.37

 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.11

 
$
0.19

 
$
2.12

 
$
2.37

 
 
 
 
 
 
 
 
Dividends declared per share of common stock
$
0.265

 
$
0.25

 
$
1.06

 
$
1.00

Weighted average number of shares outstanding
40,149,083

 
40,078,061

 
40,132,106

 
40,015,380

Weighted average number of shares and dilutive potential shares outstanding
40,149,083

 
40,078,061

 
40,144,159

 
40,074,820


  See accompanying notes to financial statements.








 

 
3
 
Table of Contents

EL PASO ELECTRIC COMPANY
STATEMENTS OF COMPREHENSIVE OPERATIONS
(Unaudited)
(In thousands)
 
 
Three Months Ended
 
Twelve Months Ended
 
March 31,
 
March 31,
 
2014
 
2013
 
2014
 
2013
Net income
$
4,615

 
$
7,634

 
$
85,564

 
$
95,136

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrecognized pension and postretirement benefit costs:
 
 
 
 
 
 
 
Net gain (loss) arising during period
19,700

 
—

 
102,664

 
(2,109
)
Prior service benefit
—

 
—

 
97

 
—

Reclassification adjustments included in net income for amortization of:
 
 
 
 
 
 
 
Prior service benefit
(1,459
)
 
(1,400
)
 
(5,619
)
 
(5,719
)
Net loss
1,123

 
2,675

 
8,920

 
11,521

Net unrealized gains/losses on marketable securities:
 
 
 
 
 
 
 
Net holding gains arising during period
998

 
6,793

 
11,904

 
8,562

Reclassification adjustments for net (gains) losses included in net income
(2,865
)
 
158

 
(3,576
)
 
1,413

Net losses on cash flow hedges:
 
 
 
 
 
 
 
Reclassification adjustment for interest expense included in net income
107

 
101

 
417

 
392

Total other comprehensive income before income taxes
17,604

 
8,327

 
114,807

 
14,060

Income tax benefit (expense) related to items of other comprehensive income (loss):
 
 
 
 
 
 
 
Unrecognized pension and postretirement benefit costs
(7,422
)
 
(570
)
 
(40,418
)
 
(1,479
)
Net unrealized losses (gains) on marketable securities
357

 
(1,287
)
 
(1,456
)
 
(2,166
)
Losses on cash flow hedges
(92
)
 
(52
)
 
(208
)
 
(138
)
Total income tax expense
(7,157
)
 
(1,909
)
 
(42,082
)
 
(3,783
)
Other comprehensive income, net of tax
10,447

 
6,418

 
72,725

 
10,277

Comprehensive income
$
15,062

 
$
14,052

 
$
158,289

 
$
105,413

See accompanying notes to financial statements.

 
4
 
Table of Contents

EL PASO ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
Three Months Ended
 
March 31,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
4,615

 
$
7,634

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of electric plant in service
20,568

 
19,368

Amortization of nuclear fuel
11,476

 
11,510

Deferred income taxes, net
761

 
3,103

Allowance for equity funds used during construction
(2,906
)
 
(2,663
)
Other amortization and accretion
4,141

 
4,081

Gain on sale of assets
(1,499
)
 
—

Other operating activities
(2,811
)
 
179

Change in:
 
 
 
Accounts receivable
6,600

 
(3,645
)
Inventories
525

 
(1,220
)
Net overcollection of fuel revenues
2,011

 
3,844

Prepayments and other
(2,968
)
 
(3,519
)
Accounts payable
(8,958
)
 
(18,585
)
Taxes accrued
(379
)
 
(866
)
Other current liabilities
1,673

 
2,004

Deferred charges and credits
(1,537
)
 
(13,492
)
Net cash provided by operating activities
31,312

 
7,733

Cash flows from investing activities:
 
 
 
Cash additions to utility property, plant and equipment
(48,255
)
 
(55,406
)
Cash additions to nuclear fuel
(11,822
)
 
(9,888
)
Capitalized interest and AFUDC:
 
 
 
Utility property, plant and equipment
(4,590
)
 
(4,286
)
Nuclear fuel
(1,246
)
 
(1,302
)
Allowance for equity funds used during construction
2,906

 
2,663

Decommissioning trust funds:
 
 
 
Purchases, including funding of $1.1 million
(31,242
)
 
(13,378
)
Sales and maturities
28,827

 
10,907

Proceeds from sale of assets
1,679

 
—

Other investing activities
375

 
3,285

Net cash used for investing activities
(63,368
)
 
(67,405
)
Cash flows from financing activities:
 
 
 
Dividends paid
(10,676
)
 
(10,050
)
Borrowings under the revolving credit facility:
 
 
 
Proceeds
51,563

 
12,586

Payments
(19,964
)
 
(9,702
)
Other financing activities
(1,067
)
 
(544
)
Net cash provided by (used for) financing activities
19,856

 
(7,710
)
Net decrease in cash and cash equivalents
(12,200
)
 
(67,382
)
Cash and cash equivalents at beginning of period
25,592

 
111,057

Cash and cash equivalents at end of period
$
13,392

 
$
43,675

See accompanying notes to financial statements.

 
5
 
Table of Contents

EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)

A. Principles of Preparation
These condensed financial statements should be read in conjunction with the financial statements and notes thereto in the Annual Report of El Paso Electric Company on Form 10-K for the year ended December 31, 2013 (the “ 2013 Form 10-K”). Capitalized terms used in this report and not defined herein have the meaning ascribed to such terms in the 2013 Form 10-K. In the opinion of the Company’s management, the accompanying financial statements contain all adjustments necessary to present fairly the financial position of the Company at March 31, 2014 and December 31, 2013 ; the results of its operations and comprehensive operations for the three and twelve months ended March 31, 2014 and 2013 ; and its cash flows for the three months ended March 31, 2014 and 2013 . The results of operations and comprehensive operations and cash flows for the three months ended March 31, 2014 are not necessarily indicative of the results to be expected for the full calendar year.
Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), certain financial information has been condensed and certain footnote disclosures have been omitted. Such information and disclosures are normally included in financial statements prepared in accordance with generally accepted accounting principles.
Use of Estimates . The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenues . Revenues related to the sale of electricity are generally recorded when service is rendered or electricity is delivered to customers. The billing of electricity sales to retail customers is based on the reading of their meters, which occurs on a systematic basis throughout the month. Unbilled revenues are estimated based on monthly generation volumes and by applying an average revenue/kWh to the number of estimated kWhs delivered but not billed. Accounts receivable included accrued unbilled revenues of $17.7 million at March 31, 2014 and $19.8 million at December 31, 2013 . The Company presents revenues net of sales taxes in its statements of operations.

Supplemental Cash Flow Disclosures (in thousands)
 
 
 
 
 
Three Months Ended
 
 
March 31,
 
 
2014
 
2013
Cash paid (received) for:
 
 
 
 
Interest on long-term debt and borrowing under the revolving credit facility
$
10,174

 
$
9,893

 
Income tax refund, net
(767
)
 
(3,088
)
Non-cash financing activities:
 
 
 
 
Grants of restricted shares of common stock
1,197

 
929

 
Issuance of performance shares
—

 
849


New Accounting Standards. In July 2013, the FASB issued new guidance (ASU 2013-11, Income Taxes (Topic 740)) to eliminate the diversity in the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 requires an entity to present an unrecognized tax benefit in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except in certain circumstances when it would be reflected as a liability. ASU 2013-11 is effective prospectively to all unrecognized tax benefits that exist for reporting periods beginning after December 15, 2013 and early adoption is permitted. Retrospective application is also permitted. The Company implemented ASU 2013-11 in the first quarter of 2014 on a prospective basis. This ASU did not have a significant impact on the Company's statement of operations or statement of cash flows.



 
6
 
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)


B. Accumulated Other Comprehensive Income (Loss)
       Changes in Accumulated Other Comprehensive Income (Loss) (net of tax) by component which are presented below (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2014
 
Three Months Ended March 31, 2013
 
 
 
Unrecognized Pension and Postretirement Benefit Costs
 
Net Unrealized Gains (Losses) on Marketable Securities
 
Net Losses on Cash Flow Hedges
 
Accumulated Other Comprehensive Income (Loss)
 
Unrecognized Pension and Postretirement Benefit Costs
 
Net Unrealized Gains (Losses) on Marketable Securities
 
Net Losses on Cash Flow Hedges
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
(21,330
)
 
$
36,240

 
$
(12,298
)
 
$
2,612

 
$
(75,737
)
 
$
22,194

 
$
(12,541
)
 
$
(66,084
)
 
Other comprehensive income before reclassifications
12,147

 
799

 
—

 
12,946

 
—

 
5,543

 
—

 
5,543

 
Amounts reclassified from accumulated other comprehensive income (loss)
(205
)
 
(2,309
)
 
15

 
(2,499
)
 
705

 
121

 
49

 
875

Balance at end of period
$
(9,388
)
 
$
34,730

 
$
(12,283
)
 
$
13,059

 
$
(75,032
)
 
$
27,858

 
$
(12,492
)
 
$
(59,666
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Twelve Months Ended March 31, 2014
 
Twelve Months Ended March 31, 2013
 
 
 
Unrecognized Pension and Postretirement Benefit Costs
 
Net Unrealized Gains (Losses) on Marketable Securities
 
Net Losses on Cash Flow Hedges
 
Accumulated Other Comprehensive Income (Loss)
 
Unrecognized Pension and Postretirement Benefit Costs
 
Net Unrealized Gains (Losses) on Marketable Securities
 
Net Losses on Cash Flow Hedges
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
(75,032
)
 
$
27,858

 
$
(12,492
)
 
$
(59,666
)
 
$
(77,246
)
 
$
20,049

 
$
(12,746
)
 
$
(69,943
)
 
Other comprehensive income (loss) before reclassifications
63,599

 
9,738

 
—

 
73,337

 
(1,264
)
 
6,695

 
—

 
5,431

 
Amounts reclassified from accumulated other comprehensive income (loss)
2,045

 
(2,866
)
 
209

 
(612
)
 
3,478

 
1,114

 
254

 
4,846

Balance at end of period
$
(9,388
)
 
$
34,730

 
$
(12,283
)
 
$
13,059

 
$
(75,032
)
 
$
27,858

 
$
(12,492
)
 
$
(59,666
)

 
7
 
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)


Amounts reclassified from accumulated other comprehensive income (loss) for the three and twelve months ended March 31, 2014 and 2013 are as follows ( in thousands):

Details about Accumulated Other Comprehensive Income (Loss) Components
 
Three Months Ended March 31,
 
Twelve Months Ended March 31,
 
Affected Line Item in the Statement of Operations
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization of pension and postretirement benefit costs:
 
 
 
 
 
 
 
 
 
 
 
Prior service benefit
 
$
1,459

 
1,400

 
$
5,619

 
$
5,719

 
(a)
 
Net loss
 
(1,123
)
 
(2,675
)
 
(8,920
)
 
(11,521
)
 
(a)
 
 
 
 
336

 
(1,275
)
 
(3,301
)
 
(5,802
)
 
(a)
 
Income tax effect
(131
)
 
570

 
1,256

 
2,324

 
 
 
 
 
 
205

 
(705
)
 
(2,045
)
 
(3,478
)
 
(a)
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
Net realized gain (loss) on sale of securities
 
2,865

 
(158
)
 
3,576

 
(934
)
 
Investment and interest income, net
 
Unrealized losses on available-for-sale securities included in pre-tax income
 
—

 
—

 
—

 
(479
)
 
Investment and interest income, net
 
 
 
 
2,865

 
(158
)
 
3,576

 
(1,413
)
 
Income before income taxes
 
 
 
 
(556
)
 
37

 
(710
)
 
299

 
Income tax expense
 
 
 
 
2,309

 
(121
)
 
2,866

 
(1,114
)
 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss on cash flow hedge:
 
 
 
 
 
 
 
 
 
 
 
Amortization of loss
 
(107
)
 
(101
)
 
(417
)
 
(392
)
 
Interest on long-term debt and revolving credit facility
 
 
 
 
(107
)
 
(101
)
 
(417
)
 
(392
)
 
Income before income taxes
 
 
 
 
92

 
52

 
208

 
138

 
Income tax expense
 
 
 
 
(15
)
 
(49
)
 
(209
)
 
(254
)
 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications
 
$
2,499

 
$
(875
)
 
$
612

 
$
(4,846
)
 
 
 
 
(a) These items are included in the computation of net periodic benefit cost. See Note H, Employee Benefits, for additional information.







 
8
 
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)


C. Regulation
General
The rates and services of the Company are regulated by incorporated municipalities in Texas, the PUCT, the NMPRC, and the FERC. The PUCT and the NMPRC have jurisdiction to review municipal orders, ordinances and utility agreements regarding rates and services within their respective states and over certain other activities of the Company. The FERC has jurisdiction over the Company's wholesale (sales for resale) transactions, transmission service and compliance with federally-mandated reliability standards. The decisions of the PUCT, NMPRC and the FERC are subject to judicial review.

Texas Regulatory Matters

2012 Texas Retail Rate Settlement . On April 17, 2012, the El Paso City Council approved the settlement of the Company's 2012 Texas retail rate case and fuel reconciliation in PUCT Docket No. 40094. The PUCT issued a final order approving the settlement on May 23, 2012 and the rates were effective as of May 1, 2012. As part of the settlement, the Company agreed to submit a future fuel reconciliation request covering the period beginning July 1, 2009 and ending no later than June 30, 2013 by December 31, 2013 or as part of its next rate case, if earlier. The Company filed a fuel reconciliation request covering the period July 1, 2009 through March 31, 2013, as later discussed. The settlement also provided for the continuation of the energy efficiency cost recovery factor and the military base discount recovery factor. Both of these surcharges require annual filings to reconcile and revise the recovery factors.     

Fuel and Purchased Power Costs. The Company's actual fuel costs, including purchased power energy costs, are recovered from customers through a fixed fuel factor. The PUCT has adopted a fuel cost recovery rule ( the "Texas Fuel Rule") that allows the Company to seek periodic adjustments to its fixed fuel factor. The Company can seek to revise its fixed fuel factor based upon the approved formula at least four months after its last revision except in the month of December. On September 9, 2013, the Company filed a request, which was assigned Docket No. 41803, to increase its fixed fuel factor by $16.9 million or 12.2% annually, pursuant to its approved formula. The revised fixed fuel factor reflected increases in prices for natural gas. The increase in the fixed fuel factor was approved on September 23, 2013 and was effective with October 2013 billings. On April 15, 2014, the Company filed a request, which was assigned Docket No. 42384, to increase its fixed fuel factor by $10.7 million or 6.9% annually, pursuant to its approved formula. The revised fixed fuel factor reflects further increases in prices for natural gas. The increase in the fixed fuel factor received interim approval on April 28, 2014 and was effective with May 2014 billings.
Fuel Reconciliation Proceeding . On September 27, 2013, the Company filed an application with the PUCT, designated as Docket No. 41852, to reconcile $545.3 million of fuel and purchased power expenses incurred during the 45 -month period from July 1, 2009 through March 31, 2013. The fuel reconciliation requests to recover $3.4 million of rewards for Palo Verde operations. Hearings in the fuel reconciliation have been suspended as the parties in the case seek to negotiate a settlement. The Company is unable to predict the outcome of these settlement negotiations. A final order must be issued by September 26, 2014.
Montana Power Station Approvals . The Company has received a Certificate of Convenience and Necessity ("CCN") authorization from the PUCT to construct the first two (of four ) units of the Montana Power Station ("the MPS"). The Company also had to obtain air permits from state and federal regulatory agencies before it could begin construction. On January 22, 2014, the Texas Commission on Environmental Quality ("TCEQ") issued the required permit. The U.S. Environmental Protection Agency ("EPA") issued a permit for greenhouse gas ("GHG") on March 25, 2014. This permit became final on April 25, 2014 when no appeals were filed prior to the expiration of the period for appeal.
On September 6, 2013, the Company filed an application with the PUCT for issuance of a CCN to construct, own and operate two additional 88 MW natural gas-fired generating units designated as the MPS Units 3 and 4 in El Paso County, Texas. The case has been designated PUCT Docket No. 41763. Hearings in this case were held in February 2014. In accordance with PUCT rules, the final order must be issued by September 5, 2014.
The Company filed three transmission line CCN applications with the PUCT as part of the MPS Project:
•
MPS to Caliente: a 115 -kV transmission line from the MPS to the existing Caliente Substation in east El Paso. (PUCT Docket No. 41360)
•
MPS In & Out: a 115 -kV transmission line from the MPS to intersect with the existing Caliente - Coyote 115 -kV transmission line. (PUCT Docket No. 41359)
•
MPS to Montwood: a 115 -kV transmission line from the MPS to the existing Montwood Substation in east El Paso. (PUCT Docket No. 41809)

 
9
 
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)



The transmission CCN filings for both the MPS to Caliente and the MPS In & Out were filed on April 15, 2013, and the transmission CCN filing for the MPS to Montwood was filed on September 24, 2013. The Company is requesting to build these transmission lines to connect the new MPS to the electrical grid in order to meet expected customer growth and electric demand and to improve system reliability. A final order approving a unanimous settlement in the MPS to Caliente transmission CCN filing was received on March 10, 2014. Hearings on the MPS to Montwood and MPS In & Out transmission line CCN cases have been suspended as the parties in the cases seek to negotiate settlements. The Company is unable to predict the outcome of these settlement negotiations. A final order is expected in the fall of 2014.
Other Required Approvals . The Company has obtained other required approvals for recovery of fuel costs through fixed fuel factors, other tariffs and approvals as required by the Public Utility Regulatory Act (the "PURA") and the PUCT.
New Mexico Regulatory Matters
2009 New Mexico Stipulation. On December 10, 2009, the NMPRC issued a final order conditionally approving the stipulated rates in NMPRC Case No. 09-00171-UT. The stipulated rates went into effect with January 2010 bills. The stipulated rates provide for an Efficient Use of Energy Factor Rate Rider to recover energy efficiency expenditures which requires an annual filing and approval of the related incentives and adjustments to the recovery factors.
Fuel and purchased power costs in New Mexico are recovered through a Fuel and Purchased Power Cost Adjustment Clause (the "FPPCAC"). On January 8, 2014, the NMPRC approved the continuation of the FPPCAC without modification in NMPRC Case No. 13-00380-UT. The Company recovers its investment in Palo Verde Unit 3 in New Mexico through the FPPCAC as purchased power using a proxy market price approved in the 2009 New Mexico rate stipulation.

Montana Power Station Approvals. The Company has received a CCN authorization from the NMPRC to construct the first two (of four ) units of the MPS. As discussed above, the Company also had to obtain air permits from the TCEQ and EPA before it could begin construction. On September 6, 2013, the Company filed an application with the NMPRC for issuance of a CCN to construct, own and operate two additional 88 MW natural gas-fired generating units designated as the MPS Units 3 and 4 in El Paso County, Texas. The case has been designated NMPRC Case No. 13-00297-UT. No protests to the Company's application were filed and the hearing examiner issued a recommended decision to approve the Company's application on February 20, 2014. A final order is expected in the second quarter of 2014.

Revolving Credit Facility, Issuance of Long-Term Debt and Guarantee of Debt. On October 30, 2013, the Company received approval in NMPRC Case No. 13-00317-UT to amend its current $300 million Revolving Credit Facility ("RCF") to include an option, subject to lender's approval, to expand the amount of the potential borrowings available under the facility to $400 million and extend the maturity date by up to four years; issue up to $300 million in new long-term debt; and to guarantee the issuance of up to $50 million of new debt by Rio Grande Resources Trust ("RGRT") to finance future purchases of nuclear fuel and to refinance existing debt obligations related to the financing of purchases of nuclear fuel.

On January 14, 2014, the Company and RGRT entered into a second amended and restated credit agreement related to the RCF with JP Morgan Chase Bank, N.A., as administrative agent and issuing bank, and Union Bank, N.A., as syndication agent, and various lending banks party thereto. Under the terms of the agreement, the Company has available $300 million and the ability to increase the RCF by up to $100 million (up to a total of $400 million ) upon the satisfaction of certain conditions, more fully set forth in the agreement, including obtaining commitments from lenders or third party financial institutions. The RCF has a term ending January 2019 . The Company may extend the maturity date up to two times, in each case for an additional one year period upon the satisfaction of certain conditions.

Other Required Approvals . The Company has obtained other required approvals for other tariffs, securities transactions, long-term resource plans, recovery of energy efficiency costs through a base rate rider and other approvals as required by the NMPRC.
Federal Regulatory Matters
Public Service Company of New Mexico's ( " PNM " ) 2010 Transmission Rate Case. On October 27, 2010, PNM filed a Notice of Transmission Rate Change for transmission delivery services provided by PNM. These rates went into effect on June 1, 2011. The Company takes transmission service from PNM. On January 2, 2013, the FERC issued a letter order approving a unanimous stipulation and agreement. Pursuant to the stipulation, on January 31, 2013, PNM refunded $1.9 million , for amounts

 
10
 
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)


that PNM collected since June 1, 2011, in excess of settlement rates. This amount was recorded in the fourth quarter of 2012 as a reduction of transmission expense.
Revolving Credit Facility, Issuance of Long-Term Debt and Guarantee of Debt. On November 15, 2013, the FERC issued an order in Docket No. ES13-59-000 approving the Company's filing to amend its current $300 million RCF to include an option, subject to lender's approval, to expand the amount of the potential borrowings available under the facility to $400 million and extend the maturity date by up to four years; issue up to $300 million in new long-term debt; and to guarantee the issuance of up to $50 million of new debt by RGRT to finance future purchases of nuclear fuel and to refinance existing debt obligations related to the purchase of nuclear fuel. As noted above, on January 14, 2014, the Company and RGRT entered into a second amended and restated credit agreement related to the RCF.

Other Required Approvals. The Company has obtained required approvals for rates and tariffs, securities transactions and other approvals as required by the FERC.




 
11
 
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)


D. Common Stock
Dividend Policy. The Company paid $10.7 million and $10.1 million in quarterly cash dividends during the three months ended March 31, 2014 and 2013 , respectively. The Company paid a total of $42.7 million and $40.1 million in quarterly cash dividends during the twelve months ended March 31, 2014 and 2013 , respectively.
Basic and Diluted Earnings Per Share . The basic and diluted earnings per share are presented below (in thousands except for share data):
 
Three Months Ended March 31,
 
Twelve Months Ended March 31,
 
2014
 
2013
 
2014
 
2013
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic number of common shares outstanding
40,149,083

 
40,078,061

 
40,132,106

 
40,015,380

Dilutive effect of unvested performance awards
—

 
—

 
12,053

 
50,206

Dilutive effect of stock options
—

 
—

 
—

 
9,234

Diluted number of common shares outstanding
40,149,083

 
40,078,061

 
40,144,159

 
40,074,820

Basic net income per common share:
 
 
 
 
 
 
 
Net income
$
4,615

 
$
7,634

 
$
85,564

 
$
95,136

Income allocated to participating restricted stock
(36
)
 
(26
)
 
(260
)
 
(248
)
Net income available to common shareholders
$
4,579

 
$
7,608

 
$
85,304

 
$
94,888

Diluted net income per common share:
 
 
 
 
 
 
 
Net income
$
4,615

 
$
7,634

 
$
85,564

 
$
95,136

Income reallocated to participating restricted stock
(36
)
 
(26
)
 
(260
)
 
(247
)
Net income available to common shareholders
$
4,579

 
$
7,608

 
$
85,304

 
$
94,889

Basic net income per common share:
 
 
 
 
 
 
 
Distributed earnings
$
0.265

 
$
0.25

 
$
1.06

 
$
1.00

Undistributed earnings
(0.155
)
 
(0.06
)
 
1.07

 
1.37

Basic net income per common share
$
0.110

 
$
0.19

 
$
2.13

 
$
2.37

Diluted net income per common share:
 
 
 
 
 
 
 
Distributed earnings
$
0.265

 
$
0.25

 
$
1.06

 
$
1.00

Undistributed earnings
(0.155
)
 
(0.06
)
 
1.06

 
1.37

Diluted net income per common share
$
0.110

 
$
0.19

 
$
2.12

 
$
2.37

The amount of restricted stock awards and performance shares at 100% performance level excluded from the calculation of the diluted number of common shares outstanding because their effect was antidilutive is presented below:

 
Three Months Ended
 
Twelve Months Ended
 
March 31,
 
March 31,
 
2014
 
2013
 
2014
 
2013
Restricted stock awards
79,413

 
56,101

 
57,017

 
44,253

Performance shares (a)
128,508

 
124,997

 
90,384

 
78,112

____________________
(a)
Certain performance shares were excluded from the computation of diluted earnings per share as no payouts would have been required based upon performance at the end of each corresponding period.

 
12
 
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)



E. Income Taxes
The Company files income tax returns in the United States ("U.S.") federal jurisdiction and in the states of Texas, New Mexico and Arizona. The Company is no longer subject to tax examination by the taxing authorities in the federal and New Mexico jurisdictions for years prior to 2009 and in Arizona for years prior to 2008. The Company is currently under audit in Texas for tax years 2007 through 2011. The Company reached a settlement with the Arizona Department of Revenue in March 2014 in their audit of income tax returns for the years 1998 through 2007 which did not have a material effect on income tax expense.
For the three months ended March 31, 2014 and 2013 , the Company’s effective tax rate was 24.2% and 30.3% , respectively. For the twelve months ended March 31, 2014 and 2013 , the Company's effective tax rate was 32.8% and 34.2% , respectively. The Company's effective tax rate for the three months ended March 31, 2014 differs from the federal statutory tax rate of 35.0% primarily due to capital gains in the decommissioning trusts realized in the first quarter of 2014, which are taxed at a federal rate of 20.0% , the allowance for equity funds used during construction and state income taxes. The Company's effective tax rate for the three months ended March 31, 2013 and the twelve months ended March 31, 2014 and 2013 differs from the federal statutory tax rate of 35.0% primarily due to the allowance for equity funds used during construction and state income taxes.

F. Commitments, Contingencies and Uncertainties
For a full discussion of commitments and contingencies, see Note K of Notes to Financial Statements in the 2013 Form 10-K. In addition, see Note C above and Notes C and E of Notes to Financial Statements in the 2013 Form 10-K regarding matters related to wholesale power sales contracts and transmission contracts subject to regulation and Palo Verde, including decommissioning, spent nuclear fuel and waste disposal, and liability and insurance matters.
Power Purchase and Sale Contracts
To supplement its own generation and operating reserves, and to meet required renewable portfolio standards, the Company engages in firm power purchase arrangements which may vary in duration and amount based on evaluation of the Company’s resource needs, the economics of the transactions, and specific renewable portfolio requirements. For a full discussion of power purchase and sale contracts that the Company has entered into with various counterparties, see Note K of Notes to Financial Statements in the 2013 Form 10-K. In addition the 50 MW Macho Springs solar photovoltaic project located in Luna County, New Mexico, is projected to begin commercial operation before June 2014 .
Environmental Matters
General. The Company is subject to extensive laws, regulations and permit requirements with respect to air and greenhouse gas emissions, water discharges, soil and water quality, waste management and disposal, natural resources and other environmental matters by federal, state, regional, tribal and local authorities. Failure to comply with such laws, regulations and requirements can result in actions by authorities or other third parties that might seek to impose on the Company administrative, civil and/or criminal penalties or other sanctions. In addition, releases of pollutants or contaminants into the environment can result in costly cleanup liabilities. These laws, regulations and requirements are subject to change through modification or reinterpretation, or the introduction of new laws and regulations and, as a result, the Company may face additional capital and operating costs to comply. For a full discussion of certain key environmental issues, laws and regulations facing the Company see Note K of Notes to Financial Statements in the 2013 Form 10-K.
Clean Air Interstate Rule/Cross State Air Pollution Rule . The EPA promulgated the Cross-State Air Pollution Rule ("CSAPR") in August 2011, which rule involves requirements to limit emissions of nitrogen oxides ("NOx") and sulfur dioxide ("SO2") from certain of the Company's power plants in Texas and/or purchase allowances representing other parties' emissions reductions. CSAPR was intended to replace the EPA's 2005 Clean Air Interstate Rule ("CAIR"). While the U.S. Court of Appeals for the District of Columbia Circuit ("D.C. Court of Appeals") vacated CSAPR in August 2012 and allowed CAIR to stand until the EPA issued a proper replacement, on April 29, 2014, the U.S. Supreme Court upheld CSAPR, remanding certain portions of CSAPR to the D.C. Court of Appeals for consideration. The Company will evaluate what impact, if any, the D.C. Court of Appeals subsequent holdings on remand will have on its operations.
Other Laws and Regulations and Risks. The Company intends to cease its participation in Four Corners Generating Station ("Four Corners") at the expiration of the 50-year participation agreement in 2016 . The Company believes that it has better economic and cleaner alternatives for serving the energy needs of its customers than coal-fired generation, which is subject to extensive regulation and litigation. For example, as a result of Arizona Public Service Company's ("APS") recent Best Available Retrofit

 
13
 
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)


Technology Federal Implementation Plan compliance strategy notification to the EPA, Four Corners is required to install expensive pollution control equipment in order to continue operation in the future. The Company's share of the cost of these controls is currently estimated by APS to be approximately $39 million if the Company were to extend its participation in the plant. In addition, the EPA has entered into a consent decree which would require it to issue its final rulemaking regarding the regulation of coal combustion residuals ("CCR") under the federal Resource, Conservation and Recovery Act by December 19, 2014. Once issued, the Company may be required to incur significant costs to address CCRs either generated in the past and disposed of at or from Four Corners, as well as CCRs generated in connection with the ongoing operations of Four Corners. Further, assured supplies of water are important for the Company's operations and assets, including Four Corners. Four Corners is located in a region that has been experiencing drought conditions which could affect the plant's water supply. Four Corners has accordingly been involved in negotiations and proceedings with third parties relating to water supply issues. The drought conditions and related negotiations and proceedings could adversely affect the amount of power available, or the price thereof, from Four Corners. The Company is negotiating with APS on the disposition of its ownership interest of Four Corners to allow the other participants to pursue a life extension of the Four Corners plant.
Climate Change. On June 25, 2013, President Obama set forth his plan to address climate change. He reiterated a goal of reducing greenhouse gas emissions ("GHG") "in the range of 17 percent " below 2005 levels by 2020. The plan included a variety of executive actions, including future regulatory measures to reduce carbon emissions from power plants. In a White House memorandum of the same date, the President directed the EPA to issue a new proposal for GHG rulemaking addressing new power plants by September 20, 2013, and a rule for existing power plants by June 1, 2014. The formal proposal for new power plants was published in the Federal Register on January 8, 2014. The Company continues its review of the new proposal and plans to participate in the post-publication comment period (with extension) ending May 9, 2014 . Given the very significant remaining uncertainties regarding these rules, the Company believes it is impossible to meaningfully quantify the costs of these potential requirements at present.
Environmental Litigation and Investigations . Since 2009, the EPA and certain environmental organizations have been scrutinizing, and in some cases, have filed lawsuits, relating to certain air emissions and air permitting matters related to Four Corners. In particular, since July 2011, the U.S. Department of Justice (the "DOJ"), on behalf of the EPA, and APS have been engaged in substantive settlement negotiations in an effort to resolve the pending matters. The allegations being addressed through settlement negotiations are that APS failed to obtain the necessary permits and install the controls necessary under the U.S. Clean Air Act ("CAA") to reduce SO2, NOx, and particular matter ("PM"), and that defendants failed to obtain an operating permit under Title V of the CAA that reflects applicable requirements imposed by law. In March 2012, the DOJ provided APS with a draft consent decree to settle the EPA matter, which decree contains specific provisions for the reduction and control of NOx, SO2, and PM, as well as provisions for a civil penalty, and expenditures on environmental mitigation projects with an emphasis on projects that address alleged harm to the Navajo Nation. Settlement discussions are on-going and the Company is unable to predict the outcome of these settlement negotiations. The Company has accrued a total of $0.5 million as a loss contingency related to this matter.
The Company received notice that Earthjustice filed a lawsuit in the United States District Court for New Mexico on October 4, 2011 for alleged violations of the Prevention of Significant Deterioration ("PSD") provisions of the CAA related to Four Corners. On January 6, 2012, Earthjustice filed a First Amended Complaint adding claims for violations of the CAA's New Source Performance Standards ("NSPS") program. Among other things, the plaintiffs seek to have the court enjoin operations at Four Corners until APS applies for and obtains any required PSD permits and complies with the referenced NSPS program. The plaintiffs further request the court to order the payment of civil penalties, including a beneficial mitigation project. On April 2, 2012, APS and the other Four Corners' participants filed motions to dismiss with the court. The case is being held in abeyance while the parties seek to negotiate a settlement. On March 30, 2013, upon joint motion of the parties, the court issued an order deeming the motions to dismiss withdrawn without prejudice during pendency of the stay. At such time as the stay is lifted, APS, the Company and the other Four Corners participants may reinstate the motions to dismiss. On April 25, 2014, the stay was extended until May 15, 2014. The Company is unable to predict the outcome of this litigation.
New Mexico Tax Matter Related to Coal Supplied to Four Corners
On May 23, 2013, the New Mexico Taxation and Revenue Department issued a notice of assessment for coal severance surtax, penalty, and interest totaling approximately $30 million related to coal supplied under the coal supply agreement for Four Corners (the "Assessment"). The Company's share of the Assessment is approximately $1.5 million . On behalf of the Four Corners participants, the coal supplier made a partial payment of the Assessment and immediately filed a refund claim with respect to that partial payment in August 2013. The New Mexico Taxation and Revenue Department denied the refund claim. On December 19, 2013, the coal supplier and APS, on its own behalf and as operating agent for Four Corners, filed complaints with the New

 
14
 
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)


Mexico District Court contesting both the validity of the Assessment and the refund claim denial. APS believes the Assessment and the refund claim denial are without merit. The Company cannot predict the timing, results, or potential impacts of the outcome of this litigation.

G. Litigation
The Company is a party to various legal actions. In many of these matters, the Company has excess casualty liability insurance that covers the various claims, actions and complaints. Based on a review of these claims and applicable insurance coverage, the Company believes that none of these claims will have a material adverse effect on the financial position, results of operations or cash flows of the Company. See Note C above and Note C of the Notes to Financial Statements in the 2013 Form 10-K for discussion of the effects of government legislation and regulation on the Company.

H. Employee Benefits
Retirement Plans
The net periodic benefit cost recognized for the three and twelve months ended March 31, 2014 and 2013 is made up of the components listed below as determined using the projected unit credit actuarial cost method (in thousands):
 
 
Three Months Ended
 
Twelve Months Ended
 
March 31,
 
March 31,
 
2014
 
2013
 
2014
 
2013
Components of net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
2,173

 
$
2,400

 
$
9,100

 
$
9,004

Interest cost
3,870

 
3,400

 
14,084

 
13,579

Expected return on plan assets
(4,680
)
 
(4,275
)
 
(17,513
)
 
(15,108
)
Amortization of:
 
 
 
 
 
 
 
Net loss
1,773

 
2,675

 
10,196

 
11,066

Prior service (benefit) cost
(259
)
 
25

 
(187
)
 
113

Net periodic benefit cost
$
2,877

 
$
4,225

 
$
15,680

 
$
18,654

During the three months ended March 31, 2014 , the Company contributed $3.5 million of its projected $8.7 million 2014 annual contribution to its retirement plans.
During the quarter ended March 31, 2014 , the Company implemented certain amendments to the Retirement Income Plan and Excess Benefit Plan. In the first quarter of 2014, the Company offered a cash balance pension plan as an alternative to its current final average pay pension plan for employees hired prior to January 1, 2014. The cash balance pension plan also included an enhanced employer matching contribution to the employee's respective 401(k) Defined Contribution Plan. The revisions in the benefit plans were effective April 1, 2014. As a result of these actions, the Company remeasured the assets and liabilities of the retirement plans based on actuarially determined estimates, using the end of alternative choice date of February 28, 2014 as the remeasurement date. The discount rate used to remeasure the benefit obligation at February 28, 2014 was 4.6% for the Retirement Income Plan and 4.5% for the Excess Benefit Plan, compared to 4.9% for both plans at December 31, 2013. As a result of the changes described above, the benefit obligation of the affected plans decreased $19.7 million , accumulated other comprehensive income before income taxes increased $19.7 million , estimated future benefit payments from 2014 through 2018 increased $17.2 million compared to the previous estimates. The 2014 net periodic benefit cost is estimated to decrease by $8.4 million compared to the net periodic benefit cost incurred in 2013 due to the changes described above and revisions to actuarial assumptions.

 
15
 
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)


Other Postretirement Benefits
The net periodic benefit cost recognized for the three and twelve months ended March 31, 2014 and 2013 is made up of the components listed below (in thousands):  
 
Three Months Ended
 
Twelve Months Ended
 
March 31,
 
March 31,
 
2014
 
2013
 
2014
 
2013
Components of net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
700

 
$
1,100

 
$
3,443

 
$
4,408

Interest cost
1,125

 
1,375

 
4,906

 
5,611

Expected return on plan assets
(525
)
 
(475
)
 
(2,001
)
 
(1,754
)
Amortization of:
 
 
 
 
 
 
 
Prior service benefit
(1,200
)
 
(1,425
)
 
(5,432
)
 
(5,832
)
Net (gain) loss
(650
)
 
—

 
(1,276
)
 
455

Net periodic benefit cost (benefit)
$
(550
)
 
$
575

 
$
(360
)
 
$
2,888


The Company has not contributed to its other postretirement benefits plan during the three months ended March 31, 2014 and does not expect to contribute to its other postretirement benefit plan in 2014.

