salt verde financial corporation · will be issued in book-entry form through the facilities of the...

N E W I S S U E F U L L B O O K - E N T R Y

In the opinion of Bond Counsel, under existing law and assuming compliance with the tax covenants described herein, andassuming the accuracy of certain representations and certifications made by SVFC and the District described herein, interest on theBonds is excluded from gross income for Federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, asamended (the “Code”). Bond Counsel is also of the opinion that such interest is not treated as a preference item in calculating thealternative minimum tax imposed under the Code with respect to individuals and corporations. Interest on the Bonds is, however,included in the adjusted current earnings of certain corporations for purposes of computing the alternative minimum tax imposed onsuch corporations. Bond Counsel is further of the opinion that, under existing law, interest on the Bonds is exempt from income taxesimposed by the State of Arizona. See “TAX MATTERS” herein regarding certain other tax considerations.

$1,129,765,000

Salt Verde Financial CorporationSenior Gas Revenue Bonds, Series 2007

Dated: Date of Delivery Due: December 1, as shown on the inside cover

Salt Verde Financial Corporation, an Arizona nonprofit corporation (“SVFC”), is issuing its Senior Gas Revenue Bonds,Series 2007 (the “Bonds”) under a Trust Indenture dated as of October 1, 2007 (the “Indenture”), between SVFC and U.S. BankNational Association, as trustee (the “Trustee”), to finance the cost of acquiring a thirty-year supply of natural gas pursuant to anAgreement for Purchase and Sale of Natural Gas dated October 12, 2007 (the “Prepaid Gas Agreement”), between SVFC andCitigroup Energy Inc. (the “Gas Supplier”). All of the natural gas purchased by SVFC will be sold to the Salt River ProjectAgricultural Improvement and Power District (the “District”) pursuant to a Natural Gas Supply Agreement dated October 12, 2007(the “Supply Agreement”), between SVFC and the District and is expected to be used in the District’s electrical power generatingfacilities. See “THE GAS SUPPLY ACQUISITION” herein.

Interest on the Bonds is payable on December 1, 2007 and semiannually thereafter on each June 1 and December 1. The Bondswill be issued in book-entry form through the facilities of The Depository Trust Company (“DTC”). Payments of principal of,premium, if any, and interest on the Bonds will be made directly to DTC, and will subsequently be disbursed to DTC Participants andthereafter to Beneficial Owners of the Bonds, all as described herein. See “TERMS OF THE BONDS-Book-Entry Only System”herein. The Bonds are subject to optional and mandatory redemption prior to maturity as described herein. See “TERMS OF THEBONDS” herein.

The proceeds of the Bonds will be used to (i) finance the Prepayment of the natural gas under the Prepaid Gas Agreement, (ii) fundcapitalized interest on the Bonds and the Subordinate Lien Bond (defined herein) and (iii) pay the costs of issuance of the Bonds andthe Subordinate Lien Bond. See “SOURCES AND USES OF FUNDS” herein.

The Bonds will be special obligations of SVFC payable solely from, and secured as to the payment of the principal andRedemption Price (defined herein) thereof, and interest thereon, in accordance with their terms and the provisions of the Indenturesolely by, the Trust Estate (defined herein) pledged under the Indenture. The Bonds are not payable from, or secured by a legal orequitable pledge of, or lien or charge upon, any property of SVFC or any of its income or receipts except the Revenues (defined herein)and the other funds pledged therefor pursuant to the Indenture (which pledge is subject to the application of the Revenues and suchother funds for the purposes and on the terms and conditions set forth in the Indenture). Neither the faith and credit nor the taxing powerof the State of Arizona, the District or any public or quasi-public agency is pledged to the payment of the principal or Redemption Priceof, or the interest on, the Bonds. The issuance of the Bonds does not directly, indirectly or contingently obligate the State or anypolitical subdivision thereof, including the District, to levy or pledge any form of taxation or to make any appropriation for the paymentof the Bonds. SVFC has no taxing power and is not a political subdivision, public agency or quasi-public agency of the State. Thepayment of the principal or Redemption Price of, or interest on, the Bonds will be a special obligation of SVFC, as provided in theIndenture, and will not constitute a debt, liability or obligation of the State or any political subdivision thereof, including the District.The payment obligations of the District under the Supply Agreement are limited obligations payable solely from the District’selectrical utility system revenues. See “SOURCES OF PAYMENT AND SECURITY FOR THE BONDS” herein.

The Gas Supplier’s payment obligations under the Prepaid Gas Agreement will be guaranteed by Citigroup Inc. (the “Guarantor”)pursuant to a guarantee (the “Guarantee”) in favor of SVFC and the Trustee. The Guarantee guarantees only the payments required to bemade by the Gas Supplier under the Prepaid Gas Agreement and does not constitute a guarantee of SVFC’s obligations with respect to theBonds. See “THE GAS SUPPLYACQUISITION” and “THE GAS SUPPLIER, THE GUARANTOR AND THE GUARANTEE “ herein.

The Bonds are offered, when, as and if issued by SVFC and accepted by Citigroup Global Markets Inc. (the “Underwriter”),subject to the approval of legality by Nixon Peabody LLP, New York, New York, Bond Counsel to SVFC, and certain other conditions.Certain legal matters will be passed upon for the Underwriter by Orrick, Herrington & Sutcliffe LLP, Los Angeles, California. Certainlegal matters will be passed upon for SVFC by Jennings, Strouss & Salmon P.L.C., Phoenix, Arizona as SVFC’s Counsel. Certain legalmatters will be passed upon for the District by Winston & Strawn LLP, New York, New York and Jennings, Strouss & Salmon, P.L.C. Itis expected that the Bonds will be available for delivery through DTC on or about October 25, 2007.

This cover page contains information for quick reference only. It is not a summary of this issue. Investors must read the entireOfficial Statement to obtain information essential to the making of an informed investment decision.

CitiOctober 12, 2007

$1,129,765,000

Salt Verde Financial Corporation Senior Gas Revenue Bonds, Series 2007

MATURITY December 1

PRINCIPAL AMOUNT INTEREST RATE YIELD CUSIP†

2015 $3,990,000 5.000% 4.260% 79575EAA62016 $2,100,000 5.000% 4.350% 79575EAB42017 $4,115,000 5.000% 4.440% 79575EAC22018 $5,720,000 5.000% 4.540% 79575EAD02019 $8,585,000 5.250% 4.630% 79575EAE82020 $11,655,000 5.250% 4.700% 79575EAF52021 $15,105,000 5.250% 4.750% 79575EAG32022 $18,790,000 5.250% 4.790% 79575EAH12023 $22,835,000 5.250% 4.830% 79575EAJ72024 $26,985,000 5.250% 4.860% 79575EAK42025 $31,365,000 5.250% 4.910% 79575EAL22026 $37,645,000 5.250% 4.930% 79575EAM02027 $44,200,000 5.250% 4.950% 79575EAN82028 $51,110,000 5.250% 4.980% 79575EAP32029 $58,475,000 5.500% 5.010% 79575EAQ1

$222,580,000 5.000% Term Bond Due December 1, 2032— Yield 5.060%— CUSIP 79575EAR9 $564,510,000 5.000% Term Bond Due December 1, 2037— Yield 5.100%— CUSIP 79575EAS7

___________________________ †CUSIP® is a registered trademark of the American Bankers Association. CUSIP data herein is provided by Standard & Poor’s, CUSIP Service Bureau, a division of The McGraw-Hill Companies, Inc. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Service. CUSIP numbers are provided for convenience of reference only. SVFC and the Underwriter do not assume responsibility for the accuracy of such numbers.

The information set forth herein has been furnished by SVFC, the Gas Supplier, the Guarantor, the Swap Counterparty, the Credit Facility Provider and the District and other sources which are believed to be reliable. The information and expressions of opinion contained herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of SVFC, the Gas Supplier, the Guarantor, the Swap Counterparty, the Credit Facility Provider or the District since the date hereof.

No broker, dealer, salesman or other person has been authorized to give any information or to make any representations other than those contained in this Official Statement in connection with the offering made hereby and, if given or made, such information or representations must not be relied upon as having been authorized by SVFC, the District, the Gas Supplier, Guarantor or the Underwriter. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there, be any sale of the Bonds, in any jurisdiction to any person to whom it is unlawful to make such offer, solicitation or sale.

CERTAIN STATEMENTS CONTAINED IN THIS OFFICIAL STATEMENT REFLECT NOT HISTORICAL FACTS BUT FORECASTS AND "FORWARD-LOOKING STATEMENTS." IN THIS RESPECT, THE WORDS "ESTIMATE," "PROJECT," "ANTICIPATE," "EXPECT," "INTEND," "BELIEVE" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. ALL PROJECTIONS, FORECASTS, ASSUMPTIONS, EXPRESSIONS OF OPINIONS, ESTIMATES AND OTHER FORWARD-LOOKING STATEMENTS ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS SET FORTH IN THIS OFFICIAL STATEMENT.

THE BONDS HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR WITH ANY STATE SECURITIES COMMISSION.

IN CONNECTION WITH THE OFFERING OF THE BONDS, THE UNDERWRITER MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

The CUSIP numbers are included in this Official Statement for the convenience of the owners and potential owners of the Bonds. No assurance can be given that the CUSIP numbers for a particular maturity of the Bonds will remain the same after the date of issuance and delivery of the Bonds. None of SVFC, the Trustee or the Underwriter assumes any responsibility for the accuracy of such numbers.

THE UNDERWRITER HAS PROVIDED THE FOLLOWING SENTENCE FOR INCLUSION IN THIS OFFICIAL STATEMENT: THE UNDERWRITER HAS REVIEWED THE INFORMATION IN THIS OFFICIAL STATEMENT IN ACCORDANCE WITH, AND AS PART OF, ITS RESPONSIBILITIES TO INVESTORS UNDER THE FEDERAL SECURITIES LAWS AS APPLIED TO THE FACTS AND CIRCUMSTANCES OF THIS TRANSACTION, BUT THE UNDERWRITER DOES NOT GUARANTEE THE ACCURACY OR COMPLETENESS OF SUCH INFORMATION.

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TABLE OF CONTENTS

Page

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INTRODUCTION ........................................................................................................................................ 1

THE GAS SUPPLY ACQUISITION ........................................................................................................... 4 General ................................................................................................................................................... 4 The Prepaid Gas Agreement................................................................................................................... 4 The Supply Agreement........................................................................................................................... 8 The Commodity Price Hedge ............................................................................................................... 10

SOURCES OF PAYMENT AND SECURITY FOR THE BONDS .......................................................... 12 Special Obligations; Limitations on Liability ...................................................................................... 12 The Trust Estate.................................................................................................................................... 13 Revenues and Flow of Funds ............................................................................................................... 14 Payments Under the Guarantee ............................................................................................................ 19

INVESTMENT CONSIDERATIONS ....................................................................................................... 19 Limited Obligations of SVFC .............................................................................................................. 19 Early Redemption of Bonds ................................................................................................................. 19 Financial Position of the District .......................................................................................................... 20 Decline in the District's Natural Gas Requirements ............................................................................. 20 Financial Position of Gas Supplier and Guarantor ............................................................................... 20 Financial Position of Swap Counterparty............................................................................................. 21 Structured Financing ............................................................................................................................ 21 Enforcement of Contracts..................................................................................................................... 22

SOURCES AND USES OF FUNDS.......................................................................................................... 23

TERMS OF THE BONDS.......................................................................................................................... 23 General ................................................................................................................................................. 23 Book-Entry Only System ..................................................................................................................... 23 Mandatory Redemption ........................................................................................................................ 26 Optional Redemption ........................................................................................................................... 26 Sinking Fund Redemption.................................................................................................................... 27 Notice of Redemption .......................................................................................................................... 27 Bonds Redeemed in Part ...................................................................................................................... 28 Selection of Bonds to be Redeemed..................................................................................................... 28 Refunding Bonds.................................................................................................................................. 28 Registration and Exchange of Bonds; Persons Treated as Owners. ..................................................... 28 Debt Service Requirements .................................................................................................................. 30

THE ISSUER.............................................................................................................................................. 31 Relationship to the District................................................................................................................... 31 SVFC’s Limited Liability..................................................................................................................... 31 Restriction on Additional Obligations.................................................................................................. 31

THE DISTRICT.......................................................................................................................................... 31