I. Financial Instruments and Investments
FASB guidance requires the Company to disclose estimated fair values for its financial instruments. The Company has determined that cash and temporary investments, investment in debt securities, accounts receivable, decommissioning trust funds, long-term debt, short-term borrowings under the RCF, accounts payable and customer deposits meet the definition of financial instruments. The carrying amounts of cash and temporary investments, accounts receivable, accounts payable and customer deposits approximate fair value because of the short maturity of these items. Investments in debt securities and decommissioning trust funds are carried at fair value.
Long-Term Debt and Short-Term Borrowings Under the RCF. The fair values of the Company’s long-term debt and short-term borrowings under the RCF are based on estimated market prices for similar issues and are presented below (in thousands):  
 
March 31, 2014
 
December 31, 2013
 
Carrying
Amount
 
Estimated
Fair
Value
 
Carrying
Amount
 
Estimated
Fair
Value
Pollution Control Bonds
$
193,135

 
$
202,897

 
$
193,135

 
$
193,990

Senior Notes
696,508

 
744,856

 
696,485

 
734,515

RGRT Senior Notes (1)
110,000

 
116,560

 
110,000

 
115,850

RCF (1)
45,951

 
45,951

 
14,352

 
14,352

Total
$
1,045,594

 
$
1,110,264

 
$
1,013,972

 
$
1,058,707

_______________  
(1)
Nuclear fuel financing as of March 31, 2014 and December 31, 2013 is funded through the $110 million RGRT Senior Notes and $20.0 million and $14.4 million , respectively under the RCF. As of March 31, 2014 , $26.0 million was outstanding under the RCF for working capital or general corporate purposes. As of December 31, 2013 , no amount was outstanding under the RCF for working capital or general corporate purposes. The interest rate on the Company’s borrowings under the RCF is reset throughout the quarter reflecting current market rates. Consequently, the carrying value approximates fair value.

Marketable Securities. The Company’s marketable securities, included in decommissioning trust funds in the balance sheets, are reported at fair value which was $217.5 million and $214.1 million at March 31, 2014 and December 31, 2013 , respectively. These securities are classified as available for sale under FASB guidance for certain investments in debt and equity securities and are valued using prices and other relevant information generated by market transactions involving identical or comparable securities. The reported fair values include gross unrealized losses on marketable securities whose impairment the Company has deemed to

 
16
 
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)


be temporary. The tables below present the gross unrealized losses and the fair value of these securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):  
 
March 31, 2014
 
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Description of Securities  (1) :
 
 
 
 
 
 
 
 
 
 
 
Federal Agency Mortgage Backed Securities
$
4,667

 
$
(28
)
 
$
2,457

 
$
(170
)
 
$
7,124

 
$
(198
)
U.S. Government Bonds
1,548

 
(1
)
 
16,128

 
(893
)
 
17,676

 
(894
)
Municipal Obligations
6,860

 
(101
)
 
13,038

 
(651
)
 
19,898

 
(752
)
Corporate Obligations
2,734

 
(66
)
 
1,299

 
(44
)
 
4,033

 
(110
)
Total Debt Securities
15,809

 
(196
)
 
32,922

 
(1,758
)
 
48,731

 
(1,954
)
Common Stock
1,614

 
(122
)
 
—

 
—

 
1,614

 
(122
)
Total Temporarily Impaired Securities
$
17,423

 
$
(318
)
 
$
32,922

 
$
(1,758
)
 
$
50,345

 
$
(2,076
)
 
_________________
(1)
Includes approximately 119 securities.
 
December 31, 2013
 
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Description of Securities  (2) :
 
 
 
 
 
 
 
 
 
 
 
Federal Agency Mortgage Backed Securities
$
6,444

 
$
(169
)
 
$
1,421

 
$
(119
)
 
$
7,865

 
$
(288
)
U.S. Government Bonds
8,114

 
(245
)
 
10,866

 
(840
)
 
18,980

 
(1,085
)
Municipal Obligations
12,286

 
(335
)
 
7,782

 
(479
)
 
20,068

 
(814
)
Corporate Obligations
3,284

 
(96
)
 
901

 
(54
)
 
4,185

 
(150
)
Total Debt Securities
30,128

 
(845
)
 
20,970

 
(1,492
)
 
51,098

 
(2,337
)
Common Stock
2,305

 
(126
)
 
—

 
—

 
2,305

 
(126
)
Total Temporarily Impaired Securities
$
32,433

 
$
(971
)
 
$
20,970

 
$
(1,492
)
 
$
53,403

 
$
(2,463
)
 
_________________
(2)
Includes approximately 122 securities.
The Company monitors the length of time the security trades below its cost basis along with the amount and percentage of the unrealized loss in determining if a decline in fair value of marketable securities below recorded cost is considered to be other than temporary. In addition, the Company will research the future prospects of individual securities as necessary. As a result of these factors, as well as the Company’s intent and ability to hold these securities until their market price recovers, these securities are considered temporarily impaired. The Company does not anticipate expending monies held in trust before 2044 or a later period when the Company begins to decommission Palo Verde.
 












 
17
 
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)


The reported fair values also include gross unrealized gains on marketable securities which have not been recognized in the Company’s net income. The table below presents the unrecognized gross unrealized gains and the fair value of these securities, aggregated by investment category (in thousands):  
 
March 31, 2014
 
December 31, 2013
 
Fair
Value
 
Unrealized
Gains
 
Fair
Value
 
Unrealized
Gains
Description of Securities:
 
 
 
 
 
 
 
Federal Agency Mortgage Backed Securities
$
10,276

 
$
489

 
$
9,929

 
$
433

U.S. Government Bonds
9,719

 
180

 
6,258

 
126

Municipal Obligations
10,237

 
528

 
8,783

 
450

Corporate Obligations
9,758

 
649

 
9,188

 
506

Total Debt Securities
39,990

 
1,846

 
34,158

 
1,515

Common Stock
105,835

 
43,402

 
103,808

 
43,145

Common Collective Trust-Equity Funds
16,891

 
235

 
—

 
—

Equity Mutual Funds
—

 
—

 
16,802

 
3,081

Cash and Cash Equivalents
4,448

 
—

 
5,924

 
—

Total
$
167,164

 
$
45,483

 
$
160,692

 
$
47,741

The Company’s marketable securities include investments in municipal, corporate and federal debt obligations. Substantially all of the Company’s mortgage-backed securities, based on contractual maturity, are due in ten years or more. The mortgage-backed securities have an estimated weighted average maturity which generally range from three years to eight years and reflects anticipated future prepayments. The contractual year for maturity of these available-for-sale securities as of March 31, 2014 is as follows (in thousands):  
 
Total
 
2014
 
2015
through
2018
 
2019 through 2023
 
2024 and Beyond
Municipal Debt Obligations
$
30,135

 
$
976

 
$
13,279

 
$
12,562

 
$
3,318

Corporate Debt Obligations
13,791

 
317

 
3,324

 
5,963

 
4,187

U.S. Government Bonds
27,395

 
1,210

 
14,347

 
6,434

 
5,404

The Company recognizes impairment losses on certain of its securities deemed to be other than temporary. In accordance with FASB guidance, these impairment losses are recognized in net income, and a lower cost basis is established for these securities. For the three and twelve months ended March 31, 2014 and 2013 , the Company recognized other than temporary impairment losses on its available-for-sale securities as follows (in thousands):  
 
Three Months Ended
 
Twelve Months Ended
 
March 31,
 
March 31,
 
2014
 
2013
 
2014
 
2013
Unrealized holding losses included in pre-tax income
$
—

 
$
—

 
$
—

 
$
(479
)
 












 
18
 
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)


The Company’s marketable securities in its decommissioning trust funds are sold from time to time and the Company uses the specific identification basis to determine the amount to reclassify out of accumulated other comprehensive income and into net income. The proceeds from the sale of these securities and the related effects on pre-tax income are as follows (in thousands):  
 
Three Months Ended
 
Twelve Months Ended
 
March 31,
 
March 31,
 
2014
 
2013
 
2014
 
2013
Proceeds from sales or maturities of available-for-sale securities
$
28,827

 
$
10,907

 
$
74,067

 
$
89,870

Gross realized gains included in pre-tax income
$
3,014

 
$
39

 
$
3,961

 
$
1,128

Gross realized losses included in pre-tax income
(149
)
 
(197
)
 
(385
)
 
(2,062
)
Gross unrealized losses included in pre-tax income
—

 
—

 
—

 
(479
)
Net gains (losses) in pre-tax income
$
2,865

 
$
(158
)
 
$
3,576

 
$
(1,413
)
Net unrealized holding gains included in accumulated other comprehensive income
$
998

 
$
6,793

 
$
11,904

 
$
8,562

Net (gains) losses reclassified out of accumulated other comprehensive income
(2,865
)
 
158

 
(3,576
)
 
1,413

Net gains (losses) in other comprehensive income
$
(1,867
)
 
$
6,951

 
$
8,328

 
$
9,975

Fair Value Measurements. FASB guidance requires the Company to provide expanded quantitative disclosures for financial assets and liabilities recorded on the balance sheet at fair value. Financial assets carried at fair value include the Company’s decommissioning trust investments and investment in debt securities which are included in deferred charges and other assets on the balance sheets. The Company has no liabilities that are measured at fair value on a recurring basis. The FASB guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
•
Level 1 – Observable inputs that reflect quoted market prices for identical assets and liabilities in active markets. Financial assets utilizing Level 1 inputs include the nuclear decommissioning trust investments in active exchange-traded equity securities, mutual funds and U.S. Treasury securities that are in a highly liquid and active market.
•
Level 2 – Inputs other than quoted market prices included in Level 1 that are observable for the asset or liability either directly or indirectly. Financial assets utilizing Level 2 inputs include the nuclear decommissioning trust investments in fixed income securities. The fair value of these financial instruments is based on evaluated prices that reflect observable market information, such as actual trade information of similar securities, adjusted for observable differences. The Common Collective Trusts are valued using the net asset value ("NAV") provided by the administrator of the fund. The NAV price is quoted on a restrictive market although the underlying investments are traded on active markets.
•
Level 3 – Unobservable inputs using data that is not corroborated by market data and primarily based on internal Company analysis using models and various other analyses. Financial assets utilizing Level 3 inputs include the Company’s investment in debt securities.
The securities in the Company’s decommissioning trust funds are valued using prices and other relevant information generated by market transactions involving identical or comparable securities. FASB guidance identifies this valuation technique as the “market approach” with observable inputs. The Company analyzes available-for-sale securities to determine if losses are other than temporary.




 
19
 
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)


During the first quarter of 2014, the Company sold its nuclear decommissioning trust investments in equity mutual funds, classified as Level 1, and invested those assets in common collective trusts which are classified as Level 2. The fair value of the Company’s decommissioning trust funds and investment in debt securities, at March 31, 2014 and December 31, 2013 , and the level within the three levels of the fair value hierarchy defined by FASB guidance are presented in the table below (in thousands):  
Description of Securities
Fair Value as of March 31, 2014
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Trading Securities:
 
 
 
 
 
 
 
Investments in Debt Securities
$
1,503

 
$
—

 
$
—

 
$
1,503

Available for sale:
 
 
 
 
 
 
 
U.S. Government Bonds
$
27,395

 
$
27,395

 
$
—

 
$
—

Federal Agency Mortgage Backed Securities
17,400

 
—

 
17,400

 
—

Municipal Obligations
30,135

 
—

 
30,135

 
—

Corporate Obligations
13,791

 
—

 
13,791

 
—

Subtotal, Debt Securities
88,721

 
27,395

 
61,326

 
—

Common Stock
107,449

 
107,449

 
—

 
—

Common Collective Trust-Equity Funds
16,891

 
—

 
16,891

 
—

Cash and Cash Equivalents
4,448

 
4,448

 
—

 
—

Total available for sale
$
217,509

 
$
139,292

 
$
78,217

 
$
—

Description of Securities
Fair Value as of December 31, 2013
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Trading Securities:
 
 
 
 
 
 
 
Investments in Debt Securities
$
1,555

 
$
—

 
$
—

 
$
1,555

Available for sale:
 
 
 
 
 
 
 
U.S. Government Bonds
$
25,238

 
$
25,238

 
$
—

 
$
—

Federal Agency Mortgage Backed Securities
17,794

 
—

 
17,794

 
—

Municipal Obligations
28,851

 
—

 
28,851

 
—

Corporate Obligations
13,373

 
—

 
13,373

 
—

Subtotal, Debt Securities
85,256

 
25,238

 
60,018

 
—

Common Stock
106,113

 
106,113

 
—

 
—

Equity Mutual Funds
16,802

 
16,802

 
—

 
—

Cash and Cash Equivalents
5,924

 
5,924

 
—

 
—

Total available for sale
$
214,095

 
$
154,077

 
$
60,018

 
$
—

There were no transfers in or out of Level 1 and Level 2 fair value measurements categories due to changes in observable inputs during the three and twelve month periods ending March 31, 2014 and 2013 . There were no purchases, sales, issuances, and settlements related to the assets in the Level 3 fair value measurement category during the three and twelve months ended March 31, 2014 and 2013 .

 
20
 

Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
El Paso Electric Company:

We have reviewed the balance sheet of El Paso Electric Company as of March 31, 2014 , the related statements of operations, and comprehensive operations, for the three-month and twelve-month periods ended March 31, 2014 and 2013 , and the related statements of cash flows for the three-month periods ended March 31, 2014 and 2013 . These financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the balance sheet of El Paso Electric Company as of December 31, 2013 , and the related statements of operations, comprehensive operations, changes in common stock equity, and cash flows for the year then ended (not presented herein); and in our report dated February 26, 2014 , we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying balance sheet as of December 31, 2013 , is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.

/s/ KPMG LLP
Kansas City, Missouri
May 8, 2014

 
21
 

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The information contained in this Item 2 updates, and should be read in conjunction with, the information set forth in Part II, Item 7 of our 2013 Annual Report on Form 10-K.

FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Quarterly Report on Form 10-Q other than statements of historical information are “forward-looking statements.” The Private Securities Litigation Reform Act of 1995 has established that these statements qualify for safe harbors from liability. Forward-looking statements may include words like we “believe”, “anticipate”, “target”, “expect”, “pro forma”, “estimate”, “intend”, “will”, “is designed to”, “plan” and words of similar meaning. Forward-looking statements describe our future plans, objectives, expectations or goals. Such statements address future events and conditions concerning and include, but are not limited to, such things as:
•
capital expenditures,
•
earnings,
•
liquidity and capital resources,
•
ratemaking/regulatory matters,
•
litigation,
•
accounting matters,
•
possible corporate restructurings, acquisitions and dispositions,
•
compliance with debt and other restrictive covenants,
•
interest rates and dividends,
•
environmental matters,
•
nuclear operations, and
•
the overall economy of our service area.
These forward-looking statements involve known and unknown risks that may cause our actual results in future periods to differ materially from those expressed in any forward-looking statement. Factors that would cause or contribute to such differences include, but are not limited to, such things as:
•
our ability to recover our costs and earn a reasonable rate of return on our invested capital through the rates that we charge,
•
the ability of our operating partners to maintain plant operations and manage operation and maintenance costs at the Palo Verde and Four Corners plants, including costs to comply with any potential new or expanded regulatory or environmental requirements,
•
reductions in output at generation plants operated by us,
•
unscheduled outages of generating units including outages at Palo Verde,
•
the size of our construction program and our ability to complete construction on budget,
•
potential delays in our construction schedule due to legal or other reasons,
•
disruptions in our transmission system, and in particular the lines that deliver power from our remote generating facilities,
•
electric utility deregulation or re-regulation,
•
regulated and competitive markets,
•
ongoing municipal, state and federal activities,
•
economic and capital market conditions,
•
changes in accounting requirements and other accounting matters,
•
changing weather trends and the impact of severe weather conditions,
•
rates, cost recovery mechanisms and other regulatory matters including the ability to recover fuel costs on a timely basis,
•
changes in environmental laws and regulations and the enforcement or interpretation thereof, including those related to air, water or greenhouse gas emissions or other environmental matters,
•
changes in customers' demand for electricity as a result of energy efficiency initiatives and emerging competing services and technologies,
•
cuts in military spending or shutdowns of the federal government that reduce demand for our services from military and governmental customers,
•
political, legislative, judicial and regulatory developments,
•
the impact of lawsuits filed against us,
•
the impact of changes in interest rates,

 
22
 
Table of Contents

•
changes in, and the assumptions used for, pension and other post-retirement and post-employment benefit liability calculations, as well as actual and assumed investment returns on pension plan and other post-retirement plan assets,
•
the impact of recent U.S. health care reform legislation,
•
the impact of changing cost escalation and other assumptions on our nuclear decommissioning liability for Palo Verde,
•
Texas, New Mexico and electric industry utility service reliability standards,
•
homeland security considerations, including those associated with the U.S./Mexico border region,
•
coal, uranium, natural gas, oil and wholesale electricity prices and availability,
•
possible income tax and interest payments as a result of audit adjustments proposed by the IRS or state taxing authorities, and
•
other circumstances affecting anticipated operations, sales and costs.
These lists are not all-inclusive because it is not possible to predict all factors. A discussion of some of these factors is included in the 2013 Annual Report on Form 10-K under the headings “Risk Factors” and “Management's Discussion and Analysis” “-Summary of Critical Accounting Policies and Estimates” and “-Liquidity and Capital Resources.” This report should be read in its entirety. No one section of this report deals with all aspects of the subject matter. Any forward-looking statement speaks only as of the date such statement was made, and we are not obligated to update any forward-looking statement to reflect events or circumstances after the date on which such statement was made, except as required by applicable laws or regulations.

Summary of Critical Accounting Policies and Estimates
The preparation of our financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and related notes for the periods presented and actual results could differ in future periods from those estimates. Critical accounting policies and estimates are both important to the portrayal of our financial condition and results of operations and require complex, subjective judgments and are more fully described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2013 Annual Report on Form 10-K.

Summary
The following is an overview of our results of operations for the three and twelve month periods ended March 31, 2014 and 2013 . Net income and basic earnings per share for the three and twelve month periods ended March 31, 2014 and 2013 are shown below:  
 
Three Months Ended
 
 
Twelve Months Ended
 
March 31,
 
 
March 31,
 
2014
 
2013
 
 
2014
 
2013
Net income (in thousands)
$
4,615

 
$
7,634

 
 
$
85,564

 
$
95,136

Basic earnings per share
0.11

 
0.19

 
 
2.13

 
2.37


The following table and accompanying explanations show the primary factors affecting the after-tax change in net income between the 2014 and 2013 periods presented (in thousands):  

 
23
 
Table of Contents

 
Three Months Ended
 
Twelve Months Ended
March 31, 2013 net income
$
7,634

 
$
95,136

Change in (net of tax):
 
 
 
Increased investment and interest income (a)
2,410

 
4,205

Increased miscellaneous income (b)
1,000

 
711

Increased deregulated Palo Verde Unit 3 revenues (c)
906

 
1,652

Increased interest on long-term debt (d)
11

 
(1,950
)
Decreased retail non-fuel base revenues (e)
(3,163
)
 
(7,214
)
Increased taxes other than income taxes (f)
(1,703
)
 
(2,470
)
Increased operations and maintenance expense at fossil-fuel generating plants (g)
(1,301
)
 
(1,975
)
Increased depreciation and amortization (h)
(792
)
 
(2,257
)
Other
(387
)
 
(274
)
March 31, 2014 net income
$
4,615

 
$
85,564

 
______________
(a)
Investment and interest income increased for the three and twelve month periods ended March 31, 2014 compared to the same periods last year primarily due to increased realized gains on the sale of equity investments in our Palo Verde decommissioning trust funds.
(b)
Miscellaneous income increased for the three months ended March 31, 2014 compared to the same period last year primarily due to the sale of land in the first quarter of 2014.
(c)
Revenues from retail sales of deregulated Palo Verde Unit 3 power increased for the three and twelve months ended March 31, 2014 compared to the same periods last year due primarily to increased proxy market power prices in the current periods.
(d)
Interest on long-term debt increased for the twelve months ended March 31, 2014 compared to the same period last year due to interest on $150 million of 3.3% senior notes issued in December 2012 partially offset by the refunding and remarketing of two series of pollution control bonds at lower rates in August 2012.
(e)
Retail non-fuel base revenues decreased for the three months ended March 31, 2014 compared to the same period last year primarily due to a $4.0 million, pre-tax reduction in non-fuel base revenues from sales to our residential customers reflecting a 9.3% decrease in kWh sales due to milder winter weather in the first quarter of 2014. Retail non-fuel base revenues decreased for the twelve months ended March 31, 2014 compared to the same period last year primarily due to an $8.1 million, pre-tax reduction in non-fuel base revenues from sales to our residential and small commercial and industrial customers reflecting a decrease in kWh sales due to milder winter weather and cooler summer weather during the current period. Retail non-fuel base revenues exclude fuel recovered through New Mexico base rates. For a complete discussion of non-fuel base revenues, see page 25.
(f)
Taxes other than income taxes increased for the three and twelve month periods ended March 31, 2014 compared to the same periods last year primarily due to an increase in property tax accruals reflecting both increased property values and higher assessment rates. In the first quarter of 2014, Arizona adjusted its 2013 property tax rate which resulted in increased Arizona property taxes of $1.5 million when compared to the first quarter of 2013.
(g)
Operations and maintenance expense at our fossil-fuel generating plants increased for the three and twelve months ended March 31, 2014 compared to the same periods last year primarily due to an increase in the level of maintenance activity at our Four Corners generating plant and two of our local fossil-fuel generating plants.
(h)
Depreciation and amortization increased for the three and twelve month periods ended March 31, 2014 compared to the same periods last year primarily due to an increase in depreciable plant including Rio Grande Unit 9 which began commercial operation in May 2013.



 
24
 
Table of Contents

Historical Results of Operations
The following discussion includes detailed descriptions of factors affecting individual line items in the results of operations. The amounts presented below are presented on a pre-tax basis.
Operating revenues
We realize revenue from the sale of electricity to retail customers at regulated rates and the sale of energy in the wholesale power market generally at market-based prices. Sales for resale (which are FERC-regulated cost-based wholesale sales within our service territory) accounted for less than 1% of revenues.
Revenues from the sale of electricity include fuel costs that are recovered from our customers through fuel adjustment mechanisms. A significant portion of fuel costs are also recovered through base rates in New Mexico. We record deferred fuel revenues for the difference between actual fuel costs and recoverable fuel revenues until such amounts are collected from or refunded to customers. “Non-fuel base revenues” refers to our revenues from the sale of electricity excluding such fuel costs.    
No retail customer accounted for more than 4% of our non-fuel base revenues. Residential and small commercial customers comprise 75% or more of our non-fuel base revenues. While this customer base is more stable, it is also more sensitive to changes in weather conditions. The current rate structures in New Mexico and Texas reflect higher base rates during the peak summer season of May through October and lower base rates during November through April for our residential and small commercial and industrial customers. As a result, our business is seasonal, with higher kWh sales and revenues during the summer cooling season.
Weather significantly impacts our residential, small commercial and industrial customers, and to a lesser extent, our sales to public authorities. Heating and cooling degree days can be used to evaluate the effect of weather on energy use. For each degree the average outdoor temperature varies from a standard of 65 degrees Fahrenheit a degree day is recorded. For the three months ended March 31, 2014, retail non-fuel base revenues were negatively impacted by milder winter weather when compared to the same period in 2013. Heating degree days decreased 28.4% when compared to the same period in 2013 and were 19.2% under the 10-year average. For the twelve months ended March 31, 2014, retail non-fuel base revenues were negatively impacted by both cooler summer weather and milder winter weather when compared to the prior period. Cooling degree days decreased 6.4% and heating degree days decreased by 6.5% when compared to the same period last year. The table below shows heating and cooling degree days compared to a 10-year average.
 
Three Months Ended
Twelve Months Ended
 
March 31,
 
March 31,
 
 
 
10-Year
 
 
 
10-Year
 
2014
 
2013
 
Average
 
2014
 
2013
 
Average*
Heating degree days
958

 
1,338

 
1,186

 
2,046

 
2,188

 
2,247

Cooling degree days
25

 
33

 
25

 
2,687

 
2,872

 
2,633

______________
* Calendar year basis.
 
Customer growth is a key driver of the growth of retail sales. The average number of retail customers grew 1.3% for both the three and twelve month periods ended March 31, 2014 when compared to the same periods last year. See the tables presented on pages 27 and 28 which provide detail on the average number of retail customers and the related revenues and kWh sales.
Retail non-fuel base revenues. Retail non-fuel base revenues decreased $4.8 million, or 4.4% for the three months ended March 31, 2014, when compared to the same period last year. The decrease in retail non-fuel base revenues reflected milder winter weather in the first quarter of 2014 which impacted sales to residential, small commercial, and to a lesser extent public authority customers. Retail non-fuel base revenues from sales to residential customers decreased by $4.0 million reflecting a 9.3% decrease in kWh sales despite a 1.2% increase in the average number of residential customers served. Retail non-fuel base revenues from sales to small commercial and industrial customers decreased 2.0% reflecting a 1.6% decrease in kWh sales to small commercial and industrial customers despite a 2.1% increase in the average number of small commercial and industrial customers served. KWh sales to large commercial and industrial customers decreased 7.4% and non-fuel base revenues decreased 2.6% largely due to discontinued operations by several customers. While kWh sales to public authorities decreased approximately 4.5% compared to the same quarter in 2013, non-fuel base revenues increased slightly due to demand charges.
Retail non-fuel base revenues decreased by $10.9 million, or 1.9%, for the twelve months ended March 31, 2014, when compared to the same period last year primarily due to a $5.0 million, or 2.1%, reduction in non-fuel base revenues from sales to our residential customers reflecting a 2.5% decrease in kWh sales due to milder winter weather and cooler summer weather during

 
25
 
Table of Contents

the current period. The decrease for the twelve month period is also due to a $3.1 million, or 1.6% decrease in non-fuel base revenues from sales to small commercial and industrial customers reflecting a 1.5% decrease in kWh sales. Retail non-fuel base revenues decreased $1.2 million, or 2.9%, from sales to large commercial and industrial customers and $1.6 million, or 1.7% from sales to public authorities primarily due to reduced sales to military installations in our service territory.
Fuel revenues. Fuel revenues consist of (i) revenues collected from customers under fuel recovery mechanisms approved by the state commissions and the FERC, (ii) deferred fuel revenues which are comprised of the difference between fuel costs and fuel revenues collected from customers, and (iii) fuel costs recovered in base rates in New Mexico. In New Mexico and with our sales for resale customer, the fuel adjustment clause allows us to recover under-recoveries or refund over-recoveries of current fuel costs above the amount recovered in base rates with a two-month lag. In Texas, fuel costs are recovered through a fixed fuel factor. We can seek to revise our fixed fuel factor based upon an approved formula at least four months after our last revision except in the month of December. In addition, if we materially over-recover fuel costs, we must seek to refund the over-recovery, and if we materially under-recover fuel costs, we may seek a surcharge to recover those costs. Fuel over and under recoveries are considered material when they exceed 4% of the previous twelve months' fuel costs.
In the three months ended March 31, 2014, we over-recovered our fuel costs by $2.0 million and for the twelve months ended March 31, 2014, we under-recovered our fuel costs by $12.7 million. In October 2013, we implemented an increased fixed fuel factor in Texas which was based upon a formula that reflects projected prices for natural gas. In the three and twelve months ended March 31, 2013, we over-recovered our fuel costs by $3.8 million and $10.5 million, respectively. A refund of $6.8 million was made to our Texas customers in the third quarter of 2012. At March 31, 2014, we had a net fuel under-recovery balance of $4.2 million, including an under-recovery balance of $3.9 million in Texas, $0.2 million in New Mexico, and $0.1 million for our FERC customer.
Off-system sales. Off-system sales are wholesale sales into markets outside our service territory. Off-system sales are primarily made in off-peak periods when we have competitive generation capacity available after meeting our regulated service obligations. We share 90% of off-system sales margins with our Texas and New Mexico customers, and we retain 10% of off-system sales margins. We are sharing 25% of our off-system sales margins with our sales for resale customer under the terms of their contract.
Typically, we realize a significant portion of our off-system sales margins in the first quarter of each calendar year when our native load is lower than at other times of the year, allowing for the sale in the wholesale market of relatively larger amounts of off-system energy generated from lower cost generating resources. Palo Verde's availability is an important factor in realizing these off-system sales margins.
Off-system sales revenues increased $8.4 million, or 40.5% for the three months ended March 31, 2014, when compared to the same period last year, as a result of higher average market prices for power. Retained margins from off-system sales increased $0.3 million for the three months ended March 31, 2014, compared to the same period last year. Off-system sales revenues increased $14.6 million, or 19.0% for the twelve months ended March 31, 2014, when compared to the same period last year, as a result of higher average market prices for power partially offset by a 3.4% decrease in kWh sales. Retained margins from off-system sales increased $0.4 million for the twelve months ended March 31, 2014, compared to the same period last year.

 
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Comparisons of kWh sales and operating revenues are shown below (in thousands):
 
 
 
 
 
 
 
 
 
Increase (Decrease)
Quarter Ended March 31:
2014
 
2013
 
Amount
 
Percent
kWh sales:
 
 
 
 
 
 
 
Retail:
 
 
 
 
 
 
 
Residential
543,030

 
598,506

 
(55,476
)
 
(9.3
)%
Commercial and industrial, small
493,919

 
501,704

 
(7,785
)
 
(1.6
)
Commercial and industrial, large
226,552

 
244,585

 
(18,033
)
 
(7.4
)
Sales to public authorities
343,028

 
359,084

 
(16,056
)
 
(4.5
)
Total retail sales
1,606,529

 
1,703,879

 
(97,350
)
 
(5.7
)
Wholesale:
 
 
 
 
 
 
 
Sales for resale
12,392

 
11,999

 
393

 
3.3

Off-system sales
697,014

 
675,927

 
21,087

 
3.1

Total wholesale sales
709,406

 
687,926

 
21,480

 
3.1

Total kWh sales
2,315,935

 
2,391,805

 
(75,870
)
 
(3.2
)
Operating revenues:
 
 
 
 
 
 
 
Non-fuel base revenues:
 
 
 
 
 
 
 
Retail:
 
 
 
 
 
 
 
Residential
$
45,594

 
$
49,608

 
$
(4,014
)
 
(8.1
)%
Commercial and industrial, small
32,121

 
32,775

 
(654
)
 
(2.0
)
Commercial and industrial, large
8,328

 
8,548

 
(220
)
 
(2.6
)
Sales to public authorities
17,656

 
17,561

 
95

 
0.5

Total retail non-fuel base revenues
103,699

 
108,492

 
(4,793
)
 
(4.4
)
Wholesale:
 
 
 
 
 
 
 
Sales for resale
448

 
388

 
60

 
15.5

Total non-fuel base revenues
104,147

 
108,880

 
(4,733
)
 
(4.3
)
Fuel revenues:
 
 
 
 
 
 
 
Recovered from customers during the period
31,173

 
26,727

 
4,446

 
16.6

Over collection of fuel
(2,010
)
 
(3,842
)
 
1,832

 
(47.7
)
New Mexico fuel in base rates
16,095

 
16,909

 
(814
)
 
(4.8
)
Total fuel revenues (1)
45,258

 
39,794

 
5,464

 
13.7

Off-system sales:
 
 
 
 
 
 
 
Fuel cost
21,463

 
16,163

 
5,300

 
32.8

Shared margins
6,744

 
4,001

 
2,743

 
68.6

Retained margins
802

 
476

 
326

 
68.5

Total off-system sales
29,009

 
20,640

 
8,369

 
40.5

Other (2)
7,102

 
7,976

 
(874
)
 
(11.0
)
Total operating revenues
$
185,516

 
$
177,290

 
$
8,226

 
4.6

Average number of retail customers (3):
 
 
 
 
 
 
 
Residential
350,334

 
346,154

 
4,180

 
1.2
 %
Commercial and industrial, small
39,218

 
38,403

 
815

 
2.1

Commercial and industrial, large
49

 
50

 
(1
)
 
(2.0
)
Sales to public authorities
5,047

 
4,953

 
94

 
1.9

Total
394,648

 
389,560

 
5,088

 
1.3

 
______________
(1)
Includes deregulated Palo Verde Unit 3 revenues for the New Mexico jurisdiction of $4.4 million and $3.0 million, respectively.
(2)
Represents revenues with no related kWh sales.
(3)
The number of retail customers presented for both the current and prior periods are based on the number of service locations. Previous presentations of the number of retail customers in 2013 were based on the number of bills rendered including consolidated bills for customers operating multiple facilities. Management believes that the number of service locations provides a more accurate indicator of customers served than the number of bills rendered.

 
27
 
Table of Contents

 
 
 
 
 
Increase (Decrease)
Twelve Months Ended March 31:
2014
 
2013
 
Amount
 
Percent
kWh sales:
 
 
 
 
 
 
 
Retail:
 
 
 
 
 
 
 
Residential
2,623,786

 
2,691,285

 
(67,499
)
 
(2.5
)%
Commercial and industrial, small
2,341,363

 
2,377,008

 
(35,645
)
 
(1.5
)
Commercial and industrial, large
1,077,346

 
1,081,200

 
(3,854
)
 
(0.4
)
Sales to public authorities
1,606,551

 
1,633,179

 
(26,628
)
 
(1.6
)
Total retail sales
7,649,046

 
7,782,672

 
(133,626
)
 
(1.7
)
Wholesale:
 
 
 
 
 
 
 
Sales for resale
61,625

 
64,458

 
(2,833
)
 
(4.4
)
Off-system sales
2,493,709

 
2,581,380

 
(87,671
)
 
(3.4
)
Total wholesale sales
2,555,334

 
2,645,838

 
(90,504
)
 
(3.4
)
Total kWh sales
10,204,380

 
10,428,510

 
(224,130
)
 
(2.1
)
Operating revenues:
 
 
 
 
 
 
 
Non-fuel base revenues:
 
 
 
 
 
 
 
Retail:
 
 
 
 
 
 
 
Residential
$
232,637

 
$
237,678

 
$
(5,041
)
 
(2.1
)%
Commercial and industrial, small
183,914

 
186,988

 
(3,074
)
 
(1.6
)
Commercial and industrial, large
40,015

 
41,218

 
(1,203
)
 
(2.9
)
Sales to public authorities
95,139

 
96,753

 
(1,614
)
 
(1.7
)
Total retail non-fuel base revenues
551,705

 
562,637

 
(10,932
)
 
(1.9
)
Wholesale:
 
 
 
 
 
 
 
Sales for resale
2,232

 
2,308

 
(76
)
 
(3.3
)
Total non-fuel base revenues
553,937

 
564,945

 
(11,008
)
 
(1.9
)
Fuel revenues:
 
 
 
 
 
 
 
Recovered from customers during the period (1)
137,927

 
124,386

 
13,541

 
10.9

Under (over) collection of fuel
12,681

 
(10,450
)
 
23,131

 
—

New Mexico fuel in base rates
72,481

 
74,099

 
(1,618
)
 
(2.2
)
Total fuel revenues (2)
223,089

 
188,035

 
35,054

 
18.6

Off-system sales:
 
 
 
 
 
 
 
Fuel cost
73,541

 
63,178

 
10,363

 
16.4

Shared margins
15,759

 
12,004

 
3,755

 
31.3

Retained margins
1,875

 
1,434

 
441

 
30.8

Total off-system sales
91,175

 
76,616

 
14,559

 
19.0

Other (3)
30,387

 
31,997

 
(1,610
)
 
(5.0
)
Total operating revenues
$
898,588

 
$
861,593

 
$
36,995

 
4.3

Average number of retail customers (4):
 
 
 
 
 
 
 
Residential
348,936

 
344,627

 
4,309

 
1.3
 %
Commercial and industrial, small
39,040

 
38,567

 
473

 
1.2

Commercial and industrial, large
50

 
51

 
(1
)
 
(2.0
)
Sales to public authorities
5,020

 
4,877

 
143

 
2.9

Total
393,046

 
388,122

 
4,924

 
1.3

 
______________
(1)
Excludes $6.9 million of refunds in the twelve month period ended March 31, 2013 related to prior periods' Texas deferred fuel revenues.
(2)
Includes deregulated Palo Verde Unit 3 revenues for the New Mexico jurisdiction of $12.8 million and $10.2 million, respectively.
(3)
Represents revenues with no related kWh sales.
(4)
The number of retail customers presented for both the current and prior periods are based on the number of service locations. Previous presentations of the number of retail customers in the twelve month period ended March 31, 2013 were based on the number of bills rendered including consolidated bills for customers operating multiple facilities. Management believes that the number of service locations provides a more accurate indicator of customers served than the number of bills rendered.