THE GAS SUPPLIER, THE GUARANTOR AND THE GUARANTEE................................................. 32 The Gas Supplier and the Guarantor .................................................................................................... 32 The Guarantee ...................................................................................................................................... 32

TABLE OF CONTENTS (continued)

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CERTAIN INFORMATION REGARDING THE SWAP COUNTERPARTY ........................................ 32

CERTAIN INFORMATION REGARDING THE CREDIT FACILITY PROVIDER.............................. 33

LITIGATION.............................................................................................................................................. 35 SVFC.................................................................................................................................................... 35 The District........................................................................................................................................... 35

APPROVAL OF LEGAL MATTERS........................................................................................................ 36

TAX MATTERS......................................................................................................................................... 36 Federal Income Taxes .......................................................................................................................... 36 State Taxes ........................................................................................................................................... 36 Original Issue Discount ........................................................................................................................ 36 Original Issue Premium........................................................................................................................ 37 Ancillary Tax Matters .......................................................................................................................... 37 Changes in Law and Post Issuance Events........................................................................................... 38

CONTINUING DISCLOSURE.................................................................................................................. 38

FINANCIAL STATEMENTS .................................................................................................................... 38

FINANCIAL ADVISOR ............................................................................................................................ 39

UNDERWRITING ..................................................................................................................................... 39

CERTAIN RELATIONSHIPS ................................................................................................................... 39

RATINGS ................................................................................................................................................... 39

MISCELLANEOUS ................................................................................................................................... 39 APPENDIX A - INFORMATION RELATING TO THE SALT RIVER PROJECT

AGRICULTURAL IMPROVEMENT AND POWER DISTRICT AND ITS ELECTRIC SYSTEM

APPENDIX B - AUDITED FINANCIAL STATEMENTS OF THE SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, ITS SUBSIDIARIES AND THE SALT RIVER VALLEY WATER USERS’ ASSOCIATION FOR YEARS ENDED APRIL 30, 2007 AND APRIL 30, 2006

APPENDIX C - SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE

APPENDIX D- SUMMARY OF CERTAIN PROVISIONS OF THE PREPAID GAS AGREEMENT

APPENDIX E - SUMMARY OF CERTAIN PROVISIONS OF THE SUPPLY AGREEMENT

APPENDIX F - FORM OF OPINION OF BOND COUNSEL

TABLE OF CONTENTS

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APPENDIX G - FORM OF CONTINUING DISCLOSURE AGREEMENT

APPENDIX H - SCHEDULE OF AMORTIZED VALUE OF THE BONDS

APPENDIX I - SCHEDULE OF TERMINATION PAYMENTS

OFFICIAL STATEMENT

$1,129,765,000 Salt Verde Financial Corporation

Senior Gas Revenue Bonds, Series 2007

INTRODUCTION

This introduction is only a brief review of, and is qualified by more complete information contained elsewhere in, this Official Statement, including the cover page and the appendices hereto, and the documents summarized or described herein. A full review should be made of the entire Official Statement. The offering of the Bonds to potential investors is made only by means of the entire Official Statement.

This Official Statement, including its appendices, is furnished to provide certain information in connection with the issuance and sale of $1,129,765,000 aggregate principal amount of Senior Gas Revenue Bonds, Series 2007 (the "Bonds") of the Salt Verde Financial Corporation ("SVFC"). SVFC is a nonprofit corporation of the State of Arizona that has been organized for the purpose of acquiring, financing, and selling natural gas to the Salt River Project Agricultural Improvement and Power District (the "District") at a discount. See "THE ISSUER" and "THE GAS SUPPLY ACQUISITION."

Certain capitalized terms used in this Official Statement are used with the meanings assigned to such terms in "APPENDIX C- SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE", "APPENDIX D- SUMMARY OF CERTAIN PROVISIONS OF THE PREPAID GAS AGREEMENT" and "APPENDIX E - SUMMARY OF CERTAIN PROVISIONS OF THE SUPPLY AGREEMENT".

The Bonds will be issued under a Trust Indenture, dated as of October 1, 2007 (the "Indenture"), between SVFC and U.S. Bank National Association, as trustee (the "Trustee"). The net proceeds from the sale of the Bonds will be used to make a lump sum prepayment (the "Prepayment") to Citigroup Energy, Inc. (the "Gas Supplier") to acquire a supply of natural gas (the "Gas Supply") for delivery over a thirty-year period. The Gas Supply is being purchased by SVFC from the Gas Supplier pursuant to an Agreement for Purchase and Sale of Natural Gas, dated as of October 12, 2007 (the "Prepaid Gas Agreement"), between SVFC and Gas Supplier. The Gas Supply will be sold by SVFC to the District pursuant to a Natural Gas Supply Agreement, dated as of October 12, 2007 (the "Supply Agreement"), between SVFC and the District. The annual quantity of natural gas to be delivered represents approximately 20% of the natural gas purchased by the District for use by its electric system in the year 2006.

SVFC is entering into the Prepaid Gas Agreement and the District and SVFC are entering into the Supply Agreement in order to secure for the District a fixed quantity of natural gas. The District will pay SVFC a variable price based on a specified discount to the monthly market index for the District’s delivery point, the El Paso Natural Gas Co., San Juan Non-Bondad (the "Delivery Point"), for all natural gas delivered or deemed delivered under the Supply Agreement (the "Contract Price"). Failure by the District to pay for natural gas delivered within two (2) Business Days of when such payment is due will result in an immediate termination of the Supply Agreement and upon such termination all obligations of SVFC to deliver Gas to District shall cease; provided, however, that if the District has paid the defaulted amount together with any interest accrued thereon within fifteen (15) days of the date of such termination, no notice of redemption of Bonds has at the time of such payment been issued by the Trustee and no Early Termination Date for the Prepaid Gas Agreement has occurred, the Supply Agreement (including the obligations of SVFC to deliver natural gas to the District thereunder) will immediately be reinstated. See "THE GAS SUPPLY ACQUISITION-The Supply Agreement."

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The purchase by SVFC from the Gas Supplier of natural gas at a fixed price and the sale by SVFC to the District of natural gas at a floating index based price leaves SVFC exposed to the risk of market movements in the price of natural gas. To hedge this risk, SVFC will enter into a commodity price swap agreement (the "Commodity Swap Agreement") with the Royal Bank of Canada (the "Swap Counterparty"), under terms that are expected to enable SVFC to receive a revenue stream with respect to the sale of such natural gas that is substantially fixed for the life of the Prepaid Gas Agreement. See "THE GAS SUPPLY ACQUISITION-The Commodity Price Hedge-The Commodity Swap Agreement."

In order to hedge its price exposure under the Prepaid Gas Agreement, the Gas Supplier will enter into a separate commodity price swap agreement (the "Supplier Swap Agreement") with the Swap Counterparty under which the Gas Supplier will pay a fixed natural gas price to the Swap Counterparty in return for the Swap Counterparty’s payment to the Gas Supplier of a variable natural gas price. Nothing in the Supplier Swap Agreement relieves the Gas Supplier of its obligation to perform under the Prepaid Gas Agreement. See "THE GAS SUPPLY ACQUISITION-The Commodity Price Hedge-The Supplier Swap Agreement."

The obligations of the District under the Supply Agreement are generally limited to the payment of the Contract Price for natural gas delivered or deemed delivered to the Delivery Point. The District is obligated to make Contract Price payments to SVFC under the Supply Agreement if and only if natural gas is actually delivered (or deemed delivered) to the Delivery Point. The District’s payment obligations under the Supply Agreement are payable as operating expenses from the revenues of the District’s electric system. The obligations of the District under the Supply Agreement do not constitute a guarantee of SVFC’s obligations with respect to the Bonds.

Upon the occurrence of any of certain "Termination Events" under the Prepaid Gas Agreement, the Prepaid Gas Agreement may be terminated and, upon such termination, amounts due by a party to the other party, including the Termination Amount (as defined in the Prepaid Gas Agreement) to be paid by the Gas Supplier, are required to be paid in accordance with the Prepaid Gas Agreement. See "THE GAS SUPPLY ACQUISITION." The Termination Amount is anticipated to be sufficient to pay the Redemption Price of the Bonds upon the mandatory redemption of the Bonds on the termination of the Prepaid Gas Agreement. The Gas Supplier’s payment obligations under the Prepaid Gas Agreement will be guaranteed by Citigroup Inc. (the "Guarantor") pursuant to a guarantee (the "Guarantee") in favor of SVFC and the Trustee. The Guarantee guarantees only the payments required to be made by the Gas Supplier under the Prepaid Gas Agreement and does not constitute a guarantee of SVFC’s obligations with respect to the Bonds. See "THE GAS SUPPLY ACQUISITION" and "THE GAS SUPPLIER, THE GUARANTOR AND THE GUARANTEE."

The Indenture establishes a Senior Lien Bonds Debt Service Reserve Account held by the Trustee, and a Senior Lien Bond Debt Service Reserve Requirement of $92,210,216. The Senior Lien Debt Service Reserve Requirement will be funded in part with the proceeds of the Subordinate Lien Bond (as defined below) and in part by the Senior Lien Reserve Account Credit Facility issued by MBIA Insurance Corporation ("MBIA" and, from time to time, the "Senior Lien Reserve Account Credit Facility Provider"), with initial coverage equal to the difference between the Senior Lien Debt Service Reserve Requirement and the amount of the initial cash deposit. Amounts in the Senior Lien Bonds Debt Service Reserve Account will be applied as provided in the Indenture to the payment of the Bonds first by the application of any cash and thereafter by a draw on the Senior Lien Reserve Account Credit Facility. See "SOURCES AND USES OF FUNDS" and "SOURCES OF PAYMENT AND SECURITY FOR THE BONDS – Senior Lien Bonds Debt Service Fund and Senior Lien Bonds Capitalized Interest Account."

The Indenture establishes a Working Capital Reserve Fund held by the Trustee, and a Working Capital Reserve Requirement of $23,175,900. There will be deposited in the Working Capital Reserve

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Fund a surety bond (the "Working Capital Reserve Account Credit Facility") issued by MBIA (the "Working Capital Reserve Account Credit Facility Provider"), with initial coverage equal to the Working Capital Reserve Requirement. See "SOURCES OF PAYMENT AND SECURITY FOR THE BONDS – Working Capital Reserve Fund." MBIA, in its capacity as both Senior Lien Reserve Account Credit Facility Provider and Working Capital Reserve Account Credit Facility Provider, is sometimes referred to herein as the "Credit Facility Provider". The Senior Lien Reserve Account Credit Facility and the Working Capital Reserve Account Credit Facility are referred to collectively herein from time to time as the "Surety Bonds".

Simultaneously with the issuance of the Bonds, SVFC will issue its $29,030,000 Subordinate Gas Revenue Bond, Series 2007 (the "Subordinate Lien Bond") under the Indenture. A condition to the issuance of the Bonds will be the issuance of the Subordinate Lien Bond. The Subordinate Lien Bond is not offered hereby. Information relating to the Subordinate Lien Bond included herein is for contextual purposes only and is presented to assist investors in understanding the terms of the transaction. The pledge of the Trust Estate in respect of (i) the Bonds, (ii) the Commodity Swap Agreement and (iii) the principal portion of any Reimbursement Obligation (but such pledge is limited to Make-up Payments received) is senior and superior to the pledge of the Trust Estate to secure the payment of the interest on the Subordinate Lien Bond. See "SOURCES OF PAYMENT AND SECURITY FOR THE BONDS – The Trust Estate." The principal of the Subordinate Lien Bond is secured by and payable only from moneys remaining in the Senior Lien Bonds Debt Service Reserve Account upon the repayment or defeasance of the Bonds.

The Bonds will be special obligations of SVFC payable solely from, and secured as to the payment of the principal and Redemption Price thereof, and interest thereon, in accordance with their terms and the provisions of the Indenture solely by, the Trust Estate. The Trust Estate is pledged and assigned for the payment of the principal and Redemption Price of and interest on the Bonds in accordance with their terms, subject only to the provisions of the Indenture permitting the application thereof for the purposes and on the terms and conditions set forth in the Indenture. Neither the faith and credit nor the taxing power of the State, the District or any other political subdivision or public or quasi-public agency is pledged to the payment of the principal or Redemption Price of, or the interest on, the Bonds. The issuance of the Bonds does not directly, indirectly or contingently obligate the State or any political subdivision thereof, including the District, to levy or pledge any form of taxation or to make any appropriation for the payment of the Bonds. SVFC has no taxing power and is not a political subdivision, public agency or quasi-public agency of the State. The payment of the principal or Redemption Price of, or interest on, the Bonds will be a special obligation of SVFC, as provided in the Indenture and will not constitute a debt, liability or obligation of the State, any political subdivision of the State or any public or quasi-public agency, including the District. See "SOURCES OF PAYMENT AND SECURITY FOR THE BONDS."