 
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Energy expenses
Our sources of energy include electricity generated from our nuclear, natural gas and coal generating plants and purchased power. Palo Verde represents approximately 34% of our available net generating capacity and approximately 66% and 54% of our Company-generated energy for the three and twelve months ended March 31, 2014, respectively. Fluctuations in the price of natural gas, which also is the primary factor influencing the price of purchased power, have had a significant impact on our cost of energy.
Energy expenses increased $12.2 million or 21.3% for the three months ended March 31, 2014, when compared to the same period in 2013, primarily due to increased natural gas costs of $8.3 million due to a 39.7% increase in the average price of natural gas offset by a 6.8% decrease in MWhs generated with natural gas, and increased costs of purchased power of $5.0 million due to a 34.5% increase in the average market price for power. The increase in energy expense was partially offset by a 27.1% decrease in the MWhs generated with coal. The table below details the sources and costs of energy for the three months ended March 31, 2014 and 2013.
 
Three Months Ended March 31,
 
2014
 
2013
Fuel Type
Cost
 
MWh
 
Cost per
MWh
 
Cost
 
MWh
 
Cost per
MWh
 
(in thousands)
 
 
 
 
 
(in thousands)
 
 
 
 
Natural gas
$
35,577

 
567,744

 
$
62.66

 
$
27,325

 
609,363

 
$
44.84

Coal
2,968

 
134,236

 
22.11

 
3,787

 
184,043

 
20.58

Nuclear
13,041

 
1,364,077

 
9.56

 
13,287

 
1,333,882

 
9.96

Total
51,586

 
2,066,057

 
24.97

 
44,399

 
2,127,288

 
20.87

Purchased power:
 
 
 
 
 
 
 
 
 
 
 
Photovoltaic
3,205

 
28,799

 
111.29

 
3,185

 
27,700

 
114.98

Other
14,710

 
331,944

 
44.31

 
9,692

 
321,005

 
30.19

Total purchased power
17,915

 
360,743

 
49.66

 
12,877

 
348,705

 
36.93

Total energy
$
69,501

 
2,426,800

 
28.64

 
$
57,276

 
2,475,993

 
23.13


Our energy expenses increased $44.7 million or 17.4% for the twelve months ended March 31, 2014, when compared to 2013, primarily due to increased natural gas costs of $40.9 million due to a 29.8% increase in the average price of natural gas and increased purchased power costs of $6.8 million due to a 17.4% increase in the average cost of purchased power partially offset by a 5.2% decrease in MWhs purchased. The table below details the sources and costs of energy for the twelve months ended March 31, 2014 and 2013.
 
Twelve Months Ended March 31,
 
2014
 
2013
Fuel Type
Cost
 
MWh
 
Cost per
MWh
 
Cost
 
MWh
 
Cost per
MWh
 
(in thousands)
 
 
 
 
 
(in thousands)
 
 
 
 
Natural gas
$
172,391

 
3,645,204

 
$
47.29

 
$
131,477

 
3,608,070

 
$
36.44

Coal
12,861

 
585,910

 
21.95

 
13,691

 
645,668

 
21.20

Nuclear
48,703

 
4,996,428

 
9.75

 
50,873

 
5,098,474

 
9.98

Total
233,955

 
9,227,542

 
25.35

 
196,041

 
9,352,212

 
20.96

Purchased power:
 
 
 
 
 
 
 
 
 
 
 
Photovoltaic
13,883

 
122,025

 
113.77

 
13,182

 
116,648

 
113.01

Other
53,518

 
1,437,943

 
37.22

 
47,387

 
1,528,408

 
31.00

Total purchased power
67,401

 
1,559,968

 
43.21

 
60,569

 
1,645,056

 
36.82

Total energy
$
301,356

 
10,787,510

 
27.94

 
$
256,610

 
10,997,268

 
23.33




 
29
 
Table of Contents

Other operations expense
Other operations expense remained relatively unchanged for the three months ended March 31, 2014 compared to the same period last year. Other operations expense decreased $0.8, or 0.3% for the twelve months ended March 31, 2014, compared to the same period last year, primarily due to decreased operations expense at Palo Verde of $1.3 million, decreased customer care expense of $1.1 million primarily related to a decrease in our provision for uncollectible customer accounts reflecting improved collection efforts, and a decrease of $3.0 million in employee pension and benefits costs as a result of changes in actuarial assumptions used to calculate expenses for our pension and other post-retirement employee benefit plans and plan modifications. The decrease was partially offset by an increase of $3.4 million related to consulting and legal services related in part to the analysis of our future involvement at the Four Corners Generating Station and software systems support and improvement, and a $1.7 million increase in transmission expense which reflects a $1.9 million refund associated with transmission delivery services provided by the Public Service Company of New Mexico recorded in the fourth quarter of 2012 with no comparable amount in the current period.

Maintenance expense
Maintenance expense for the three months ended March 31, 2014 increased $1.7 million, or 13.8% compared to the corresponding period last year, primarily due to a $2.7 million increase in maintenance at our fossil-fuel generating plants. In the three months ended March 31, 2014, we had increased maintenance at Four Corners and Newman Units 1 and 2. The increase was partially offset by a $0.9 million decrease in maintenance expense at Palo Verde.

Maintenance expense increased $5.9 million, or 10.3%, for the twelve months ended March 31, 2014, compared to the same period last year primarily due to the timing of planned maintenance at our fossil-fuel generating plants. In the twelve months ended March 31, 2014, we performed an increased level of planned maintenance at Newman Unit 2 and Four Corners.
Depreciation and amortization expense
Depreciation and amortization expense increased $1.2 million or 6.2%, and $3.4 million or 4.4% for the three and twelve month periods ended March 31, 2014, respectively, compared to the same periods last year primarily due to the increase in depreciable plant balances including Rio Grande Unit 9 which began commercial operation in May 2013.

Taxes other than income taxes

Taxes other than income taxes increased $2.6 million, or 20.2% for the three months ended March 31, 2014, and $3.7 million, or 6.6% for the twelve months ended March 31, 2014, compared to the same periods in the prior year primarily due to increased property tax rates. In the first quarter of 2014, Arizona adjusted its 2013 property tax rate which resulted in increased Arizona property taxes of $1.5 million when compared to the first quarter of 2013.
Other income (deductions)
Other income (deductions) increased $4.8 million for the three months ended March 31, 2014, compared to the same period last year, primarily due to increased investment and interest income reflecting realized gains net of losses on equity investments in our decommissioning trust of $3.0 million and a $1.5 million increase in miscellaneous non-operating income due primarily to a gain recognized on the sale of land in 2014 with no comparable amounts being recorded in 2013.

Other income (deductions) increased $4.9 million, or 34.7% for the twelve months ended March 31, 2014, compared to the twelve months ended March 31, 2013, primarily due to increased investment and interest income reflecting a $3.6 million realized gain net of losses on equity investments in our decommissioning trust for the twelve months ended March 31, 2014 compared to a $1.4 million net loss for the same period in 2013.

Interest charges (credits)

Interest charges (credits) remained relatively unchanged for the three month period ended March 31, 2014, when compared to the same period last year. Interest charges (credits) increased $2.2 million, or 4.8%, for the twelve months period ended March 31, 2014, compared to the same period last year, primarily due to interest on $150 million of 3.3% senior notes issued in December 2012 partially offset by a decrease in interest on short-term borrowings for working capital purposes and the refunding and remarketing of two series of pollution control bonds at lower rates in August 2012.


 
30
 
Table of Contents

Income tax expense
Income tax expense decreased $1.8 million, or 55.6% for the three months ended March 31, 2014, compared to the same period last year, primarily due to decreased pre-tax income and a lower tax rate on capital gains realized on investments sold in the qualified nuclear decommissioning trust in the first quarter of 2014. Income tax expense decreased $7.7 million, or 15.6% for the twelve months ended March 31, 2014, compared to the same period last year, primarily due to decreased pre-tax income.
New Accounting Standards
In July 2013, the FASB issued new guidance (ASU 2013-11, Income Taxes (Topic 740)) to eliminate the diversity in the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 requires an entity to present an unrecognized tax benefit in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except in certain circumstances when it would be reflected as a liability. ASU 2013-11 is effective prospectively to all unrecognized tax benefits that exist for reporting periods beginning after December 15, 2013 and early adoption is permitted. Retrospective application is also permitted. We implemented ASU 2013-11 in the first quarter of 2014 on a prospective basis. This ASU did not have a significant impact on our statement of operations or statement of cash flows.
Inflation
For the last several years, inflation has been relatively low and, therefore, has had minimal impact on our results of operations and financial condition.


 
31
 
Table of Contents

Liquidity and Capital Resources
We continue to maintain a strong balance of common stock equity in our capital structure which supports our bond ratings, allowing us to obtain financing from the capital markets at a reasonable cost. At March 31, 2014, our capital structure, including common stock, long-term debt, and short-term borrowings under the revolving credit facility ("RCF"), consisted of 47.6% common stock equity and 52.4% debt. At March 31, 2014, we had on hand $13.4 million in cash and cash equivalents. Based on current projections, we believe that we will have adequate liquidity through our current cash balances, cash from operations, and available borrowings under the RCF to meet all of our anticipated cash requirements for the next twelve months. We may issue long-term debt in the capital markets to finance capital requirements in 2014.
Our principal liquidity requirements in the near-term are expected to consist of capital expenditures to expand and support electric service obligations, expenditures for nuclear fuel inventory, interest payments on our indebtedness, cash dividend payments, operating expenses including fuel costs, maintenance costs and taxes.
Capital Requirements . During the three months ended March 31, 2014, our capital requirements primarily consisted of expenditures for the construction and purchase of electric utility plant, purchases of nuclear fuel, and cash dividend payments, Projected utility construction expenditures are to expand and update our transmission and distribution systems, add new generation, and make capital improvements and replacements at Palo Verde and other generating facilities. We have purchased land for a new plant site, the Montana Power Station ("the MPS"), which will initially consist of two (of four) natural gas-fired 88 MW simple-cycle aeroderivative combustion turbines. We began purchasing certain components of the MPS and as of March 31, 2014, we had expended $122.6 million on the MPS, including AFUDC, of which $13.9 million was incurred during 2014. Estimated cash construction expenditures for all capital projects for 2014 are expected to be approximately $316.4 million. See Part I, Item 1, “Business - Construction Program” in our 2013 Form 10-K. Cash capital expenditures for new electric plant were $48.3 million in the three months ended March 31, 2014 compared to $55.4 million in the three months ended March 31, 2013. Capital requirements for purchases of nuclear fuel were $11.8 million for the three months ended March 31, 2014 compared to $9.9 million for the three months ended March 31, 2013.
On March 31, 2014, we paid a quarterly cash dividend of $0.265 per share or $10.7 million to shareholders of record on March 14, 2014. We expect to continue paying quarterly dividends during 2014 and we expect to review the dividend policy in the second quarter of 2014. At the current payout rate, we would expect to pay total cash dividends of approximately $42.8 million during 2014. In addition, while we do not currently anticipate repurchasing shares in 2014, we may repurchase common stock in the future. Under our common stock repurchase program, purchases can be made at open market prices or in private transactions, and repurchased shares are available for issuance under employee benefit and stock incentive plans, or may be retired. No shares of common stock were repurchased during the three months ended March 31, 2014. As of March 31, 2014, 393,816 shares remain eligible for repurchase.
We will continue to maintain a prudent level of liquidity as well as take market conditions for debt and equity securities into account. With the initiation of a dividend in early 2011, we are moving toward primarily utilizing the distribution of dividends to maintain a balanced capital structure, supplemented by share repurchases when appropriate. Our liquidity needs can fluctuate quickly based on fuel prices and other factors and we are continuing to make investments in new electric plant and other assets in order to reliably serve our customers. In light of these factors, we expect it will be a number of years before we achieve a dividend payout equivalent to industry average.
Our cash requirements for federal and state income taxes vary from year to year based on taxable income, which is influenced by the timing of revenues and expenses recognized for income tax purposes. Accelerated tax deductions including bonus depreciation resulted in net operating loss carryforwards in 2011 through 2013 and as a result income tax payments are expected to be minimal in 2014.
We continually evaluate our funding requirements related to our retirement plans, other post-retirement benefit plans, and decommissioning trust funds. We contributed $3.5 million of the projected $8.7 million 2014 annual contribution to our retirement plans and $1.1 million of the projected $4.5 million 2014 annual contribution to our decommissioning trust funds during the three months ended March 31, 2014. In the three months ended March 31, 2014, we did not make any contributions to our other post-retirement benefit plans and we do not expect to contribute to our other post-retirement benefits plan in 2014. We are in compliance with the funding requirements of the federal government for our benefit plans. In addition, we are in compliance with the funding requirements of the federal law and the Arizona Nuclear Power Project Participation Agreement for our decommissioning trust.
Capital Resources . Cash from operations has been our primary source for funding capital requirements. Cash from operations was $31.3 million for the three months ended March 31, 2014 and $7.7 million for the three months ended March 31, 2013. The primary factors affecting the increased cash flow from operations were the funding of $17.5 million for employee pension and other post-retirement benefit plans in the first quarter of 2013 compared to $3.5 million in the first quarter of 2014, a decrease in accounts receivable due to the timing of customer payments, and a smaller decline in accounts payable. Cash from operations has also been impacted by the timing of the recovery of fuel costs through fuel recovery mechanisms in Texas and New Mexico

 
32
 
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and our sales for resale customer. We recover actual fuel costs from customers through fuel adjustment mechanisms in Texas, New Mexico, and from our sales for resale customer. We record deferred fuel revenues for the under-recovery or over-recovery of fuel costs until they can be recovered from or refunded to customers. In Texas, fuel costs are recovered through a fixed fuel factor. We can seek to revise our fixed fuel factor at least four months after the last revision except in the month of December based upon our approved formula which allows us to adjust fuel rates to reflect changes in costs of natural gas. On October 1, 2013, we implemented an increased fixed fuel factor charged to our Texas retail customers which was based upon a formula that reflects projected prices for natural gas. Additionally, on April 15, 2014, we filed a request to increase our Texas fixed fuel factor by 6.9% to reflect increases in prices for natural gas. This increase received interim approval on April 28, 2014 and was effective with May 2014 billings. During the three months ended March 31, 2014, we had an over-recovery of fuel costs of $2.0 million, compared to an over-recovery of fuel costs of $3.8 million during the three months ended March 31, 2013. At March 31, 2014, we had a net fuel under-recovery balance of $4.2 million, including an under-recovery balance of $3.9 million in Texas, $0.2 million in New Mexico, and $0.1 million for our FERC customer.
We maintain a RCF for working capital and general corporate purposes and the financing of nuclear fuel through the Rio Grande Resources Trust (“RGRT”). RGRT is the trust through which we finance our portion of nuclear fuel for Palo Verde and is consolidated in our financial statements. On January 14, 2014, we amended and extended our $300 million RCF, which includes an option to expand the size to $400 million, upon the satisfaction of certain conditions including obtaining commitments from lenders or third party financial institutions. The amended facility extends the maturity from September 2016 to January 2019. In addition, we may extend the January 2019 maturity, subject to lenders' approval, by two additional one year periods. The terms of the agreement provide that amounts we borrow under the RCF may be used for working capital and general corporate purposes. The total amount borrowed for nuclear fuel by RGRT was $130.0 million at March 31, 2014, of which $20.0 million had been borrowed under the RCF and $110 million was borrowed through senior notes. At March 31, 2013, the total amounts borrowed for nuclear fuel by RGRT was $135.0 million of which $25.0 million was borrowed under the RCF and $110 million was borrowed through senior notes. Interest costs on borrowings to finance nuclear fuel are accumulated by RGRT and charged to us as fuel is consumed and recovered from customers through fuel recovery charges. At March 31, 2014, $26.0 million was outstanding under the RCF for working capital or general corporate purposes. No borrowings were outstanding at March 31, 2013 under the RCF for working capital or general corporate purposes.    
We believe we have adequate liquidity through our current cash balances, cash from operations, our RCF, and our favorable access to capital markets to meet all of our anticipated cash requirements for the next twelve months. In the fourth quarter of 2013, we received approval from the NMPRC and the FERC to incrementally issue up to $300 million of long-term debt and to guarantee the issuance of up to $50 million of new debt by RGRT to finance future purchases of nuclear fuel and to refinance existing nuclear fuel debt obligations. Obtaining the ability to issue up to $300 million of new long-term debt, from time to time, provides us with the flexibility to access the debt capital markets when needed and when conditions are favorable. We may decide to access the debt market in the second half of 2014.

Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Item 3.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk due to changes in interest rates, equity prices and commodity prices. See our 2013 Form 10-K, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” for a complete discussion of the market risks we face and our market risk sensitive assets and liabilities. As of March 31, 2014 , there have been no material changes in the market risks we face or the fair values of assets and liabilities disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our 2013 Annual Report Form 10-K.

Item 4.
Controls and Procedures
Evaluation of disclosure controls and procedures . Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we conducted an evaluation pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, our chief executive officer and our chief financial officer concluded that, as of March 31, 2014 , our disclosure controls and procedures are effective.
Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting in connection with the evaluation required by paragraph (d) of the Securities Exchange Act of 1934 Rules 13a-15 or 15d-15, that occurred during the quarter ended March 31, 2014 , that materially affected, or that were reasonably likely to materially affect, our internal control over financial reporting.

 
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PART II. OTHER INFORMATION

Item 1.
Legal Proceedings
We hereby incorporate by reference the information set forth in Part I of this report under Notes C and G of Notes to Financial Statements.

Item 1A.
Risk Factors
Our 2013 Form 10-K includes a detailed discussion of our risk factors.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

(c)
Issuer Purchases of Equity Securities.
Period
 
Total
Number
of Shares
Purchased
 
Average Price
Paid per Share
(Including
Commissions)
 
Total
Number of
Shares
Purchased as
Part of a
Publicly
Announced
Program
 
Maximum
Number of
Shares that May
Yet Be Purchased
Under the Plans
or Programs
January 1 to January 31, 2014
 
—

 
$
—

 
—

 
393,816

February 1 to February 28, 2014
 
—

 
—

 
—

 
393,816

March 1 to March 31, 2014
 
—

 
—

 
—

 
393,816


Item 4.
Mine Safety Disclosures

Not Applicable.

Item 5.        Other Information

Investors should note that we announce material financial information in SEC filings, press releases and public conference calls. Based on new guidance from the SEC, we may also use the Investor Relations section of our website (www.epelectric.com) to communicate with investors about our company. It is possible that the financial and other information we post there could be deemed to be material information. The information on our website is not part of this document.

Item 6.
Exhibits
See Index to Exhibits incorporated herein by reference.

 
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
EL PASO ELECTRIC COMPANY
 
 
By:
/s/ NATHAN T. HIRSCHI
 
Nathan T. Hirschi
 
Senior Vice President - Chief Financial Officer
 
(Duly Authorized Officer and Principal Financial Officer)
Dated: May 8, 2014

 
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EL PASO ELECTRIC COMPANY
INDEX TO EXHIBITS
 
 
 
 
Exhibit
Number
 
Exhibit
 
 
 
†10.01

 
Form of Directors' Restricted Stock Award Agreement between the Company and certain directors of the Company. (Identical in all material respects to Exhibit 10.07 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999).
 
 
 
10.02

 
Amendment No. 7 to Four Corners Project Co-Tenancy Agreement, dated December 30, 2013, between Arizona Public Service Company, Public Service Company of New Mexico, Salt River Project Agricultural Improvement and Power District, Southern California Edison Company, Tucson Electric Power Company and the Company.
 
 
 
10.03

 
Amendment No. 13 to Four Corners Project Operating Agreement, dated December 1, 2010, between Arizona Public Service Company, Public Service Company of New Mexico, Salt River Project Agricultural Improvement and Power District, Southern California Edison Company, Tucson Electric Power Company and the Company.
 
 
 
10.04

 
Amendment No. 14 to Four Corners Project Operating Agreement, dated December 30, 2013, between Arizona Public Service Company, Public Service Company of New Mexico, Salt River Project Agricultural Improvement and Power District, Southern California Edison Company, Tucson Electric Power Company and the Company.
 
 
 
10.05

 
Amendment No. 1 to Shiprock - Four Corners Project 345-kV Switchyard Interconnection Agreement, dated December 30, 2013, between Arizona Public Service Company, Public Service Company of Colorado, Public Service Company of New Mexico, Salt River Project Agricultural Improvement and Power District, Southern California Edison Company, Tri-State Generation and Transmission Association, Inc, Tucson Electric Power Company, Western Area power Administration and the Company.
 
 
 
10.06

 
Amendment No. 16 to the Arizona Nuclear Power Project Participation Agreement, dated April 28, 2014, between Arizona Public Service Company, Salt River Project Agricultural Improvement and Power District, Southern California Edision Company, Public Service Company of New Mexico, Southern California Public Power Authority Association Department of Water and Power of the City of Los Angeles and the Company.
 
 
 
10.07

 
Amendment and Supplement No. 2 to the Supplemental and Additional Indenture of Lease, dated March 7, 2011, between the Navajo Nation, Arizona Public Service Company, Public Service Company of New Mexico, Salt River Project Agricultural Improvement and Power District, Southern California Edison Company, Tucson Electric Power Company, and the Company.
 
 
 
10.08

 
Amendment and Supplement No. 3 to the Supplemental and Additional Indenture of Lease, dated March 7, 2011, between the Navajo Nation, Arizona Public Service Company, Public Service Company of New Mexico, Salt River Project Agricultural Improvement and Power District, Tucson Electric Power Company, and the Company.
 
 
 
15

 
Letter re Unaudited Interim Financial Information
 
 
 
31.01

 
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
32.01

 
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101.INS

 
XBRL Instance Document
 
 
 
101.SCH

 
XBRL Taxonomy Extension Schema Linkbase Document
 
 
 
101.CAL

 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF

 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB

 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE

 
XBRL Taxonomy Extension Presentation Linkbase Document
 

 
36
 
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†
In lieu of non-employee director cash compensation, twelve agreements, dated as of January 1, and April 1, 2014, substantially identical in all material respects to this Exhibit, have been entered into with Catherine A. Allen; Edward Escudero; Patricia Z. Holland-Branch; Woodley L. Hunt; Michael K. Parks; and Stephen N. Wertheimer; directors of the Company.

 
 


 
37
 


EXHIBIT 10.02

AMENDMENT NO. 7 TO FOUR CORNERS PROJECT CO-TENANCY AGREEMENT
THIS AMENDMENT NO. 7 TO FOUR CORNERS PROJECT CO-TENANCY AGREEMENT (this “ Amendment ”) is made and entered into as of December 30, 2013, by and among ARIZONA PUBLIC SERVICE COMPANY, an Arizona corporation (“ Arizona ”); EL PASO ELECTRIC COMPANY, a Texas corporation (“ El Paso ”); PUBLIC SERVICE COMPANY OF NEW MEXICO, a New Mexico corporation (“ New Mexico ”); SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, an agricultural improvement district, organized and existing under the laws of the State of Arizona (“ Salt River Project ”); SOUTHERN CALIFORNIA EDISON COMPANY, a California corporation (“ Edison ”); and TUCSON ELECTRIC POWER COMPANY, an Arizona corporation (“ Tucson ”). Arizona, El Paso, New Mexico, Salt River Project, Edison and Tucson are herein collectively referred to as the “ Parties ”.
RECITALS
The Parties entered into the Four Corners Project Co-Tenancy Agreement, effective as of July 19, 1966, and amendments thereto through Amendment No. 6, dated February 3, 2000 (as amended by such amendments, the “ Co-Tenancy Agreement ”), providing, among other things, for the allocation of ownership in the Four Corners Project.
Arizona and Edison are parties to a Purchase and Sale Agreement, dated as of November 8, 2010 (the “ Purchase Agreement ”), providing, among other things, for the sale by Edison to Arizona, and the purchase by Arizona from Edison, of Edison’s interests in the Four Corners Project and the Facilities Switchyard (the “ Edison Interest Transfer ”).
Following the Edison Interest Transfer, Arizona, the owner of the Initial Four Corners Plant, intends to retire Units 1, 2 and 3 of the Initial Four Corners Plant.
This Amendment will take effect on the Amendment No. 7 Effective Date, as defined herein.
STATEMENT OF AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:
1. Defined Terms . Defined terms used but not defined in this Amendment shall have the respective meanings ascribed to such terms in the Co-Tenancy Agreement.

2. Amendment of Section 1 . Section 1 is hereby amended to delete “SOUTHERN CALIFORNIA EDISON COMPANY, a California corporation (hereinafter referred to as “Edison”);” from the eighth line thereof.

3. Amendment of Section 2.5 . Section 2.5 is hereby amended to substitute “Southern California Edison Company, a California corporation (hereinafter referred to as “Edison”)” for “Edison” in the first line thereof, and to add the following immediately following






the last sentence thereof: “Amendment No. 7 to this Agreement (“ Amendment No. 7 ”) provides, among other things, for updated ownership percentages as they existed following the consummation of the transfer to Arizona by Edison of Edison’s interests in the Four Corners Project pursuant to that certain Purchase and Sale Agreement, dated as of November 8, 2010 (the “ Purchase Agreement ”). As of the effective date of Amendment No. 7, Edison is no longer a party to this Agreement, and all references to Edison as well as Edison’s designation as a Participant, as that term is defined in Section 5.27 herein, are limited to facts or matters occurring or agreements entered into prior to the effective date of Amendment No. 7.”

4. Amendment of Section 5.11(a) . Section 5.11(a) is hereby amended to delete the language after “Clerk,” in the sixth line and replace it with “as amended from time to time.” References in the Co-Tenancy Agreement to the effective date thereof or of a particular provision or instrument shall mean the effective date of the original Co-Tenancy Agreement or of the particular provision or instrument when first referenced in the original Co-Tenancy Agreement as then amended.”

5. Amendment of Section 5.27 . Section 5.27 is hereby amended to delete “, Edison” in the second line thereof, to add the following clause immediately following “Project” in the third line thereof: “, and, when referring specifically to facts or matters occurring or agreements entered into prior to the effective date of Amendment No. 7, Edison”,” and to add the following sentence immediately following the last sentence thereof: “The term “Original Participants” shall refer to “Arizona, El Paso, New Mexico, Salt River Project, Edison and Tucson.”.

6. Amendment of Section 6.2. Section 6.2 is hereby amended to read in full as follows:
“6.2 The Participants shall hold title to and own as tenants in common all the facilities forming part of the Four Corners Project (excluding the Common Facilities, the Switchyard Facilities, the New Facilities, the Related Facilities not included in the New Facilities, and the Reserve Auxiliary Power Source) as follows:
6.2.1 Arizona shall own an undivided 63% interest therein.
6.2.2 El Paso shall own an undivided 7% interest therein.
6.2.3 New Mexico shall own an undivided 13% interest therein.
6.2.4 Salt River Project shall own an undivided 10% interest therein.
6.2.5 Tucson shall own an undivided 7% interest therein.”
7. Amendment of Section 6.2(a) . Section 6.2(a) is hereby amended to read in full as follows:

“6.2(a) The Participants shall hold title to and own as tenants in common the Related Facilities not included in the New Facilities existing on the effective date of Amendment No. 7 as follows:

2



6.2(a)1 Arizona shall own an undivided 73.20% interest therein.
6.2(a)2 El Paso shall own an undivided 5.07% interest therein.
6.2(a)3 New Mexico shall own an undivided 9.42% interest therein.
6.2(a)4 Salt River Project shall own an undivided 7.24% interest therein.
6.2(a)5 Tucson shall own an undivided 5.07% interest therein.
The Participants shall hold title to and own as tenants in common all Related Facilities, including improvements thereto, acquired or constructed after the effective date of Amendment No. 7 as follows:
6.2(a)6 Arizona shall own an undivided 63% interest therein.
6.2(a)7 El Paso shall own an undivided 7% interest therein.
6.2(a)8 New Mexico shall own an undivided 13% interest therein.
6.2(a)9 Salt River Project shall own an undivided 10% interest therein.
6.2(a)10 Tucson shall own an undivided 7% interest therein.”
8. Amendment of Section 6.3.1 . Section 6.3.1 is hereby amended to substitute “63%” for “15%” in the first line thereof.

9. Amendment of Section 6.3.2 . Section 6.3.2 is hereby amended to substitute “[Reserved]” for the text thereof.

10. Amendment of Section 6.3(a)1 . Section 6.3(a)1 is hereby amended to substitute “Arizona” for “Edison” in the first line thereof.

11. Amendment of Section 6.4.1 . Section 6.4.1 is hereby amended to substitute “63%” for “15%” in the first line thereof.

12. Amendment of Section 6.4.2 . Section 6.4.2 is hereby amended to substitute “[Reserved]” for the text thereof.

13. Amendment of Section 6.5 . Section 6.5 is hereby amended read in full as follows:

“6.5 The Participants shall hold title to and own as tenants in common the Common Facilities and the Existing Related Facilities included in the New Facilities, in both cases, existing on the effective date of Amendment No. 7 as follows:
6.5.1 Arizona shall own an undivided 73.20% interest therein.
6.5.2 El Paso shall own an undivided 5.07% interest therein.

3



6.5.3 New Mexico shall own an undivided 9.42% interest therein.
6.5.4 Salt River Project shall own an undivided 7.24% interest therein.
6.5.5 Tucson shall own an undivided 5.07% interest therein.
The Participants shall hold title to and own as tenants in common all Future Related Facilities, including improvements thereto, acquired or constructed after the effective date of Amendment No. 7 as follows:
6.5.6 Arizona shall own an undivided 63% interest therein.
6.5.7 El Paso shall own an undivided 7% interest therein.
6.5.8 New Mexico shall own an undivided 13% interest therein.
6.5.9 Salt River Project shall own an undivided 10% interest therein.
6.5.10 Tucson shall own an undivided 7% interest therein.”
14. Amendment of Section 6.6.1 . Section 6.6.1 is hereby amended to substitute “63%” for “15%” in the first line thereof.

15. Amendment of Section 6.6.2 . Section 6.6.2 is hereby amended to substitute “[Reserved]” for the text thereof.

16. Amendment of Section 6.7 . Section 6.7 is hereby amended to delete “Edison,” from the second line thereof.

17. Amendment of Section 6.8 . Section 6.8 is hereby amended to delete “Edison,” from the second line thereof.

18. Amendment of Section 6.9 . Section 6.9 is hereby amended to delete “Edison,” from the third line thereof.

19. Amendment of Section 7.1.1 . Section 7.1.1 is hereby amended to substitute “75.33%” for “43.33%” in the first line thereof.

20. Amendment of Section 7.1.2 . Section 7.1.2 is hereby amended to substitute “[Reserved]” for the text thereof.

21. Amendment of Section 7.2.1 . Section 7.2.1 is hereby amended to substitute “52.23%” for “40.23%” in the first line thereof.

22. Amendment of Section 7.2.2 . Section 7.2.2 is hereby amended to substitute “[Reserved]” for the text thereof.

23. Amendment of Section 7.3.1 . Section 7.3.1 is hereby amended to substitute “63%” for “15%” in the first line thereof.

4



24. Amendment of Section 7.3.2 . Section 7.3.2 is hereby amended to substitute “[Reserved]” for the text thereof.

25. Amendment of Section 7.4.1 . Section 7.4.1 is hereby amended to substitute “57.90%” for “54.44%” in the first line thereof.

26. Amendment of Section 7.4.2 . Section 7.4.2 is hereby amended to substitute “[Reserved]” for the text thereof.

27. Amendment of Section 7.5.1 . Section 7.5.1 is hereby amended to substitute “62.45%” for “19.25%” in the first line thereof.

28. Amendment of Section 7.5.2 . Section 7.5.2 is hereby amended to substitute “[Reserved]” for the text thereof.

29. Amendment of Section 7.7 . Section 7.7 is hereby amended to delete “Edison,” from the second line thereof.

30. Amendment of Section 8.1.1 . Section 8.1.1 is hereby amended to substitute “63%” for “15%” in the first line thereof.

31. Amendment of Section 8.1.2 . Section 8.1.2 is hereby amended to substitute “[Reserved]” for the text thereof.

32. Amendment of Section 10.1 . Section 10.1 is hereby amended to read in full as follows:

“10.1
If, because of emergency or planned shutdowns of Common Facilities or Related Facilities or the curtailment for any cause in the use thereof, Units 1, 2, 3 (prior to their respective retirements), 4 and 5 are not all operable simultaneously and continuously at their Net Effective Generating Capacity, then the reduced capacity entitlement of each Participant, because of the inability to operate said Units simultaneously and continuously at their Net Effective Generating Capacity, shall be determined as follows:
Reduced Capacity Entitlement of
Initial Four Corners Plant
C = N x NEGC 1  
NEGC 2  
Reduced Capacity Entitlement of
Four Corners Project
CD1U = N x (NEGC 2 - NEGC 1 ) x P
NEGC 2  

5



Where:
C = Reduced capacity entitlement of Arizona in Initial Four Corners Plant.
CD 1U = With respect to each Participant, the reduced capacity entitlement of such Participant in the Four Corners Project.
N = Reduced Net Effective Generating Capacity of the Enlarged Four Corners Generating Station.
NEGC 1 = The Net Effective Generating Capacity of the Initial Four Corners Plant at the time of such emergency or planned shutdown or curtailment.
NEGC 2 = The Net Effective Generating Capacity of the Enlarged Four Corners Generating Station at the time of such emergency or planned shutdown or curtailment.
P = With respect to each Participant, such Participant’s percentage of Net Effective Generation under Section 8.1.”
33. Amendment of Section 10.3. Section 10.3 is hereby amended to read in full as follows:

“10.3
Except as otherwise provided in this Section 10, no Participant shall exercise its rights relating to the Common Facilities or Related Facilities so as to endanger or unreasonably interfere with the operation of the Initial Four Corners Plant (prior to the retirement of each of Units 1, 2 and 3 of the Initial Four Corners Plant) or the Four Corners Project.”
34. Compliance with Section 13.11.2 and Section 13.12 of the Co-Tenancy Agreement . In accordance with Section 13.11.2 of the Co-Tenancy Agreement, Arizona agrees to assume from and after the Amendment No. 7 Effective Date the obligations and duties of Edison under the Project Agreements. In accordance with Section 13.12 of the Co-Tenancy Agreement, Arizona agrees that it shall not transfer or assign all or any portion of the Transfer Interest acquired by Arizona upon consummation of the Edison Interest Transfer without complying with Section 13 of the Co-Tenancy Agreement.

35. Amendment of Section 23.1.3. Section 23.1.3 is hereby amended to read in full as follows:

“23.1.3 Public Service Company of New Mexico
c/o Secretary
Main Offices
Albuquerque, New Mexico 87158-1245”

36. Amendment of Section 23.1.5. Section 23.1.5 is hereby amended to substitute “[Reserved]” for the text thereof.

6


37. Amendment of Exhibit 2, Figure 1 . Figure 1 of Exhibit 2 is hereby replaced in its entirety by Figure 1 attached to this Amendment.

38. Amendment No. 7 Effective Date; Termination . The “ Amendment No. 7 Effective Date ” means the date of consummation of the Edison Interest Transfer pursuant to the Purchase Agreement (the “ Edison Transfer Closing Date ”); provided, however, that this Amendment will terminate if (a) Arizona or Edison provides written notice to the Parties to the effect that the Edison Transfer Closing Date will not occur, or (b) the Purchase Agreement is terminated, or (c) the Edison Transfer Closing Date does not occur on or prior to December 31, 2013.

39. Notices . Any notice provided for in this Amendment shall be deemed properly served, given or made if delivered in person or sent by registered or certified mail, postage prepaid, to the persons specified below:
Arizona Public Service Company
c/o Secretary
P.O. Box 53999
Phoenix, Arizona 85072 3999

El Paso Electric Company
c/o Secretary
P.O. Box 982
El Paso, Texas 79960

Public Service Company of New Mexico
c/o Secretary
Main Offices
Albuquerque, New Mexico 87158-1245

Salt River Project Agricultural
Improvement and Power District
c/o Secretary
P.O. Box 1980
Phoenix, Arizona 85281

Southern California Edison Company
c/o Secretary
P.O. Box 800
Rosemead, California 91770

Tucson Electric Power Company
c/o Secretary
P.O. Box 711
Tucson, Arizona 85702

7




40. Effect of Amendment . The Parties acknowledge and agree that (a) except as specifically amended by this Amendment, the Co-Tenancy Agreement is unamended, and (b) the Co-Tenancy Agreement, as amended by this Amendment, remains in full force and effect.

41. Counterparts; Facsimile . This Amendment may be executed in any number of counterparts, each of which will be deemed an original, but all of which together shall constitute one and the same instrument. Any facsimile copies hereof or signature hereon shall, for all purposes, be deemed originals.






8



































EXHIBIT 10.03
FOUR CORNERS PROJECT OPERATING AGREEMENT AMENDMENT NO. 13
1.
PARTIES :

The parties to this Amendment No. 13 (this “Amendment”) to the Four Corners Project Operating Agreement (the “Operating Agreement”) are: ARIZONA PUBLIC SERVICE COMPANY, an Arizona corporation; EL PASO ELECTRIC COMPANY, a Texas corporation; PUBLIC SERVICE COMPANY OF NEW MEXICO, a New Mexico corporation; SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, an agricultural improvement district, organized and existing under the laws of the State of Arizona; SOUTHERN CALIFORNIA EDISON COMPANY, a California corporation; and TUCSON ELECTRIC POWER COMPANY, an Arizona corporation, formerly known as Tucson Gas & Electric Company (collectively, hereinafter referred to as the “Participants”).

2.
RECITALS :

This Amendment is made with reference to the following facts, among others:

2.1.
The Operating Agreement has been amended by Amendment No. 1, dated August 5, 1974; Amendment No. 2, dated September 1, 1975; Amendment No. 3, dated March 23, 1981; Amendment No. 4, dated January 21, 1982; Amendment No. 5, dated January 11, 1982; Amendment No. 6, dated February 25, 1982; Amendment No. 7, dated January 1, 1983; Amendment No. 8, dated July 5, 1989; Amendment No. 9, dated October 6, 1989; Amendment No. 10, dated May 30, 1991;

1


Amendment No. 11, dated May 23, 1997; and Amendment No. 12, dated February 3, 2000.

2.2
The Participants wish to now amend or otherwise modify the Operating Agreement in order to create a Switchyard Engineering and Operating Committee that will, in lieu of the Engineering and Operating Committee, oversee the operation and maintenance of the Switchyard Facilities, as provided for in this Amendment.

2.3
Capitalized terms not otherwise defined in this Amendment shall have the meanings given to them in the Operating Agreement.

3.
AGREEMENT :

For and in consideration of the premises and the mutual obligations of, and undertakings by, the Participants, as hereinafter provided in this Amendment, the Participants agree as follows:

4.
DEFINITIONS :

The term “Switchyard Facilities” shall have the meaning given to it in Section 5.72 of the Operating Agreement. Exhibit 1 of this Amendment, however, is included as a reference with respect to the ownership percentages of the Switchyard Facilities.

5.
COORDINATION COMMITTEE; CHANGE IN SCOPE OF RESPONSIBILITIES :
The Operating Agreement is hereby amended by adding the following to Section 7.2:
7.2.5.
Exercise general supervision over the Switchyard Engineering and Operating Committee.
7.2.6.
Consider and act upon all matters referred to the Coordination Committee by the Switchyard Engineering and Operating Committee.

2



6.
ENGINEERING AND OPERATING COMMITTEE; CHANGE IN SCOPE OF RESPONSIBILITIES :

Section 8 of the Operating Agreement is hereby amended by adding the following to the end of Section 8.1:
The Engineering and Operating Committee’s functions and responsibilities set forth in this Operating Agreement shall no longer apply to the Switchyard Facilities, to the extent the continued application of such functions and responsibilities to the Switchyard Facilities after the effectiveness of this Amendment would be duplicative of, or inconsistent with, the functions and responsibilities of the Switchyard Engineering and Operating Committee for the Switchyard Facilities under this Operating Agreement or assigned to the Switchyard Engineering and Operating Committee by the Coordination Committee.

7.
SWITCHYARD ENGINEERING AND OPERATING COMMITTEE:

The Operating Agreement is hereby amended by adding Section 8A as follows:
8A.1. The Switchyard Engineering and Operating Committee is hereby established. It shall consist of not more than two representatives designated by each of the Participants. Each such representative shall be authorized by the Participant by whom he or she is designated to act on its behalf, with respect to those matters that are the responsibilities of the Switchyard Engineering and Operating Committee.
8A.2. The Switchyard Engineering and Operating Committee shall be and remain in existence during the term of the Operating Agreement; provided, however, that any action or determination of the Switchyard Engineering and Operating Committee shall require an affirmative vote of all Participants, acting through

3



their respective representatives, that have an ownership interest in that portion of the Four Corners Project that is the subject matter of the action or determination. Only those Participants having an ownership interest in that portion of the Four Corners Project that is the subject matter of an action or determination may participate in the discussions relating to such action or determination; provided, however, that this restriction shall apply only when required by a regulatory authority with jurisdiction over the Participants(s), an applicable code of conduct, or a Participant’s reasonable competitive concerns.
8A.3. The Switchyard Engineering and Operating Committee shall have the following functions and responsibilities for the Switchyard Facilities:
8A.3.1.
Review and approve the following items to the extent related to the performance of Operating Work related to the Switchyard Facilities:
8A.3.1.1.
Practices and procedures for accounting for transmission losses applicable to the Switchyard Facilities.
8A.3.1.2.
The annual capital expenditures budget.
8A.3.1.3.
The annual operating and maintenance budget.
8A.3.1.4.
The written statement of operating and maintenance practices and procedures.
8A.3.1.5.
Planned maintenance schedules.
8A.3.1.6.
Policies for establishing inventories of Emergency Spare Parts, and Materials, and Supplies.

4



8A.3.1.7.
Statistical and administrative reports, budgets and information, and other similar records, and the form and preparation thereof, to be kept and performed by the Operating Agent.
8A.3.1.8.
Procedures for determining the Capacity of the Switchyard Facilities.
8A.3.1.9.
Procedures for capital and operating and maintenance expenditures.
8A.3.1.10.
Procedures for performance testing.
8A.3.1.11.
Procedures for maintaining complete and accurate Power and Energy
accounting, as applicable to the Switchyard Facilities only.
8A.3.1.12.
In consultation with the Operating Agent and Engineering and
Operating Committee, procedures for managing Operating
Emergencies or curtailed operations.
8A.3.2.
In conjunction with the Engineering and Operating Committee, establish the criteria under which Unit 3 will be tripped, in accordance with the Unit Tripping Agreement.
8A.3.3.
Perform such other functions and responsibilities as may be assigned to it from time to time by the Coordination Committee.
8A.4. The Switchyard Engineering and Operating Committee shall have no authority to modify any of the provisions of the Operating Agreement.

5



8A.5.
The Switchyard Engineering and Operating Committee shall keep written minutes and records of all meetings, and any action or determination made by the Switchyard Engineering and Operating Committee shall be reduced to writing and shall become effective when signed by either representative of each Participant on the Switchyard Engineering and Operating Committee or an authorized alternate except that, in the event of an Operating Emergency, action may be taken or a determination may be made on the basis of oral approvals and such action or determination subsequently shall be reduced to writing.
8A.6.
Each Participant shall notify the other Participants promptly of any change in the designation of its representatives on the Switchyard Engineering and Operating Committee. Any of the Participants may, by written notice to the other Participants, designate an alternate or substitute to act as such representative in the absence of any of its regular members or to act on specified occasions with respect to specified matters.
8A.7. The Switchyard Engineering and Operating Committee shall direct that, pursuant to FERC requirements, an ad hoc committee be formed to review all Participant and third party requests to add facilities or interconnect to the Switchyard Facilities.
8A.8. The Switchyard Engineering and Operating Committee shall have the authority to review and approve requests from any Participant to affix its name to Switchyard Facilities capital items, the granting of such approval only being subject to guidelines to be established by the Switchyard Engineering and Operating Committee as to the manner and location on which the name shall be affixed.

6



8.
EXECUTION BY COUNTERPARTS :

This Amendment may be executed in any number of counterparts, and upon execution by all of the Participants, the counterparts shall have the same force and effect as an original instrument and as if all of the Participants had signed the same instrument. Any signature page of this Amendment may be detached from any counterpart of this Amendment without impairing the legal effect of any signature thereon, and may be attached to another counterpart of this Amendment identical in form hereto but having attached to it one or more signature pages.

9.
EFFECT OF AMENDMENTS :

Except as specifically amended or otherwise modified herein, the Operating Agreement, as previously amended, shall remain in full force and effect.

10.
EFFECTIVE DATE :

This Amendment shall be effective upon the date when executed by all of the Participants.

[Remainder of page intentionally left blank; signature page follows]

7



11.
SIGNATURE CLAUSE :

The signatories hereto represent that they have been appropriately authorized to enter into this Amendment on behalf of the party for whom they sign. This Amendment is hereby executed as of the 1st day of December , 2010.
ARIZONA PUBLIC SERVICE COMPANY

By _______________________     

Its _______________________     

EL PASO ELECTRIC COMPANY

By _______________________     

Its _______________________     

PUBLIC SERVICE COMPANY OF NEW MEXICO

By _______________________     

Its _______________________     

SOUTHERN CALIFORNIA EDISON COMPANY

By ______________________     

Its ______________________     

TUCSON ELECTRIC POWER COMPANY

By _____________________     

Its _____________________     

Review by SRP Legal Services          SALT RIVER PROJECT AGRICULTURAL
IMPROVEMENT AND POWER DISTRICT

By:______________________          By: ______________________     

Printed Name:_____________          Its: ______________________     


8



































EXHIBIT 10.04

AMENDMENT NO. 14 TO FOUR CORNERS PROJECT OPERATING AGREEMENT
THIS AMENDMENT NO. 14 TO FOUR CORNERS PROJECT OPERATING AGREEMENT (this “ Amendment ”) is made and entered into as of December 30, 2013, by and among ARIZONA PUBLIC SERVICE COMPANY, an Arizona corporation (“ Arizona ”); EL PASO ELECTRIC COMPANY, a Texas corporation (“ El Paso ”); PUBLIC SERVICE COMPANY OF NEW MEXICO, a New Mexico corporation (“ New Mexico ”); SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, an agricultural improvement district, organized and existing under the laws of the State of Arizona (“ Salt River Project ”); SOUTHERN CALIFORNIA EDISON COMPANY, a California corporation (“ Edison ”); and TUCSON ELECTRIC POWER COMPANY, an Arizona corporation (“ Tucson ”). Arizona, El Paso, New Mexico, Salt River Project, Edison and Tucson are herein collectively referred to as the “ Parties ”.
RECITALS
The Parties entered into the Four Corners Project Operating Agreement, effective as of March 1, 1967, and amendments thereto through Amendment No. 13, dated December 1, 2010 (as amended by such amendments, the “ Operating Agreement ”), providing, among other things, for the operation and management of the Four Corners Project.
Arizona and Edison are parties to a Purchase and Sale Agreement, dated as of November 8, 2010 (the “ Purchase Agreement ”), providing, among other things, for the sale by Edison to Arizona, and the purchase by Arizona from Edison, of Edison’s interests in the Four Corners Project and the Facilities Switchyard (the “ Edison Interest Transfer ”).
Following the Edison Interest Transfer, Arizona, the owner of the Initial Four Corners Plant, intends to retire Units 1, 2 and 3 of the Initial Four Corners Plant.
This Amendment will take effect on the Amendment No. 14 Effective Date, as defined herein.
STATEMENT OF AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

1. Defined Terms . Defined terms used but not defined in this Amendment shall have the respective meanings ascribed to such terms in the Operating Agreement.

2. Amendment of Section 1 . Section 1 is hereby amended to delete “SOUTHERN CALIFORNIA EDISON COMPANY, a California corporation (hereinafter referred to as “Edison”);” from the eighth line thereof.

3. Amendment of Section 2.5 . Section 2.5 is hereby amended to substitute “Southern California Edison Company, a California corporation (hereinafter referred to as “Edison”)” for “Edison” in the first line thereof, and to add the following sentence immediately





following the last sentence thereof: “Amendment No. 14 to this Agreement provides, among other things, for updated ownership percentages as they existed following the consummation of the transfer to Arizona by Edison of Edison’s interests in the Four Corners Project pursuant to that certain Purchase and Sale Agreement, dated as of November 8, 2010 (the “Purchase Agreement”). As of the effective date of Amendment No. 14 to this Agreement, Edison will no longer be a party to this Agreement, and all references to Edison as well as Edison’s designation as a Participant, as that term is defined in Section 5.56 herein, are limited to facts or matters occurring or agreements entered into prior to the effective date of Amendment No. 14 to this Agreement.”

4. Amendment of Section 5.23 . Section 5.23 is hereby amended to substitute “and as amended from time to time” for the clause “and as amended by Amendment No. 3 executed contemporaneously with Amendment No. 6 to this Operating Agreement.”

5. Amendment of Section 5.47 . Section 5.47 is hereby amended to add after the word “Agreement” the following:
“, as amended from time to time. References in the Operating Agreement to the effective date thereof or of a particular provision shall mean the effective date of the original Operating Agreement or of the particular provision when first referenced in the original Operating Agreement, as then amended.
6. Amendment of Section 5.56 . Section 5.56 is hereby amended to delete “, Edison” in the second line thereto, and to add the following clause immediately following “Project” in the third line thereof: “, and, when referring specifically to facts or matters occurring or agreements entered into prior to the effective date of Amendment No. 14 to this Agreement, Edison”, and to add the following sentence immediately following the last sentence thereof: “The term “Original Participants” shall refer to Arizona, El Paso, New Mexico, Salt River Project, Edison and Tucson.”

7. Amendment of Section 6.2 . Section 6.2 is hereby amended to delete “, Edison” from the first line thereof.

8. Amendment of Section 8A.3.2 . Section 8A.3.2 is hereby amended to add the following sentence at the end thereof:

“Upon the retirement of each of Units 1, 2 and 3, this Section 8A.3.2 shall be of no force and effect.”
9. Amendment of Section 8.2.3 . Section 8.2.3 is hereby amended to read in full as follows:
    
“Establish procedures for the delivery of coal to the Minimum Coal Storage Pile if one is maintained.”
10. Deletion of Section 8.2.9 . Section 8.2.9 is hereby deleted in its entirety and Section 8.2.10 is renumbered Section 8.2.9 .

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11. Amendment of Section 17.1.1.2 . Section 17.1.1.2 is hereby amended to substitute “63%” for “15%” in the first line thereof, and to delete “Edison 48%” in the second line thereof.

12. Amendment of Section 17.1.1.3 . Section 17.1.1.3 is hereby amended to substitute “75.33%” for “43.33%” in the first line thereof, and to delete “Edison 32%” in the second line thereof.

13. Amendment of Section 17.1.1.4 . Section 17.1.1.4 is hereby amended to substitute “52.23%” for “40.23%” in the first line thereof, and to delete “Edison 12%” in the second line thereof.

14. Amendment of Section 17.1.1.6 . Section 17.1.1.6 is hereby amended to substitute “57.90%” for “54.44%” in the first line thereof, and to delete “Edison 3.46%” in the second line thereof.

15. Amendment of Section 17.1.1.7 . Section 17.1.1.7 is hereby amended to substitute “63%” for “15%” in the first line thereof, and to delete “Edison 48%” in the second line thereof.

16. Amendment of Section 17.1.1.8 . Section 17.1.1.8 is hereby amended to substitute “62.45%” for “19.25%” in the first line thereof, and to delete “Edison 43.2%” in the second line thereof.

17. Amendment of Section 17.1.1.9 . Section 17.1.1.9 is hereby amended to read in full as follows:

“17.1.1.9(a)      Common Facilities and Related Facilities - for Operating Costs incurred prior to, or required to satisfy liabilities related to operation of the Common and Related Facilities, prior to the effective date of Amendment No. 14.
Arizona              73.20%
El Paso              5.07%
New Mexico              9.42%
Salt River Project          7.24%
Tucson                  5.07%

17.1.1.9(b)      Common Facilities and Related Facilities - for all Operating Costs not covered by Section 17.1.1.9(a).
Arizona              63%
El Paso              7%
New Mexico              13%
Salt River Project          10%
Tucson                  7%

provided, that if any of Units 1, 2 or 3 of the Initial Four Corners Plant is operated for a period after the effective date of Amendment No. 14, the Operating Agent shall adjust the percentages in this Section 17.1.1.9(b) during such period to reflect the operation of such Unit(s) at the Initial Four Corners Plant, subject to review by the Auditing Committee.

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Operating Costs which cannot be assigned to any generating Unit or facility but apply to all units shall be shared among all Participants at the Enlarged Four Corners Generating Station in the same said percentages as the Common Facilities and Related Facilities.”
18. Amendment of Section 17.12. Section 17.12 is hereby amended to read in full as follows:

“17.12      The Participants shall reimburse Arizona for other costs incurred in operating the Four Corners Project which are not specifically delineated in the Operating Agreement. Such reimbursement shall be shared by the Participants in proportion to their respective Participant Share(s). The reimbursement methodology shall be determined pursuant to the guidelines presented in Sections 17.9.3, 17.9.4 and 17.9.5.”
19. Amendment of Section 19.19 . Section 19.19 is hereby amended to substitute “81.50%” for “57.50%” in the fifth line thereof, and to delete “Edison 24.00%” from the ninth line thereof.

20. Amendment of Section 21.1.4 . Section 21.1.4 is hereby amended to read in full as follows

“21.1.4. Physical damage insurance, covering the Four Corners Project”

21. Amendment of Section 24.1.1 . Section 24.1.1 is hereby amended to add the following sentence after the final sentence thereof: “Normal delivery points for Arizona shall also be where Arizona’s 500kV transmission line is attached to the 500kV bus in the 500kV switchyard. Such point is shown on Exhibit 2 hereof as position #9.”

22. Amendment of Section 24.1.2 . Section 24.1.2 is hereby amended to substitute “[Reserved]” for the text thereof.

23. Amendment of Section 24.2.1 . Section 24.2.1 is hereby amended to add the following sentence after the final sentence thereof: “Arizona shall also be entitled to sufficient Capacity in the 345kV switchyard to permit 21.6 megawatts of its entitlement of Power and Energy from Units 4 and 5 to be delivered from said units, or from position #9 in the 500kV switchyard, to the point where the Connection to 345kV Switchyard Facilities is attached to the 345kV bus in the 345kV switchyard (positions #1 and #3).”

24. Amendment of Section 24.2.4 . Section 24.2.4 is hereby amended to substitute “[Reserved]” for the text thereof.

25. Amendment of Section 24.4 . Section 24.4 is hereby amended to substitute “57.90%” for “54.44%” in the third line thereof, and to delete “Edison 3.46%” in the fourth line thereof.

26. Deletion of Sections 26.3, 26.4, 26.5 and 26.6 . Sections 26.3, 26.4, 26.5 and 26.6 are hereby deleted in their entirety.

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27. Amendment of Section 32.1.3. Section 32.1.3 is hereby amended to read in full as follows:

“32.1.3. Public Service Company of New Mexico
c/o Secretary
Main Offices
Albuquerque, New Mexico 87158-1245”

28. Amendment of Section 32.1.5. Section 32.1.5 is hereby amended to substitute “[Reserved]” for the text thereof.

29. Amendment of Exhibit 2 . Exhibit 2 is hereby amended as follows:

To substitute “63%” for “15%” in the first line of the “PROJECT ALLOCATION” table relating to the “CONNECTION TO RESERVE AUXILIARY POWER SOURCE,” and to delete “Edison 48%” from the second line thereof.
To substitute “57.90%” for “54.44%” in the first line of the “COST ALLOC. & OWNERSHIPS” table relating to the “NO.1 230/345KV BUS TIE TRANSFORMER,” and to delete “Edison 3.46%” from the second line thereof.
To substitute “62.45%” for “19.25%” in the first line of the “COST ALLOCATION & OWNERSHIPS” table relating to the “CONNECTION TO 345KV SWITCHYARD FACILITIES,” and to delete “Edison 43.20%” from the second line thereof.
To substitute “75.33%” for “43.33%” in the first line of the “COST ALLOCATION & OWNERSHIPS” table relating to the “500KV SWITCHYARD LIMITS,” and to delete “Edison 32.00%” from the second line thereof.
To substitute “52.23%” for “40.23%” in the first line of the “COST ALLOCATION & OWNERSHIPS” table relating to the “345KV SWITCHYARD LIMITS,” and to delete “Edison 12.00%” from the second line thereof.
To substitute “63%” for “15%” in the first line of the “PROJECT ALLOCATION” table relating to the “345/500KV, 4-16 250MVA EA.” diagram on the lower right corner of Exhibit 2, and to delete “Edison 48.00%” from the second line thereof.
30. Deletion of Exhibit 4 . Exhibit 4 is hereby deleted in its entirety.

31. Amendment No. 14 Effective Date; Termination . The “ Amendment No. 14 Effective Date ” means the date of consummation of the Edison Interest Transfer pursuant to the Purchase Agreement (the “ Edison Transfer Closing Date ”); provided, however, that this Amendment will terminate if (a) Arizona or Edison provides written notice to the Parties to the effect that the Edison Transfer Closing Date will not occur, (b) the Purchase Agreement is terminated, or (c) the Edison Transfer Closing Date does not occur on or prior to December 31, 2013.

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32. Notices . Any notice provided for in this Amendment shall be deemed properly served, given or made if delivered in person or sent by registered or certified mail, postage prepaid, to the persons specified below:
Arizona Public Service Company
c/o Secretary
P.O. Box 53999
Phoenix, Arizona 85072‑3999

El Paso Electric Company
c/o Secretary
P.O. Box 982
El Paso, Texas 79960

Public Service Company of New Mexico
c/o Secretary
Main Offices
Albuquerque, New Mexico 87158-1245

Salt River Project Agricultural
Improvement and Power District
c/o Secretary
P.O. Box 1980
Phoenix, Arizona 85281

Southern California Edison Company
c/o Secretary
P.O. Box 800
Rosemead, California 91770

Tucson Electric Power Company
c/o Secretary
P.O. Box 711
Tucson, Arizona 85702

33. Effect of Amendment . The Parties acknowledge and agree that (a) except as specifically amended by this Amendment, the Operating Agreement is unamended, and (b) the Operating Agreement, as amended by this Amendment, remains in full force and effect.

34. Counterparts; Facsimile . This Amendment may be executed in any number of counterparts, each of which will be deemed an original, but all of which together shall constitute one and the same instrument. Any facsimile copies hereof or signature hereon shall, for all purposes, be deemed originals.








6






































EXHIBIT 10.05


AMENDMENT NO. 1 TO SHIPROCK - FOUR CORNERS PROJECT 345-KV SWITCHYARD INTERCONNECTION AGREEMENT
THIS AMENDMENT NO. 1 TO SHIPROCK - FOUR CORNERS PROJECT 345-KV SWITCHYARD INTERCONNECTION AGREEMENT (this “ Amendment ”) is made and entered into as of December 30, 2013, by and among ARIZONA PUBLIC SERVICE COMPANY (“ Arizona ”), an Arizona corporation; El PASO ELECTRIC COMPANY (“ El Paso ”), a Texas corporation; PUBLIC SERVICE COMPANY OF COLORADO (“ PSCo ”), a Colorado corporation; PUBLIC SERVICE COMPANY OF NEW MEXICO (“ PNM ”), a New Mexico corporation; SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT (“ Salt River Project ”), an agricultural improvement district, organized and existing under the laws of the State of Arizona; SOUTHERN CALIFORNIA EDISON COMPANY (“ Edison ”), a California corporation; TRI‑STATE GENERATION AND TRANSMISSION ASSOCIATION, INC. (“ Tri-State ”), a Colorado cooperative corporation doing business in the states of Colorado, Nebraska, New Mexico, and Wyoming; TUCSON ELECTRIC POWER COMPANY (“ Tucson ”), an Arizona corporation; and THE UNITED STATES OF AMERICA acting by and through the Administrator, Western Area Power Administration, Department of Energy (“ Western ”), represented by the officer executing this Agreement or a duly appointed successor; individually referred to as “ Party ” and collectively as “ Parties ”.
RECITALS
The Parties entered into the Shiprock - Four Corners Project 345-kV Switchyard Interconnection Agreement, accepted by the Federal Energy Regulatory Commission on September 23, 2002 (the “ Interconnection Agreement ”), providing, among other things, the terms and conditions relating to the relocation and upgrade of the Four Corners Project transmission line.
Arizona and Edison are parties to a Purchase and Sale Agreement, dated as of November 8, 2010 (the “ Purchase Agreement ”), providing, among other things, for the sale by Edison to Arizona, and the purchase by Arizona from Edison, of Edison’s interests in the Four Corners Project and the Switchyard Facilities (the “ Edison Interest Transfer ”).
This Amendment will take effect on the Amendment No. 1 Effective Date, as defined herein.
STATEMENT OF AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:
1. Defined Terms . Defined terms used but not defined in this Amendment shall have the respective meanings ascribed to such terms in the Interconnection Agreement.

2. Amendment of Cover Page . The cover page of the Interconnection Agreement is hereby amended to delete “SOUTHERN CALIFORNIA EDISON COMPANY” therefrom.




3.     Amendment of Section 1 . Section 1 is hereby amended to delete “SOUTHERN CALIFORNIA EDISON COMPANY (“SCE”), a California corporation;” from the eighth line thereof.

4.     Amendment of Section 2 . Section 2 is hereby amended to add the following as Section 2.8 to the Interconnection Agreement:

“2.8
As of the effective date of Amendment No. 1 to the Interconnection Agreement, Southern California Edison Company, a California corporation (“SCE”), is no longer a party to the Interconnection Agreement or a Four Corners Participant as defined in Section 4.21 of the Interconnection Agreement following the consummation of the transfer to APS by SCE of SCE’s interests in the Four Corners Project pursuant to that certain Purchase and Sale Agreement, dated as of November 8, 2010. The term “Original Parties” shall refer to APS, EPE, PSCO, PNM, SRP, SCE, Tri-State, TEP and Western.”
5.     Amendment of Section 4.15 . Section 4.15 is hereby amended to delete “SCE,” from the second line thereof.

6.     Amendment of Section 4.21 . Section 4.21 is hereby amended to delete “SCE,” from the first line thereof.

7.     Amendment of Section 4 .32 . Section 4.32 is hereby amended to delete “SCE,” from the second line thereof.

8.     Amendment of Section 35.1 . Section 35.1 is hereby amended to delete the following:

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

9.     Amendment of Exhibit 1 . Exhibit 1 is hereby amended to substitute the following “ Ownership ” table in its entirety for the “ Ownership ” table in the bottom right-hand corner of the exhibit:

Ownership
APS
52.23%
SRP
10.00%
EPE
10.50%
TEP
4.65%
PNM
22.62%
 
 
 
 
 
 

10.     Amendment of Exhibit 4 . Exhibit 4 is hereby amended to include the following paragraph following the “ Notes ” section thereof:

“This Exhibit 4 reflects the historical allocations of the Common Facilities Costs which were incurred under the Interconnection Agreement. Amendment No. 1 to the


2


Interconnection Agreement (“Amendment No. 1”), provides, among other things, for updated ownership percentages as they existed following the consummation of the transfer to APS by SCE of SCE’s interests in the Four Corners Project pursuant to that certain PURCHASE AND SALE AGREEMENT, dated as of November 8, 2010 (the “Purchase Agreement”). As of the effective date of Amendment No. 1, SCE is no longer a party to the Interconnection Agreement.”
11.     Amendment of Exhibit 8 . Exhibit 8 is hereby replaced by Attachment 1 to this Amendment.

12 .    Amendment of Exhibit 10 . Exhibit 10 is hereby replaced by Attachment 2 to this Amendment.

13.     Amendment No. 1 Effective Date; Termination . The “ Amendment No. 1 Effective Date ” means the date of consummation of the Edison Interest Transfer pursuant to the Purchase Agreement (the “ Edison Transfer Closing Date ”); provided, however, that this Amendment will terminate if (a) Arizona or Edison provides written notice to the Parties to the effect that the Edison Transfer Closing Date will not occur, (b) the Purchase Agreement is terminated, and Edison hereby agrees to provide written notice to the other Parties of such termination, within five (5) days of such termination, or (c) the Edison Transfer Closing Date does not occur on or prior to December 31, 2013.

14.     Notices . Any notice provided for in this Amendment shall be deemed properly served, given or made if delivered in person or sent by registered or certified mail, postage prepaid, to the persons specified below:
Arizona Public Service Company
c/o Secretary
P.O. Box 53999
Phoenix, Arizona 85072‑3999

El Paso Electric Company
c/o Secretary
P.O. Box 982
El Paso, Texas 79960

Public Service Company of Colorado
c/o Manager Transmission Operations West
P.O. Box 1078
Golden, Colorado 80402-1078

Public Service Company of New Mexico
c/o Secretary
Main Offices
Albuquerque, New Mexico 87158-1245

3



Salt River Project Agricultural
Improvement and Power District
c/o Secretary
P.O. Box 1980
Phoenix, Arizona 85281

Southern California Edison Company
c/o Secretary
P.O. Box 800
Rosemead, California 91770

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

Tucson Electric Power Company
c/o Secretary
P.O. Box 711
Tucson, Arizona 85702

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

15.     Compliance with Section 28 of Interconnection Agreement . Pursuant to Section 28.2 of the Interconnection Agreement, Edison hereby provides notice to the other Parties of Edison’s assignment of its interest in the Interconnection Agreement to Arizona. Arizona agrees to assume all obligations and duties of Edison under the Interconnection Agreement.

16.     Effect of Amendment . The Parties acknowledge and agree that (a) except as specifically amended by this Amendment, the Interconnection Agreement is unamended, and (b) the Interconnection Agreement, as amended by this Amendment, remains in full force and effect.

17.     Counterparts; Facsimile . This Amendment may be executed in any number of counterparts, each of which will be deemed an original, but all of which together shall constitute one and the same instrument. Any facsimile copies hereof or signature hereon shall, for all purposes, be deemed originals.










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EXHIBIT 10.06

AMENDMENT NUMBER 16
TO THE ARIZONA NUCLEAR POWER PROJECT PARTICIPATION AGREEMENT

1.      PARTIES:

The Parties to this Amendment Number 16 to the Arizona Nuclear Power Project Participation Agreement, hereinafter referred to as "Amendment Number 16," are: ARIZONA PUBLIC SERVICE COMPANY, a corporation organized and existing under and by virtue of the laws of the State of Arizona, hereinafter referred to as "Arizona"; SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, an agricultural improvement district organized and existing under and by virtue of the laws of the State of Arizona, hereinafter referred to as "Salt River Project"; SOUTHERN CALIFORNIA EDISON COMPANY, a corporation organized and existing under and by virtue of the laws of the State of California, hereinafter referred to as "Edison"; PUBLIC SERVICE COMPANY OF NEW MEXICO, a corporation organized and existing under and by virtue of the laws of the State of New Mexico, hereinafter referred to as "PNM"; EL PASO ELECTRIC COMPANY, a corporation organized and existing under and by virtue of the laws of the State of Texas, hereinafter referred to as "El Paso"; SOUTHERN CALIFORNIA PUBLIC POWER AUTHORITY, a joint powers agency organized and existing under and by virtue of the laws of the State of California, doing business in the State of Arizona as SOUTHERN CALIFORNIA PUBLIC POWER AUTHORITY ASSOCIATION, hereinafter referred to as "SCPPA"; and DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES, a municipal corporation organized and existing under and by virtue of the laws of the State of California, hereinafter referred to as "LADWP"; all hereinafter individually referred to as "Party" and collectively as "Parties."

2.
RECITALS:

2.1
Arizona, Salt River Project, Edison, PNM, El Paso, SCPPA and LADWP are parties to a certain agreement entitled Arizona Nuclear Power Project Participation Agreement, dated as of August 23, 1973, as amended by: Amendment Number 1, dated as of January 1, 1974; Amendment Number 2, dated as of August 28, 1975; Amendment Number 3, dated as of July 22, 1976; Amendment Number 4, dated as of December 15, 1977; Amendment Number 5, dated as of December 5, 1979; Amendment Number 6, effective as of October 16, 1981; Amendment Number 7, effective as of April 1, 1982; Amendment Number 8, executed as of September 12, 1983; Amendment Number 9, executed as of June 12, 1984 Amendment Number 10, executed as of November 21, 1985; Amendment Number 11, effective January 10, 1987; Amendment Number 12, effective August 5, 1988; Amendment Number 13, effective June 15, 1991; Amendment Number 14, effective June 20, 2000, retroactive to January 1, 1993; and Amendment Number 15, effective January 13, 2011, hereinafter, as so amended, collectively referred to as the "Participation Agreement."

2.2
On April 21, 2011, the NRC, by letter to Arizona, confirmed the issuance of Renewed Facility Operating License Nos. NPF-41 (Unit 1), NPF-51 (Unit 2), and NPF -74 (Unit 3) for Palo Verde Station (collectively, the "License Extensions").

2.3
Pursuant to the License Extensions, (i) Renewed Facility Operating License No. NPF-41 (Unit 1) expires at midnight on June 1, 2045; (ii) Renewed Facility Operating License No. NPF-51 (Unit 2) expires at midnight on April 24, 2046; and (iii) Renewed Facility Operating License No. NPF-74 (Unit 3) expires at midnight on November 25, 2047




(collectively, the "Extended License"). The latest expiration date of the original licenses previously had been November 25, 2027.

2.4
Pursuant to Section 35.7 of the Participation Agreement, the latest termination date of the Participation Agreement currently is December 31, 2027, which does not include the License Extensions.

2.5
Section 8A.4.4 of the Participation Agreement currently requires each Participant to accumulate Termination Funds over "the remaining license term (as specified in the original license issued for each Generating Unit . . . ." (emphasis added)

2.6.
Arizona, PNM and El Paso (in Texas, not New Mexico) have already included in their cost of service the amounts for contributions to their decommissioning trust that reflect the Extended License ("60 Year Termination Funding Curves"), rather than the Original License ("40 Year Termination Funding Curves"), and collect from their respective ratepayers on that basis.

2.7
The Termination Funding Committee currently uses the 40 Year Termination Funding Curves to measure compliance of the Participants with the termination funding requirements set forth in the Participation Agreement and the Termination Funding Committee Manual. Therefore, the ability of Arizona, PNM and El Paso to meet their termination funding obligations is adversely impacted by the reduced recovery from their ratepayers under the 60 Year Termination Funding Curves, and their continuing obligation to maintain their Termination Funds at the higher levels required by the 40 Year Termination Funding Curves.

2.8
On June 18, 2012, the Termination Funding Committee held its annual meeting to submit its Annual Funding Status Reports and to resolve the foregoing termination funding curve issues. At the meeting, the Termination Funding Committee resolved, upon proper motion, that the 60 Year Termination Funding Curves were technically correct, and conditionally adopted the 60 Year Termination Funding Curves subject to the Administrative Committee's extension of the Participation Agreement term.

2.9
On October 19, 2012, the Administrative Committee unanimously voted to adopt the form of this Amendment Number 16.

3.    AGREEMENT:

For and in consideration of the premises and the mutual obligations of and undertakings by the Parties as hereinafter provided in this Amendment Number 16 to the Participation Agreement, the Parties agree as set forth below.

4.    EFFECTIVE DATE:

This Amendment Number 16 shall become effective on the date that the Party which last in time executes this Amendment Number 16. The amended termination funding curves that are associated with this Amendment Number 16 shall be applied retroactively to January 1, 2012.

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5.    DEFINED TERMS:

5.1
The Capitalized and italicized words and phrases used in this Amendment Number 16 shall have the meanings ascribed to them in the Participation Agreement as amended by this Amendment Number 16.

5.2
All references to a "Section" or "Sections" in this Amendment Number 16 shall mean a Section or Sections of the Participation Agreement unless the text expressly states otherwise.

6.
AMENDMENTS TO THE ARIZONA NUCLEAR POWER PROJECT MADE BY THIS AMENDMENT NUMBER 16:

6.1
Amend Section 8A.4.4, by deleting the strikethrough text and substituting therefor the underlined text:

"Within six months after the date on which Amendment No. 13 shall become effective or such other date established by the Administrative Committee, the Termination Funding Committee shall establish criteria and standards, consistent with applicable law, including the rules and regulations of the NRC [including without limitation such discount factors, allowances for inflation, bases for estimating future net earnings on accumulations in the Termination Fund(s) of the Participants and other elements as may be appropriate to provide reasonable assurance that each Participant will accumulate in its Termination Fund(s) over the then-applicable remaining license term for each Generating Unit (as specified in the original license issued for each Generating Unit authorizing fuel load and low power operation of such unit) (sufficient funds to pay such Participant's share of the most current estimate of the Termination Costs of such unit ) ] that will be used by the committee to determine whether or not the periodic deposits made by each Participant in its Termination Fund(s) have been adequate and the accumulations in its Termination Funds will be adequate to meet the requirements of Section 8A.7.2.3 hereof and to comply with applicable laws. At least once every three years the Termination Funding Committee shall review such criteria and standards and make such adjustments thereto as are warranted by the circumstances then existing or as may be required by applicable law. Additionally, the Termination Funding Committee shall establish the format, content and time for submission of the funding status reports and certificates that Participants are required to submit pursuant to Section 8A.7.2.4 hereof."


6.2
Amend Section 35.7, by deleting the strikethrough text and substituting therefor the underlined text:

"This Participation Agreement shall terminate on the earlier of: (i) the expiration date of the longest operating license period authorized by the NRC (or any governmental agency that is a successor to the NRC) for Palo Verde Station December 31, 2027, or (ii) the date on which all Generating Units shall have been permanently removed from service and all Termination Work in respect of all Generating/Terminated Units has been completed; provided, however, that . . ."


6.3
Except as amended by this Amendment Number 16, the remaining terms of the Participation Agreement shall remain in full force and effect.

7.      EXECUTION BY COUNTERPARTS:
This Amendment Number 16 may be executed in any number of counterparts, whether by facsimile, electronic signature or otherwise, and upon execution by all Participants, each executed counterpart

3



shall have the same force and effect as an original instrument and as if all Participants had signed the same instrument. Any signature page of this Amendment Number 16 may be detached from any counterpart of the Amendment Number 16 without impairing the legal effect of any signature thereon, and may be attached to another counterpart of this Amendment Number 16 identical in form hereto but having attached to it one or more signature pages.