The Indenture, the Prepaid Gas Agreement, the Supply Agreement and the Commodity Swap Agreement have been structured so that the Revenues available to SVFC, together with the amounts on deposit in certain of the Funds held by the Trustee under the Indenture, are expected to be sufficient at all times to provide for the timely payment of the scheduled debt service requirements on the Bonds and SVFC’s payment obligations to the Swap Counterparty under the Commodity Swap Agreement. SVFC’s ability to meet its obligations with respect to the Bonds and the Commodity Swap Agreement will depend primarily upon the performance by the Gas Supplier of its natural gas delivery and other obligations under the Prepaid Gas Agreement (or the Guarantor under the Guarantee), timely payment by the District under the Supply Agreement and timely payment by the Swap Counterparty under the Commodity Swap Agreement.

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This Official Statement and the Appendices hereto include and incorporate by reference financial and other information about SVFC, the District, the Gas Supplier, the Guarantor, the Swap Counterparty and the Credit Facility Provider that may be relevant to a potential purchaser of the Bonds in considering the District’s ability to make the payments required to be made by it under the Supply Agreement, the Gas Supplier’s ability to meet its natural gas delivery and payment obligations under the Prepaid Gas Agreement, the Guarantor’s ability to meet its obligations under the Guarantee, the Swap Counterparty’s ability to make payments under the Commodity Swap Agreement and the Credit Facility Provider’s ability to pay on its Senior Lien Reserve Account Credit Facility.

This Official Statement speaks only as of its date, and the information contained herein is subject to change. This Official Statement and the Appendices hereto contain brief descriptions of, among other matters, SVFC, the District, the Gas Supplier, the Guarantor, the Swap Counterparty, the Credit Facility Provider, the Bonds, the Indenture, the Supply Agreement, the Prepaid Gas Agreement, the Commodity Swap Agreement, the Supplier Swap Agreement, the Swap Counterparty, and the security and sources of payment for the Bonds. Such descriptions and information do not purport to be comprehensive or definitive. The summaries contained herein and in the Appendices hereto of the Indenture and of other documents are intended as summaries only and are qualified in their entirety by reference to such documents; additionally, references herein to the Bonds are qualified in their entirety to the form thereof included in the Indenture. Copies of the Indenture, the Prepaid Gas Agreement and the Supply Agreement are available upon request provided to the Underwriter.

THE GAS SUPPLY ACQUISITION

General

The purchase of a portion of the District’s natural gas requirements from SVFC for a thirty-year period will enable the District to acquire a fixed supply of that portion of its natural gas requirements at a discount from the Index Price.

Deliveries of the natural gas to be purchased by the District are scheduled to commence on May 1, 2008 and are scheduled to continue through October 31, 2037. The daily quantity of natural gas (the "Daily Contract Quantity") to be purchased by the District during this period will vary from month to month, and year to year. The annual quantity of natural gas to be delivered represents approximately 20% of the natural gas purchased by the District for use by its electric system in the year 2006.

The Supply Agreement does not prohibit or restrict the District from entering into other gas supply agreements in the future, including agreements with the Gas Supplier or SVFC, for all or any portion of its natural gas requirements (each, an "Additional Supply Agreement").

The Prepaid Gas Agreement

The information contained below includes descriptions of certain provisions of the Prepaid Gas Agreement. Reference is made to Appendix D for a more complete summary of certain provisions of the Prepaid Gas Agreement.

Consideration for Delivery of Prepaid Gas; Security for Performance of Obligations

In consideration of Gas Supplier’s agreement to deliver the natural gas under the Prepaid Gas Agreement, SVFC will pay to the Gas Supplier the Prepayment from the proceeds of the Bonds.

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Non-performance by Gas Supplier

If the Gas Supplier fails on any day, for any reason other than Force Majeure (as defined in the Prepaid Gas Agreement), to deliver to the applicable Delivery Point the quantity of natural gas required to be delivered to such Delivery Point on such day pursuant to the Prepaid Gas Agreement (a "Delivery Default"), the Gas Supplier is to pay SVFC for each day an amount calculated in accordance with the terms of the Prepaid Gas Agreement.

SVFC Failure to Receive Natural Gas; Remarketing of Natural Gas by the Gas Supplier

SVFC’s failure on any day, for any reason other than Force Majeure, to meet its obligation to take delivery at the applicable Delivery Point of the quantity of natural gas required to be received at such Delivery Point on such day from the Gas Supplier, is a "Receipt Default" under the Prepaid Gas Agreement. In such event, the Gas Supplier is required to attempt to remarket such natural gas in accordance with the terms of the Prepaid Gas Agreement.

Remarketing of Natural Gas

The Prepaid Gas Agreement authorizes the District, while the Supply Agreement is in effect, on SVFC’s behalf, to request the Gas Supplier to remarket natural gas purchased under the Prepaid Gas Agreement. Under the Prepaid Gas Agreement, remarket means any commercially reasonable effort to sell natural gas. Upon receipt of such request, the Gas Supplier is to remarket such natural gas in accordance with the Remarketing Protocols (as set forth in the Prepaid Gas Agreement), including remarketing such natural gas for the Highest Price (as defined in the Prepaid Gas Agreement). The Remarketing Protocols generally provide for the remarketing of such natural gas for a Qualifying Use unless a remarketing for a Non-Qualifying Use results in a higher price and that price is higher than the Minimum Price. Such remarketed natural gas is considered delivered under both the Prepaid Gas Agreement and the Supply Agreement so that the District is liable for the Contract Price of such natural gas, subject to a credit for the net Remarketing Proceeds.

The Prepaid Gas Agreement also provides that, while the Supply Agreement is in effect, the Gas Supplier is to remarket Anticipatory Tax Event Gas and Tax Event Gas subject to the right of the District to use any of such natural gas for a Qualifying Use. Anticipatory Tax Event Gas and Tax Event Gas consist generally of the natural gas delivered under the Prepaid Gas Agreement during periods when the proceeds of prior sales of natural gas for a Non-Qualifying Use which have not been applied to a Remediation Use reach certain levels. The Gas Supplier is to remarket the Anticipatory Tax Event Gas and Tax Event Gas not retained by the District in accordance with the Remarketing Protocols, except that Tax Event Gas may be remarketed for a Non-Qualifying Use only if approved by an Opinion of Tax Counsel. Such remarketed Anticipatory Tax Event Gas and Tax Event Gas is considered delivered under both the Prepaid Gas Agreement and the Supply Agreement so that the District is liable for the Contract Price of such natural gas, subject to a credit for the net Remarketing Proceeds.

If the Supply Agreement is terminated, the Prepaid Gas Agreement provides that the Gas Supplier is to remarket the Termination Gas. Termination Gas is all the natural gas to be delivered after the termination of the Supply Agreement. The Gas Supplier is to remarket the Termination Gas in accordance with the Remarketing Protocols with the following two exceptions: (1) if any of the Termination Gas cannot be remarketed for at least the Minimum Price, the Gas Supplier is to purchase such Termination Gas at the Minimum Price (the Minimum Price for Termination Gas is the Contract Price) and (2) if any Termination Gas is also Tax Event Gas, such Termination Gas may be remarketed for a Non-Qualifying Use only if approved by an Opinion of Tax Counsel; except that, if such Tax Event Gas cannot be remarketed for a Qualifying Use for at least the Minimum Price, the Gas Supplier is to purchase such Tax

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Event Gas at the Minimum Price. Purchases of sufficient amounts of Termination Gas which is also Tax Event Gas by the Gas Supplier will evidence an Excess Gas Event, which is one of the Termination Events that could result in a termination of the Prepaid Gas Agreement prior to its Scheduled Termination Date and a mandatory redemption of the Bonds. See "TERMS OF THE BONDS - Mandatory Redemption - Redemption on Early Termination of the Prepaid Gas Agreement."

For further information on remarketing by the Gas Supplier, see "Appendix D - SUMMARY OF CERTAIN PROVISIONS OF THE PREPAID GAS AGREEMENT - Gas Supplier Remarketing Provisions" and the related definitions.

Remediation

The Prepaid Gas Agreement provides that, during each Gas Supplier Remediation Period while the Supply Agreement is in effect, the Gas Supplier is to use commercially reasonable efforts to cause amounts in the Remediation Fund to be applied for a Remediation Use. A "Gas Supplier Remediation Period" generally means each period when there is Anticipatory Tax Event Gas or Tax Event Gas or when amounts have been on deposit in the Remediation Fund for at least twelve months. Amounts on deposit in the Remediation Fund consist of the Remarketing Proceeds of natural gas sold for a Non-Qualifying Use and the interest thereon. Remediation Use means generally the purchase of natural gas or electricity with amounts in the Remediation Fund and the sale or use of such natural gas or electricity for a Qualifying Use. For further information on the remediation of the Remarking Proceeds of natural gas sold for a Non-Qualifying Use, see "Appendix D - SUMMARY OF CERTAIN PROVISIONS OF THE PREPAID GAS AGREEMENT - Remediation Provisions" and "Appendix E - SUMMARY OF CERTAIN PROVISIONS OF THE SUPPLY AGREEMENT."

Force Majeure

Except with regard to a party’s obligation to make payment(s) due under the Prepaid Gas Agreement, neither party will be liable to the other for failure to perform an obligation under the Prepaid Gas Agreement to the extent such failure was caused by Force Majeure. During any Delivery Month in which all or a portion of the Monthly Contract Quantity is not delivered or received due to Force Majeure, the Gas Supplier is to pay SVFC an amount equal to the product of (i) the quantity of the Monthly Contract Quantity not taken because of the Force Majeure and (ii) the Index Price. Payment of such amount will satisfy Gas Supplier’s obligation to deliver, and SVFC’s obligation to receive, the Prepaid Gas that was not delivered or received due to Force Majeure.

Termination Events; Termination of the Prepaid Gas Agreement

Termination Event at the Option of SVFC. Under the Prepaid Gas Agreement, a Termination Event is to be deemed to have occurred at the option of SVFC upon the occurrence of any of the following events:

(a) The Gas Supplier, and the Guarantor on the Gas Supplier’s behalf, fail to pay either: (1) any Gas Payment as invoiced or (2) any undisputed amount due under the Prepaid Gas Agreement other than a Gas Payment, in each case by 11:00 a.m. on the second Business Day following receipt by Gas Supplier of notice of such failure.

(b) A Bankruptcy Event occurs with respect to the Gas Supplier or the Guarantor.

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(c) Failure of the Gas Supplier to provide an alternative guaranty or collateral as provided in the Prepaid Gas Agreement by the fifth (5th) Business Day following receipt by Gas Supplier of notice of such failure.

(d) Any representation or warranty given by the Gas Supplier in the Prepaid Gas Agreement proves to have been false or misleading when made and such misrepresentation or warranty has had or could reasonably be expected to have a material adverse effect on the Gas Supplier’s ability to perform its obligations under the Prepaid Gas Agreement related to the delivery of natural gas or the making of payments under the Prepaid Gas Agreement.

(e) Any representation or warranty given by the Guarantor in the Guarantee proves to have been false or misleading when made and such misrepresentation or warranty has had or could reasonably be expected to have a material adverse effect on the Guarantor’s ability to make payments under the Guarantee.

(f) For reasons other than Force Majeure or a Receipt Default, the Gas Supplier delivers (a) no natural gas (other than replacement natural gas) for a period of five (5) consecutive days for which natural gas is required to be delivered, or (b) less than fifty percent (50%) of the natural gas (other than replacement natural gas) required to be delivered on any particular day for ten (10) cumulative days during any contract year during the Term of the Prepaid Gas Agreement.

(g) The termination of the Supplier Swap Agreement due to Gas Supplier’s default together with the failure to replace the Supplier Swap Agreement in accordance with the Prepaid Gas Agreement.