8.    SIGNATURE CLAUSE:

Each of the signatories below represents that he/she is appropriately authorized to enter into this Amendment Number 16 on behalf of the Party for which he/she signs.


ARIZONA PUBLIC SERVICE COMPANY

By: /s/ Randall K. Edington
Its: Ex VP/CNO
Date: 4/28/14




STATE OF ARIZONA )
) SS.
County of Maricopa )

On this 28 th day of April , 2014 before me, the undersigned Notary Public, personally appeared Randall K. Edington     who acknowledged him/herself to be the     Ex VP/CNO
of ARIZONA PUBLIC SERVICE COMPANY, an Arizona corporation, and that he/she as such officer,
being authorized to do, executed the foregoing instrument for the purposes therein contained by signing
the name of the company by him/herself as such Executive Vice President/Chief Nuclear Officer .


IN WITNESS WHEREOF, I hereunto set my hand and official seal.

        

/s/ Jennifer R. Stokic
Notary Public



My Commission Expires:

1-17-2015


4







































EXHIBIT 10.07






AMENDMENT AND SUPPLEMENT NO. 2

TO

SUPPLEMENTAL AND ADDITIONAL INDENTURE OF LEASE

BETWEEN

THE NAVAJO NATION

AND

ARIZONA PUBLIC SERVICE COMPANY,

EL PASO ELECTRIC COMPANY,

PUBLIC SERVICE COMPANY OF NEW MEXICO,

SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT,

SOUTHERN CALIFORNIA EDISON COMPANY

AND

TUCSON ELECTRIC POWER COMPANY






Dated: March 7, 2011





AMENDMENT AND SUPPLEMENT NO. 2 TO
SUPPLEMENTAL AND ADDITIONAL INDENTURE OF LEASE
This Amendment and Supplement No. 2 to the Supplemental and Additional Indenture of Lease dated March 7, 2011 (this “ Amendment ”) is by and between the Navajo Nation (formerly known as The Navajo Tribe of Indians), acting through the Navajo Nation Council, for and on behalf of the Navajo Nation (hereinafter referred to as the “ Nation ”), as lessor, and Arizona Public Service Company (“ APS ”), El Paso Electric Company, Public Service Company of New Mexico, Salt River Project Agricultural Improvement and Power District, Southern California Edison Company (“ Edison ”), and Tucson Electric Power Company (formerly known as Tucson Gas & Electric Company) (hereinafter, collectively, together with their successors and assigns, referred to as the “ Lessees, ” and each individually referred to as a “ Lessee ”). The Nation and the Lessees are hereinafter collectively referred to as the “ Parties .”
The Parties agree as follows:
1
BACKGROUND .
1.1
APS has leased certain premises from the Nation under that certain Indenture of Lease dated December 1, 1960 between APS and the Nation, as supplemented and amended by that certain Supplemental and Additional Indenture of Lease dated July 6, 1966, between the Nation, APS and the other Lessees, as further supplemented and amended by that certain Amendment and Supplement No. 1 to Supplemental and Additional Indenture of Lease dated April 25, 1985, between the Nation, APS and the other Lessees (the “ 1985 Lease Supplement ”; and such Indenture of Lease, as supplemented and amended, the “ 1960 Lease ”).
1.2
Lessees have leased certain premises from the Nation under that certain Supplemental and Additional Indenture of Lease dated July 6, 1966, between the Nation and the Lessees, as supplemented and amended by the 1985 Lease


1


Supplement (such Supplemental and Additional Indenture of Lease, as supplemented and amended, the “ 1966 Lease ”).
1.3
The Parties desire to amend the 1960 Lease and the 1966 Lease to reflect certain new terms and conditions.
1.4
Edison does not intend to remain a participant in the Four Corners Project after July 2016. Accordingly, Edison intends to end its tenancy under the Lease upon the earlier of the sale of its interest in the Four Corners Project or July 6, 2016. The date on which Edison ends its tenancy, as set forth in the preceding sentence, is referred to as the “ Amendment 2 Termination Date .”
1.5    Upon the Amendment 2 Termination Date, this Amendment shall terminate.
1.6
The 1960 Lease and the 1966 Lease are amended only as set forth in this Amendment. To the extent, however, that there is any conflict between the 1960 Lease and this Amendment or the 1966 Lease and this Amendment, this Amendment shall govern.
1.7
This Amendment is not intended to and does not merge the leasehold estates of the 1960 Lease and the 1966 Lease, or the rights, liabilities, or obligations (collectively, “ Rights ”) of the Parties set forth in the 1960 Lease and the 1966 Lease. Further, in no event shall the Lessees (except for APS) have any Rights under the 1960 Lease or with respect to the leasehold estate demised to APS under the 1960 Lease. Rather, except for APS, all the Lessees’ Rights are limited only to the Four Corners Project, as set forth in the 1966 Lease.
2
Definitions .
2.1
“ § 323 Grant” or “§ 323 Grants ” - One or more grants of rights-of-way and easements under the Act of February 5, 1948 (62 Stat. 17, 18, 25 U.S.C. § 323-328), the Act of March 3, 1879 (20 Stat. 394, 5 U.S.C. § 485), as amended, and

2


the Acts of July 9, 1832, and July 27, 1868 (4 Stat. 564, 15 Stat. 228. 25 U.S.C. § 2) and such regulations promulgated thereunder, as are applicable, including 25 C.F.R. § 1.2 and 25 C.F.R. Part 169.
2.2    “ § 323 Grant Land” - Has the meaning set forth in Section 5.2.
2.3
“ Annual Payment ” - Except for (i) payments owed to the Nation under the existing Settlement and Closing Agreements that the Nation has executed with each individual Lessee, (ii) payments that will be owed to the Nation under the Settlement and Closing Agreements set forth in Section 14, and (iii) the payment set forth in Section 4.5, the total and sole payment that shall be made by (X) APS to the Nation, in consideration for the rights set forth in the 1960 Lease, including, but not limited to, (a) all leasehold rights, (b) the Existing § 323 Grants, and (c) the Renewed § 323 Grants; and by (Y) the Lessees to the Nation, in consideration for the rights set forth in the 1966 Lease, including, but not limited to, (a) all leasehold rights, (b) the Existing § 323 Grants, and (c) the Renewed § 323 Grants.
2.4
“ Communication Sites ” - The communication sites and related facilities identified within item 5 of Exhibit B.
2.5    “ Existing § 323 Grants ” - The § 323 Grants set forth on Exhibit B.
2.6    “ Four Corners Project ” - Has the meaning set forth in the 1966 Lease.
2.7    “ Initial Four Corners Plant ” - Has the meaning set forth in the 1966 Lease.
2.8    “ Plan ” - Has the meaning set forth in Section 7.1.
2.9
“ Plant ” - For convenience only, and not to merge the leasehold estates under the 1960 Lease and the 1966 Lease, a reference to the Initial Four Corners Plant and the Four Corners Project, respectively.
2.10    “ Renewed § 323 Grants ” - Has the meaning set forth in Section 4.2.


3


2.11
“ Navajo Nation Lands ” - Has the meaning set forth in the 1966 Lease for the term “Reservation Lands.”
2.12
“ Secretary ” - The Secretary of the United States Department of the Interior or his or her duly authorized designee, representative, or successor.
2.13
“ Transmission Lines ” - The electrical transmission lines and related facilities identified within items 3 and 4 of Exhibit B.
3
TERM .
3.1
This Amendment shall become effective when it has been signed by the Lessees and subsequently signed by the Nation’s duly authorized representative, pursuant to a Navajo Nation Council Resolution approving this Amendment.
3.2
The Navajo Nation Council Resolution approving this Amendment, and signature by the Nation’s duly authorized representative, shall be deemed to be sufficient legal approval by the Nation of this Amendment.
3.3    This Amendment shall terminate on the Amendment 2 Termination Date.
3.4
In the event this Amendment terminates as a result of the arrival of July 6, 2016, Edison shall not be relieved of any of its continuing or accrued and unfulfilled or unperformed obligations to the Nation under the 1966 Lease, and Edison shall retain all of its rights under the 1966 Lease with respect to such continuing obligations.

4
NATION’S CONSENT TO § 323 GRANTS BY SECRETARY FOR THE PLANT, TRANSMISSION LINES, AND COMMUNICATION SITES.
4.1
The Nation has previously consented to, and the Secretary has granted, the Existing § 323 Grants, and the renewal, extension or reissuance of each Existing § 323 Grant will be necessary.

4



4.2
The Nation consents and covenants to consent now, and for the terms of each of the 1960 Lease and the 1966 Lease (collectively, “ Consents ”), that the Lessees shall have the right to obtain, by grant from the Secretary, and the Nation Consents to the grant by the Secretary, of renewed, extended, or reissued § 323 Grants for the rights-of-way covered in the Existing § 323 Grants. (Such renewed, extended, or reissued § 323 Grants are referred to as the “ Renewed § 323 Grants ”).
4.3
The Nation and Lessees will cooperate fully with each other and the Secretary to obtain the Renewed § 323 Grants.
4.4
The Navajo Nation Council Resolution approving this Amendment shall be deemed to be sufficient legal approval by the Nation for the Renewed § 323 Grants. No further consideration shall be required by the Nation in order for the Secretary to issue the Renewed § 323 Grants.
4.5
The Lessees shall provide the Nation a copy of applications for the Renewed § 323 Grants, and each application shall be accompanied by a payment of no more than $800 per application.
4.6
The Existing § 323 Grants and the Renewed § 323 Grants shall be additional and supplementary to, separate and independent from, and not conditioned upon the leasehold rights leased to APS under the 1960 Lease and to the Lessees under the 1966 Lease; and a termination of either the 1960 Lease or the 1966 Lease for any reason shall not terminate any §323 Grant, and a termination of any § 323 Grant for any reason, shall not terminate the 1960 Lease or the 1966 Lease.
4.7
The Nation agrees to support the renewal, extension, or reissuance of the Existing § 323 Grants as categorically excluded under section 3.2A of the Bureau of Indian Affairs’ 2005 National Environmental Policy Act Handbook. If the Secretary

5


determines that additional environmental impact analysis is required, the Nation hereby grants Lessees access to all Navajo Nation Lands necessary to complete such additional analysis. Lessees will work with the appropriate Navajo Nation agencies to effectuate any necessary access to any Navajo Nation Lands. The Nation also agrees to assist the Lessees in completing such analysis and to take reasonable actions to reduce the time and cost required to complete such analysis.
4.8
Except as set forth in the 1960 Lease, APS shall not change the voltages of the Transmission Lines without the Nation’s prior approval.
4.9
Under no circumstances shall any § 323 Grant be interpreted as granting a fee simple interest to the Lessees or any other property interest, except as set forth in the § 323 Grant.

5
ADDITIONAL TERMS REGARDING § 323 GRANTS FOR TRANSMISSION LINES .
5.1
The provisions of Section 5.2 through Section 5.7, Section 11, and Section 13 below constitute a separate agreement between the Nation and APS. In no event shall any default, action or omission by APS under Section 5.2 through Section 5.7, Section 11, or Section 13 below have any effect on any other Parties’ rights, privileges, duties, obligations and liabilities under the remainder of this Amendment.
5.2
The Navajo Nation Lands subject to an Existing § 323 Grant or a Renewed § 323 Grant and pertaining only to the Transmission Lines shall hereinafter be referred to as “ § 323 Grant Land .”
5.3
The use of the § 323 Grant Land shall be strictly limited to constructing, reconstructing, replacing, repairing, operating and maintaining the Transmission Lines. Any other use of the § 323 Grant Land shall require the consent of the

6


Nation. The consent of the Nation may be given, given upon conditions, or denied at the sole discretion of the Nation.
5.4
The Nation shall be under no obligation to forego the use of the § 323 Grant Land or any portion or lands burdened by the § 323 Grant Land, or to refrain from authorizing any use of said lands by any third party, including but not limited to, the exploration for and development and transportation of coal, oil, gas, or other natural resources located within or beneath said lands, except to the extent that such use physically interferes with the operation and maintenance of the Transmission Lines or interferes with the purposes of the § 323 Grants.
5.5
Upon the Nation’s proposed authorization of the use of the § 323 Grant Lands by any third party, which new use may occupy the § 323 Grant Lands or otherwise burden the § 323 Grant Lands, the Nation agrees to notify APS and commence good faith consultation with APS prior to the Nation’s final approval of said third party use. Prior to the Nation’s final approval, the Nation shall require the third party to enter into an agreement with APS, which agreement must be acceptable to APS, to indemnify, defend, and hold APS harmless from any and all liability arising from the third party’s use, interest, and activities within the § 323 Grant Land.
5.6
Five years prior to the expiration of a Renewed § 323 Grant, or as soon as practicable after any earlier termination of a Renewed § 323 Grant, APS and the Nation shall meet to discuss whether APS will leave in place all, some, or none of the Transmission Lines. If APS and the Nation cannot agree to terms regarding the disposition of one or more of the Transmission Lines, APS shall remove the Transmission Line(s) for which no agreement is reached, in accordance with the Lease and applicable laws and requirements, and shall leave the § 323 Grant Land

7


in good condition. On the expiration date of a Renewed § 323 Grant, APS shall have ninety (90) days to peaceably and without legal process deliver the possession of the § 323 Grant Land, with or without the Transmission Lines, as the case may be. In the event a Renewed § 323 Grant is terminated early, APS shall have six months to peaceably and without legal process deliver the possession of the § 323 Grant Land for such terminated § 323 Grant, with or without the Transmission Lines, as the case may be. If delivery cannot be performed on or before such 90-day period or six month period, as the case may be, APS and the Nation shall commence good faith negotiations for compensation, fees or damages to be paid to the Nation for prospective periods of occupation, use, or burden of the § 323 Grant Lands.
5.7
Holding over by APS after the expiration or early termination of a Renewed § 323 Grant shall not constitute an extension/renewal thereof, or give APS any rights in or to the § 323 Grant Lands. Holding over after expiration or early termination of a Renewed § 323 Grant shall not give APS any rights via a Renewed § 323 Grant. Following expiration or early termination of a § 323 Grant, the act of applying for a § 323 Grant from the Secretary shall not give APS any rights to the § 323 Grant land.
6
NATION’S SUPPORT OF ENVIRONMENTAL REVIEWS AND § 323 GRANTS . The Nation shall work with the Lessees to obtain the necessary regulatory approvals and to advocate on behalf of the Lessees in support of any National Environmental Policy Act, Endangered Species Act, or National Historic Preservation Act analyses; § 323 renewals or extensions; or any other requirements of the Department of the Interior (“ DOI ”) or the Nation that are prerequisites necessary to conduct the operations of the Plant, Transmission Lines, and Communication Sites. In its interactions with the DOI,


8


the Nation shall support the interests of the Lessees and advocate positions that support the continued operations of the Plant, Transmission Lines, and Communication Sites.
7
EMPLOYMENT AT THE FOUR CORNERS GENERATING STATION .
Section 19 of the 1960 Lease, Section 24 of the 1966 Lease and Section 25 of the 1966 Lease (as amended by Section 12 of the 1985 Lease Supplement) are deleted in their entirety and replaced as follows:
7.1
Without limiting the scope or effectiveness of the provisions of Section 17 of the 1960 Lease (Operation of Power Plant) or Section 22 of the 1966 Lease (Operation of Enlarged Four Corners Generating Station), APS and the Lessees shall comply with the terms of the Four Corners Generating Station Preference Plan (the “ Plan ”), attached as Exhibit C.
7.2
In the event that, in the opinion of their counsel, federal law develops in the future to permit APS and the Lessees, respectively, to grant a preference in employment based on tribal affiliation, as distinguished from a “Native American Indian” preference in employment, APS and the Lessees shall practice a Navajo preference in employment at the Plant in accordance with the requirements of this Section 7 and the Plan.
7.3
If, at any time, APS’s then current Collective Bargaining Agreement (which governs labor at the Plant), as negotiated by APS in its sole discretion, conflicts

9



with this Section 7 or the Plan, then APS’s Collective Bargaining Agreement shall take precedence.
8
ADVISORY COMMITTEE .
APS, the Lessees, and the Nation shall establish a Four Corners Advisory Committee for the purpose of promoting open dialogue between them regarding operations of the Plant.
8.1
The Committee shall consist of two members of the Navajo Nation Government with experience in energy-related matters, one from the executive and one from the legislative branch, and two senior officials representing APS and the Lessees, who shall be tasked to work together and in consultation with their respective leaderships to resolve concerns raised by APS and the Lessees or the Nation in a mutually beneficial manner. The Committee shall meet regularly, but no less than two times a year. Discussion topics and updates may include voluntary compliance agreements, the impact of plant operations on the Nation’s members and surrounding communities and emerging issues.
8.2
APS and the Lessees or the Nation may submit disagreements and disputes to the Committee for discussion and possible resolution. Decisions of the Committee shall be in the nature of recommendations and shall not be binding on APS and the Lessees or the Nation.
9
ANNUAL PAYMENT .
9.1
The Annual Payment shall replace all compensation for rents, rights of way, or otherwise, set forth in the § 323 Grants (as to the § 323 Grant Land), the 1960 Lease and the 1966 Lease, as applicable. All sections of the aforementioned documents imposing a payment obligation on APS and the Lessees are hereby deleted.

10



9.2
The Annual Payment, which shall be $7,000,000 (in 2011 dollars), shall begin on July 6, 2011. All subsequent Annual Payments shall be subject to annual adjustments, based upon changes in the April Consumer Price Index U.S. City Average for All Urban Consumers, published by the U.S. Bureau of Labor Statistics (“ CPI ”). The annual CPI adjustment for the Annual Payment shall be as set forth in Exhibit D.
9.3
On or before July 6 of each year, APS and the Lessees shall submit one check for the Annual Payment to the Nation and indicate the adjustment required by the CPI.
9.4
No Lessee shall be responsible or liable to the Nation for the payment of any portion of such Annual Payment of any other Lessee. In the event that one or more Lessees fails to pay the Nation its portion of such Annual Payment at the time such Annual Payment is submitted to the Nation, APS (or the then operator of the Plant) shall inform the Nation of the name of the Lessee(s) failing to make the Annual Payment and the specific amount of each such Lessee’s shortfall. In the event the Nation incurs costs associated with obtaining the required Annual Payment owed, the Nation shall be entitled to recover from the defaulting Lessee(s) its associated costs, including, but not limited to, attorney’s fees, filing fees and interest accrued. A list of each Lessee’s portion of the Annual Payment shall be provided to the Nation.
9.5
The Nation agrees that the Annual Payment payable by APS and the Lessees constitutes fair and adequate consideration for the rights granted in the 1960 Lease, the 1966 Lease, the Existing § 323 Grants and the Renewed § 323 Grants.
9.6
Upon agreement between the Lessees, the percentage of the Annual Payment owed by each of APS and the Lessees, respectively, may be changed without the

11


consent of the Nation. But in no event shall the amount due be less than 100% of the Annual Payment, as calculated in accordance with Section 9.2. In the event of a change in payment percentages, an updated list of each Lessee’s portion of the Annual Payment shall be provided to the Nation.
9.7
In consideration of the Annual Payment made by APS and the Lessees, respectively, the Nation releases APS and the Lessees from all and any kind of claims, suits, actions, causes of action, rights, liabilities, and obligations (the aforementioned, collectively referred to as “ Claims ”), whether past, present, or future, known or unknown, for or related to compensation due under the 1960 Lease or 1966 Lease, or compensation for the Existing § 323 Grants and the Renewed § 323 Grants. In consideration of the Annual Payment made by APS and the Lessees, respectively, the Nation releases APS and the Lessees from and settles all outstanding issues and potential Claims, under the 1960 Lease or 1966 Lease, or under the Existing § 323 Grants. Notwithstanding the foregoing, the release set forth in this Section 9.7 shall not apply to any claims arising under Section 11 of this Amendment.
9.8
APS and the Lessees release the Nation from and settle all outstanding issues and potential Claims under the 1960 Lease or the 1966 Lease, or under the Existing § 323 Grants. Notwithstanding the foregoing, the release set forth in this Section 9.8 shall not apply to any claims arising under Section 11 of this Amendment.
10
SURVEY OF PLANT .
10.1
APS and the Lessees and the Nation agree that part of the Annual Payment is based on their understanding that the Plant Site and the Ancillary Facilities, as identified within items 1 and 2 of Exhibit B (the “ Plant Property ”), comprise a

12


total of 3,663 acres (3,600 acres, with an upper margin of error of 63 acres) (the “ Expected Plant Property Acreage ”).
10.2
APS and the Nation agree that part of APS’s share of the Annual Payment is based on their understanding that the § 323 Grant Land comprises 10,000 acres (9839.40 acres, with an upper margin of error of 172 acres) (the “ Expected § 323 Grant Land Acreage ”).
10.3
APS, for the § 323 Grant Land, and APS and the Lessees, for the Plant Property, shall conduct surveys of the § 323 Grant Land and the Plant Property, respectively, within twelve months for the § 323 Grant Land, and six months for the Plant Property, after the effective date of this Amendment. The Nation hereby grants APS and the Lessees access to all Navajo Nation Lands necessary to complete such surveys, and APS and the Lessees will work with the appropriate Nation agencies to effectuate any necessary access to any Navajo Nation Lands. The actual acres for the Plant Property and the § 323 Grant Land, as determined in such surveys, shall each be referred to as the “ Actual Acreage .” If the Actual Acreage for the Plant Property exceeds the Expected Plant Property Acreage, or if the Actual Acreage for the § 323 Grant Land exceeds the Expected § 323 Grant Land Acreage, then Section 10.4 and, if necessary, Section 10.5 shall apply. If Section 10.4 does not apply, there shall be no adjustment to the Annual Payment and no other compensation shall be due to the Nation.
10.4
If the Actual Acreage for the Plant Property exceeds the Expected Plant Property Acreage, or if the Actual § 323 Grant Land Acreage exceeds the Expected § 323 Grant Land Acreage, APS (individually) or APS and the Lessees, as the case may be, shall have 90 days to cure and reduce the respective Actual Acreages to at or below the Expected Plant Property Acreage or Expected § 323 Grant Land

13


Acreage, as the case may be. If the Actual Acreages are reduced accordingly, there shall be no adjustment to the Annual Payment and no other compensation shall be due to the Nation.
10.5
For any Actual Acreage in excess of the Expected Plant Property Acreage or Expected § 323 Grant Land Acreage that APS (individually) or APS and the Lessees fail or choose not to cure, the Annual Payment shall be adjusted in the next Annual Payment as follows: (a) for each one acre the Actual Acreage of the Plant Property exceeds the Expected Plant Property Acreage, the Annual Payment shall increase by $269, adjusted annually by the CPI (in 2011 dollars); and (b) for each one acre the Actual Acreage of the § 323 Grant Land exceeds the Expected § 323 Grant Land Acreage, the Annual Payment payable by APS shall increase by $612, adjusted annually by the CPI (in 2011 dollars).
10.6
Any adjusted Annual Payment shall be prospective only, and there shall be no true-up required for previous Annual Payments, and the Nation shall have no claims against the Lessees for additional liabilities or compensation for historic use of the Plant Property or the § 323 Grant Land related to property survey inaccuracies.
10.7
The respective surveys will not be used to acquire additional or different lands beyond what the surveys demonstrate comprise the current boundaries of the Plant Property or the § 323 Grant Lands.
11
APS’S 230kV LINES .
APS and the Nation disagree as to whether the provisions of Section 17 of the 1960 Lease (Operation of Power Plant) or Section 22 of the 1966 Lease (Operation of Enlarged Four Corners Generating Station) apply to the Existing §323 Grants listed on Exhibit B for the 230kV lines identified as (a) Flagstaff to Leupp and (b) Cholla to Leupp (collectively, the

14


“ Leupp Lines ”). APS and the Nation each reserve the right to assert that the aforementioned sections apply or do not apply to the Leupp Lines, as the case may be.
12
DECOMMISSIONING .
Upon the decommissioning of the Initial Four Corners Plant, the Four Corners Project or any part of either facility, the final decommissioning obligations of APS as to the Initial Four Corners Plant and of the Lessees as to the Four Corners Project shall be limited to the requirements under the applicable federal environmental laws existing at the time of such decommissioning. All or any part of any such decommissioning may occur at any time during the term of either the 1960 Lease or the 1966 Lease, as applicable.
13
MOENKOPI SUBSTATION .
In the event that there is a future expansion of the Moenkopi Substation, it shall be subject to an increase in APS’s portion of the Annual Payment by $1500 per acre (in April 2009 dollars) for up to 100 acres. The $1500 per acre payment shall be adjusted annually by the CPI (in April 2009 dollars). The expansion shall be subject to all applicable regulatory requirements.
14
SETTLEMENT AND CLOSING AGREEMENTS .
Except for Edison, each Party shall execute a new Settlement and Closing Agreement in form and substance substantially similar to the proposed sample Settlement and Closing Agreement attached as Exhibit F.
15
NO CROSS DEFAULT .
Notwithstanding anything to the contrary in this Amendment, the 1960 Lease or the 1966 Lease, a default by APS under the 1960 Lease, as amended by this Amendment, shall not constitute a default by Lessees under the 1966 Lease, and a default by Lessees under the 1966 Lease, as amended by this Amendment, shall not constitute a default by APS under the 1960 Lease.

15



16
PRIMARY FUEL .
The primary fuel used at the Plant shall be coal.
17
NO THIRD PARTY BENEFICIARIES .
The 1960 Lease and the 1966 Lease are not intended to confer upon any third person any rights, privileges, waivers, obligations, or remedies granted hereunder.
18
EXECUTION IN COUNTERPARTS .
This Amendment may be executed in any number of counterparts, and each executed counterpart shall have the same force and effect as an original instrument and as if all of the Parties to the aggregate counterparts had signed the same instrument. Any signature page of this Amendment may be detached from any counterpart thereof without impairing the legal effect of any signatures thereon, and may be attached to other counterparts of this Amendment identical in form hereto but having attached to it one or more additional signature pages.



16


























        
EXHIBIT A

This exhibit intentionally not used.







Exhibit C









FOUR CORNERS GENERATING STATION PREFERENCE PLAN










March 7, 2011




















Table of Contents

I.    INTRODUCTION ..................................................................................................... 1

II.    PREFERENCE POLICY STATEMENT ................................................................... 1

III.    SELECTION .............................................................................................................. 1

IV.    GOALS ...................................................................................................................... 2

V.    TRAINING ................................................................................................................ 3

VI.    RECRUITMENT/ADVERTISING FOR REGULAR EMPLOYEES ...................... 3

VII.    ADVERSITING/RECRUITING FOR TEMPORARY EMPLOYEES .................... 4

VIII.    CONTRACT LABOR/SERVICES ........................................................................... 4

IX.    CROSS CULTURAL COMMUNICATIONS PROGRAM ...................................... 4

X.    DISPUTE RESOLUTION FOR EMPLOYEES ....................................................... 4

XI.    ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES .......................... 5








I.
INTRODUCTION

The purpose of this Preference Plan is to clarify and delineate Arizona Public Service Company's ("APS") Indian Preference Plan for the Four Corners Generating Station ("Four Corners") and specifically, the procedures for giving preference in employment to Indians.

II.
PREFERENCE POLICY STATEMENT

Employment at Four Corners is based on qualifications without regard to race, color, creed, religion, national origin, sex, or age, except that preference will be given to qualified Indians, provided, however, that to the extent allowed by law (as set forth in Section 7.2 of the Amendment, to which this Preference Plan is attached), APS will give preference to qualified Navajos rather than to Indians. Each member of APS's management is responsible for implementing this policy in his/her areas and is held accountable for it in the same way each manager is held accountable for other company policies. In particular, the Plant Manager for Four Corners has overall accountability and responsibility for implementation of this Preference Plan.

III.    SELECTION

In order to conduct operations at Four Corners in a safe and effective manner, all positions must be filled by persons qualified to perform the work required. APS has procedures to evaluate the qualifications (knowledge, skills and abilities) required for each job position. In general, these job qualifications are documented in "job descriptions" maintained by APS's Human Resource Department. Employees may also obtain a copy of their job descriptions by contacting their supervisors.

Job requirements consist of standards which identify the skills, education, and experience necessary to perform a particular job. These job requirements are the basis for hiring decisions and are also used to formulate employee training programs for job classifications with few incumbent-Indian employees. Hence, it is important that the job descriptions describe the true requirements of the job. For this reason, APS will review its job descriptions to assure that the job qualifications are relevant to the job requirements.

Qualifications are assessed on the basis of performance reviews, skills evaluations, experience and education, as appropriate for the position under consideration. Supervisors (and previous employers, in the case of external applicants) may be contacted. Skills may be evaluated by written tests, skill demonstrations, or by supervisory interview. Tests will be validated for job relevancy.

APS is committed to Indian preference in employment. Preference will be given to Indians who possess the skills and abilities to fulfill the job requirements established above.

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IV.    GOALS

The purpose of this Preference Plan is to provide a means to increase the employment of Indians at Four Corners, in both regular full-time and temporary positions. In particular, APS intends to focus on increasing the overall employment of Indians at Four Corners and promoting Indians into management positions.

Analysis of Indian employment levels by job classification will lead to establishing goals for job placement and training. These goals will be reviewed annually to evaluate the progress made toward the objective, and revised as necessary.

The commitment of APS is to offer available job opportunities to Indians who satisfy job requirements, whether the person is a current employee or a non-employee identified through recruitment and advertising. Through the adoption and implementation of training programs at Four Corners, the long-range goal is to develop a pool of Indian candidates qualified for all positions.

Openings created through resignation, discharge, transfer, promotion, or a newly created position cause the posting of an internal "bid" and create opportunities for internal movement through the bid process. Bidding is the established process by which job vacancies are announced, advertised and filled. When vacancies occur, employees, who feel they have the qualifications for a particular job, may submit their internal applications (bids) for consideration.

The bid process frequently creates a cascading effect, as employees vacate existing jobs to fill positions that result from another employee accepting a bid to fill the original vacancy. When an Indian bidder accepts a position vacated by another Indian, the net effect on the overall percentage of Indian employment is zero. While Indian bidders will be given preference in accordance with this Preference Plan, an increase in the total percentage of Indian employees at Four Corners can be expected only when the cascading effect of the bid system results in the employment of external Indian candidates.

Nevertheless, the potential for increasing the number of Indian employees is greater in certain job classifications than in others. Some of these job classifications are:

•
First and second level supervision
•
Operations (Operator Trainee through Control Operator)
•
Machinist
•
Plant Mechanic
•
Electrician
•
Equipment Operator
•
Plant Chemist
•
Scheduler

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Four Corners management will give these job classifications particular attention to increase employment of Indians. Additionally, technical and professional recruiting will be increased to locate, identify, and employ suitable Indian candidates for engineers, technicians, and professional positions.

V.    TRAINING

When there are too few qualified Indian bidders, internal training programs to increase the availability of Indian bidders may be appropriate. Training programs should focus on raising the level of skills, knowledge and abilities of Indians in "feeder jobs." These are jobs which typically provide employees for higher level jobs, particularly when the lower level job has skill, knowledge and ability requirements that are prerequisites for a higher level job. Training should continue until the goal has been met. Other "in-place" training programs, such as apprenticeships and operations training, are on-going and continue to provide trained replacements for journeymen.

Indians will be encouraged to enhance their careers at APS by taking advantage of on­ the-job training, apprenticeships, and in-house and off-the-job educational courses. As a specific part·of this Preference Plan, the following actions will be taken to provide opportunities for Indians to advance to journeyman-level and supervisory positions.

1.
New apprenticeships will be awarded only to qualified Indians.

2.
Currently employed Indian journeymen will be selected for supervisory training to make them better qualified for future opportunities in foreman positions.

Because of the magnitude of the work and its accompanying time constraints, virtually everyone at Four Corners is affected by an overhaul. Four Corners has chosen to supplement the knowledge, skills and experience of its regular full-time employees with those of temporary workers with job specific skills. During an overhaul, where possible, regular full time employees are upgraded to higher level skill positions including supervisory positions. In this manner, employees may further expand the practical application of their technical and supervisory skills.

VI.    RECRUITMENT/ADVERTISING FOR REGULAR EMPLOYEES

Recruitment is any activity that causes individuals to apply for employment. Advertising is one method of recruitment. Examples of other methods include meetings with graduating college seniors, participation in trade fairs, and day programs.

Since most regular full-time jobs at Four Corners are filled internally, a large recruitment effort is not needed. Thus, recruitment of regular full-time employees should be limited to those positions which are not filled by Indians internally. For purposes of this Preference Plan, recruitment will concentrate on jobs in which Indians are underutilized.

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In an effort to attract qualified Indian applicants, contacts with key organizations throughout the Navajo Reservation will be maintained, although contacts within the Western Navajo Agency will be emphasized. In addition, Four Corners will work with appropriate tribal agencies to develop other potential recruitment sources.

Universities, vocational schools, Joint Training and Partnership Act classroom training programs, the Navajo Division of Education, the ONLR, and employment service offices located in the vicinity of Four Corners will be included in the recruitment and advertising efforts of Four Corners. Technical and professional jobs will be emphasized in recruitment efforts at colleges, universities, and in periodic advertisements to attempt to locate and identify suitable Indian candidates for employment opportunities.

Advertising and recruiting efforts will include a statement that APS at Four Corners recognizes Indian preference in employment. The following statement will be included in all . advertisements for employment opportunities at Four Corners and on bid sheets posting jobs at Four Corners:

APS follows a policy of giving preferential treatment to Indians in connection with employment at the Four Corners Generating Station.

VII.      ADVERTISING/RECRUITING FOR TEMPORARY EMPLOYEES

Each year, temporary employees are hired for certain specific assignments at Four Corners. Only when no qualified Indian applicant is found, after a thorough review of returning Indian applicants, existing files on temporary Indian employees, and new applications from Indians (generated by advertising), will a temporary position be filled by a non-Indian.

VIII.      CONTRACT LABOR/SERVICES

APS will select qualified Indian-owned businesses, when available, to provide contract labor or services at Four Corners. APS will notify its vendors (a) of the employment and contracting preference policy at Four Corners; and (b) that they are expected to comply with applicable laws and regulations.

IX.      CROSS CULTURAL COMMUNICATIONS PROGRAM

APS will develop and implement a cross-cultural program designed to provide a forum for Indian and non-Indian employees to openly examine and discuss the culturally significant customs, beliefs, values, and social mores that all individuals bring with them to the workplace.

X.      DISPUTE RESOLUTION FOR EMPLOYEES

APS acknowledges the value of maintaining a work environment free of prejudice and discrimination. Nevertheless, despite even the best of intentions, complaints do arise, and the parties have determined that complaints of whatever nature are best handled internally, without the involvement of external agencies. Therefore, employees are encouraged to take advantage of

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APS' s existing internal processes. Through this approach, a wide variety of employment related complaints may be addressed and resolved.

If Navajo Nation officials become aware of an employment concern at Four Corners, the Navajo Nation must bring the issue to the Advisory Committee, formed pursuant to the Lease (to which this Preference Plan is attached), for resolution.

XI.    ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES

This Preference Plan is the entire agreement between the Parties concerning its subject matter and supersedes all prior agreements and understandings, whether or not written, including without limitation the letter agreement dated March 8, 1985 between APS and the Navajo Nation and signed by G. Mark De Michele and Peterson Zah. This Preference Plan also is not intended to confer upon any person other than the Parties any rights, privileges, waivers, obligations or remedies granted hereunder.


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EXHIBIT E

This exhibit intentionally not used.





Exhibit F
(Includes Exhibits A-D of the Restated and Amended Settlement and Closing Agreement)



DRAFT
11/4/2010 3:30 PM

Restated and Amended Settlement and Closing Agreement



This Restated and Amended Settlement and Closing Agreement (the " Restated Agreement ") amends the Settlement and Closing Agreement dated August 15, 2002 (" Original Agreement ") and is entered into as of the Effective Date (as defined in Section 18) by Arizona Public Service Company (" APS ") and the Office of the Navajo Tax Commission (" ONTC "), acting on its own behalf and, pursuant to Section 103 of the Navajo Nation Uniform Tax Administration Statute (" UTAS "), on behalf of the Navajo Nation. APS and the ONTC may be referred to herein individually as a "Party" or collectively as the "Parties."

Recitals

A. Pursuant to Section 105 of UTAS, the ONTC, on behalf of the Navajo Nation, issued an assessment to APS on [Date] seeking to assess the Possessory Interest Tax (" PIT ") on APS in connection with its ownership and operation of the Four Comers Power Plant (the " Plant "), switchyards, and transmission and distribution facilities within the Navajo Nation (hereinafter, the Plant, switchyards, and transmission and distribution facilities within the Navajo Nation are collectively referred to as the " Facilities "). Pursuant to Regulation 1.125 of the ONTC Tax Administration Regulations, the ONTC also issued on [Date] a private ruling asserting that it has jurisdictional authority to impose the Business Activity Tax (" BAT ") upon APS' activities related to the Facilities. Pursuant to Section 133 of UTAS, the ONTC is entering into this Restated Agreement.

B. APS and the other participants in the Plant (collectively, the "Participants") assert that neither the Navajo Nation nor the ONTC has jurisdictional authority to impose any tax on APS, the Participants or the Facilities based on (i) certain agreements between the Navajo Nation, APS and Participants, including without limitation, certain covenants in leases entered into by APS, the Participants and the Navajo Nation and approved by the United States (" Leases ") and in federal grants of rights-of-way issued to APS and the Participants by the United States (" Grants "), (ii) the location of the Facilities on federally granted rights-of-way, (iii) the non-Indian character of APS and the Participants, and (iv) relevant case law.

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C. The ONTC asserts that it possesses jurisdictional authority to administer taxes enacted by the Navajo Nation with respect to the Participants, including APS, and the Facilities based on (i) certain agreements between the Navajo Nation, APS and the Participants, including without limitation, certain covenants in the Leases and Grants, (ii) the location of the Facilities on lands held in trust by the United States for the benefit of the Navajo Tribe, and (iii) relevant case law.

D.    The Parties entered into the Original Agreement for purposes of settling the dispute and to avoid litigation over the question of the jurisdictional authority of the Navajo Nation and ONTC to tax the Facilities and APS, based on its ownership interest in and operation of the Facilities.

E.    The Parties desire to restate, amend and extend the Original Agreement and are thus entering into this Restated Agreement in accordance with the express terms set forth below.

WHEREFORE, THE PARTIES AGREE AS FOLLOWS:

1. Settlement Payments . Subject to the terms and conditions contained in this Restated Agreement, APS will make settlement payments as specified below ("Settlement Payments"):

a.
PIT Settlement Payments.

(i) Beginning with calendar year 2001 and continuing through July 7, 2041 (the "Amended Term"), APS will pay to ONTC the following amount as a PIT Settlement Payment for the APS-owned Facilities, subject to adjustment as provided in subsection a(ii) of this Section 1:
           

Calendar year                  PIT Settlement Payment
2001                     $2,993,515.00
     2002 - 2003                     $5,987,030.00 per year
2004 - 2040                      $6,342,600 per year
2041                     $3,171,300.00


(ii) Beginning July 8, 2016 and continuing through July 7, 2041, the PIT Settlement Payment is subject to reduction in the event APS and/or the Participants permanently shut down any of the Facilities and/or unit(s) of the Plant in which APS has an ownership interest, including but not limited to the permanent shut down of the entire Plant (the "Permanently Shut Down Facilities"). For any Permanently Shut Down Facilities salvage value will be determinative of value, and

2



salvage value will be based on 5% of original or acquisition cost of the Permanently Shut Down Facilities in question. In the event of any permanent shut down under this Section la(ii), the PIT Settlement Payment will be recalculated in two steps:
a.
Step One : PIT Settlement Payment will be proportionally reduced by multiplying the PIT Settlement Payment by a factor that represents the ratio of the original or acquisition cost of the APS-owned Facilities within the Navajo Nation that are not Permanently Shut Down Facilities divided by the total original or acquisition cost of the APS-owned Facilities.
b.
Step Two : The proportionately reduced PIT Settlement Payment derived under Step One will then be increased by adding the product of a 3% in-lieu-of tax rate and the salvage value (i.e., 5% of original or acquisition cost) of the Permanently Shut Down Facilities. A sample calculation in included as Exhibit D to this Restated Agreement.

(iii) In the event APS constructs a new unit or units at the Plant during the Amended Term, the PIT Settlement Payment will be proportionally increased by an amount that represents the product obtained by multiplying the original or acquisition cost of the new APS­ owned unit or units by the following factor:
a.
The PIT Settlement Payment of $6,342,600 divided by the original or acquisition cost of the APS- owned Facilities within the Navajo Nation as of the Effective Date of this Restated Agreement. A sample calculation in included as Exhibit 1 to this Restated Agreement

(iv) APS will pay the PIT Settlement Payment specified above (as may be adjusted pursuant to Section la(ii) or Section la(iii), above) for calendar years 2002-2040 on a semi-annual basis, with the first half for each calendar year due November 1 and the second half due May 1 of the following year. APS will pay the PIT Settlement Payment specified above for calendar year 2041 on or before November 1, 2041. On or before June 1 of each calendar year during the term of this Restated Agreement, APS will provide to the ONTC, for informational purposes only, the form attached as Exhibit A.

(v) Interest on any late payment of the PIT Settlement Payment will be computed from the date the PIT Settlement Payment was first due to the date such payment is received by the ONTC. The rate of interest on any late payment will be equal to the rate then being used by the Internal Revenue Service for an underpayment of taxes by an

3



individual. If APS fails to timely pay the PIT Settlement Payment, APS also will pay an additional amount equal to 5% of its PIT Settlement Payment. For each full month the payment is overdue, APS will pay an additional amount equal to 0.5% of its PIT Settlement Payment; provided, however, that the maximum additional amount APS must pay for the failure to timely pay shall not exceed 10% of the PIT Settlement Payment amount due. If APS fails to timely provide the Report for PIT Settlement Payment, attached as Exhibit A, as required by Section l(a)(iv) of this Restated Agreement, APS will pay an additional 5% of its PIT Settlement Payment due for the period for each month or fraction thereof that the Report for PIT Settlement Payment is not provided; provided, however, that the minimum additional amount to be paid for failure to timely provide such Report for PIT Settlement Payment shall be $50 and the maximum additional amount shall not exceed 25% of APS' PIT Settlement Payment for that period. For good cause shown, the ONTC may in its discretion relieve APS from all or part of the requirements imposed under this Section 1.a(v).

(vi) APS will provide, within six (6) months of the Effective Date of this Restated Agreement, a schedule of original or acquisition cost for the Facilities in which APS has an ownership interest (including the Permanently Shut Down Facilities) for use in connection with the calculations provided for in Section l .a(ii). In addition, if APS constructs a new unit or units at the Plant for purposes of Section 1.a(iii), APS will provide a schedule of original or acquisition cost for such new unit or units within six (6) months after its/their completion, for use in connection with the calculations provided for in Section 1.a(iii).

(vii) The ONTC expressly agrees that APS is hereby released from any obligation and will not be required or requested to make any other payment with respect to any other amounts that the ONTC asserted or could have asserted were payable prior to execution of this Restated Agreement.

b.      BAT Settlement Payment.

(i) Effective as of July 6, 2001 and continuing through the Amended Term, APS will calculate its BAT Settlement Payment amount using the following formula:
BAT Settlement Payment =
[ (R * AI * Net KWhrs) less (Deductions) less (10% Standard Deduction) ] *
5%

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Where R = $.0256 I KWhr.

Where Net KWhrs = APS' share of actual net kilowatt hours generated from the Plant during the quarterly period.

Where Deductions = (1) Salaries and/or other compensation paid to members of the Navajo Nation; (2) Purchases of Navajo goods and services; and (3) Any payment made to the government of the Navajo Nation, except for the BAT Settlement Payment paid pursuant to this Restated Agreement and any penalties or fines.

Where Standard Deduction = an amount equal to the greater of ten percent of (R
* AI * Net KWhrs) or $125,000.00.

As set forth on Exhibit C,·APS will include in its Operating Report provided to the ONTC a statement of actual net generation for each quarter.

Where AI = an adjustment calculated in the 3rd Quarter of each year based upon a 5-year rolling average of Producer Price Index data published by the Bureau of Labor Statistics. Annual adjustments shall be cumulative, i.e., the total current year adjustment shall be equal to the incremental current year adjustment multiplied by the previous year's adjustment. The incremental adjustment shall be calculated utilizing the following methodology:
AI = (75% * Cost Index) plus (25% * Revenue Index).

Where Cost Index =
42.3% * Bituminous Coal and Lignite: West (BLS Series
PCU1211#214)
plus      0.9% * Natural Gas (BLS Series PCU1331#A2)
plus      7.6% * Other Heavy Construction (BLS Series PCUBHVY#)
plus      49.2% * Unit Labor Costs: NonFarm Business (BLS Series
PRS85006112)

Where Revenue Index =
65.2% * Electric Power and Natural Gas Utilities, Other, Mountain (BLS Series PCU4981#148)
plus
34.8% * Electric Power and Natural Gas Utilities, Other, Pacific (BLS Series PCU4981#149)

If any of the BLS indices used in this calculation are discontinued, the Parties shall mutually agree upon an equivalent substitute BLS index. The Parties agree that, beginning January 1, 2002, the Bituminous Coal and Lignite: Surface

5




Mining (BLS Series PCU1211#1) will be substituted into the calculation in place of Bituminous Coal and Lignite: West (BLS Series PCU1211#214).

A calculation of AI for the 3rd Quarter 2001 through the 2nd Quarter 2002 BAT Settlement Payments is attached as Exhibit B. The 5-year average of index data for 1996 through 2000 is used to develop this initial adjustment.

Each subsequent annual adjustment will be made for the 3rd Quarter BAT Settlement Payment using the 5-year rolling average of index data through the end of the previous year.

A sample calculation of AI for the 3rd Quarter 2002 through 2nd Quarter 2003 BAT Settlement Payments using estimated data is included in Exhibit B. Calculations in subsequent years will follow this same formula.

(ii) APS will make its BAT Settlement Payments on a quarterly basis, with payments due 45 days after the end of each calendar quarter. APS will, at the time of making such payments, provide to the ONTC an Operating Report containing the following information used to calculate APS' BAT Settlement Payment:

(a)
APS revenue requirement, as adjusted by AI;
(b)
Net KWhrs for the quarter;
(c)
Deductions as defined above; and
(d)
Standard Deduction.

The format for the Operating Report is set forth in Exhibit C.

(iii) Interest on any late payment of a BAT Settlement Payment will be computed from the date the BAT Settlement Payment was first due to the date such payment is received by the ONTC. The rate of interest on any late payments will be equal to the rate then being used by the Internal Revenue Service for an underpayment of taxes by an individual. If APS fails to timely pay the BAT Settlement Payment, APS will pay an additional amount equal to 5% of the BAT Settlement Payment due. For each full month the payment is overdue, APS will pay an additional amount equal to 0.5% of the amount of its BAT Settlement Payment; provided, however, that the maximum additional amount that APS will be required to pay for the failure to timely pay shall not exceed 10% of the BAT Settlement Payment amount due. If APS fails to timely provide to the ONTC an Operating Report required by this Restated Agreement, APS will pay an additional 5% of its BAT Settlement Payment for each month or fraction thereof that the Operating Report has not been provided to the ONTC; provided, however, that the minimum additional amount to be paid for APS' failure to timely provide such

6



Operating Report will be $50 and the maximum additional amount will not exceed twenty-five percent (25%) of APS' BAT Settlement Payment for that period. For good cause shown, the ONTC may in its discretion relieve APS from all or part of the requirements imposed under this Section 2.b(iii).

(iv) The ONTC expressly agrees that APS is hereby released from any obligation and will not be required or requested to make any other payment with respect to any other amounts that the ONTC asserted or could have asserted were payable prior to execution of this Restated Agreement.

2.
Releases .

a. APS hereby releases and forever discharges the ONTC, its predecessors, successors, affiliates, and assigns, of and from any and all claims, demands, damages, actions, causes of action, or suits of whatsoever kind and nature, existing as of the Effective Date of this Restated Agreement, whether now known or unknown to the Parties, or whether asserted or unasserted, related, either directly or indirectly, to any and all PIT and BAT tax assessments and taxes, and interest and penalties thereon, allegedly owed by the ONTC, its predecessors, successors, affiliates, and assigns, to APS arising from APS' ownership interests or operation of the Facilities.

b. The ONT C hereby releases and forever discharges APS, its predecessors, successors, affiliates, and assigns, of and from any and all claims, demands, damages, actions, causes of action, or suits of whatsoever kind and nature, existing as of the Effective Date of this Restated Agreement, whether now known or unknown to the Parties, or whether asserted or unasserted, related, either directly or indirectly, to any and all PIT and BAT tax assessments and taxes, and interest and penalties thereon, allegedly owed by APS, its predecessors, successors, affiliates, and assigns, to the ONTC or Navajo Nation arising from APS' ownership interests or operation of the Facilities.

c. The ONTC expressly covenants that it will not seek to apply or assess the Navajo Sales Tax, approved by the Navajo Nation Council pursuant to Resolution No. C0-84-01 on October 18, 2001 (as amended), with respect to any electricity generated at, from or by the Plant except for retail sales of electricity to persons who purchase electricity for that person's own use, including use in that person's trade or business and not for resale, redistribution or retransmission, within the Navajo Nation.

3.
Case Closure.

The Parties agree that the following cases shall be closed:

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Possessory Interest Tax: Case No. 01-042
Business Activity Tax: Case No. 01-056
4.
Preservation of Rights.

It is understood and agreed that this is a settlement of disputed claims, whether asserted or unasserted, and that nothing contained herein shall be construed as an admission of liability, guilt, or wrongdoing by or on behalf of any of the undersigned Parties, all such liability, guilt, or wrongdoing being expressly denied. The Parties acknowledge and agree that this Restated Agreement shall not prejudice or limit in any way the rights or contentions of any Party. The Parties further agree that this Restated Agreement shall not in any way be deemed a waiver or amendment of any provisions of any other agreement between the Navajo Nation, APS and/or any of the Participants, including but not limited to the Leases and Grants. This Restated Agreement, and the actions of the Parties contemplated hereunder, are not intended, nor shall they be deemed, to constitute any waiver, consent or admission with respect to the existence or lack of regulatory, taxing, or adjudicatory authority or jurisdiction of the Navajo Nation or the ONTC over the Facilities or any Party hereto.

5.
Enforcement and Judicial Review.

a. Neither Party shall commence any judicial or administrative action challenging the validity of this Restated Agreement or any Party's authority to enter into it. Any commencement of such an action by a Party shall constitute a material breach of this Restated Agreement by that Party.

b.
Challenge to Validity of the Restated Agreement.

(i) If the ONTC, or any of its representatives, officers, employees, departments or agents (a) commences any judicial or administrative action challenging this Agreement or the ONTC's authority to enter into it, or (b) otherwise in any manner invalidates or breaches this Restated Agreement or takes any action contrary to this Restated Agreement, APS may, in its sole discretion, elect to seek specific performance of or terminate this Restated Agreement. If the ONTC, or any of its representatives, officers, employees, departments or agents, repeals the PIT or BAT and enacts a replacement tax that the ONTC seeks to assert against APS or the Facilities, APS may terminate this Restated Agreement. The ONTC agrees and recognizes that if APS terminates this Restated Agreement, APS shall have no further obligation or liability to make any Settlement Payments from the date of termination forward. The ONTC further agrees and recognizes that in such circumstance, APS has preserved its rights to contest the

8



jurisdiction of the ONTC or the Navajo Nation to assert or assess any taxes against APS with respect to the Facilities, APS' activities at the Facilities, or with respect to any other properties or activities within the Navajo Nation.

(ii) If APS, or any of its representatives, officers, employees, departments, or agents (a) commences any judicial or administrative action challenging this Restated Agreement or APS' authority to enter into it, or (b) otherwise in any manner invalidates or breaches this Restated Agreement or takes any action contrary to this Restated Agreement, the ONTC may, in its sole discretion, elect to seek specific performance of or terminate this Restated Agreement. APS agrees and recognizes that, if the ONTC elects to terminate this Restated Agreement, the ONTC has preserved its rights to assert jurisdiction to assess taxes against APS from and after the date of termination with respect to the Facilities, APS' activities at the Facilities, or with respect to any other properties or activities of APS within the Navajo Nation. If the ONTC elects to terminate this Restated Agreement, the ONTC shall be under no further obligation to accept Settlement Payments in satisfaction of APS' obligations.

(iii) If any person or entity not a Party to this Restated Agreement or the Navajo Nation, or any of their representatives, officers, employees, agencies, departments or agents, commences any judicial, administrative or other action challenging in any way the Restated Agreement's validity, the Parties shall jointly request that the court, tribunal, agency, or official before which the action is·pending dismiss the action. If the action is not dismissed, either Party may file an appropriate responsive pleading, or otherwise act as reasonably necessary to respond to the action or to otherwise protect such Party. If any person, including the Navajo Nation or ONTC, brings an action or proceeding to assert or challenge the jurisdictional authority of the Nation or ONTC to tax the Facilities or activities at the Facilities with respect to such other person other than APS, each Party agrees not to rely on any ruling in such action or proceeding for purposes of challenging the validity of this Restated Agreement as long as the other Party is not in material breach hereof.

(iv) If any court, tribunal, agency or official determines that this Restated Agreement is non-binding on the ONTC or the Navajo Nation, APS may elect to terminate this Restated Agreement, and if so terminated, APS shall have no further obligation or liability to make any Settlement Payments from the date of termination forward. The ONTC agrees and recognizes that in such circumstance APS has preserved its rights to contest the jurisdiction of the Navajo Nation and ONTC to

9




assert or assess any taxes against APS with respect to the Facilities, APS' activities at the Facilities, or with respect to any other properties or activities within the Navajo Nation.

(v) If any court, tribunal, agency or official determines that this Restated Agreement is non-binding on APS, the ONTC may elect to terminate this Restated Agreement, and if so terminated, APS agrees and recognizes that in such circumstance, the ONTC has preserved its rights to assert jurisdiction to assess any taxes against APS with respect to the Facilities, APS' activities at the Facilities, or with respect to any other properties or activities within the Navajo Nation.

c.     Other Taxes. Nothing in this Restated Agreement affects the rights, if any, of (i) the Navajo Nation or ONTC to seek to enforce taxes other than the Sales Tax (except as otherwise provided in Section 2(c) above), PIT or BAT on APS or the Facilities or (ii) APS to challenge any such action by the Navajo Nation or ONTC, including when permitted by federal law, bringing such an action in federal court.

d.     Enforcement of the Restated Agreement . Enforcement of this Restated Agreement by either Party shall be pursuant to this Restated Agreement and not pursuant to any Navajo Nation or other law independent of this Restated Agreement. Nothing in this Restated Agreement shall or may be deemed to limit a Party's right to seek enforcement of this Restated Agreement or defend any claim in federal or tribal court where otherwise permitted by law. Nothing in this Restated Agreement shall or may be deemed as a consent to federal or tribal court jurisdiction by either Party.

6.
Assignment .

APS may transfer or assign, without the consent of the Navajo Nation or ONTC, all or any portion of its interests and obligations under this Restated Agreement to any parent, subsidiary, affiliate or successor in interest of APS by merger, acquisition, or consolidation or to any other current or future owner of the Facilities, provided that the assignee assumes in writing all of APS' obligations under this Restated Agreement.

7.
Representations .

Each Party represents and warrants as of the Effective Date of this Restated Agreement as follows:

a. It has full legal right, power and authority to execute, deliver and perform this Restated Agreement;

b. It has taken all appropriate and necessary action to authorize the execution, delivery and performance of this Restated Agreement;

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c. It has obtained all consents, approvals and authorizations necessary for the valid execution and delivery of this Restated Agreement;

d. This Restated Agreement constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy or insolvency laws or by limitation upon the availability of equitable remedies;

e. It is not in violation of any applicable law promulgated or judgment entered by any federal, state, local or other governmental body, which violations, individually or in the aggregate, would adversely affect the performance of its obligations under this Restated Agreement; and

f. The execution, delivery and performance by it of this Restated Agreement, the compliance with the terms and provisions hereof and the carrying out of the transactions contemplated hereby, (i) do not conflict with and will not conflict with or result in a breach or violation of any of the terms and provisions of its organizational documents, and (ii) to the best of its knowledge, do not conflict with and will not conflict with or result in a breach or violation of any of the terms and provisions of any law, rule or regulation, or any order, writ, injunction, judgment or decree by any court or other governmental body against it or by which it or any of its properties is bound, or any loan agreement, indenture, mortgage, note, resolution, bond or contract or other agreement or instrument to which it is a party or by which it or any of its properties is bound, or constitute or will constitute a default thereunder or will result in the imposition of any lien upon any of its properties.

8.
Successors and Assigns.

This Restated Agreement shall be binding on and inure to the benefit of the Parties hereto and their successors and assigns.

9.
Entire Agreement.

Except for any separate agreement of the Parties settling disputed claims related to applicability of the BAT to certain transmission and distribution facilities within the Navajo Nation, this Restated Agreement reflects the entire agreement of the Parties relating to taxation of the Facilities and no other agreement written or oral shall be used to effect any changes of the provisions retained herein. No amendment of this Restated Agreement shall be valid unless in writing and signed by all Parties.

10.
Counterparts .

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This Restated Agreement may be signed in counterparts, each of which shall be deemed an original. Facsimile signatures shall be as valid as original signatures until each Party receives a fully signed counterpart with original signatures. Each Party shall provide the other Party with original signatures so that each Party shall have a fully signed counterpart within five business days after the date of the last signature.

12



11.
Relationship of Parties.

Nothing herein may be construed to create an association, joint venture, trust, or partnership, or to impose a trust or partnership covenant, obligation or liability on or with regard to any one or more of the Parties.

12.
Severability .

Subject to the provisions of and except as otherwise provided in Section 5, Enforcement and Judicial Review, of this Restated Agreement, if any term or condition of this Restated Agreement is held to be invalid, void, or unenforceable by any court or tribunal of competent jurisdiction, that holding shall not affect the validity or enforceability of any other term or condition of this Restated Agreement, unless either Party determines in its sole discretion that enforcing the balance of the Restated Agreement would deprive that Party of a fundamental benefit of its bargain.

13.
Adjustment of PIT and BAT Settlement Payment Amounts; Termination.

a. One year prior to the expiration of the Amended Term, the Parties shall commence good faith negotiations to establish PIT and BAT Settlement Payment amounts for APS to run concurrently with any extension of the Leases and Grants. If the Parties are not able to reach agreement upon new PIT and BAT Settlement Payment amounts before expiration of the Amended Term, the Parties will either continue this Restated Agreement in effect with the PIT and BAT Settlement Payment amounts set forth in Section 1 above, or either Party may elect to terminate this Restated Agreement.

b. The Parties recognize and agree that, upon termination or expiration of this Restated Agreement for any reason, (i) each Party has preserved all of its rights and arguments regarding the question of the jurisdictional authority of the Navajo Nation and ONTC to tax the Facilities and/or APS and its successors and assigns based on ownership interests in and operation of the Facilities; (ii) this Restated Agreement shall not in any way be deemed a waiver or amendment of any provisions of any agreement between the Navajo Nation, APS and/or any of the Participants, including but not limited to the Leases and Grants; and (iii) neither Party may assert any claim, demand, damages, action, cause of action, or suit of whatsoever kind and nature, whether known or unknown to the Parties, or whether asserted or unasserted, related, either directly or indirectly, to any and all PIT and BAT tax assessments and taxes, and interest and penalties thereon, that arose or may have arisen while this Restated Agreement was in effect.

13



14.
No Third Party Beneficiaries.

Nothing herein, either express or implied is intended or may be construed to confer upon or to give to any person or entity other than the Parties any rights or remedies under or by reason of this Restated Agreement.

15.
Limited Responsibility.

The Parties acknowledge and agree that it is their mutual intent that the obligations, representations, warranties and undertakings under this Restated Agreement or as a result of the transactions contemplated by this Restated Agreement are limited to only those expressly set forth herein, and not enlarged by implication, creation of law, or otherwise.

16.
Survival .

The provisions of Sections 2(a) and (b), 4, 7 and 13.b of this Restated Agreement survive expiration or termination of this Restated Agreement. Provided that the Restated Agreement remains in effect through the Amended Term, APS' obligation to make the calendar year 2041 PIT Settlement Payment specified in this Restated Agreement and APS' obligation to make BAT Settlement Payments for any periods prior to expiration or termination of this Restated Agreement also shall survive expiration or termination of this Restated Agreement.


17.
Notices .

Notices shall be deemed to have been given if in writing and (a) hand delivered,
(b) delivered by a reputable overnight courier service (such as but not limited to FedEx and UPS), (c) mailed by certified or registered mail, return receipts requested, first class postage prepaid, or (d) transmitted by telecopy or electronic mail, followed within 24 hours by transmittal under option (a), (b) or (c) above addressed as follows:

If to ONTC:

President
The Navajo Nation
P.O. Box 9000 Window Rock, Arizona 86515
With a copy to:

Attorney General
Navajo Nation Department of Justice
P.O. Drawer 2010

14



Window Rock, Arizona 86515

Executive Director
Office of the Navajo Tax Commission
P.O. Box 1903
Window Rock, Arizona 86515


If to APS:

Arizona Public Service Corporation
400 North 5th Street
Phoenix, Arizona 85004
Attn: Corporate Secretary


With a copy to:

Pinnacle West Capital Corporation
400 North 5th Street
Phoenix, Arizona 85004
Attn: Executive Vice President and General Counsel

or at such other address as the Parties may, from time to time, designate in writing. Service by overnight courier or mail shall be deemed made on the first business day delivery is attempted or upon receipt, whichever is earlier. Service by telecopy or electronic mail shall be deemed made upon confirmed transmission.

18.
Effective Date; Effect of this Restated Agreement.

This Restated Agreement is effective upon the date when duly executed by both Parties (the "Effective Date"). It is the Parties' intention that through the Effective Date of this Restated Agreement, the terms and conditions of the Original Agreement in effect at the date of execution of this Restated Agreement shall continue to govern the Parties' rights and obligations thereunder. Upon and after the Effective Date of this Restated Agreement, the Parties' right and obligations shall be governed by the terms and conditions of this Restated Agreement.

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16
EXHIBIT 10.08






AMENDMENT AND SUPPLEMENT NO. 3

TO

SUPPLEMENTAL AND ADDITIONAL INDENTURE OF LEASE

BETWEEN

THE NAVAJO NATION

AND

ARIZONA PUBLIC SERVICE COMPANY,

EL PASO ELECTRIC COMPANY,

PUBLIC SERVICE COMPANY OF NEW MEXICO,

SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT,

AND

TUCSON ELECTRIC POWER COMPANY










Dated: March 7, 2011












AMENDMENT AND SUPPLEMENT NO. 3 TO
SUPPLEMENTAL AND ADDITIONAL INDENTURE OF LEASE
This Amendment and Supplement No. 3 to the Supplemental and Additional Indenture of Lease dated March 7, 2011 (this “ Amendment ”) is by and between the Navajo Nation (formerly known as The Navajo Tribe of Indians), acting through the Navajo Nation Council for and on behalf of the Navajo Nation (hereinafter referred to as the “ Nation ”), as lessor, and Arizona Public Service Company (“ APS ”), El Paso Electric Company, Public Service Company of New Mexico, Salt River Project Agricultural Improvement and Power District, and Tucson Electric Power Company (formerly known as Tucson Gas & Electric Company) (hereinafter, collectively, together with their successors and assigns, referred to as the “ Lessees, ” and each individually referred to as a “ Lessee ”). The Nation and the Lessees are hereinafter collectively referred to as the “ Parties .”
The Parties agree as follows:
1
BACKGROUND .
1.1
APS has leased certain premises from the Nation under that certain Indenture of Lease dated December 1, 1960 between APS and the Nation, as supplemented and amended by that certain Supplemental and Additional Indenture of Lease dated July 6, 1966, between the Nation, APS, and the other Lessees, as further supplemented and amended by that certain Amendment and Supplement No. 1 to Supplemental and Additional Indenture of Lease dated April 25, 1985, between the Nation, APS and the other Lessees (the “ 1985 Lease Supplement ”; and such Indenture of Lease, as supplemented and amended, the “ 1960 Lease ”).
1.2
Lessees have leased certain premises from the Nation under that certain Supplemental and Additional Indenture of Lease dated July 6, 1966, between the Nation, Southern California Edison Company (“ SCE ”), and the Lessees, as

1



supplemented and amended by the 1985 Lease Supplement (such Supplemental and Additional Indenture of Lease, as supplemented and amended, the “ 1966 Lease ”).
1.3
The Parties desire to extend the respective terms of and otherwise amend the 1960 Lease and the 1966 Lease to reflect certain new terms and conditions.
1.4
The 1960 Lease and the 1966 Lease are amended only as set forth in this Amendment. To the extent, however, that there is any conflict between the 1960 Lease and this Amendment or the 1966 Lease and this Amendment, this Amendment shall govern .
1.5
This Amendment is not intended to and does not merge the leasehold estates of the 1960 Lease and the 1966 Lease, or the rights, liabilities, or obligations (collectively, “ Rights ”) of the Parties set forth in the 1960 Lease and the 1966 Lease. Further, in no event shall the Lessees (except for APS) have any Rights under the 1960 Lease or with respect to the leasehold estate demised to APS under the 1960 Lease. Rather, except for APS, all the Lessees’ Rights are limited only to the Four Corners Project, as set forth in the 1966 Lease.
2
DEFINITIONS .
2.1
“ § 323 Grant” or “§ 323 Grants ” - One or more grants of rights-of-way and easements under the Act of February 5, 1948 (62 Stat. 17, 18, 25 U.S.C. §323-328), the Act of March 3, 1879 (20 Stat. 394, 5 U.S.C. § 485), as amended, and the Acts of July 9, 1832, and July 27, 1868 (4 Stat. 564, 15 Stat. 228. 25 U.S.C. §2) and such regulations promulgated thereunder, as are applicable, including 25 C.F.R. §1.2 and 25 C.F.R. Part 169.
2.2
“ § 323 Grant Land ” - Has the meaning set forth in Section 5.2.

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2.3
“ Affiliate ” - With respect to any Lessee hereto, any entity, including but not limited to a corporation, company, partnership, LLC/LLP or joint venture that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with such Lessee. For purposes of this definition, the term “control” (including “controlled by” and “under common control with”) shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of an entity, whether through the ownership of voting securities, regardless of percentage by written contract, or otherwise.
2.4
“ Annual Payment ” - Except for (i) payments owed to the Nation under the existing Settlement and Closing Agreements that the Nation has executed with each individual Lessee (ii) the payments that will be owed to the Nation under the Settlement and Closing Agreements set forth in Section 14; (iii) the negotiation premium set forth in Section 3.4; and (iv) the payment set forth in Section 4.5, the total and sole payment that shall be made by (X) APS to the Nation, in consideration for the rights set forth in the 1960 Lease, including, but not limited to, (a) all leasehold rights, (b) the Existing § 323 Grants, and (c) the Renewed § 323 Grants; and by (Y) the Lessees to the Nation, in consideration for the rights set forth in the 1966 Lease, including, but not limited to, (a) all leasehold rights, (b) the Existing § 323 Grants, and (c) the Renewed § 323 Grants.
2.5
“ Communication Sites ” - The communication sites and related facilities identified within item 5 of Exhibit B.
2.6
“ Existing § 323 Grants ” - The § 323 Grants set forth on Exhibit B.
2.7
“ Four Corners Project ” - Has the meaning set forth in the 1966 Lease.
2.8
“ Initial Four Corners Plant ” - Has the meaning set forth in the 1966 Lease.

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2.9
“ Plan ” - Has the meaning set forth in Section 7.1.
2.10
“ Plant ” - For convenience only, and not to merge the leasehold estates under the 1960 Lease and the 1966 Lease, a reference to the Initial Four Corners Plant and the Four Corners Project, respectively.
2.11
“ Renewed § 323 Grants ” - Has the meaning set forth in Section 4.2.
2.12
“ Navajo Nation Lands ” - Has the meaning set forth in the 1966 Lease for the term “Reservation Lands.”
2.13
“ Secretary ” - The Secretary of the United States Department of the Interior or his or her duly authorized designee, representative, or successor.
2.14
“ Transmission Lines ” - The electrical transmission lines and related facilities identified within items 3 and 4 of Exhibit B.
3
TERM .
3.1
This Amendment shall become effective (the “ Amendment Effective Date ”) upon the earlier of SCE’s sale of its interest in the Four Corners Project or July 6, 2016 (the “ Amendment 2 Termination Date ,” as defined in the Amendment and Supplement No. 2 to the Supplemental and Additional Indenture of Lease, attached as Exhibit A).
3.2
The Navajo Nation Council Resolution approving this Amendment, and signature by the Nation’s duly authorized representative, shall be deemed to be sufficient legal approval by the Nation of this Amendment.
3.3
The 1960 Lease and the 1966 Lease (and the Annual Payments payable thereunder) are extended to July 6, 2041, whether or not the Initial Four Corners Plant or the Four Corners Project are operating or the Renewed § 323 Grants are terminated.

4



3.4
The Nation will engage in good-faith negotiations for an additional extension of both the 1960 Lease and the 1966 Lease beyond 2041, provided that such negotiations begin no later than July 2029 and conclude by July 2031. Any mutual agreement to continue the negotiations beyond July 2031, which such negotiations are not successfully completed, will extend the term of both the 1960 Lease and the 1966 Lease equally beyond July 2041, provided that (i) the negotiation extension period shall not exceed three years; and (ii) APS with respect to the 1960 Lease and the Lessees with respect to the 1966 Lease shall pay the Nation a pre-negotiated premium (above the Annual Payment) for the period the negotiations are extended.

4
NATION’S CONSENT TO § 323 GRANTS BY SECRETARY FOR THE PLANT, TRANSMISSION LINES, AND COMMUNICATION SITES .
4.1
The Nation has previously consented to, and the Secretary has granted, the Existing § 323 Grants, and the renewal, extension or reissuance of each Existing § 323 Grant will be necessary.
4.2
The Nation consents and covenants to consent now, and for the terms of each of the 1960 Lease and the 1966 Lease (collectively, “ Consents ”), that the Lessees shall have the right to obtain, by grant from the Secretary, and the Nation Consents to the grant by the Secretary, of renewed, extended, or reissued § 323 Grants for the rights-of-way covered in the Existing § 323 Grants. (Such renewed, extended, or reissued § 323 Grants are referred to as the “ Renewed § 323 Grants ”).
4.3
The Nation and Lessees will cooperate fully with each other and the Secretary to obtain the Renewed § 323 Grants.

5



4.4
The Navajo Nation Council Resolution approving this Amendment shall be deemed to be sufficient legal approval by the Nation for the Renewed § 323 Grants. No further consideration shall be required by the Nation in order for the Secretary to issue the Renewed § 323 Grants.
4.5
The Lessees shall provide the Nation a copy of applications for the Renewed § 323 Grants, and each application shall be accompanied by a payment of no more than $800 per application.
4.6
The Existing § 323 Grants and the Renewed § 323 Grants shall be additional and supplementary to, separate and independent from, and not conditioned upon the leasehold rights leased to APS under the 1960 Lease and to the Lessees under the 1966 Lease; and a termination of either the 1960 Lease or the 1966 Lease for any reason shall not terminate any §323 Grant, and a termination of any § 323 Grant for any reason, shall not terminate the 1960 Lease or the 1966 Lease.
4.7
The Nation agrees to support the renewal, extension, or reissuance of the Existing § 323 Grants as categorically excluded under section 3.2A of the Bureau of Indian Affairs’ 2005 National Environmental Policy Act Handbook. If the Secretary determines that additional environmental impact analysis is required, the Nation hereby grants Lessees access to all Navajo Nation Lands necessary to complete such additional analysis. Lessees will work with the appropriate Navajo Nation agencies to effectuate any necessary access to any Navajo Nation Lands. The Nation also agrees to assist the Lessees in completing such analysis and to take reasonable actions to reduce the time and cost required to complete such analysis.
4.8
Except as set forth in the 1960 Lease, APS shall not change the voltages of the Transmission Lines without the Nation’s prior approval.

6



4.9
Under no circumstances shall any § 323 Grant be interpreted as granting a fee simple interest to the Lessees or any other property interest, except as set forth in the § 323 Grant.