(h) The occurrence of an Excess Gas Event. An "Excess Gas Event" means that subsequent to the issue date of the Bonds and after a Tax Event has occurred, due to events that occurred (or did not occur) or other changes in expectations, the remaining natural gas to be delivered under the Prepaid Gas Agreement is no longer required for Qualifying Uses as evidenced exclusively by the following: (i) SVFC or (while the Supply Agreement is in effect) the District is unable to apply the natural gas then remaining to be delivered under the Prepaid Gas Agreement for a Qualifying Use; and (ii) the Gas Supplier does not remarket natural gas as set forth in the Prepaid Gas Agreement, excluding, during a Tax Event Period, the Gas Supplier's purchases of the Termination Gas at the Minimum Price in accordance with the Prepaid Gas Agreement.

(i) The termination of the Commodity Swap Agreement for reasons other than SVFC’s nonpayment together with the failure to replace the Commodity Swap Agreement in accordance with the Prepaid Gas Agreement.

Termination Event at the Option of the Gas Supplier. Under the Prepaid Gas Agreement, a Termination Event is to be deemed to have occurred at the option of the Gas Supplier upon the occurrence of any of the following events: (a) the termination of the Supplier Swap Agreement for reasons other than Gas Supplier’s default together with the failure to replace the Supplier Swap Agreement in accordance with the Prepaid Gas Agreement, or (b) the termination of the Commodity Swap Agreement due to SVFC’s default together with the failure to replace the Commodity Swap Agreement in accordance with the Prepaid Gas Agreement.

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Right to Establish Early Termination Date. Upon a Termination Event at the option of SVFC, SVFC may, but is not obligated to, establish a date that is the Early Termination Date and immediately provide notice to the Gas Supplier and the Trustee specifying the relevant Termination Event and the Early Termination Date. Upon a Termination Event at the option of Gas Supplier, the Gas Supplier may, but is not obligated to, establish a date that is the Early Termination Date and immediately provide notice to SVFC, the District and the Trustee specifying the relevant Termination Event and the Early Termination Date. In any case, the termination date so established is to be referred to as the "Early Termination Date" and the Term of the Prepaid Gas Agreement shall cease on the Early Termination Date; provided, however, the obligations of both the Gas Supplier and SVFC to make payments on an early termination pursuant to the Prepaid Gas Agreement will continue after an Early Termination Date. An Early Termination Date is to be the last day of the calendar month in which notice is given.

Payment of Termination Amount; Redemption of Bonds

Within three (3) Business Days following the Early Termination Date, Gas Supplier is to deposit the Termination Amount with the Trustee for deposit in the Termination Fund. Amounts in the Termination Fund are to be applied to the mandatory redemption of the Bonds on the fifteenth day of the following month. See "TERMS OF THE BONDS – Mandatory Redemption – Redemption Upon Early Termination."

The Supply Agreement

The information contained below includes descriptions of certain provisions of the Supply Agreement. Reference is made to Appendix E for a more complete summary of certain provisions of the Supply Agreement.

The Supply Agreement will be effective commencing on the date of its execution and continue in effect until October 31, 2037, unless terminated earlier due to certain defaults, as set forth therein, or the termination of the Prepaid Gas Agreement.

Delivery and Receipt Obligations; Payment by the District

SVFC is to deliver and the District is to receive, on a firm basis, the Contract Gas on each Gas Day of each Delivery Month in the applicable Daily Contract Quantity pursuant to the terms and conditions of the Supply Agreement. Notwithstanding anything to the contrary contained in the Supply Agreement: (i) the obligation of SVFC to deliver natural gas under the Supply Agreement is limited to the delivery of natural gas which SVFC receives under the Prepaid Gas Agreement on such Gas Day; (ii) the obligation of SVFC to pay any amount under the Supply Agreement or to give credits against amounts due from the District under the Supply Agreement is limited to amounts SVFC receives under the Prepaid Gas Agreement or otherwise available to SVFC in connection with the transaction for which such payment or credit relates and which are on deposit in the Operating Fund; (iii) any imbalance, transportation, tax, or indemnification charges for which SVFC is responsible under the Prepaid Gas Agreement are to be considered imbalance, transportation, tax, indemnification charges incurred by SVFC under the Supply Agreement; and (iv) any event of Force Majeure affecting the delivery of natural gas by the Gas Supplier under the Prepaid Gas Agreement will be considered an event of Force Majeure affecting SVFC with respect to the delivery of natural gas under the Supply Agreement.

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Consideration

For each MMBtu of Contract Gas delivered or deemed delivered to the District by SVFC at the applicable Delivery Point, the District is to pay SVFC the Contract Price for such natural gas for deposit in the Revenue Fund and the Administrative Fee for such Contract Gas for deposit in the Operating Fund.

SVFC Delivery Default

If an SVFC Delivery Default is anticipated or upon the occurrence of a SVFC Delivery Default, the party that first learns of such anticipated SVFC Delivery Default or SVFC Delivery Default is to notify the other party and the Gas Supplier of such default promptly; provided, that any failure to give such notice, or any delay in giving such notice, will not affect the District’s rights under the Supply Agreement. The District will have no obligation to pay for any of the Contract Gas that was not delivered as a result of a SVFC Delivery Default. Due to the interplay of the Prepaid Gas Agreement and the Supply Agreement, a SVFC Delivery Default under the Supply Agreement will result from a Gas Supplier Delivery Default under the Prepaid Gas Agreement.

District Receipt Failure

The District’s failure on any day, for any reason other than Force Majeure, to meet its obligation to take delivery at the Delivery Point of the quantity of natural gas required to be received at such Delivery Point is a "District Receipt Failure" under the Supply Agreement. The District will be liable for the Contract Price for all natural gas as to which there is a District Receipt Failure. Pursuant to the Prepaid Gas Agreement, upon the failure of SVFC to receive any natural gas to be delivered thereunder for any reason other than Force Majeure, the Gas Supplier is obligated to remarket such natural gas in accordance with the Prepaid Gas Agreement. Due to the interplay of the Prepaid Gas Agreement and the Supply Agreement, a District Receipt Failure under the Supply Agreement will result in an SVFC Receipt Failure under the Prepaid Gas Agreement. SVFC will agree in the Supply Agreement to credit against the Contract Price payments due from the District in any month with respect to District Receipt Failures the amount paid by the Gas Supplier in such month (other than amounts deposited or to be deposited in the Remediation Fund) with respect to SVFC’s failures to receive any natural gas to be delivered thereunder in such month for any reason other than Force Majeure, up to the amount of such Contract Price payments due from the District. Notwithstanding a payment by Gas Supplier and any related remarketing of natural gas pursuant to the Prepaid Gas Agreement with respect to any portion of the Contract Gas, such Contract Gas will be deemed to have been delivered by SVFC to the District under the Supply Agreement and remarketed on the District’s behalf. The District will be liable for the Contract Price for all natural gas so remarketed. The Gas Supplier and SVFC may agree, in lieu of remarketing natural gas and making payments as provided the Prepaid Gas Agreement to a Postponed Delivery Schedule for the natural gas relating to the Receipt Default.

Billing

The payment of the monthly net amount payable by the District for natural gas delivered or deemed delivered under the Supply Agreement is to be made by the District by 11:00 a.m. on the 25th day of the next succeeding month; provided, that if such payment date is not a Business Day, payment is due on the next succeeding Business Day.

Source of District’s Payments

The District will agree in the Supply Agreement to make the payments it is required to make thereunder from the revenues of its electric system, and only from such revenues, and as a charge against

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such revenues, as an operating expense of its electric system and as a cost of fuel for its electric generating units; provided, that the District, in its discretion, may apply any legally available moneys to the payment of amounts due under the Supply Agreement. The District will covenant and agree in the Supply Agreement that it will establish, maintain, and collect rates and charges for its electric system so as to provide revenues sufficient, together with all available electric system revenues, to enable the District to pay to SVFC all amounts payable under the Supply Agreement and to pay all other amounts payable from the revenues of the District’s electric utility system, and to maintain any required reserves.

Termination of Supply Agreement upon Termination of the Prepaid Gas Agreement

Notwithstanding anything in the Supply Agreement to the contrary, the Supply Agreement will terminate automatically, without the necessity of any action by, or notice to, either party, upon the termination of the Prepaid Gas Agreement.

Covenants of the Parties Regarding Federal Tax Issues

The parties agree to comply with any certifications made to, or procedures required by, Tax Counsel to protect the Tax-Exempt Status of the Bonds regarding the sale, delivery, purchase or receipt of natural gas pursuant to the terms of the Supply Agreement, the application of any Proceeds Subject to Remediation or any other proceeds in connection with the natural gas, and any other matters affecting the Tax-Exempt Status of the Bonds.

The Commodity Price Hedge

The Commodity Swap Agreement

The Commodity Swap Agreement between SVFC and the Swap Counterparty will be governed by an ISDA Master Agreement (including the Schedule thereto) and Confirmation thereof. Pursuant to the terms of the Commodity Swap Agreement, SVFC is obligated to make monthly payments calculated by reference to a floating price index and the Swap Counterparty is obligated to make monthly payments calculated by reference to a fixed price.

The monthly floating and fixed payments that are to be made by SVFC and the Swap Counterparty, respectively, under the Commodity Swap Agreement will be netted pursuant to the terms of the Commodity Swap Agreement. Net payments required to be made by the Swap Counterparty under the Commodity Swap Agreement (i.e., "Commodity Swap Receipts") will be deposited to the Revenue Fund created by the Indenture. Pursuant to the Indenture, net payments required to be made by SVFC under the Commodity Swap Agreement (i.e., "Commodity Swap Payments") are payable from the Commodity Swap Payment Fund. See "TERMS OF THE BONDS-Revenues and Flow of Funds."

The Commodity Swap Agreement includes termination events relating to bankruptcy, nonpayment and the termination of the Prepaid Gas Agreement, the occurrence of any of which will automatically trigger an Early Termination Date (collectively, the "Automatic Early Termination Events") which will apply to both SVFC and the Swap Counterparty. In addition to the Automatic Early Termination Events, the Commodity Swap Agreement includes the standard ISDA form agreement events of default and termination events that permit the designation of an Early Termination Date (the "Early Termination Events") which will only apply to the Swap Counterparty. These Early Termination Events permit (but do not require) the designation of an Early Termination Date and can only be exercised by SVFC and not the Swap Counterparty. In addition to such events, SVFC may designate an Early Termination Date if the rating of the long term unsecured debt (without credit or structural enhancement) of the Swap Counterparty is below "A2" and "A" by Moody’s, and S&P, respectively.

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The Supplier Swap Agreement

Concurrently with SVFC’s execution and delivery of the Commodity Swap Agreement, the Gas Supplier will enter into the Supplier Swap Agreement pursuant to which Gas Supplier will be required to make monthly payments calculated by reference to a fixed price and will be entitled to receive monthly payments calculated by reference to a floating price index.

Replacement of Swap Counterparty Pursuant to the Prepaid Gas Agreement

Pursuant to the terms of the Prepaid Gas Agreement, if any Automatic Early Termination Event occurs under the Commodity Swap Agreement or the Supplier Swap Agreement whereby the Swap Counterparty is the Defaulting Party or Affected Party, SVFC and the Gas Supplier shall immediately and in good faith endeavor to identify a substitute counterparty (i) willing to execute a replacement swap agreement for each of the Commodity Swap Agreement and the Supplier Swap Agreement with such Defaulting Party or Affected Party, and (ii) that is not subject to any event, default or event of default, law, rule, order, judgment, agreement or any other circumstance that would cause it to be the "Defaulting Party" or the "Affected Party" under the Commodity Swap Agreement or the Supplier Swap Agreement upon its execution of such replacement swap agreement (such a substitute counterparty, a "Qualified Substitute Counterparty"). Upon identification of such a Qualified Substitute Counterparty by either SVFC or Gas Supplier, neither party shall unreasonably withhold its consent to entering into a replacement swap agreement with respect to the Commodity Swap Agreement or the Supplier Swap Agreement, as applicable, with such Qualified Substitute Counterparty, and, after obtaining such consent, each of SVFC and Gas Supplier shall execute a replacement swap agreement with respect to the Commodity Swap Agreement or Supplier Swap Agreement, as applicable, with the Qualified Substitute Counterparty; provided, however, that no such replacement swap agreement shall become effective unless (i) the effective date of the new Commodity Swap Agreement represented by such replacement shall be executed and effective within thirty (30) Days of the Early Termination Date established for the prior Commodity Swap Agreement; (ii) the Commodity Swap Agreement and the Supplier Swap Agreement in effect after such replacement shall have substantially the same terms as the Commodity Swap Agreement and the Supplier Swap Agreement in effect prior to such replacement; and (iii) the Gas Supplier, SVFC and the Trustee shall have received written confirmation from both Moody’s and S&P that such replacement shall not result in any reduction in or withdrawal of the then outstanding ratings on the Bonds.

Pursuant to the terms of the Prepaid Gas Agreement, if any Early Termination Event other than a Automatic Early Termination Event occurs (a) under the Commodity Swap Agreement or the Supplier Swap Agreement whereby the Swap Counterparty is the Defaulting Party or Affected Party, (b) under the Commodity Swap Agreement where SVFC is the Defaulting Party or Affected Party, or (c) under the Supplier Swap Agreement where the Gas Supplier is the Defaulting Party or Affected Party, SVFC and the Gas Supplier shall immediately and in good faith endeavor to identify a Qualified Substitute Counterparty. Upon identification of such a Qualified Substitute Counterparty by either SVFC or the Gas Supplier, neither party shall unreasonably withhold its consent to entering into a replacement swap agreement with respect to the Commodity Swap Agreement or the Supplier Swap Agreement, as applicable, with such Qualified Substitute Counterparty, and, after obtaining such consent, each of SVFC and the Gas Supplier shall execute a replacement swap agreement with respect to the Commodity Swap Agreement or Supplier Swap Agreement, as applicable, with the Qualified Substitute Counterparty; provided, however, that no such replacement swap agreement shall become effective unless (i) the new Commodity Swap Agreement represented by such replacement shall be in place and effective on the day that SVFC has established as the Early Termination Date (as defined in the Commodity Swap Agreement) for the prior Commodity Swap Agreement; (ii) on the effective date of the new Commodity Swap Agreement all amounts required to have been paid to the Trustee under the prior Commodity Swap

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Agreement on or prior to the termination of the prior Commodity Swap Agreement and all amounts required to be paid to the Trustee under the new Commodity Swap Agreement on such date shall have been paid to the Trustee without regard to the source of such payment; (iii) the replacement Commodity Swap Agreement and the Supplier Swap Agreement shall have substantially the same terms as the Commodity Swap Agreement and the Supplier Swap Agreement in effect prior to such replacement; and (iv) the Gas Supplier, SVFC and the Trustee shall have received written confirmation from both Moody’s and S&P that such replacement shall not result in any reduction in or withdrawal of the then outstanding ratings on the Bonds.

Notwithstanding anything to the contrary in the Prepaid Gas Agreement, neither SVFC nor the Gas Supplier will have any obligation to enter into a replacement swap agreement with a Qualified Swap Counterparty unless the party is able to terminate the existing Commodity Swap Agreement or Supplier Swap Agreement, as applicable, without liability for any payment other than payment of any Unpaid Amount (as defined in the Commodity Swap Agreement or the Supplier Swap Agreement, as applicable).

SOURCES OF PAYMENT AND SECURITY FOR THE BONDS

This Section describes the security and sources of payment for the Bonds. The information contained below includes descriptions of certain provisions of the Indenture. Reference is made to Appendix C for a more complete summary of certain provisions of the Indenture.

Special Obligations; Limitations on Liability

The Bonds shall be special obligations of SVFC payable solely from, and secured as to the payment of the principal and Redemption Price thereof, and interest thereon, in accordance with their terms and the provisions of the Indenture solely by, the Trust Estate pledged under the Indenture. The Bonds shall not be payable from, or secured by a legal or equitable pledge of, or lien or charge upon, any property of SVFC or any of its income or receipts except the Revenues and the other funds pledged therefor pursuant to the Indenture (which pledge is subject to the application of the Revenues and such other funds for the purposes and on the terms and conditions set forth in the Indenture). Neither the faith and credit nor the taxing power of the State, the District or any other political subdivision or any public or quasi-public agency is pledged to the payment of the principal or Redemption Price of, or the interest on, the Bonds. The issuance of the Bonds does not directly, indirectly or contingently obligate the State or any political subdivision thereof, including the District, to levy or pledge any form of taxation or to make any appropriation for the payment of the Bonds. SVFC has no taxing power and is not a political subdivision, public agency or quasi-public agency of the State. The payment of the principal or Redemption Price of, or interest on, the Bonds is a special obligation of SVFC, as provided in the Indenture, and does not constitute a debt, liability or obligation of the State or any political subdivision thereof, including the District. The payment obligations of the District under the Supply Agreement, including the District’s obligation to pay the Contract Price to SVFC for natural gas delivered or deemed delivered under the Supply Agreement, are limited obligations payable solely from the District’s electrical utility system revenues. The District has no obligation to make any payment to SVFC for natural gas not delivered or deemed delivered to the District in accordance with the Supply Agreement.

The District’s obligation to pay the Contract Price for natural gas delivered or deemed delivered pursuant to the Supply Agreement will be classified as an operating expense of its electric system. Operating expenses are payable prior to debt service on the outstanding bonds and notes of the District (which are currently outstanding in the principal amount of approximately $3.2 billion) which are payable from net revenues of the District’s electric system.

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Certain financial and operating data with respect to the District, which may be relevant to an evaluation of the District’s ability to meet its payment obligations under the Supply Agreement, is included in Appendix A hereto. The audited financial statements of the District for the fiscal years ended April 30, 2007 and April 30, 2006 are included as Appendix B to this Official Statement. See "FINANCIAL STATEMENTS."

The Trust Estate

As security for payment of the principal and Redemption Price of and interest on the Bonds, SVFC has pledged and assigned to, and granted a security interest to the Trustee in, the following described property (the "Trust Estate"):

(a) the proceeds of the sale of the Bonds (subject to the application of funds for the purposes and on the terms and conditions set forth in the Indenture);

(b) all right, title and interest of SVFC in, to and under the Prepaid Gas Agreement, the Guarantee, the Supply Agreement and the Commodity Swap Agreement;

(c) the Revenues (including any portions thereof constituting Make-up Payments);

(d) any Termination Amount; and

(e) all Funds and Accounts established by the Indenture and held by the Trustee (other than the Rebate Fund); subject in all cases to the application thereof for the purposes and on the terms and conditions set forth in the Indenture.

The Trust Estate is also pledged to (i) the payment of amounts due from SVFC under the Commodity Swap Agreement and (ii) the principal portion of any Reimbursement Obligation incurred in connection with a draw on a Surety Bond (but such pledge is limited to Make-up Payments received) on parity with the pledge of the Trust Estate securing the Bonds.

"Revenues" as defined in the Indenture means: (i) all revenues, income, rents, user fees or charges, and receipts derived or to be derived by SVFC from or attributable or relating to the ownership of the Gas Supply, including all revenues attributable or relating to the Gas Supply or to the payment of the costs thereof received or to be received by SVFC under the Supply Agreement, the Prepaid Gas Agreement, the Guarantee or otherwise payable to it for the sale and/or transportation of natural gas or otherwise with respect to the Gas Supply; (ii) interest received or to be received on any moneys or securities (other than moneys or securities held in the Rebate Fund, the Operating Fund or the Termination Fund) held pursuant to the Indenture and paid or required to be paid into the Revenue Fund; and (iii) any Commodity Swap Receipts received by SVFC; but excluding from subsection (i) above the following items: (A) any Termination Amount; (B) any Required Replacement Amount; (C) amounts paid by or on behalf of SVFC for the mandatory redemption of Bonds; (D) the Issuer Administrative Fee and (E) the Administrative Fee.

Subsection (i) of Revenues includes each "Make-up Payment", which means, generally, each payment that has been received by SVFC or the Trustee from the District under the Supply Agreement to make up for a prior payment default thereunder, or from the Commodity Swap Counterparty under the Commodity Swap to make up for a prior payment default thereunder, in each case when the receipt of such Make-up Payment occurs after a draw on the Senior Lien Bonds Debt Service Reserve Account has been made to pay debt service on the 2007 Senior Lien Bonds or after a draw on the Working Capital Reserve Fund has been made to pay a Commodity Swap Payment. See "APPENDIX C–SUMMARY OF

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CERTAIN PROVISIONS OF THE INDENTURE–DEFINITIONS." To the extent that a Make-up Payment is not received or is deficient, the Indenture provides that a Reimbursement Obligation may be repaid from moneys that become available therefor in the Operating Fund (which Fund is to be held by SVFC and is not part of the Trust Estate). However, the cash portion of the Senior Lien Bonds Debt Service Reserve Account may not be fully restored. See "SOURCES OF PAYMENT AND SECURITY FOR THE BONDS–Revenues and Flow of Funds–Operating Fund."

Revenues and Flow of Funds

Pursuant to the Indenture, SVFC has established the following Funds and Accounts to be held by the Trustee (with the exception only of the Rebate Fund and Operating Fund, which shall be held by SVFC):

(i) the Project Fund;

(ii) the Cost of Issuance Fund;

(iii) the Revenue Fund;

(iv) the Senior Lien Bonds Debt Service Fund, and within such Fund, a Senior Lien Bonds Debt Service Account (which will include both a Senior Lien Bonds Restricted Debt Service Subaccount and a Senior Lien Bonds Unrestricted Debt Service Subaccount), Senior Lien Bonds Capitalized Interest Account and a Senior Lien Bonds Debt Service Reserve Account;

(v) the Commodity Swap Payment Fund;

(vi) the Subordinate Lien Bond Debt Service Fund, and within such Fund, a Subordinate Lien Bond Debt Service Account (which will include both a Subordinate Lien Bond Restricted Debt Service Subaccount and a Subordinate Lien Bond Unrestricted Debt Service Subaccount) and a Subordinate Lien Bond Capitalized Interest Account;

(vii) the Rebate Fund;

(viii) the Redemption Fund;

(ix) the Termination Fund;

(x) the Operating Fund; and

(xi) the Working Capital Reserve Fund.

Within the Funds held by the Trustee, the Trustee may create one or more accounts or subaccounts as may facilitate the administration of the Indenture.

Project Fund

There will be paid into the Project Fund, from the proceeds of the Bonds, the amount as specified in the Indenture (and set forth hereinabove under "SOURCES AND USES OF FUNDS"). Amounts in the Project Fund will be used to make the Prepayment to the Gas Supplier in accordance with the Prepaid Gas Agreement.

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Cost of Issuance Fund

Moneys deposited in the Cost of Issuance Fund will be used by the Trustee to pay Costs of Issuance as provided in the Indenture.

Revenue Fund

All Revenues except for the Issuer Administrative Fee, the Administrative Fee and Make-up Payments are to be deposited promptly by the Trustee upon receipt thereof into the Revenue Fund. In each month during which there is a deposit of Revenues into the Revenue Fund (but in no case later than the respective dates set forth below), the Trustee is to credit to the following Funds and Accounts, in the following order of priority (except as provided in (iii) below, with the full amount to be transferred to any Fund or Account in a month, which amounts shall include any amounts needed to eliminate any existing shortfall in deposits in prior months and any accrued interest, to be transferred to such Fund before any transfer is made to a Fund with a lower priority), the amounts set forth below (such transfers to be made in such a manner so as to assure good funds in such Funds on the respective dates set forth below):

(i) To the Senior Lien Bonds Debt Service Account: not later than the 25th of such Month, or if such day is not a Business Day, the next succeeding Business Day, the Scheduled Debt Service Deposit for the Bonds for such Month, with the amounts so transferred being divided between the Senior Lien Bonds Restricted Debt Service Subaccount and the Senior Lien Bonds Unrestricted Debt Service Subaccount in accordance with the provisions of the Tax Certificate;

(ii) If SVFC has issued obligations to refund Bonds that are payable from Revenues on a parity with the Bonds ("Senior Lien Refunding Bonds"), to the debt service fund or funds (or account or accounts) for such Senior Lien Refunding Bonds, not later than the 25th of such Month, or if such day is not a Business Day, the next succeeding Business Day, the amounts required to be deposited in such funds pursuant to the proceedings and documents pursuant to which such Senior Lien Refunding Bonds were issued;

(iii) To the Commodity Swap Payment Fund: not later than the 25th of such Month, or if such day is not a Business Day, the next succeeding Business Day, the amount, if any, required for the Commodity Swap Payment, if any, coming due in such Month as set forth in a Written Direction to the Trustee (and if no such Commodity Swap Payment shall be due in such Month, no deposit to the Commodity Swap Payment Fund shall be made in such Month); provided, that if there are insufficient moneys in the Revenue Fund to make the full transfers required by this clause (iii) and clauses (i) and (ii) above, such transfers are to be made pro rata based on the respective amounts due;

(iv) To the Subordinate Lien Bond Debt Service Account: not later than the 25th of such Month, or if such day is not a Business Day, the next succeeding Business Day, the Scheduled Debt Service Deposit for the Subordinate Lien Bond for such Month, with the amounts so transferred being divided between the Subordinate Lien Bond Restricted Debt Service Subaccount and the Subordinate Lien Bond Unrestricted Debt Service Subaccount in accordance with the provisions of the Tax Certificate;

(v) To SVFC for deposit to the Rebate Fund: not later than the last day of such Month, the amount required to be on deposit in the Rebate Fund as set forth in a written direction of SVFC to the Trustee to promptly pay to the United States of America the amount of any

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rebate due pursuant to the Tax Certificate (and if no such rebate amount shall be due in such Month, no deposit to the Rebate Fund shall be made in such Month);

(vi) To the Redemption Fund: not later than the 25th of such Month, or if such day is not a Business Day on the next succeeding Business Day, the amount specified in a Written Direction of SVFC for the redemption of Bonds at the option of SVFC pursuant to the Indenture;

(vii) To SVFC for deposit to the Operating Fund: not later than the last day of such Month, all remaining amounts in the Revenue Fund.