5
ADDITIONAL TERMS REGARDING § 323 GRANTS FOR TRANSMISSION LINES .
5.1
The provisions of Section 5.2 through Section 5.7 and Section 10 and Section 12 below constitute a separate agreement between the Nation and APS. In no event shall any default, action or omission by APS under Section 5.2 through Section 5.7, Section 10, or Section 12 below have any effect on any other Parties’ rights, privileges, duties, obligations and liabilities under the remainder of this Amendment.
5.2
The Navajo Nation Lands subject to an Existing § 323 Grant or a Renewed § 323 Grant and pertaining only to the Transmission Lines shall hereinafter be referred to as “ § 323 Grant Land .”
5.3
The use of the § 323 Grant Land shall be strictly limited to constructing, reconstructing, replacing, repairing, operating and maintaining the Transmission Lines. Any other use of the § 323 Grant Land shall require the consent of the Nation. The consent of the Nation may be given, given upon conditions, or denied at the sole discretion of the Nation.
5.4
The Nation shall be under no obligation to forego the use of the § 323 Grant Land or any portion or lands burdened by the § 323 Grant Land, or to refrain from authorizing any use of said lands by any third party, including but not limited to, the exploration for and development and transportation of coal, oil, gas, or other natural resources located within or beneath said lands, except to the extent that

7


such use physically interferes with the operation and maintenance of the Transmission Lines or interferes with the purposes of the § 323 Grants.
5.5
Upon the Nation’s proposed authorization of the use of the § 323 Grant Lands by any third party, which new use may occupy the § 323 Grant Lands or otherwise burden the § 323 Grant Lands, the Nation agrees to notify APS and commence good faith consultation with APS prior to the Nation’s final approval of said third party use. Prior to the Nation’s final approval, the Nation shall require the third party to enter into an agreement with APS, which agreement must be acceptable to APS, to indemnify, defend, and hold APS harmless from any and all liability arising from the third party’s use, interest, and activities within the § 323 Grant Land.
5.6
Five years prior to the expiration of a Renewed § 323 Grant, or as soon as practicable after any earlier termination of a Renewed § 323 Grant, APS and the Nation shall meet to discuss whether APS will leave in place all, some, or none of the Transmission Lines. If APS and the Nation cannot agree to terms regarding the disposition of one or more of the Transmission Lines, APS shall remove the Transmission Line(s) for which no agreement is reached, in accordance with the Lease and applicable laws and requirements, and shall leave the § 323 Grant Land in good condition. On the expiration date of a Renewed § 323 Grant, APS shall have ninety (90) days to peaceably and without legal process deliver the possession of the § 323 Grant Land, with or without the Transmission Lines, as the case may be. In the event a Renewed § 323 Grant is terminated early, APS shall have six months to peaceably and without legal process deliver the possession of the § 323 Grant Land for such terminated § 323 Grant, with or without the Transmission Lines, as the case may be. If delivery cannot be

8


performed on or before such 90-day period or six month period, as the case may be, APS and the Nation shall commence good faith negotiations for compensation, fees or damages to be paid to the Nation for prospective periods of occupation, use, or burden of the § 323 Grant Lands.
5.7
Holding over by APS after the expiration or early termination of a Renewed § 323 Grant shall not constitute an extension/renewal thereof, or give APS any rights in or to the § 323 Grant Lands. Holding over after expiration or early termination of a Renewed § 323 Grant shall not give APS any rights via a Renewed § 323 Grant. Following expiration or early termination of a § 323 Grant, the act of applying for a § 323 Grant from the Secretary shall not give APS any rights to the § 323 Grant land.
6
NATION’S SUPPORT OF ENVIRONMENTAL REVIEWS AND § 323 GRANTS . The Nation shall work with the Lessees to obtain the necessary regulatory approvals and to advocate on behalf of the Lessees in support of any National Environmental Policy Act, Endangered Species Act, or National Historic Preservation Act analyses; § 323 renewals or extensions; or any other requirements of the Department of the Interior (“ DOI ”) or the Nation that are prerequisites necessary to conduct the operations of the Plant, Transmission Lines, and Communication Sites. In its interactions with the DOI, the Nation shall support the interests of the Lessees and advocate positions that support the continued operations of the Plant, Transmission Lines, and Communication Sites.
7
EMPLOYMENT AT THE FOUR CORNERS GENERATING STATION .
Section 19 of the 1960 Lease, Section 24 of the 1966 Lease and Section 25 of the 1966 Lease (as amended by Section 12 of the 1985 Lease Supplement) are deleted in their entirety and replaced as follows:

9



7.1
Without limiting the scope or effectiveness of the provisions of Section 17 of the 1960 Lease (Operation of Power Plant) or Section 22 of the 1966 Lease (Operation of Enlarged Four Corners Generating Station), APS and the Lessees shall comply with the terms of the Four Corners Generating Station Preference Plan (the “ Plan ”), attached as Exhibit C.
7.2
In the event that, in the opinion of their counsel, federal law develops in the future, to permit APS and the Lessees, respectively, to grant a preference in employment based on tribal affiliation, as distinguished from a “Native American Indian” preference in employment, APS and the Lessees shall practice a Navajo preference in employment at the Plant in accordance with the requirements of this Section 7 and the Plan.
7.3
If, at any time, APS’s then current Collective Bargaining Agreement (which governs labor at the Plant), as negotiated by APS, in its sole discretion, conflicts with this Section 7 or the Plan, then APS’s Collective Bargaining Agreement shall take precedence.
8
ADVISORY COMMITTEE .
APS, the Lessees, and the Nation shall establish a Four Corners Advisory Committee for the purpose of promoting open dialogue between them regarding operations of the Plant.
8.1
The Committee shall consist of two members of the Navajo Nation Government with experience in energy-related matters, one from the executive and one from

10



the legislative branch, and two senior officials representing APS and the Lessees, who shall be tasked to work together and in consultation with their respective leaderships to resolve concerns raised by APS and the Lessees or the Nation in a mutually beneficial manner. The Committee shall meet regularly, but no less than two times a year. Discussion topics and updates may include voluntary compliance agreements, the impact of plant operations on the Nation’s members and surrounding communities and emerging issues.
8.2
APS and the Lessees or the Nation may submit disagreements and disputes to the Committee for discussion and possible resolution. Decisions of the Committee shall be in the nature of recommendations and shall not be binding on APS and the Lessees or the Nation.
9
ANNUAL PAYMENT .
9.1
The Annual Payment shall replace all compensation for rents, rights of way, or otherwise, set forth in the § 323 Grants (as to the § 323 Grant Land), the 1960 Lease and the 1966 Lease, as applicable. All sections of the aforementioned documents imposing a payment obligation on APS and the Lessees are hereby deleted.
9.2
The Annual Payment shall be $7,000,000, as adjusted from the April 2011 CPI (defined below), and shall begin on the Amendment Effective Date. All subsequent Annual Payments shall be subject to annual adjustments, based upon changes in the April Consumer Price Index U.S. City Average for All Urban Consumers, published by the U.S. Bureau of Labor Statistics (“ CPI ”). The annual CPI adjustment for the Annual Payment shall be as set forth in Exhibit D.

11



9.3
On or before July 6 of each year, APS and the Lessees shall submit one check for the Annual Payment to the Nation and indicate the adjustment required by the CPI.
9.4
No Lessee shall be responsible or liable to the Nation for the payment of any portion of such Annual Payment of any other Lessee. In the event that one or more Lessees fails to pay the Nation its portion of such Annual Payment at the time such Annual Payment is submitted to the Nation, APS (or the then operator of the Plant) shall inform the Nation of the name of the Lessee(s) failing to make the Annual Payment and the specific amount of each such Lessee’s shortfall. In the event the Nation incurs costs associated with obtaining the required Annual Payment owed, the Nation shall be entitled to recover from the defaulting Lessee(s) its associated costs, including, but not limited to, attorney’s fees, filing fees and interest accrued. A list of each Lessee’s portion of the Annual Payment shall be provided to the Nation.
9.5
The Nation agrees that the Annual Payment payable by APS and the Lessees constitutes fair and adequate consideration for the rights granted in the 1960 Lease, the 1966 Lease, the Existing § 323 Grants and the Renewed § 323 Grants.
9.6
Upon agreement between the Lessees, the percentage of the Annual Payment owed by each of APS and the Lessees, respectively, may be changed without the consent of the Nation. But in no event shall the amount due be less than 100% of the Annual Payment, as calculated in accordance with Section 9.2. In the event of a change in payment percentages, an updated list of each Lessee’s portion of the Annual Payment shall be provided to the Nation. In consideration of the Annual Payment made by APS and the Lessees, respectively, the Nation releases APS and the Lessees from all and any kind of claims, suits, actions, causes of action, rights,

12


liabilities, and obligations (the aforementioned, collectively referred to as “ Claims ”), whether past, present, or future, known or unknown, for or related to compensation due under the 1960 Lease or 1966 Lease, or compensation for the Existing § 323 Grants and the Renewed § 323 Grants.
9.7
In consideration of the Annual Payment made by APS and the Lessees, respectively, the Nation releases APS and the Lessees from and settles all outstanding issues and potential Claims, under the 1960 Lease or 1966 Lease, or under the Existing § 323 Grants. Notwithstanding the foregoing, the release set forth in this Section 9.7 shall not apply to any claims arising under Section 10 of this Amendment.
9.8
APS and the Lessees release the Nation from and settle all outstanding issues and potential Claims under the 1960 Lease or the 1966 Lease, or under the Existing § 323 Grants. Notwithstanding the foregoing, the release set forth in this Section 9.8 shall not apply to any claims arising under Section 10 of this Amendment.
10
APS’S 230kV LINES .
APS and the Nation disagree as to whether the provisions of Section 17 of the 1960 Lease (Operation of Power Plant) or Section 22 of the 1966 Lease (Operation of Enlarged Four Corners Generating Station) apply to the Existing §323 Grants listed on Exhibit B for the 230kV lines identified as (a) Flagstaff to Leupp and (b) Cholla to Leupp (collectively, the “ Leupp Lines ”). APS and the Nation each reserve the right to assert that the aforementioned sections apply or do not apply to the Leupp Lines, as the case may be.
11
DECOMMISSIONING .
Upon the decommissioning of the Initial Four Corners Plant, the Four Corners Project or any part of either facility, the final decommissioning obligations of APS as to the Initial Four Corners Plant and of the Lessees as to the Four Corners Project shall be limited to

13


the requirements under the applicable federal environmental laws existing at the time of such decommissioning. All or any part of any such decommissioning may occur at any time during the term of either the 1960 Lease or the 1966 Lease, as applicable.
12
MOENKOPI SUBSTATION .
In the event that there is a future expansion of the Moenkopi Substation, it shall be subject to an increase in APS’s portion of the Annual Payment by $1500 per acre (in April 2009 dollars) for up to 100 acres. The $1500 per acre payment shall be adjusted annually by the CPI (in April 2009 dollars). The expansion shall be subject to all applicable regulatory requirements.
13
ASSIGNMENTS .
The second paragraph of Section 19 of the 1966 Lease is deleted and replaced as follows: Except as set forth in the first paragraph of Section 19 of the 1966 Lease and in Section 9.6 of this Amendment, and except for any assignment, sublease or other transfer by a Lessee to its Affiliate, all other assignments, subleases, or other transfers of rights (including operating rights) of APS related to the 1960 Lease or the Lessees related to the 1966 Lease shall be subject to the prior written consent of the Nation, which consent shall not be unreasonably withheld, nor conditioned on any payments or changes to the terms and conditions of the respective leases, other than nominal administration fees.
14
SETTLEMENT AND CLOSING AGREEMENTS .
Each Party shall execute a new Settlement and Closing Agreement in form and substance substantially similar to the proposed sample Settlement and Closing Agreement attached as Exhibit F. Once executed, the Settlement and Closing Agreement will be effective as of July 6, 2016.
15
NO CROSS DEFAULT .

14



Notwithstanding anything to the contrary in this Amendment, the 1960 Lease or the 1966 Lease, a default by APS under the 1960 Lease, as amended by this Amendment, shall not constitute a default by Lessees under the 1966 Lease, and a default by Lessees under the 1966 Lease, as amended by this Amendment, shall not constitute a default by APS under the 1960 Lease.
16
PRIMARY FUEL .
The primary fuel used at the Plant shall be coal.
17
THIRD PARTY BENEFICIARIES .
The 1960 Lease and the 1966 Lease are not intended to confer upon any third person any rights, privileges, waivers, obligations, or remedies granted hereunder. If, on or before July 6, 2018, SCE has sold its share of the Four Corners Project (“ SCE’s Share ”), the Nation agrees that, without any additional consent or compensation, such buyer(s) of SCE’s Share (“ Buyers ”) shall (a) automatically, upon the closing of such a sale, become a Lessee(s) under the 1966 Lease and (2) assume the portion of the Annual Payment attributable to SCE’s Share. Upon the closing of such transaction, all such Buyers shall be express third party beneficiaries under this Section 17, and such Buyers and the Nation shall have first party rights to enforce full performance of this Section 17 against each other.
18
EXECUTION IN COUNTERPARTS .
This Amendment may be executed in any number of counterparts, and each executed counterpart shall have the same force and effect as an original instrument and as if all of the Parties to the aggregate counterparts had signed the same instrument. Any signature page of this Amendment may be detached from any counterpart thereof without impairing the legal effect of any signatures thereon, and may be attached to other





15































Exhibit A
(Attachments Not Included)







AMENDMENT AND SUPPLEMENT NO. 2


TO


SUPPLEMENTAL AND ADDITIONAL INDENTURE OF LEASE

BETWEEN

THE NAVAJO NATION

AND

ARIZONA PUBLIC SERVICE COMPANY,

EL PASO ELECTRIC COMPANY,

PUBLIC SERVICE COMPANY OF NEW MEXICO,

SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER
DISTRICT,

SOUTHERN CALIFORNIA EDISON COMPANY

AND

TUCSON ELECTRIC POWER COMPANY






Dated: March 7, 2011





AMENDMENT AND SUPPLEMENT NO. 2 TO SUPPLEMENTAL AND ADDITIONAL INDENTURE OF LEASE

This Amendment and Supplement No. 2 to the Supplemental and Additional Indenture of Lease dated March 7, 2011 (this " Amendment ") is by and between the Navajo Nation (formerly known as The Navajo Tribe of Indians), acting through the Navajo Nation Council, for and on behalf of the Navajo Nation (hereinafter referred to as the " Nation "), as lessor, and Arizona Public Service Company (" APS "), El Paso Electric Company, Public Service Company of New Mexico, Salt River Project Agricultural Improvement and Power District, Southern California Edison Company (" Edison "), and Tucson Electric Power Company (formerly known as Tucson Gas & Electric Company) (hereinafter, collectively, together with their successors and assigns, referred to as the " Lessees ," and each individually referred to as a " Lessee "). The Nation and the Lessees are hereinafter collectively referred to as the " Parties ."
The Parties agree as follows:
1      BACKGROUND.
1.1
APS has leased certain premises from the Nation under that certain Indenture of Lease dated December 1, 1960 between APS and the Nation, as supplemented and amended by that certain Supplemental and Additional Indenture of Lease dated July 6, 1966, between the Nation, APS and the other Lessees, as further supplemented and amended by that certain Amendment and Supplement No. 1 to Supplemental and Additional Indenture of Lease dated April 25, 1985, between the Nation, APS and the other Lessees (the " 1985 Lease Supplement "; and such Indenture of Lease, as supplemented and amended, the " 1960 Lease ").
1.2
Lessees have leased certain premises from the Nation under that certain Supplemental and Additional Indenture of Lease dated July 6, 1966, between the Nation and the Lessees, as supplemented and amended by the 1985 Lease

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Supplement (such Supplemental and Additional Indenture of Lease, as supplemented and amended, the " 1966 Lease ").
1.3
The Parties desire to amend the 1960 Lease and the 1966 Lease to reflect certain new terms and conditions.
1.4
Edison does not intend to remain a participant in the Four Corners Project after July 2016. Accordingly, Edison intends to end its tenancy under the Lease upon the earlier of the sale of its interest in the Four Corners Project or July 6, 2016. The date on which Edison ends its tenancy, as set forth in the preceding sentence, is referred to as the " Amendment 2 Termination Date. "
1.5      Upon the Amendment 2 Termination Date, this Amendment shall terminate.
1.6      The 1960 Lease and the 1966 Lease are amended only as set forth in this
Amendment. To the extent, however, that there is any conflict between the 1960
Lease and this Amendment or the 1966 Lease and this Amendment, this
Amendment shall govern.
1.7
This Amendment is not intended to and does not merge the leasehold estates of the 1960 Lease and the 1966 Lease, or the rights, liabilities, or obligations (collectively, " Rights ") of the Parties set forth in the 1960 Lease and the 1966 Lease. Further, in no event shall the Lessees (except for APS) have any Rights under the 1960 Lease or with respect to the leasehold estate demised to APS under the 1960 Lease. Rather, except for APS , all the Lessees' Rights are limited only to the Four Corners Project, as set forth in the 1966 Lease.
2      DEFINITIONS .
2.1
" § 323 Grant" or "§ 323 Grants " - One or more grants of rights-of-way and easements under the Act of February 5, 1948 (62 Stat. 17, 18, 25 U.S.C. § 323-328), the Act of March 3, 1879 (20 Stat. 394, 5 U.S.C. § 485), as amended, and
the Acts of July 9, 1832, and July 27, 1868 (4 Stat. 564, 15 Stat. 228. 25 U.S.C. § 2) and such regulations promulgated thereunder, as are applicable, including 25 C.F.R. § 1.2 and 25 C.F.R. Part 169.
2.2      " § 323 Grant Land " - Has the meaning set forth in Section 5.2.

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2.3
" Annual Payment "- Except for (i) payments owed to the Nation under the existing Settlement and Closing Agreements that the Nation has executed with each individual Lessee, (ii) payments that will be owed to the Nation under the Settlement and Closing Agreements set forth in Section 14, and (iii) the payment set forth in Section 4.5, the total and sole payment that shall be made by (X) APS to the Nation, in consideration for the rights set forth in the 1960 Lease, including, but not limited to, (a) all leasehold rights, (b) the Existing § 323 Grants, and (c) the Renewed § 323 Grants; and by (Y) the Lessees to the Nation, in consideration for the rights set forth in the 1966 Lease, including, but not limited to, (a) all leasehold rights, (b) the Existing § 323 Grants, and (c) the Renewed § 323 Grants.
2.4
" Communication Sites " - The communication sites and related facilities identified within item 5 of Exhibit B.
2.5      " Existing § 323 Grants "-The § 323 Grants set forth on Exhibit B.
2.6      " Four Corners Project "- Has the meaning set forth in the 1966 Lease.
2.7      " Initial Four Corners Plant " - Has the meaning set forth in the 1966 Lease.
2.8      " Plan "- Has the meaning set forth in Section 7.1.
2.9
" Plant "- For convenience only, and not to merge the leasehold estates under the 1960 Lease and the 1966 Lease, a reference to the Initial Four Corners Plant and the Four Corners Project, respectively.
     2.10      " Renewed § 323 Grants "- Has the meaning set forth in Section 4.2.

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2.11 " Navajo Nation Lands " - Has the meaning set forth in the 1966 Lease for the term "Reservation Lands."
2.12 " Secretary " - The Secretary of the United States Department of the Interior or his or her duly authorized designee, representative, or successor.
2.13 " Transmission Lines " - The electrical transmission lines and related facilities identified within items 3 and 4 of Exhibit B.
3      TERM.
3.1
This Amendment shall become effective when it has been signed by the Lessees and subsequently signed by the Nation's duly authorized representative, pursuant to a Navajo Nation Council Resolution approving this Amendment.
3.2
The Navajo Nation Council Resolution approving this Amendment, and signature by the Nation's duly authorized representative, shall be deemed to be sufficient legal approval by the Nation of this Amendment.
3.3      This Amendment shall terminate on the Amendment 2 Termination Date.
3.4
In the event this Amendment terminates as a result of the arrival of July 6, 2016, Edison shall not be relieved of any of its continuing or accrued and unfulfilled or unperformed obligations to the Nation under the 1966 Lease, and Edison shall retain all of its rights under the 1966 Lease with respect to such continuing obligations.

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NATION'S CONSENT TO § 323 GRANTS BY SECRETARY FOR THE PLANT, TRANSMISSION LINES, AND COMMUNICATION SITES .
4.1      The Nation has previously consented to, and the Secretary has granted, the
Existing § 323 Grants, and the renewal, extension or reissuance of each Existing § 323 Grant will be necessary.

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4.2
The Nation consents and covenants to consent now, and for the terms of each of the 1960 Lease and the 1966 Lease (collectively, " Consents "), that the Lessees shall have the right to obtain, by grant from the Secretary, and the Nation Consents to the grant by the Secretary, of renewed, extended, or reissued § 323 Grants for the rights-of-way covered in the Existing § 323 Grants. (Such renewed, extended, or reissued § 323 Grants are referred to as the " Renewed § 323 Grants ").
4.3
The Nation and Lessees will cooperate fully with each other and the Secretary to obtain the Renewed § 323 Grants.
4.4
The Navajo Nation Council Resolution approving this Amendment shall be deemed to be sufficient legal approval by the Nation for the Renewed § 323 Grants. No further consideration shall be required by the Nation in order for the Secretary to issue the Renewed § 323 Grants.
4.5
The Lessees shall provide the Nation a copy of applications for the Renewed § 323 Grants, and each application shall be accompanied by a payment of no more than $800 per application.
4.6
The Existing § 323 Grants and the Renewed § 323 Grants shall be additional and supplementary to, separate and independent from, and not conditioned upon the leasehold rights leased to APS under the 1960 Lease and to the Lessees under the 1966 Lease; and a termination of either the 1960 Lease or the 1966 Lease for any reason shall not terminate any § 323 Grant, and a termination of any § 323 Grant for any reason, shall not terminate the 1960 Lease or the 1966 Lease.
4.7
The Nation agrees to support the renewal, extension, or reissuance of the Existing § 323 Grants as categorically excluded under section 3.2A of the Bureau of Indian Affairs' 2005 National Environmental Policy Act Handbook. If the Secretary

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determines that additional environmental impact analysis is required, the Nation hereby grants Lessees access to all Navajo Nation Lands necessary to complete such additional analysis. Lessees will work with the appropriate Navajo Nation agencies to effectuate any necessary access to any Navajo Nation Lands. The Nation also agrees to assist the Lessees in completing such analysis and to take reasonable actions to reduce the time and cost required to complete such analysis.
4.8
Except as set forth in the 1960 Lease, APS shall not change the voltages of the Transmission Lines without the Nation's prior approval.
4.9
Under no circumstances shall any § 323 Grant be interpreted as granting a fee simple interest to the Lessees or any other property interest, except as set forth in the § 323 Grant.

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ADDITIONAL TERMS REGARDING § 323 GRANTS FOR TRANSMISSION LINES.
5.1
The provisions of Section 5.2 through Section 5.7, Section 11, and Section 13 below constitute a separate agreement between the Nation and APS. In no event shall any default, action or omission by APS under Section 5.2 through Section 5.7, Section 11, or Section 13 below have any effect on any other Parties' rights, privileges, duties, obligations and liabilities under the remainder of this Amendment.
5.2
The Navajo Nation Lands subject to an Existing § 323 Grant or a Renewed § 323 Grant and pertaining only to the Transmission Lines shall hereinafter be referred to as" § 323 Grant Land ."
5.3
The use of the § 323 Grant Land shall be strictly limited to constructing, reconstructing, replacing, repairing, operating and maintaining the Transmission Lines. Any other use of the § 323 Grant Land shall require the consent of the

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Nation. The consent of the Nation may be given, given upon conditions, or denied at the sole discretion of the Nation.
5.4
The Nation shall be under no obligation to forego the use of the § 323 Grant Land or any portion or lands burdened by the § 323 Grant Land, or to refrain from authorizing any use of said lands by any third party, including but not limited to, the exploration for and development and transportation of coal, oil, gas, or other natural resources located within or beneath said lands, except to the extent that such use physically interferes with the operation and maintenance of the Transmission Lines or interferes with the purposes of the § 323 Grants.
5.5
Upon the Nation's proposed authorization of the use of the § 323 Grant Lands by any third party, which new use may occupy the § 323 Grant Lands or otherwise burden the § 323 Grant Lands, the Nation agrees to notify APS and commence good faith consultation with APS prior to the Nation's final approval of said third party use. Prior to the Nation's final approval, the Nation shall require the third party to enter into an agreement with APS, which agreement must be acceptable to APS, to indemnify, defend, and hold APS harmless from any and all liability arising from the third party's use, interest, and activities within the §323 Grant Land.
5.6
Five years prior to the expiration of a Renewed § 323 Grant, or as soon as practicable after any earlier termination of a Renewed § 323 Grant, APS and the Nation shall meet to discuss whether APS will leave in place all, some, or none of the Transmission Lines. If APS and the Nation cannot agree to terms regarding the disposition of one or more of the Transmission Lines, APS shall remove the Transmission Line(s) for which no agreement is reached, in accordance with the Lease and applicable laws and requirements, and shall leave the § 323 Grant Land

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in good condition. On the expiration date of a Renewed § 323 Grant, APS shall have ninety (90) days to peaceably and without legal process deliver the possession of the § 323 Grant Land, with or without the Transmission Lines, as the case may be. In the event a Renewed§ 323 Grant is terminated early, APS shall have six months to peaceably and without legal process deliver the possession of the § 323 Grant Land for such terminated § 323 Grant, with or without the Transmission Lines, as the case may be. If delivery cannot be performed on or before such 90-day period or six month period, as the case may be, APS and the Nation shall commence good faith negotiations for compensation, fees or damages to be paid to the Nation for prospective periods of occupation, use, or burden of the § 323 Grant Lands.
5.7
Holding over by APS after the expiration or early termination of a Renewed § 323 Grant shall not constitute an extension/renewal thereof, or give APS any rights in or to the§ 323 Grant Lands. Holding over after expiration or early termination of a Renewed § 323 Grant shall not give APS any rights via a Renewed § 323 Grant. Following expiration or early termination of a § 323 Grant, the act of applying for a § 323 Grant from the Secretary shall not give APS any rights to the § 323 Grant land.
6      NATION'S SUPPORT OF ENVIRONMENTAL REVIEWS AND§ 323 GRANTS.
The Nation shall work with the Lessees to obtain the necessary regulatory approvals and to advocate on behalf of the Lessees in support of any National Environmental Policy Act, Endangered Species Act, or National Historic Preservation Act analyses; § 323 renewals or extensions; or any other requirements of the Department of the Interior (" DOl ") or the Nation that are prerequisites necessary to conduct the operations of the Plant, Transmission Lines, and Communication Sites. In its interactions with the DOI,

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the Nation shall support the interests of the Lessees and advocate positions that support the continued operations of the Plant, Transmission Lines, and Communication Sites.
7      EMPLOYMENT AT THE FOUR CORNERS GENERATING STATION.
Section 19 of the 1960 Lease, Section 24 of the 1966 Lease and Section 25 of the 1966 Lease (as amended by Section 12 of the 1985 Lease Supplement) are deleted in their entirety and replaced as follows:
7 .1.
Without limiting the scope or effectiveness of the provisions of Section 17 of the 1960 Lease (Operation of Power Plant) or Section 22 of the 1966 Lease (Operation of Enlarged Four Corners Generating Station), APS and the Lessees shall comply with the terms of the Four Corners Generating Station Preference Plan (the " Plan "), attached as Exhibit C.
7.2
In the event that, in the opinion of their counsel, federal law develops in the future to permit APS and the Lessees, respectively, to grant a preference in employment based on tribal affiliation, as distinguished from a "Native American Indian" preference in employment, APS and the Lessees shall practice a Navajo preference in employment at the Plant in accordance with the requirements of this Section 7 and the Plan.
7.3
If, at any time, APS's then current Collective Bargaining Agreement (which governs labor at the Plant), as negotiated by APS in its sole discretion, conflicts

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with this Section 7 or the Plan, then APS's Collective Bargaining Agreement shall take precedence.
8      ADVISORY COMMITTEE.
APS, the Lessees, and the Nation shall establish a Four Corners Advisory Committee for the purpose of promoting open dialogue between them regarding operations of the Plant.
8.1
The Committee shall consist of two members of the Navajo Nation Government with experience in energy-related matters, one from the executive and one from the legislative branch, and two senior officials representing APS and the Lessees, who shall be tasked to work together and in consultation with their respective leaderships to resolve concerns raised by APS and the Lessees or the Nation in a mutually beneficial manner. The Committee shall meet regularly, but no less than two times a year. Discussion topics and updates may include voluntary compliance agreements, the impact of plant operations on the Nation's members and surrounding communities and emerging issues.
8.2
APS and the Lessees or the Nation may submit disagreements and disputes to the Committee for discussion and possible resolution. Decisions of the Committee shall be in the nature of recommendations and shall not be binding on APS and the Lessees or the Nation.

9      ANNUAL PAYMENT.
9.1
The Annual Payment shall replace all compensation for rents, rights of way, or otherwise, set forth in the § 323 Grants (as to the § 323 Grant Land), the 1960 Lease and the 1966 Lease, as applicable. All sections of the aforementioned documents imposing a payment obligation on APS and the Lessees are hereby deleted.

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9.2      The Annual Payment, which shall be $7,000,000 (in 2011 dollars), shall begin on
July 6, 2011. All subsequent Annual Payments shall be subject to annual adjustments, based upon changes in the April Consumer Price Index U.S. City Average for All Urban Consumers, published by the U.S. Bureau of Labor Statistics (" CPI "). The annual CPI adjustment for the Annual Payment shall be as set forth in Exhibit D.
9.3
On or before July 6 of each year, APS and the Lessees shall submit one check for the Annual Payment to the Nation and indicate the adjustment required by the CPl.
9.4
No Lessee shall be responsible or liable to the Nation for the payment of any portion of such Annual Payment of any other Lessee. In the event that one or more Lessees fails to pay the Nation its portion of such Annual Payment at the time such Annual Payment is submitted to the Nation, APS (or the then operator of the Plant) shall inform the Nation of the name of the Lessee(s) failing to make the Annual Payment and the specific amount of each such Lessee's shortfall. In the event the Nation incurs costs associated with obtaining the required Annual Payment owed, the Nation shall be entitled to recover from the defaulting Lessee(s) its associated costs, including, but not limited to, attorney's fees, filing fees and interest accrued. A list of each Lessee's portion of the Annual Payment shall be provided to the Nation.
9.5
The Nation agrees that the Annual Payment payable by APS and the Lessees constitutes fair and adequate consideration for the rights granted in the 1960 Lease, the 1966 Lease, the Existing § 323 Grants and the Renewed § 323 Grants.
9.6
Upon agreement between the Lessees, the percentage of the Annual Payment owed by each of APS and the Lessees, respectively, may be changed without the

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consent of the Nation. But in no event shall the amount due be less than 100% of the Annual Payment, as calculated in accordance with Section 9.2. In the event of a change in payment percentages, an updated list of each Lessee's portion of the Annual Payment shall be provided to the Nation.
9.7 In consideration of the Annual Payment made by APS and the Lessees, respectively, the Nation releases APS and the Lessees from all and any kind of claims, suits, actions, causes of action, rights, liabilities, and obligations (the aforementioned, collectively referred to as " Claims "), whether past, present, or future, known or unknown, for or related to compensation due under the 1960 Lease or 1966 Lease, or compensation for the Existing § 323 Grants and the Renewed § 323 Grants. In consideration of the Annual Payment made by APS and the Lessees, respectively, the Nation releases APS and the Lessees from and settles all outstanding issues and potential Claims, under the 1960 Lease or 1966 Lease, or under the Existing § 323 Grants. Notwithstanding the foregoing, the release set forth in this Section 9.7 shall not apply to any claims arising under Section 11 of this Amendment.
9.8
APS and the Lessees release the Nation from and settle all outstanding issues and potential Claims under the 1960 Lease or the 1966 Lease, or under the Existing § 323 Grants. Notwithstanding the foregoing, the release set forth in this Section 9.8 shall not apply to any claims arising under Section 11 of this Amendment.

10      SURVEY OF PLANT.
10.1
APS and the Lessees and the Nation agree that part of the Annual Payment is based on their understanding that the Plant Site and the Ancillary Facilities, as identified within items 1 and 2 of Exhibit B (the " Plant Property "), comprise a

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total of 3,663 acres (3,600 acres, with an upper margin of error of 63 acres) (the " Expected Plant Property Acreage ").
10.2
APS and the Nation agree that part of APS's share of the Annual Payment is based on their understanding that the § 323 Grant Land comprises 10,000 acres (9839.40 acres, with an upper margin of error of 172 acres) (the "Expected § 323 Grant Land Acreage" ).
10.3
APS, for the § 323 Grant Land, and APS and the Lessees, for the Plant Property, shall conduct surveys of the § 323 Grant Land and the Plant Property, respectively, within twelve months for the § 323 Grant Land, and six months for the Plant Property, after the effective date of this Amendment. The Nation hereby grants APS and the Lessees access to all Navajo Nation Lands necessary to complete such surveys, and APS and the Lessees will work with the appropriate Nation agencies to effectuate any necessary access to any Navajo Nation Lands. The actual acres for the Plant Property and the § 323 Grant Land, as determined in such surveys, shall each be referred to as the " Actual Acreage ." If the Actual Acreage for the Plant Property exceeds the Expected Plant Property Acreage, or if the Actual Acreage for the § 323 Grant Land exceeds the Expected § 323 Grant Land Acreage, then Section 10.4 and, if necessary, Section 10.5 shall apply. If Section 10.4 does not apply, there shall be no adjustment to the Annual Payment and no other compensation shall be due to the Nation.
10.4
If the Actual Acreage for the Plant Property exceeds the Expected Plant Property Acreage, or if the Actual § 323 Grant Land Acreage exceeds the Expected § 323 Grant Land Acreage, APS (individually) or APS and the Lessees, as the case may be, shall have 90 days to cure and reduce the respective Actual Acreages to at or below the Expected Plant Property Acreage or Expected § 323 Grant Land

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Acreage, as the case may be. If the Actual Acreages are reduced accordingly, there shall be no adjustment to the Annual Payment and no other compensation shall be due to the Nation.
10.5
For any Actual Acreage in excess of the Expected Plant Property Acreage or Expected § 323 Grant Land Acreage that APS (individually) or APS and the Lessees fail or choose not to cure, the Annual Payment shall be adjusted in the next Annual Payment as follows: (a) for each one acre the Actual Acreage of the Plant Property exceeds the Expected Plant Property Acreage, the Annual Payment shall increase by $269, adjusted annually by the CPI (in 2011 dollars); and (b) for each one acre the Actual Acreage of the § 323 Grant Land exceeds the Expected § 323 Grant Land Acreage, the Annual Payment payable by APS shall increase by $612, adjusted annually by the CPI (in 2011 dollars).
10.6
Any adjusted Annual Payment shall be prospective only, and there shall be no true-up required for previous Annual Payments, and the Nation shall have no claims against the Lessees for additional liabilities or compensation for historic use of the Plant Property or the § 323 Grant Land related to property survey inaccuracies.
10.7
The respective surveys will not be used to acquire additional or different lands beyond what the surveys demonstrate comprise the current boundaries of the Plant Property or the § 323 Grant Lands.
11      APS'S 230kV LINES.
APS and the Nation disagree as to whether the provisions of Section 17 of the 1960 Lease (Operation of Power Plant) or Section 22 of the 1966 Lease (Operation of Enlarged Four Corners Generating Station) apply to the Existing §323 Grants listed on Exhibit B for the 230kV lines identified as (a) Flagstaff to Leupp and (b) Cholla to Leupp (collectively, the

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" Leupp Lines "). APS and the Nation each reserve the right to assert that the aforementioned sections apply or do not apply to the Leupp Lines, as the case may be.
12     DECOMMISSIONING.
Upon the decommissioning of the Initial Four Corners Plant, the Four Corners Project or any part of either facility, the final decommissioning obligations of APS as to the lnitial Four Corners Plant and of the Lessees as to the Four Corners Project shall be limited to the requirements under the applicable federal environmental laws existing at the time of such decommissioning. All or any part of any such decommissioning may occur at any time during the term of either the 1960 Lease or the 1966 Lease, as applicable.
13     MOENKOPI SUBSTATION.
In the event that there is a future expansion of the Moenkopi Substation, it shall be
subject to an increase in APS's portion of the Annual Payment by $1500 per acre (in April 2009 dollars) for up to 100 acres. The $1500 per acre payment shall be adjusted annually by the CPI (in April 2009 dollars). The expansion shall be subject to all applicable regulatory requirements.
14     SETTLEMENT AND CLOSING AGREEMENTS .
Except for Edison, each Party shall execute a new Settlement and Closing Agreement in form and substance substantially similar to the proposed sample Settlement and Closing Agreement attached as Exhibit F.
15     NO CROSS DEFAULT .
Notwithstanding anything to the contrary in this Amendment, the 1960 Lease or the 1966
Lease, a default by APS under the 1960 Lease, as amended by this Amendment, shall not constitute a default by Lessees under the 1966 Lease, and a default by Lessees under the 1966 Lease, as amended by this Amendment, shall not constitute a default by APS under the 1960 Lease.

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16      PRIMARY FUEL .
The primary fuel used at the Plant shall be coal.
17      NO THIRD PARTY BENEFICIARIES .
The 1960 Lease and the 1966 Lease are not intended to confer upon any third person any rights, privileges, waivers, obligations, or remedies granted hereunder.
18      EXECUTION IN COUNTERPARTS .
This Amendment may be executed in any number of counterparts, and each executed counterpart shall have the same force and effect as an original instrument and as if all of the Parties to the aggregate counterparts had signed the same instrument. Any signature page of this Amendment may be detached from any counterpart thereof without impairing the legal effect of any signatures thereon, and may be attached to other counterparts of this Amendment identical in form hereto but having attached to it one or more additional signature pages.

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Exhibit C











FOUR CORNERS GENERATING STATION PREFERENCE PLAN



















March 7, 2011








I.      INTRODUCTION

The purpose of this Preference Plan is to clarify and delineate Arizona Public Service Company's ("APS") Indian Preference Plan for the Four Corners Generating Station ("Four Corners") and specifically, the procedures for giving preference in employment to Indians.

II.      PREFERENCE POLICY STATEMENT

Employment at Four Corners is based on qualifications without regard to race, color, creed, religion, national origin, sex, or age, except that preference will be given to qualified Indians, provided, however, that to the extent allowed by law (as set forth in Section 7.2 of the Amendment, to which this Preference Plan is attached), APS will give preference to qualified Navajos rather than to Indians. Each member of APS's management is responsible for implementing this policy in his/her areas and is held accountable for it in the same way each manager is held accountable for other company policies. In particular, the Plant Manager for Four Corners has overall accountability and responsibility for implementation of this Preference Plan.

III.      SELECTION

In order to conduct operations at Four Corners in a safe and effective manner, all positions must be filled by persons qualified to perform the work required. APS has procedures to evaluate the qualifications (knowledge, skills and abilities) required for each job position. In general, these job qualifications are documented in "job descriptions" maintained by APS's Human Resource Department. Employees may also obtain a copy of their job descriptions by contacting their supervisors.