The Scheduled Debt Service Deposits are to be adjusted as directed by SVFC in a written direction to the Trustee to reflect the optional redemption of Bonds and the redemption of Bonds and Subordinate Lien Bond for remediation purposes.

Senior Lien Bonds Debt Service Fund, Senior Lien Bonds Capitalized Interest Account and Senior Lien Bonds Debt Service Reserve Account

The amounts credited to the Senior Lien Bonds Debt Service Account and amounts available in the Senior Lien Bonds Capitalized Interest Account are to be applied on each Bond Payment Date to the payment of debt service payable on such Bond Payment Date with respect to the Bonds. To the extent that such amounts are insufficient to pay 100% of the debt service payable on such Bond Payment Date with respect to such Bonds, amounts may be drawn from the Senior Lien Bonds Debt Service Reserve Account (to the extent that there are moneys (or amounts available under the Senior Lien Reserve Account Credit Facility) on deposit therein) and deposited to the Senior Lien Bonds Debt Service Account to cover such deficiency. While any Bond remains Outstanding, amounts on deposit in the Senior Lien Bonds Debt Service Reserve Account shall secure only the Bonds. Except as otherwise required by the Indenture, after all Bonds have been repaid or defeased, any moneys remaining on deposit in the Senior Lien Bonds Debt Service Reserve Account shall be used, to the extent necessary, first, to pay or defease the Subordinate Lien Bond; second, to pay or defease other obligations of SVFC; and third, to make a transfer to SVFC to be deposited to the Operating Fund.

Commodity Swap Payment Fund

Amounts credited to the Commodity Swap Payment Fund will be applied from time to time by the Trustee to the payment of the Commodity Swap Payments. To the extent that such amounts are insufficient to pay 100% of a Commodity Swap Payment payable on a particular date as specified by the Commodity Swap Agreement, amounts are required to be drawn from the Working Capital Reserve Fund (to the extent that there are amounts available under the Working Capital Reserve Account Credit Facility) to cover such deficiency.

Subordinate Lien Bond Debt Service Fund

Amounts credited to the Subordinate Lien Bond Debt Service Account and amounts available in the Subordinate Lien Bond Capitalized Interest Account will be applied on each Bond Payment Date to the payment of debt service payable on such Bond Payment Date with respect to the Subordinate Lien Bond. The Trustee will pay out of the Subordinate Lien Bond Debt Service Fund the accrued interest on Subordinate Lien Bond to be redeemed from moneys in the Redemption Fund and the accrued interest included in the purchase price of Subordinate Lien Bond purchased for retirement. The amount, if any, deposited in the Subordinate Lien Bond Capitalized Interest Account from the proceeds of the Bonds will be set aside and applied to the payment of interest on the Subordinate Lien Bond. Except as otherwise

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required by the Indenture, any amount remaining in the Subordinate Lien Bond Debt Service Fund after each date for payment of maturing principal of the Subordinate Lien Bond, other than Bond proceeds to be retained therein for purposes of making future payments, shall be transferred to the Revenue Fund.

Rebate Fund

SVFC is to apply amounts in the Rebate Fund to the payment when due of the Rebate Requirements. Within the Rebate Fund, SVFC will maintain such accounts as necessary in order for SVFC and the District to comply with the terms and requirements of the Tax Certificate. Subject to the transfer provisions described herein, all moneys at any time deposited in the Rebate Fund will be held by SVFC in trust, to the extent required to satisfy the Rebate Requirements, for payment to the United States of America, and none of SVFC, the District, the Trustee or the Owners has any rights in or claim to such moneys.

Redemption Fund

In addition to those amounts to be deposited into the Redemption Fund pursuant to a written direction of SVFC, the Trustee is to deposit all amounts which are not Revenues received from SVFC (or the Termination Amount) for deposit into the Redemption Fund, including amounts deposited in connection with a mandatory redemption of Bonds for remediation and any optional transfers from the Operating Fund upon a Written Direction of SVFC. Amounts on deposit in the Redemption Fund in respect of a mandatory redemption of Bonds for remediation and transfers from the Operating Fund for the redemption of Bonds at the option of SVFC are to be applied by the Trustee to the mandatory redemption of outstanding Bonds and/or the Subordinate Lien Bond for remediation and/or for the optional redemption of Bonds, as applicable, and in each case as directed in a Written Direction of SVFC.

Termination Fund

The Prepaid Gas Agreement provides that SVFC is to direct the Gas Supplier is to pay the Termination Amount directly to the Trustee for the account of SVFC in the event an Early Termination Date is established for the Prepaid Gas Agreement. The Trustee is to deposit the Termination Amount into the Termination Fund, and such amount is to be applied on the Early Redemption Date to the mandatory redemption of the Bonds. Any amounts remaining on deposit in the Termination Fund following such redemption and payment of all Bonds are to be withdrawn by the Trustee and paid to the Gas Supplier.

If the Termination Amount deposited in the Termination Fund is insufficient to redeem all of the Bonds on the Early Redemption Date, the Trustee is to transfer amounts from the following Funds and Accounts in the following order of priority to the Termination Fund to the extent needed to redeem, together with the Termination Amount, all Bonds on the Early Redemption Date (and the Trustee is to apply such moneys for such purpose):

From the Senior Lien Bonds Capitalized Interest Account, until no moneys remain on deposit therein and then, from the Subordinate Lien Bond Capitalized Interest Account, until no moneys remain on deposit therein; and if all amounts in such Accounts have been withdrawn and there remains a deficiency; then

Immediately after making any payments to be made from the Commodity Swap Payment Fund during the month in which the Early Redemption Date occurs, from the following Accounts and Funds, in the following order of priority: first, from the Revenue Fund, until no moneys remain on deposit therein; second, from the Senior Lien Debt Service Account, until no moneys remain on deposit therein; third,

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from the Commodity Swap Payment Fund, until no moneys remain on deposit therein; and fourth, from the Subordinate Lien Bond Debt Service Account, until no moneys remain therein; and if all amounts in such Fund and Accounts have been withdrawn and there remains a deficiency; then

From the Senior Lien Bonds Debt Service Reserve Account, until no moneys remain therein.

Immediately after the making by the Trustee of all required transfers set forth in the three preceding paragraphs, to the extent and only to the extent necessary to redeem the Subordinate Lien Bond, if moneys remain on deposit in any of the Subordinate Lien Bond Capitalized Interest Account, the Senior Lien Bonds Debt Service Reserve Account, and the Subordinate Lien Bond Debt Service Account, the Trustee is to apply such moneys to the mandatory redemption of the Subordinate Lien Bond in accordance with the Indenture, in the following order of priority: first, from the Subordinate Lien Bond Capitalized Interest Account until no moneys remain therein; second, from the Senior Lien Bonds Debt Service Reserve Account, until no moneys remain therein; and third, from the Subordinate Lien Bond Debt Service Account, until no moneys remain therein.

Immediately after the Trustee has applied moneys deposited to the Termination Fund to the extent required in accordance with the Indenture, if any moneys remain on deposit in the Revenue Fund, the Senior Lien Bond Debt Service Fund, the Commodity Swap Payment Fund, or the Subordinate Lien Bond Debt Service Fund, the Trustee is to withdraw all moneys in each such Fund and Account and pay such moneys to the Gas Supplier.

Working Capital Reserve Fund

The Working Capital Reserve Requirement will be funded through the deposit to the Working Capital Reserve Fund of the Working Capital Reserve Fund Credit Facility. The Working Capital Reserve Fund Credit Facility will be payable (upon the giving of such notice as may be required thereby) on any date on which moneys are required to be withdrawn from the Working Capital Reserve Fund to pay in whole or in part a Commodity Swap Payment.

Operating Fund

SVFC shall apply amounts credited to the Operating Fund first to the payment of administrative and other expenses of SVFC and then to satisfy any Reimbursement Obligation of SVFC under any Reimbursement Agreement that is still owed after the application of Make-Up Payments in accordance with the Indenture. Thereafter, amounts credited to the Operating Fund shall be available to SVFC, from time to time, for the following purposes (as determined by SVFC and without any order of priority):

(i) rebates to the District;

(ii) the purchase or redemption of Bonds and expenses in connection therewith; and

(iii) any other lawful purpose of SVFC.

Any purchase of Bonds (or portions thereof) by or at the direction of SVFC pursuant to the Indenture may be made with or without tenders of Bonds and at either public or private sale, in such manner as SVFC may determine.

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Payments Under the Guarantee

If at any time a payment is due to SVFC by the Gas Supplier under the Prepaid Gas Agreement and the Trustee has not received the full amount of such payment, the Trustee will immediately make a demand for payment under the Guarantee for the amount unpaid.

Pursuant to the Prepaid Gas Agreement, SVFC or the Gas Supplier is to provide notice to the Trustee if either party establishes an Early Termination Date for the Prepaid Gas Agreement. In connection with the establishment of an Early Termination Date, SVFC and the Gas Supplier are required by the Prepaid Gas Agreement to prepare and deliver to the Trustee invoices specifying amounts payable in connection with the termination of the Prepaid Gas Agreement. If any of such invoices specifies that amounts are payable by the Gas Supplier and the Trustee has not received the full amount of such payment by the end of the third Business Day following the Early Termination Date, the Trustee will make a demand for payment from the Guarantor under the Guarantee for the amount unpaid. See "THE GAS SUPPLIER, THE GUARANTOR AND THE GUARANTEE -The Guarantee."

INVESTMENT CONSIDERATIONS

Investment in the Bonds is subject to certain risks. Particular attention should be given to the risk factors described under this caption. Any one of these factors, among others, could affect the payment of principal, Redemption Price and interest due on the Bonds and the market price of the Bonds. The extent of any such effect cannot be determined at this time. The order in which the risk factors are listed is not an indication of the relative importance of the various risk factors. For additional information relevant to an investment decision, see "APPENDIX A-INFORMATION RELATING TO THE SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT AND ITS ELECTRICAL SYSTEM."

Limited Obligations of SVFC

The Bonds shall be special obligations of SVFC payable solely from, and secured as to the payment of the principal and Redemption Price thereof, and interest thereon, in accordance with their terms and the provisions of the Indenture solely by, the Trust Estate pledged under the Indenture. The Bonds shall not be payable from, or secured by a legal or equitable pledge of, or lien or charge upon, any property of SVFC or any of its income or receipts, except the Revenues and the other funds pledged therefor pursuant to the Indenture (which pledge is subject to the application of the Revenues and such other funds for the purposes and on the terms and conditions set forth in the Indenture). The transaction represented by the Prepaid Gas Agreement, the Supply Agreement, and the Commodity Swap Agreement represent the only significant business of SVFC, and SVFC has no substantial assets or revenues other than those that are pledged to the payment of the Bonds. Accordingly, no financial or operating information with respect to SVFC is included in this Official Statement. See "SOURCES OF PAYMENT AND SECURITY FOR THE BONDS-Special Obligations; Limitations on Liability" and "THE ISSUER."

Early Redemption of Bonds

Upon the occurrence of an early termination of the Prepaid Gas Agreement, the Gas Supplier will be obligated to deposit the Termination Amount with the Trustee, for the account of SVFC. The Termination Amount is to be used to redeem the outstanding Bonds prior to their scheduled maturity as described under the caption "TERMS OF THE BONDS-Mandatory Redemption - Redemption Upon Early Termination of the Prepaid Gas Agreement."