Job requirements consist of standards which identify the_skills, education, and experience necessary to perform a particular job. These job requirements are the basis for hiring decisions and are also used to formulate employee training programs for job classifications with few incumbent-Indian employees. Hence, it is important that the job descriptions describe the true requirements of the job. For this reason, APS will review its job descriptions to assure that the job qualifications are relevant to the job requirements.

Qualifications are assessed on the basis of performance reviews, skills evaluations, experience and education, as appropriate for the position under consideration. Supervisors (and previous employers, in the case of external applicants) may be contacted. Skills may be evaluated by written tests, skill demonstrations, or by supervisory interview. Tests will be validated for job relevancy.

APS is committed to Indian preference in employment. Preference will be given to Indians who possess the skills and abilities to fulfill the job requirements established above.

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IV.      GOALS

The purpose of this Preference Plan is to provide a means to increase the employment of Indians at Four Corners, in both regular full-time and temporary positions. In particular, APS intends to focus on increasing the overall employment of Indians at Four Corners and promoting Indians into management positions.

Analysis of Indian employment levels by job classification will lead to establishing goals for job placement and training. These goals will be reviewed annually to evaluate the progress made toward the objective, and revised as necessary.

The commitment of APS is to offer available job opportunities to Indians who satisfy job requirements, whether the person is a current employee or a non-employee identified through recruitment and advertising. Through the adoption and implementation of training programs at Four Corners, the long-range goal is to develop a pool of Indian candidates qualified for all positions.

Openings created through resignation, discharge, transfer, promotion, or a newly created position cause the posting of an internal "bid" and create opportunities for internal movement through the bid process. Bidding is the established process by which job vacancies are announced, advertised and filled. When vacancies occur, employees, who feel they have the qualifications for a particular job, may submit their internal applications (bids) for consideration.

The bid process frequently creates a cascading effect, as employees vacate existing jobs to fill positions that result from another employee accepting a bid to fill the original vacancy. When an Indian bidder accepts a position vacated by another Indian, the net effect on the overall percentage of Indian employment is zero. While Indian bidders will be given preference in accordance with this Preference Plan, an increase in the total percentage of Indian employees at Four Corners can be expected only when the cascading effect of the bid system results in the employment of external Indian candidates.

Nevertheless, the potential for increasing the number of Indian employees is greater in certain job classifications than in others. Some of these job classifications are:

•      First and second level supervision

•      Operations (Operator Trainee through Control Operator)

•      Machinist

•      Plant Mechanic

•      Electrician

•      Equipment Operator

•      Plant Chemist

•      Scheduler

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Four Corners management will give these job classifications particular attention to increase employment of Indians. Additionally, technical and professional recruiting will be increased to locate, identify, and employ suitable Indian candidates for engineers, technicians, and professional positions.

V.      TRAINING

When there are too few qualified Indian bidders, internal training programs to increase the availability of Indian bidders may be appropriate. Training programs should focus on raising the level of skills, knowledge and abilities of Indians in "feeder jobs." These are jobs which typically provide employees for higher level jobs, particularly when the lower level job has skill, knowledge and ability requirements that are prerequisites for a higher level job. Training should continue until the goal has been met. Other "in-place" training programs, such as apprenticeships and operations training, are on-going and continue to provide trained replacements for journeymen.

Indians will be encouraged to enhance their careers at APS by taking advantage of on­-the-job training, apprenticeships, and in-house and off-the-job educational courses. As a specific part of this Preference Plan, the follow ing actions will be taken to provide opportunities for Indians to advance to journeyman-level and supervisory positions.

1.      New apprenticeships will be awarded only to qualified Indians.

2.
Currently employed Indian journeymen will be selected for supervisory training to make them better qualified for future opportunities in foreman positions.

Because of the magnitude of the work and its accompanying time constraints, virtually everyone at Four Corners is affected by an overhaul. Four Corners has chosen to supplement the knowledge, skills and experience of its regular full-time employees with those of temporary workers with job specific skills. During an overhaul, where possible, regular full time employees are upgraded to higher level skill positions including supervisory positions. In this manner, employees may further expand the practical application of their technical and supervisory skills.

VI.      RECRUITMENT/ADVERTISING FOR REGULAR EMPLOYEES

Recruitment is any activity that causes individuals to apply for employment. Advertising is one method of recruitment. Examples of other methods include meetings with graduating college seniors, participation in trade fairs, and day programs.

Since most regular full-time jobs at Four Corners are filled internally, a large recruitment effort is not needed. Thus, recruitment of regular full-time employees should be limited to those positions which are not filled by Indians internally. For purposes of this Preference Plan, recruitment will concentrate on jobs in which Indians are underutilized.

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In an effort to attract qualified Indian applicants, contacts with key organizations throughout the Navajo Reservation will be maintained, although contacts within the Western Navajo Agency will be emphasized. In addition, Four Corners will work with appropriate tribal agencies to develop other potential recruitment sources.

Universities, vocational schools, Joint Training and Partnership Act classroom training programs, the Navajo Division of Education, the ONLR, and employment service offices located in the vicinity of Four Corners will be included in the recruitment and advertising efforts of Four Corners. Technical and professional jobs will be emphasized in recruitment efforts at colleges, universities, and in periodic advertisements to attempt to locate and identify suitable Indian candidates for employment opportunities.

Advertising and recruiting efforts will include a statement that APS at Four Corners recognizes Indian preference in employment. The following statement will be included in all advertisements for employment opportunities at Four Corners and on bid sheets posting jobs at Four Corners:

APS follows a policy of giving preferential treatment to Indians in connection with employment at the Four Corners Generating Station.

VII.      ADVERTISING/RECRUITING FOR TEMPORARY EMPLOYEES

Each year, temporary employees are hired for certain specific assignments at Four Corners. Only when no qualified Indian applicant is found, after a thorough review of returning Indian applicants, existing files on temporary Indian employees, and new applications from Indians (generated by advertising), will a temporary position be filled by a non-Indian.

VIII.      CONTRACT LABOR/SERVICES

APS will select qualified Indian-owned businesses, when available, to provide contract labor or services at Four Corners. APS will notify its vendors (a) of the employment and contracting preference policy at Four Corners; and (b) that they are expected to comply with applicable laws and regulations.

IX.      CROSS CULTURAL COMMUNICATIONS PROGRAM

APS will develop and implement a cross-cultural program designed to provide a forum for Indian and non-Indian employees to openly examine and discuss the culturally significant customs, beliefs, values, and social mores that all individuals bring with them to the workplace.

X.      DISPUTE RESOLUTION FOR EMPLOYEES

APS acknowledges the value of maintaining a work environment free of prejudice and discrimination. Nevertheless, despite even the best of intentions, complaints do arise, and the parties have determined that complaints of whatever nature are best handled internally, without the involvement of external agencies; Therefore, employees are encouraged to take advantage of

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APS's existing internal processes. Through this approach, a wide variety of employment related complaints may be addressed and resolved.

If Navajo Nation officials become aware of an employment concern at Four Corners, the Navajo Nation must bring the issue to the Advisory Committee, formed pursuant to the Lease (to which this Preference Plan is attached), for resolution.

XI .      ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES

This Preference Plan is the entire agreement between the Parties concerning its subject matter and supersedes all prior agreements and understandings, whether or not written, including without limitation the letter agreement dated March 8, 1985 between APS and the Navajo Nation and signed by G. Mark De Michele and Peterson Zah. This Preference Plan also is not intended to confer upon any person other than the Parties any rights, privileges, waivers, obligations or remedies granted hereunder.


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Exhibit D







Annual Payment for 2016 and all subsequent years:



CPI for April in year which Annual Payment is due
7,000,000.00 x              CPI for April 2011







Exhibit E


This exhibit intentionally not used.





Exhibit F
(Includes Exhibits A-D of the Restated and Amended Settlement and Closing Agreement)



DRAFT
11/4/2010 3:30 PM

Restated and Amended Settlement and Closing Agreement



This Restated and Amended Settlement and Closing Agreement (the " Restated Agreement ") amends the Settlement and Closing Agreement dated August 15, 2002 (" Original Agreement ") and is entered into as of the Effective Date (as defined in Section 18) by Arizona Public Service Company (" APS ") and the Office of the Navajo Tax Commission (" ONTC "), acting on its own behalf and, pursuant to Section 103 of the Navajo Nation Uniform Tax Administration Statute (" UTAS "), on behalf of the Navajo Nation. APS and the ONTC may be referred to herein individually as a "Party" or collectively as the "Parties."

Recitals

A. Pursuant to Section 105 of UTAS, the ONTC, on behalf of the Navajo Nation, issued an assessment to APS on [Date] seeking to assess the Possessory Interest Tax (" PIT ") on APS in connection with its ownership and operation of the Four Corners Power Plant (the " Plant "), switchyards, and transmission and distribution facilities within the Navajo Nation (hereinafter, the Plant, switchyards, and transmission and distribution facilities within the Navajo Nation are collectively referred to as the " Facilities "). Pursuant to Regulation 1.125 of the ONTC Tax Administration Regulations, the ONTC also issued on [Date] a private ruling asserting that it has jurisdictional authority to impose the Business Activity Tax (" BAT ") upon APS' activities related to the Facilities. Pursuant to Section 133 of UTAS, the ONTC is entering into this Restated Agreement.

B. APS and the other participants in the Plant (collectively, the "Participants") assert that neither the Navajo Nation nor the ONTC has jurisdictional authority to impose any tax on APS, the Participants or the Facilities based on (i) certain agreements between the Navajo Nation, APS and Participants, including without limitation, certain covenants in leases entered into by APS, the Participants and the Navajo Nation and approved by the United States (" Leases ") and in federal grants of rights-of-way issued to APS and the Participants by the United States (" Grants "), (ii) the location of the Facilities on federally granted rights-of-way, (iii) the non-Indian character of APS and the Participants, and (iv) relevant case law.

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C. The ONTC asserts that it possesses jurisdictional authority to administer taxes enacted by the Navajo Nation with respect to the Participants, including APS, and the Facilities based on (i) certain agreements between the Navajo Nation, APS and the Participants, including without limitation, certain covenants in the Leases and Grants, (ii) the location of the Facilities on lands held in trust by the United States for the benefit of the Navajo Tribe, and (iii) relevant case law.

D . The Parties entered into the Original Agreement for purposes of settling the dispute and to avoid litigation over the question of the jurisdictional authority of the Navajo Nation and ONTC to tax the Facilities and APS, based on its ownership interest in and operation of the Facilities.

E . The Parties desire to restate, amend and extend the Original Agreement and are thus entering into this Restated Agreement in accordance with the express terms set forth below.

WHEREFORE, THE PARTIES AGREE AS FOLLOWS:

1. Settlement Payments. Subject to the terms and conditions contained in this Restated Agreement, APS will make settlement payments as specified below ("Settlement Payments"):

a.      PIT Settlement Payments.

(i) Beginning with calendar year 2001 and continuing through July 7, 2041 (the "Amended Term"), APS will pay to ONTC the following amount as a PIT Settlement Payment for the APS-owned Facilities, subject to adjustment as provided in subsection a(ii) of this Section 1:

Calendar Year PIT Settlement Payment
2001                     $2,993,515.00
2002-2003                    $5,987,030.00 per year
2004-2040                    $6,342,600 per year
2041                     $3,171,300.00


(ii)      Beginning July 8, 2016 and continuing through July 7, 2041, the PIT Settlement Payment is subject to reduction in the event APS and/or the Participants permanently shut down any of the Facilities and/or unit(s) of the Plant in which APS has an ownership interest, including but not limited to the permanent shut down of the entire Plant (the "Permanently Shut Down Facilities"). For any Permanently Shut Down Facilities salvage value will be determinative of value, and

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salvage value will be based on 5% of original or acquisition cost of the Permanently Shut Down Facilities in question. In the event of any permanent shut down under this Section 1a(ii), the PIT Settlement Payment will be recalculated in two steps:
a. Step One : PIT Settlement Payment will be proportionally reduced by multiplying the PIT Settlement Payment by a factor that represents the ratio of the original or acquisition cost of the APS-owned Facilities within the Navajo Nation that are not Permanently Shut Down Facilities divided by the total original or acquisition cost of the APS-owned Facilities.
b. Step Two: The proportionately reduced PIT Settlement Payment derived under Step One will then be increased by adding the product of a 3% in-lieu-of tax rate and the salvage value (i.e., 5% of original or acquisition cost) of the Permanently Shut Down Facilities. A sample calculation in included as Exhibit D to this Restated Agreement.

(iii) In the event APS constructs a new unit or units at the Plant during the Amended Term, the PIT Settlement Payment will be proportionally increased by an amount that represents the product obtained by multiplying the original or acquisition cost of the new APS-owned unit or units by the following factor:
a. The PIT Settlement Payment of $6,342,600 divided by the original or acquisition cost of the APS- owned Facilities within the Navajo Nation as of the Effective Date of this Restated Agreement. A sample calculation in included as Exhibit 1 to this Restated Agreement

(iv) APS will pay the PIT Settlement Payment specified above (as may be adjusted pursuant to Section 1a(ii) or Section 1a(iii), above) for calendar years 2002-2040 on a semi-annual basis, with the first half for each calendar year due November 1 and the second half due May 1 of the following year. APS will pay the PIT Settlement Payment specified above for calendar year 2041 on or before November 1, 2041. On or before June 1 of each calendar year during the term of this Restated Agreement, APS will provide to the ONTC, for informational purposes only, the form attached as Exhibit A.

(v) Interest on any late payment of the PIT Settlement Payment will be computed from the date the PIT Settlement Payment was first due to the date such payment is received by the ONTC. The rate of interest on any late payment will be equal to the rate then being used by the Internal Revenue Service for an underpayment of taxes by an

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individual. If APS fails to timely pay the PIT Settlement Payment, APS also will pay an additional amount equal to 5% of its PIT Settlement Payment. For each full month the payment is overdue, APS will pay an additional amount equal to 0.5% of its PIT Settlement Payment; provided, however, that the maximum additional amount APS must pay for the failure to timely pay shall not exceed 10% of the PIT Settlement Payment amount due. If APS fails to timely provide the Report for PIT Settlement Payment, attached as Exhibit A, as required by Section1(a)(iv) of this Restated Agreement, APS will pay an additional 5% of its PIT Settlement Payment due for the period for each month or fraction thereof that the Report for PIT Settlement Payment is not provided; provided, however, that the minimum additional amount to be paid for failure to timely provide such Report for PIT Settlement Payment shall be $50 and the maximum additional amount shall not exceed 25% of APS' PIT Settlement Payment for that period. For good cause shown, the ONTC may in its discretion relieve APS from all or part of the requirements imposed under this Section l.a(v).

(vi) APS will provide, within six (6) months of the Effective Date of this Restated Agreement, a schedule of original or acquisition cost for the Facilities in which APS has an ownership interest (including the Permanently Shut Down Facilities) for use in connection with the calculations provided for in Section 1.a(ii). In addition, if APS constructs a new unit or units at the Plant for purposes of Section l.a(iii), APS will provide a schedule of original or acquisition cost for such new unit or units within six (6) months after its/their completion, for use in connection with the calculations provided for in Section l.a(iii).

(vii) The ONTC expressly agrees that APS is hereby released from any obligation and will not be required or requested to make any other payment with respect to any other amounts that the ONTC asserted or could have asserted were payable prior to execution of this Restated Agreement.

b. BAT Settlement Payment.

(i) Effective as of July 6, 2001 and continuing through the Amended Term, APS will calculate its BAT Settlement Payment amount using the following formula:

BAT Settlement Payment=

[ (R * AI * Net KWhrs) less (Deductions) less (10% Standard Deduction) ] * 5%

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Where R = $.0256 I KWhr.

Where Net KWhrs = APS' share of actual net kilowatt hours generated from the Plant during the quarterly period.

Where Deductions = (1) Salaries and/or other compensation paid to members of the Navajo Nation; (2) Purchases of Navajo goods and services; and (3) Any payment made to the government of the Navajo Nation, except for the BAT Settlement Payment paid pursuant to this Restated Agreement and any penalties or fines.

Where Standard Deduction = an amount equal to the greater of ten percent of (R
*AI* Net KWhrs) or $125,000.00.

As set forth on Exhibit C, APS will include in its Operating Report provided to the ONTC a statement of actual net generation for each quarter.

Where AI = an adjustment calculated in the 3rd Quarter of each year based upon a 5-year rolling average of Producer Price Index data published by the Bureau of Labor Statistics. Annual adjustments shall be cumulative, i.e., the total current year adjustment shall be equal to the incremental current year adjustment multiplied by the previous year's adjustment. The incremental adjustment shall be calculated utilizing the following methodology:

AI= (75% * Cost Index) plus (25% * Revenue Index).

Where Cost Index =
42.3% * Bituminous Coal and Lignite: West (BLS Series
PCU1211#214)
plus      0.9% * Natural Gas (BLS Series PCU1331#A2)
plus      7.6% * Other Heavy Construction      (BLS Series PCUBHVY#)
plus      49.2% * Unit Labor Costs: Non-Farm Business (BLS Series
PRS85006112)

Where Revenue Index =
65.2% * Electric Power and Natural Gas Utilities, Other, Mountain (BLS Series PCU4981#148)
plus      34.8% * Electric Power and Natural Gas Utilities, Other, Pacific
(BLS Series PCU4981#149)

If any of the BLS indices used in this calculation are discontinued, the Parties shall mutually agree upon an equivalent substitute BLS index. The Parties agree that, beginning January 1, 2002, the Bituminous Coal and Lignite: Surface

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Mining (BLS Series PCU1211#1) will be substituted into the calculation in place of Bituminous Coal and Lignite: West (BLS Series PCU1211#214).

A calculation of AI for the 3rd Quarter 2001 through the 2nd Quarter 2002 BAT Settlement Payments is attached as Exhibit B. The 5-year average of index data for 1996 through 2000 is used to develop this initial adjustment.

Each subsequent annual adjustment will be made for the 3rd Quarter BAT Settlement Payment using the 5-year rolling average of index data through the end of the previous year.

A sample calculation of AI for the 3rd Quarter 2002 through 2nd Quarter 2003 BAT Settlement Payments using estimated data is included in Exhibit B. Calculations in subsequent years will follow this same formula.

(ii) APS will make its BAT Settlement Payments on a quarterly basis, with payments due 45 days after the end of each calendar quarter. APS will, at the time of making such payments, provide to the ONTC an Operating Report containing the following information used to calculate APS' BAT Settlement Payment:

(a)      APS revenue requirement, as adjusted by AI;
(b)      Net KWhrs for the quarter;
(c)      Deductions as defined above; and
(d)      Standard Deduction.

The format for the Operating Report is set forth in Exhibit C.

(iii) Interest on any late payment of a BAT Settlement Payment will be computed from the date the BAT Settlement Payment was first due to the date such payment is received by the ONTC. The rate of interest on any late payments will be equal to the rate then being used by the Internal Revenue Service for an underpayment of taxes by an individual. If APS fails to timely pay the BAT Settlement Payment, APS will pay an additional amount equal to 5% of the BAT Settlement Payment due. For each full month the payment is overdue, APS will pay an additional amount equal to 0.5% of the amount of its BAT Settlement Payment; provided, however, that the maximum additional amount that APS will be required to pay for the failure to timely pay shall not exceed 10% of the BAT Settlement Payment amount due. If APS fails to timely provide to the ONTC an Operating Report required by this Restated Agreement, APS will pay an additional 5% of its BAT Settlement Payment for each month or fraction thereof that the Operating Report has not been provided to the ONTC; provided, however, that the minimum additional amount to be paid for APS' failure to timely provide such

6


Operating Report will be $50 and the maximum additional amount will not exceed twenty-five percent (25%) of APS' BAT Settlement Payment for that period. For good cause shown, the ONTC may in its discretion relieve APS from all or part of the requirements imposed under this Section 2.b(iii).

(iv) The ONTC expressly agrees that APS is hereby released from any obligation and will not be required or requested to make any other payment with respect to any other amounts that the ONTC asserted or could have asserted were payable prior to execution of this Restated Agreement.

2. Releases .

a . APS hereby releases and forever discharges the ONTC, its predecessors, successors, affiliates, and assigns, of and from any and all claims, demands, damages, actions, causes of action, or suits of whatsoever kind and nature, existing as of the Effective Date of this Restated Agreement, whether now known or unknown to the Parties, or whether asserted or unasserted, related, either directly or indirectly, to any and all PIT and BAT tax assessments and taxes, and interest and penalties thereon, allegedly owed by the ONTC, its predecessors, successors, affiliates, and assigns, to APS arising from APS' ownership interests or operation of the Facilities.

b. The ONTC hereby releases and forever discharges APS, its predecessors, successors, affiliates, and assigns, of and from any and all claims, demands, damages, actions, causes of action, or suits of whatsoever kind and nature, existing as of the Effective Date of this Restated Agreement, whether now known or unknown to the Parties, or whether asserted or unasserted, related, either directly or indirectly, to any and all PIT and BAT tax assessments and taxes, and interest and penalties thereon, allegedly owed by APS, its predecessors, successors, affiliates, and assigns, to the ONTC or Navajo Nation arising from APS' ownership interests or operation of the Facilities.

c. The ONTC expressly covenants that it will not seek to apply or assess the Navajo Sales Tax, approved by the Navajo Nation Council pursuant to Resolution No. CO-84-01 on October 18, 2001 (as amended), with respect to any electricity generated at, from or by the Plant except for retail sales of electricity to persons who purchase electricity for that person's own use, including use in that person's trade or business and not for resale, redistribution or retransmission, within the Navajo Nation.

3. Case Closure .

The Parties agree that the following cases shall be closed:

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Possessory Interest Tax: Case No. 01-042

Business Activity Tax: Case No. 01-056

4.      Preservation of Rights .

It is understood and agreed that this is a settlement of disputed claims, whether asserted or unasserted, and that nothing contained herein shall be construed as an admission of liability, guilt, or wrongdoing by or on behalf of any of the undersigned Parties, all such liability, guilt, or wrongdoing being expressly denied. The Parties acknowledge and agree that this Restated Agreement shall not prejudice or limit in any way the rights or contentions of any Party. The Parties further agree that this Restated Agreement shall not in any way be deemed a waiver or amendment of any provisions of any other agreement between the Navajo Nation, APS and/or any of the Participants, including but not limited to the Leases and Grants. This Restated Agreement, and the actions of the Parties contemplated hereunder, are not intended, nor shall they be deemed, to constitute any waiver, consent or admission with respect to the existence or lack of regulatory, taxing, or adjudicatory authority or jurisdiction of the Navajo Nation or the ONTC over the Facilities or any Party hereto.

5.      Enforcement and Judicial Review.

a. Neither Party shall commence any judicial or administrative action challenging the validity of this Restated Agreement or any Party's authority to enter into it. Any commencement of such an action by a Party shall constitute a material breach of this Restated Agreement by that Party.

b.      Challenge to Validity of the Restated Agreement .

(i) If the ONTC, or any of its representatives, officers, employees, departments or agents (a) commences any judicial or administrative action challenging this Agreement or the ONTC's authority to enter into it, or (b) otherwise in any manner invalidates or breaches this Restated Agreement or takes any action contrary to this Restated Agreement, APS may, in its sole discretion, elect to seek specific performance of or terminate this Restated Agreement. If the ONTC, or any of its representatives, officers, employees, departments or agents, repeals the PIT or BAT and enacts a replacement tax that the ONTC seeks to assert against APS or the Facilities, APS may terminate this Restated Agreement. The ONTC agrees and recognizes that if APS terminates this Restated Agreement, APS shall have no further obligation or liability to make any Settlement Payments from the date of termination forward. The ONTC further agrees and recognizes that in such circumstance, APS has preserved its rights to contest the

8


jurisdiction of the ONTC or the Navajo Nation to assert or assess any taxes against APS with respect to the Facilities, APS' activities at the Facilities, or with respect to any other properties or activities within the Navajo Nation.

(ii) If APS, or any of its representatives, officers, employees, departments, or agents (a) commences any judicial or administrative action challenging this Restated Agreement or APS' authority to enter into it, or (b) otherwise in any manner invalidates or breaches this Restated Agreement or takes any action contrary to this Restated Agreement, the ONTC may, in its sole discretion, elect to seek specific performance of or terminate this Restated Agreement. APS agrees and recognizes that, if the ONTC elects to terminate this Restated Agreement, the ONTC has preserved its rights to assert jurisdiction to assess taxes against APS from and after the date of termination with respect to the Facilities, APS' activities at the Facilities, or with respect to any other properties or activities of APS within the Navajo Nation. If the ONTC elects to terminate this Restated Agreement, the ONTC shall be under no further obligation to accept Settlement Payments in satisfaction of APS' obligations.

(iii) If any person or entity not a Party to this Restated Agreement or the Navajo Nation, or any of their representatives, officers, employees, agencies, departments or agents, commences any judicial, administrative or other action challenging in any way the Restated Agreement's validity, the Parties shall jointly request that the court, tribunal, agency, or official before which the action is pending dismiss the action. If the action is not dismissed, either Party may file an appropriate responsive pleading, or otherwise act as reasonably necessary to respond to the action or to otherwise protect such Party. If any person, including the Navajo Nation or ONTC, brings an action or proceeding to assert or challenge the jurisdictional authority of the Nation or ONTC to tax the Facilities or activities at the Facilities with respect to such other person other than APS, each Party agrees not to rely on any ruling in such action or proceeding for purposes of challenging the validity of this Restated Agreement as long as the other Party is not in material breach hereof.

(iv) If any court, tribunal, agency or official determines that this Restated Agreement is non-binding on the ONTC or the Navajo Nation, APS may elect to terminate this Restated Agreement, and if so terminated, APS shall have no further obligation or liability to make any Settlement Payments from the date of termination forward. The ONTC agrees and recognizes that in such circumstance APS has preserved its rights to contest the jurisdiction of the Navajo Nation and ONTC to

9


assert or assess any taxes against APS with respect to the Facilities, APS' activities at the Facilities, or with respect to any other properties or activities within the Navajo Nation.

(v) If any court, tribunal, agency or official determines that this Restated Agreement is non-binding on APS, the ONTC may elect to terminate this Restated Agreement, and if so terminated, APS agrees and recognizes that in such circumstance, the ONTC has preserved its rights to assert jurisdiction to assess any taxes against APS with respect to the Facilities, APS' activities at the Facilities, or with respect to any other properties or activities within the Navajo Nation.

c. Other Taxes . Nothing in this Restated Agreement affects the rights, if any, of (i) the Navajo Nation or ONTC to seek to enforce taxes other than the Sales Tax (except as otherwise provided in Section 2(c) above), PIT or BAT on APS or the Facilities or (ii) APS to challenge any such action by the Navajo Nation or ONTC, including when permitted by federal law, bringing such an action in federal court.

d. Enforcement of the Restated Agreement . Enforcement of this Restated Agreement by either Party shall be pursuant to this Restated Agreement and not pursuant to any Navajo Nation or other law independent of this Restated Agreement. Nothing in this Restated Agreement shall or may be deemed to limit a Party's right to seek enforcement of this Restated Agreement or defend any claim in federal or tribal court where otherwise permitted by law. Nothing in this Restated Agreement shall or may be deemed as a consent to federal or tribal court jurisdiction by either Party.

6.      Assignment .

APS may transfer or assign, without the consent of the Navajo Nation or ONTC, all or any portion of its interests and obligations under this Restated Agreement to any parent, subsidiary, affiliate or successor in interest of APS by merger, acquisition, or consolidation or to any other current or future owner of the Facilities, provided that the assignee assumes in writing all of APS' obligations under this Restated Agreement.

7.      Representations .

Each Party represents and warrants as of the Effective Date of this Restated
Agreement as follows:

a. It has full legal right, power and authority to execute, deliver and perform this Restated Agreement;

b. It has taken all appropriate and necessary action to authorize the execution, delivery and performance of this Restated Agreement;

10




c. It has obtained all consents, approvals and authorizations necessary for the valid execution and delivery of this Restated Agreement;

d. This Restated Agreement constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy or insolvency laws or by limitation upon the availability of equitable remedies;

e. It is not in violation of any applicable law promulgated or judgment entered by any federal, state, local or other governmental body, which violations, individually or in the aggregate, would adversely affect the performance of its obligations under this Restated Agreement; and

f. The execution, delivery and performance by it of this Restated Agreement, the compliance with the terms and provisions hereof and the carrying out of the transactions contemplated hereby, (i) do not conflict with and will not conflict with or result in a breach or violation of any of the terms and provisions of its organizational documents, and (ii) to the best of its knowledge, do not conflict with and will not conflict with or result in a breach or violation of any of the terms and provisions of any law, rule or regulation, or any order, writ, injunction, judgment or decree by any court or other governmental body against it or by which it or any of its properties is bound, or any loan agreement, indenture, mortgage, note, resolution, bond or contract or other agreement or instrument to which it is a party or by which it or any of its properties is bound, or constitute or will constitute a default thereunder or will result in the imposition of any lien upon any of its properties.

8.      Successors and Assigns.

This Restated Agreement shall be binding on and inure to the benefit of the Parties hereto and their successors and assigns.

9.      Entire Agreement.

Except for any separate agreement of the Parties settling disputed claims related to applicability of the BAT to certain transmission and distribution facilities within the Navajo Nation, this Restated Agreement reflects the entire agreement of the Parties relating to taxation of the Facilities and no other agreement written or oral shall be used to effect any changes of the provisions retained herein. No amendment of this Restated Agreement shall be valid unless in writing and signed by all Parties.

10.      Counterparts .

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This Restated Agreement may be signed in counterparts, each of which shall be deemed an original. Facsimile signatures shall be as valid as original signatures until each Party receives a fully signed counterpart with original signatures. Each Party shall provide the other Party with original signatures so that each Party shall have a fully signed counterpart within five business days after the date of the last signature.

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11. Relationship of Parties.

Nothing herein may be construed to create an association, joint venture, trust, or partnership, or to impose a trust or partnership covenant, obligation or liability on or with regard to any one or more of the Parties.

12. Severability .

Subject to the provisions of and except as otherwise provided in Section 5, Enforcement and Judicial Review, of this Restated Agreement, if any term or condition of this Restated Agreement is held to be invalid, void, or unenforceable by any court or tribunal of competent jurisdiction, that holding shall not affect the validity or enforceability of any other term or condition of this Restated Agreement; unless either Party determines in its sole discretion that enforcing the balance of the Restated Agreement would deprive that Party of a fundamental benefit of its bargain.

13.
Adjustment of PIT and BAT Settlement Payment Amounts; Termination.

a.     One year prior to the expiration of the Amended Term, the Parties shall commence good faith negotiations to establish PIT and BAT Settlement Payment amounts for APS to run concurrently with any extension of the Leases and Grants. If the Parties are not able to reach agreement upon new PIT and BAT Settlement Payment amounts before expiration of the Amended Term, the Parties will either continue this Restated Agreement in effect with the PIT and BAT Settlement Payment amounts set forth in Section 1 above, or either Party may elect to terminate this Restated Agreement.

b. The Parties recognize and agree that, upon termination or expiration of this Restated Agreement for any reason, (i) each Party has preserved all of its rights and arguments regarding the question of the jurisdictional authority of the Navajo Nation and ONTC to tax the Facilities and/or APS and its successors and assigns based on ownership interests in and operation of the Facilities; (ii) this Restated Agreement shall not in any way be deemed a waiver or amendment of any provisions of any agreement between the Navajo Nation, APS and/or any of the Participants, including but not limited to the Leases and Grants; and (iii) neither Party may assert any claim, demand, damages, action, cause of action, or suit of whatsoever kind and nature, whether known or unknown to the Parties, or whether asserted or unasserted, related, either directly or indirectly, to any and all PIT and BAT tax assessments and taxes, and interest and penalties thereon, that arose or may have arisen while this Restated Agreement was in effect.

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14.      No Third Party Beneficiaries .

Nothing herein, either express or implied is intended or may be construed to confer upon or to give to any person or entity other than the Parties any rights or remedies under or by reason of this Restated Agreement.

15.      Limited Responsibility .

The Parties acknowledge and agree that it is their mutual intent that the obligations, representations, warranties and undertakings under this Restated Agreement or as a result of the transactions contemplated by this Restated Agreement are limited to only those expressly set forth herein, and not enlarged by implication, creation of law, or otherwise.

16.      Survival .

The provisions of Sections 2(a) and (b), 4, 7 and 13.b of this Restated Agreement survive expiration or termination of this Restated Agreement. Provided that the Restated Agreement remains in effect through the Amended Term, APS' obligation to make the calendar year 2041 PIT Settlement Payment specified in this Restated Agreement and APS' obligation to make BAT Settlement Payments for any periods prior to expiration or termination of this Restated Agreement also shall survive expiration or termination of this Restated Agreement.


17.      Notices .

Notices shall be deemed to have been given if in writing and (a) hand delivered, (b) delivered by a reputable overnight courier service (such as but not limited to FedEx and UPS), (c) mailed by certified or registered mail, return receipts requested, first class postage prepaid, or (d) transmitted by telecopy or electronic mail, followed within 24 hours by transmittal under option (a), (b) or (c) above addressed as follows:
If to ONTC:

President
The Navajo Nation
P.O. Box 9000
Window Rock, Arizona 86515

With a copy to:

Attorney General
Navajo Nation Department of Justice
P.O. Drawer 2010

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Window Rock, Arizona 86515

Executive Director
Office of the Navajo Tax Commission
P.O. Box 1903
Window Rock, Arizona 86515


If to APS:

Arizona Public Service Corporation
400 North 5th Street
Phoenix, Arizona 85004
Attn: Corporate Secretary


With a copy to:

Pinnacle West Capital Corporation
400 North 5th Street
Phoenix, Arizona 85004
Attn: Executive Vice President and General Counsel

or at such other address as the Parties may, from time to time, designate in writing. Service by overnight courier or mail shall be deemed made on the first business day delivery is attempted or upon receipt, whichever is earlier. Service by telecopy or electronic mail shall be deemed made upon confirmed transmission.

18.      Effective Date; Effect of this Restated Agreement .

This Restated Agreement is effective upon the date when duly executed by both Parties (the "Effective Date" ). It is the Parties' intention that through the Effective Date of this Restated Agreement, the terms and conditions of the Original Agreement in effect at the date of execution of this Restated Agreement shall continue to govern the Parties' rights and obligations thereunder. Upon and after the Effective Date of this Restated Agreement, the Parties' right and obligations shall be governed by the terms and conditions of this Restated Agreement.

15





By signing, the undersigned certify that they have read and agreed to the terms of this
Restated Agreement.



ARIZONA PUBLIC SERVICE COMPANY


By:
    
Donald G. Robinson                 Date
President


NAVAJO NATION

By:
    
Martin Ashley, Executive Director         Date
Office of the Navajo Tax Commission



APPROVED :

By:
    
Louis Denetsosie, Attorney General         Date
Navajo Nation Department of Justice



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Exhibit 15
May 8, 2014
El Paso Electric Company El Paso, Texas
Re: Registration Statement Nos. 333‑17971, 333‑82129, 333‑142557, and 333‑178319
With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated May 8, 2014 related to our review of interim financial information.
Pursuant to Rule 436 under the Securities Act of 1933 (the Act), such report is not considered part of a registration statement prepared or certified by an independent registered public accounting firm, or a report prepared or certified by an independent registered public accounting firm within the meaning of Sections 7 and 11 of the Act.
Very truly yours,

/s/ KPMG LLP

Kansas City, Missouri






EXHIBIT 31.01
CERTIFICATIONS
I, Thomas V. Shockley III, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of El Paso Electric 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 Company as of, and for, the periods presented in this report;
4.
The Company's other certifying officers 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 Company 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 Company, 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 Company'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 Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter (the Company's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and
5.
The Company's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's




auditors and the audit committee of the Company'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 Company'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 Company's internal control over financial reporting.
 

 
Dated: May 8, 2014
EL PASO ELECTRIC COMPANY
 
 
 
By:
 
 /s/ Thomas V. Shockley III
 
 
Thomas V. Shockley III
 
 
Chief Executive Officer
 
 
(Principal Executive Officer)




I, Nathan T. Hirschi, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of El Paso Electric 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 Company as of, and for, the periods presented in this report;
4.
The Company's other certifying officers 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 Company 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 Company, 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 Company'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 Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter (the Company's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and
5.
The Company's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company'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 Company'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 Company's internal control over financial reporting.


  Dated: May 8, 2014
EL PASO ELECTRIC COMPANY
 
 
 
By:
 
/s/ Nathan T. Hirschi
 
 
Nathan T. Hirschi
 
 
Senior Vice President -
 
 
Chief Financial Officer
 
 
(Principal Financial Officer)





EXHIBIT 32.01
May 8, 2014
The certification set forth below is being submitted in connection with the Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 (the “Report”) of El Paso Electric Company (the “Company”) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code.
Thomas V. Shockley III and Nathan T. Hirschi, each certifies that, to the best of his knowledge:
1. such Report fully complies with the requirements of Section 13(a) of the Exchange Act; and
2.
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 /s/ Thomas V. Shockley III
Thomas V. Shockley III
Chief Executive Officer
 
 
/s/ Nathan T. Hirschi
Nathan T. Hirschi
Senior Vice President -
Chief Financial Officer