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The Bonds are also subject to mandatory redemption prior to maturity if the Trustee receives notice to the effect that redemption of all or a portion of the Bonds is necessary to preserve the Tax-Exempt Status of interest on the Bonds as a result of the remarketing of a portion of the Gas Supply for a Non-Qualifying Use. The Prepaid Gas Agreement and the Supply Agreement contain certain provisions regarding Remediation Use which are designed to minimize the likelihood of such a mandatory redemption. Such provisions apply while the Supply Agreement is in effect. See "THE GAS SUPPLY ACQUISITION -The Prepaid Gas Agreement – Remediation" and "Appendix E - SUMMARY OF CERTAIN PROVISIONS OF THE SUPPLY AGREEMENT - Remediation Provisions."

Financial Position of the District

The District’s obligations under the Supply Agreement are limited obligations payable solely as operating expenses of the District’s electric system. See "SOURCES OF PAYMENT AND SECURITY FOR THE BONDS-Special Obligations; Limitations on Liability." The District’s electric utility system currently has outstanding ratings of "Aa1" and "AA" by Moody’s Investors Service Inc. ("Moody’s") and Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc. ("S&P"), respectively. There can be no assurance that the ratings on the District’s outstanding long-term indebtedness secured by net revenues of the District’s electric system will not be reduced or withdrawn. See "APPENDIX A - INFORMATION RELATING TO THE SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT AND ITS ELECTRIC SYSTEM".

Decline in the District's Natural Gas Requirements

The annual quantity of natural gas to be delivered to the District under the Supply Agreement represents approximately 20% of the natural gas purchased by the District for use by its electric system in the year 2006. Although the District is required to pay for all natural gas delivered or deemed delivered to it pursuant to the Supply Agreement, it is possible that such deliveries in any month will exceed its natural gas requirements for that month. If the District cannot use natural gas delivered under the Supply Agreement, the District will resell the natural gas, either directly or in certain circumstances through remarketing by the Gas Supplier, and will bear all risk that the price received for their sale of surplus natural gas delivered under the Supply Agreement will be below the Contract Price.

Financial Position of Gas Supplier and Guarantor

The Gas Supplier will be obligated to make certain payments to the Trustee, for the account of SVFC, upon a failure of the Gas Supplier to deliver or SVFC to take natural gas under the Prepaid Gas Agreement, whether or not such failure is caused by Force Majeure. In addition, upon termination of the Supply Agreement due to a default by the District, the Gas Supplier is obligated under the Prepaid Gas Agreement to remarket the Gas Supply, including purchases by the Gas Supplier, and remit all Remarketing Proceeds to the Trustee. The Gas Supplier’s payment obligations under the Prepaid Gas Agreement are guaranteed by the Guarantor pursuant to the Guarantee. The ability of SVFC to pay principal of and interest on the Bonds when due will depend, among other things, upon the timely payment by the Gas Supplier or the Guarantor of such Gas Payments (as defined in the Prepaid Gas Agreement) including, in the event of the termination of the Supply Agreement, Remarketing Proceeds, to the Trustee.

In the event of an early termination of the Prepaid Gas Agreement, the Gas Supplier will be obligated to pay the Termination Amount to the Trustee on behalf of SVFC, and all of the outstanding Bonds will be subject to mandatory redemption prior to maturity. The ability of SVFC to pay the Redemption Price of the Bonds (and accrued interest to the Early Redemption Date, if any) will depend upon the payment by the Gas Supplier or Guarantor of the Termination Amount to the Trustee.

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No assurance can be given that the future financial position of the Gas Supplier or the Guarantor will enable either to make such payments in a timely manner. Any delay in payment by the Gas Supplier or the Guarantor could cause a delay or default in payments of the principal, Redemption Price and interest due on the Bonds. Potential purchasers of the Bonds should study the information set forth and incorporated by reference under the heading "THE GAS SUPPLIER, THE GUARANTOR AND THE GUARANTEE" in this Official Statement in assessing the capability of the Gas Supplier and the Guarantor to make the payments required to be made under the Prepaid Gas Agreement and the Guarantee.

Financial Position of Swap Counterparty

The ability of SVFC to make full payment of the principal and interest due on the Bonds may depend upon the timely payment by the Swap Counterparty of amounts payable by it pursuant to the Commodity Swap Agreement. In the event that the Swap Counterparty fails to make a payment pursuant to the Commodity Swap Agreement, a bankruptcy event occurs with respect to the Swap Counterparty under the Commodity Swap Agreement, or the Prepaid Gas Agreement is terminated, the Commodity Swap Agreement will automatically terminate. Potential purchasers of the Bonds should study the information set forth and incorporated by reference under the heading "THE GAS SUPPLY ACQUISITION-The Commodity Price Hedge" in this Official Statement in assessing the capacity of the Swap Counterparty to make the payments required to be made or to post collateral as required under the Commodity Swap Agreement.

Structured Financing

The Indenture, the Prepaid Gas Agreement, the Supply Agreement and the Commodity Swap Agreement have been structured so that the Revenues available to SVFC, together with the amounts on deposit in certain of the Funds and Accounts held by the Trustee under the Indenture, on a cumulative basis, are expected to be sufficient at all times to provide for the timely payment of the scheduled debt service requirements on the Bonds, SVFC’s payment obligations to the Swap Counterparty under the Commodity Swap Agreement and, on a subordinate basis, interest on the Subordinate Lien Bond. There is no contingency amount in any of the payments required to be paid to SVFC under the Prepaid Gas Agreement, the Supply Agreement or the Commodity Swap Agreement such that a failure of a party under one such agreement can be covered by the payments of the other parties under the other agreements. SVFC’s ability to meet its obligations on the Bonds, the Commodity Swap Agreement and interest on the Subordinate Lien Bond will depend primarily upon the performance by the Gas Supplier of its natural gas delivery and other obligations under the Prepaid Gas Agreement (or the Guarantor under the Guarantee), timely payment by the District under the Supply Agreement and timely payment by the Swap Counterparty under the Commodity Swap Agreement.

The principal sources of the Revenues pledged to the payment of interest on the Bonds are the amounts to be received by SVFC from the sale of the natural gas to the District under the Supply Agreement, payments received by SVFC under the Commodity Swap Agreement, and the amounts to be received by SVFC from the Gas Supplier under the Prepaid Gas Agreement (or the Guarantor under the Guarantee). Whether those Revenues will be sufficient to enable SVFC to meet all of its obligations on the Bonds over the entire term of such agreement will depend upon various factors, including but not limited to:

• The prospects and financial and operational performance of the Gas Supplier, or the Guarantor, and the continuing ability of each to timely meet its obligations under the Prepaid Gas Agreement and the Guarantee, for the term of the Bonds;

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• The prospects and financial and operational performance of the District and its continuing ability to timely meet its obligations under the Supply Agreement for the term of the Bonds; and

• The prospects and financial and operational performance of the Swap Counterparty, or any replacement swap counterparty, and its continuing ability to timely meet its obligations under the Commodity Swap Agreement.

Enforcement of Contracts

The ability of SVFC or the Trustee to enforce the Prepaid Gas Agreement, the Guarantee, the Supply Agreement, and the Commodity Swap Agreement, and the remedies available to the Trustee and the owners of the Bonds upon an event of default under the Indenture, are in many respects dependent upon judicial actions which are often subject to discretion and delay. Under existing law and jurisdiction decisions, the remedies provided for under such agreements may not be readily available or may be limited.

The enforceability of the various legal agreements may also be limited by bankruptcy, reorganization, insolvency, moratorium or other similar laws affecting the rights of creditors or secured parties generally and by the exercise of judicial discretion in accordance with general principles of equity. The Prepaid Gas Agreement, the Guarantee, the Supply Agreement and the Commodity Swap Agreement are all executory contracts. If any of the parties with which SVFC has contracted under such agreements is involved in a bankruptcy proceeding, subject to then relevant bankruptcy laws, SVFC’s interest in the contract would be unsecured and the relevant agreement could be discharged in return for a claim for damages against its estate with uncertain value. In such event, SVFC’s Revenues could be materially adversely affected.

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SOURCES AND USES OF FUNDS

The estimated sources and uses of funds in connection with the issuance of the Bonds and the Subordinate Lien Bond are set forth in the following table.

SOURCES: Par Amount of the Bonds $1,129,765,000.00 Original Issue Net Bond Premium $ 5,224,432.00

Par Amount of the Subordinate Lien Bond $ 29,030,000.00 TOTAL $1,164,019,432.00

USES: Prepayment under Prepaid Gas Agreement $1,009,761,016.75 Deposit to the Senior Lien Bonds Debt Service Reserve Account1 $ 29,030,000.00

Deposit to the Senior Lien Bonds Capitalized Interest Account2 $ 113,315,237.40 Deposit to the Subordinate Lien Bonds Capitalized Interest Account2 $ 3,149,184.34 Costs of Issuance3 $ 8,763,993.51

TOTAL $1,164,019,432.00

___________________________ 1 The Senior Lien Bonds Debt Service Reserve Account Requirement will be $92,210,216.00 of which

$29,030,000.00 is expected to be funded with proceeds of the Subordinate Lien Bond and $63,180,216.00 is expected to be funded through the delivery of the Senior Lien Reserve Account Credit Facility.

2 Capitalized Interest is funded through December 1, 2009. 3 Includes underwriter’s discount, rating agency fees, Credit Facility Provider fees and legal fees and other

expenses (including the premiums in respect of the Senior Lien Reserve Account Credit Facility and the Working Capital Reserve Account Credit Facility).

TERMS OF THE BONDS

The Bonds are authorized pursuant to a resolution of SVFC adopted on October 12, 2007 (the "Resolution") and under and subject to the terms and conditions of the Indenture. Appendix C hereto contains a summary of certain provisions of the Indenture. Prospective purchasers of the Bonds should read Appendix C for a more complete understanding of the terms of the Bonds.

General

The Bonds will be issued in the principal amount of $1,129,765,000 and will be dated and bear interest from the date of delivery. The Bonds will mature on the dates and in the principal amounts, and bear interest, payable on December 1, 2007 and semiannually thereafter on each June 1 and December 1 (each, an "Interest Payment Date"), at the respective rates shown on the inside cover page of this Official Statement. The principal of, Redemption Price of, if any, and interest on the Bonds are payable by the Trustee, and interest thereon will be payable by check mailed by the Trustee to the registered owner of each Bond as of the immediately preceding May 15 or November 15.

Book-Entry Only System

Information concerning The Depository Trust Company, New York, New York ("DTC") and the book-entry system has been obtained from DTC and is not guaranteed as to accuracy or completeness by, and is not to be construed as a representation by, SVFC, the Underwriter, or the Trustee.

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The Bonds will be available only in book-entry form in Authorized Denominations. DTC will act as the initial securities depository for the Bonds. The Bonds will be issued as fully registered securities in the name of Cede & Co. (DTC’s partnership nominee), or such other name as may be requested by an authorized representative of DTC. One fully registered bond certificate will be issued for each maturity of the Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC.

DTC is a limited-purpose trust company organized under the New York Bank Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds and provides asset servicing for over 2.2 million issues of U.S. and non-U.S. equity, corporate and municipal debt issues, and money market instruments from over 100 countries that DTC’s Participants (the "Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions, in deposited securities through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC, in turn, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Fixed Income Clearing Corporation, and Emerging Markets Clearing Corporation, (the "NSCC," "FICC," and "EMCC," also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc. (the "NYSE"), the American Stock Exchange LLC and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others, such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (the "Indirect Participants" and, together with the Direct Participants, the "DTC Participants"). DTC has S&P’s highest rating: AAA. The rules applicable to DTC and DTC Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org.

Purchases of the Bonds under the DTC system must be made by or through Direct Participants, who will receive a credit for such Bonds on DTC’s records. The ownership interest of each actual purchaser of each Bond (a "Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participant’s records. Beneficial Owners will not receive written confirmation from DTC of their purchase, but Beneficial Owners are expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which such Beneficial Owners entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of DTC Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interest in the Bonds, except in the event that use of the book-entry only system for the Bonds is discontinued.

To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC’s records reflect only the identity of the Direct Participants to whose account such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

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Conveyances of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

Redemption notices will be sent to DTC. If less than all of the Bonds within a maturity are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed.

Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Bonds unless authorized by a Direct Participant in accordance with DTC’s procedures. Under its usual procedures, DTC mails an Omnibus Proxy to SVFC as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Principal and interest payments on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from the Trustee, on a payment date in accordance with their respective holdings shown on DTC’s records. Payments by DTC Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such DTC Participants and not of DTC, the Trustee or SVFC, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Trustee; disbursement of such payments to Direct Participants will be the responsibility of DTC; and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving notice to SVFC or the Trustee. Under such circumstances, in the event that a successor depository is not obtained, bond certificates are required to be prepared and delivered as described in the Indenture.

SVFC may decide to discontinue use of the system of book-entry only transfers through DTC (or a successor securities depository). In that event, bond certificates will be required to be prepared and delivered to DTC.

NEITHER SVFC NOR THE TRUSTEE WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO DTC PARTICIPANTS, BENEFICIAL OWNERS OR OTHER NOMINEES OF SUCH BENEFICIAL OWNERS FOR (1) SENDING TRANSACTION STATEMENTS; (2) MAINTAINING, SUPERVISING OR REVIEWING, OR THE ACCURACY OF, ANY RECORDS MAINTAINED BY DTC OR ANY DTC PARTICIPANT OR OTHER NOMINEES OF SUCH BENEFICIAL OWNERS; (3) PAYMENT OR THE TIMELINESS OF PAYMENT BY DTC TO ANY DTC PARTICIPANT, OR BY ANY DTC PARTICIPANT OR OTHER NOMINEES OF BENEFICIAL OWNERS TO ANY BENEFICIAL OWNER, OF ANY AMOUNT DUE IN RESPECT OF THE PRINCIPAL OF OR REDEMPTION PREMIUM, IF ANY, OR INTEREST ON BONDS; (4) DELIVERY OR TIMELY DELIVERY BY DTC TO ANY DTC PARTICIPANT, OR BY ANY DTC PARTICIPANTS OR OTHER NOMINEES OF BENEFICIAL OWNERS TO ANY BENEFICIAL OWNERS, OR ANY NOTICE (INCLUDING NOTICE OF REDEMPTION) OR OTHER COMMUNICATION WHICH IS REQUIRED OR PERMITTED UNDER THE TERMS OF THE INDENTURE TO BE GIVEN TO OWNERS OF BONDS; (5) THE SELECTION OF THE

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BENEFICIAL OWNERS TO RECEIVE PAYMENT IN THE EVENT OF ANY PARTIAL REDEMPTION OF BONDS; OR (6) ANY ACTION TAKEN BY DTC OR ITS NOMINEE AS THE REGISTERED OWNER OF BONDS.

Mandatory Redemption

Redemption Upon Early Termination of the Prepaid Gas Agreement. The Bonds are subject to mandatory redemption prior to maturity in whole, and not in part, on the Early Redemption Date at a Redemption Price equal to the Amortized Value thereof as of the Early Redemption Date, plus unpaid accrued interest to the Early Redemption Date. SVFC is to provide the Trustee with Written Notice of the Early Termination Date established for the Prepaid Gas Agreement, and, immediately upon receipt of such notice, the Trustee is to establish the Early Redemption Date and take all action necessary to redeem the outstanding Bonds on the Early Redemption Date with the moneys in the Termination Fund. The Early Redemption Date will be the fifteenth day of the month following the month in which the Early Termination Date of the Prepaid Gas Agreement occurs.

"Amortized Value" means, with respect to any Bond to be redeemed, the principal amount of such Bond multiplied by the price of such Bond expressed as a percentage, calculated based on the industry standard method of calculating bond prices (as such industry standard prevails on the date of delivery of the Bonds), with a delivery date equal to the date of redemption, a maturity date equal to the stated maturity date of such Bond and a yield equal to such Bond’s initial reoffering yield as stated on the inside cover of this Official Statement, which, in the case of certain dates, produces the amounts for all of the Bonds set forth in Appendix H hereto. See "APPENDIX H-SCHEDULE OF AMORTIZED VALUE OF THE BONDS."

Redemption for Remediation. The Bonds are subject to mandatory redemption prior to maturity, in whole or in part, on any date, at a Redemption Price equal to the Amortized Value thereof, plus unpaid accrued interest to the redemption date, if required under certain circumstances to maintain the Tax-Exempt Status of the bonds issued under the Indenture. In general, those circumstances relate to the failure to apply the Gas Supply for a Qualifying Use (as such term is defined in the Prepaid Gas Agreement).

Optional Redemption

The Bonds are subject to redemption at the option of SVFC, in whole or in part (in such amounts and by such maturities as may be specified by SVFC and by lot within a maturity), on any date, at a Redemption Price equal to the greater of (a) the Amortized Value thereof, plus unpaid, accrued interest to the date of redemption; or (b) the sum of the present values of the remaining unpaid payments of principal and interest to be paid on the Bonds to be redeemed from and including the date of redemption to the stated maturity date of such Bonds, discounted to the date of redemption on a semiannual basis at a discount rate equal to the Applicable Tax-Exempt Municipal Bond Rate (described below) for such Bonds minus 0.25 percent.

The "Applicable Tax-Exempt Municipal Bond Rate" for a Bond is the "Comparable AAA General Obligations" yield curve rate for the stated maturity date as published by Municipal Market Data five Business Days prior to the date of redemption. This rate is made available daily by Municipal Market Data and is available to its subscribers through its internet address: www.tm3.com. If no such yield curve rate is established for the applicable year, the "Comparable AAA General Obligations" yield curve rate for the two published maturities most closely corresponding to the applicable year will be determined, and the "Applicable Tax-Exempt Municipal Bond Rate" will be interpolated or extrapolated from those yield curve rates on a straight-line basis. In calculating the Applicable Tax-Exempt Municipal Bond Rate,

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should Municipal Market Data no longer publish the "Comparable AAA General Obligations" yield curve rate, then the Applicable Tax-Exempt Municipal Bond Rate will equal the Consensus Scale yield curve rate for the applicable year. The Consensus Scale yield curve rate is made available daily by Municipal Market Advisors and is available to its subscribers through its internet address: www.theconsensus.com. In the further event that Municipal Market Advisors no longer publishes the Consensus Scale, the Applicable Tax-Exempt Municipal Bond Rate for a Bond will be determined by a major market maker in municipal securities, as the quotation agent, based upon the rate per annum equal to the annual yield to maturity, calculated using semi-annual compounding, of those tax-exempt general obligation bonds rated in the highest Rating Category by Moody’s and S&P with a maturity date equal to the stated maturity date of such Bond. The quotation agent’s determination of the Applicable Tax-Exempt Municipal Bond Rate is final and binding in the absence of manifest error.

Sinking Fund Redemption

The Bonds maturing December 1, 2032 are subject to sinking fund redemption on December 1 of each of the years and in the principal amounts set forth below.

Redemption Date Principal Amount 2030 $66,145,000 2031 $74,055,000 2032* $82,380,000

The Bonds maturing December 1, 2037 are subject to sinking fund redemption on December 1 of each of the years and in the principal amounts set forth below.

Redemption Date Principal Amount 2033 $91,130,000 2034 $101,395,000 2035 $112,185,000 2036 $123,525,000 2037* $136,275,000

_______________ * final maturity

Notice of Redemption

When the Trustee receives notice from SVFC of SVFC’s decision to optionally redeem Bonds, or when redemption of Bonds by the Trustee is required due to early termination of the Prepaid Gas Agreement or for remediation, or in connection with a sinking fund redemption, each as described above, the Trustee is to give notice, in the name of SVFC, of the redemption of such Bonds by first-class mail, postage prepaid, not less than 30 days (10 days in the case of any mandatory redemption under the Indenture, other than scheduled sinking fund redemption) and not more than 45 days (30 days in the case of any mandatory redemption under the Indenture, other than scheduled sinking fund redemption) prior to the redemption date to the Owner of each Bond being redeemed, at its address as it appears on the Bond Register or at such address as such Owner may have filed with the Trustee for that purpose, as of the 15th day of the month preceding such redemption date . The notice will identify the Bonds to be redeemed and state (i) the redemption date, (ii) the Redemption Price or the manner in which it will be calculated, (iii) that the Bonds called for redemption must be surrendered to collect the Redemption Price, (iv) the address

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at which the Bonds must be surrendered, and (v) that interest on the Bonds called for redemption ceases to accrue on the redemption date. The Trustee is not to give any notice of redemption with respect to a redemption of Bonds at the option of SVFC, unless upon the giving of such notice, the Trustee holds funds sufficient to pay the Redemption Price of the Bonds to be optionally redeemed determined as if the date of giving such notice of redemption was the redemption date.

So long as the book-entry system is in effect, the Trustee will send each notice of redemption to Cede & Co., as nominee of DTC, and not to the Beneficial Owners. So long as DTC or its nominee is the sole registered owner of the Bonds under the book-entry system, any failure on the part of DTC or a Direct Participant or Indirect Participant to notify the Beneficial Owner so affected will not affect the validity of the redemption. See "Book-Entry Only System" above.

Bonds Redeemed in Part

Upon surrender of a Bond redeemed in part, SVFC will execute and the Trustee will authenticate and deliver to the Owner thereof a new Bond or Bonds in Authorized Denominations equal in principal amount to the unredeemed portion of the Bond surrendered. Notwithstanding anything in the Indenture to the contrary, so long as the Bonds are held in the Book-Entry System, the Bonds will not be delivered as set forth above; rather, changes in the principal amount of such Bonds will be affected on the registration books of the Securities Depository pursuant to its rules and procedures. See "Book-Entry Only System" above.

Selection of Bonds to be Redeemed

If less than all of the Bonds of like maturity are called for redemption, the particular Bonds or portions of Bonds to be redeemed are to be selected at random by the Trustee in such manner as the Trustee in its discretion may deem fair and appropriate, from Bonds not previously called for redemption; provided, that the portion of any Bond of a denomination of more than the minimum Authorized Denomination to be redeemed will be in the principal amount of such minimum Authorized Denomination or a multiple thereof. In selecting Bonds for redemption, the Trustee will treat each Bond of a denomination of more than the minimum Authorized Denomination as representing that number of Bonds of the minimum Authorized Denomination which is obtained by dividing the principal amount of such Bond by such minimum Authorized Denomination.

Refunding Bonds

Subject to the provisions of the Indenture, and receipt by SVFC and the Trustee of written confirmation from both Moody’s and S&P that such issuance shall not result in any reduction in or withdrawal of the then outstanding ratings on the Bonds, one or more series of Bonds on a parity with the outstanding Bonds may be issued from time to time under the Indenture, pursuant to the provisions of a Supplemental Indenture, to refund, repay or otherwise refinance any Senior Lien Bonds previously issued and outstanding.

Registration and Exchange of Bonds; Persons Treated as Owners

So long as the Bonds are maintained in book-entry form, the Beneficial Owners thereof will have no right to receive physical possession of the Bonds, and transfers of ownership interests in the Bonds will be made through book entries by The Depository Trust Company and its Participants, as described above under the subcaption "Book-Entry Only System."

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The Trustee will maintain registration books for the registration and the registration of transfer of the Bonds. The transfer of any Bond may be registered only upon the books kept for the registration and registration of transfer of Bonds upon surrender thereof to the Trustee together with an assignment duly executed by the registered owner in person or by his duly authorized attorney or legal representative in such form as shall be satisfactory to the Trustee. Upon any such transfer, SVFC will execute and the Trustee will authenticate and deliver in exchange for such Bond a new registered Bond or Bonds, registered in the name of the transferee, of any denomination or denominations authorized by this agreement.

The Trustee will not be required to make any such registration or registration of transfer of a Bond during the 15 days immediately preceding an Interest Payment Date. Prior to due presentment for registration of transfer of any Bond, the Trustee will treat the registered owner as the person exclusively entitled to payment of principal and interest and the exercise of all other rights and powers of the owner.

Upon surrender thereof at the principal corporate trust office of the Trustee, together with an assignment duly executed by the registered owner or his duly authorized attorney or legal representative in such form as shall be satisfactory to the Trustee, Bonds may, at the option of the owner thereof, be exchanged for Bonds of the same maturity, of authorized denominations and bearing interest at the same rate. Every such exchange will be at the expense of SVFC, except that the Trustee will, if requested by SVFC, make a charge to any owner of a Bond requesting such registration in the amount of any tax or other governmental charge required to be paid with respect thereto.

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Debt Service Requirements

Set forth in the following table are the scheduled debt service requirements on the Bonds in each year.

Year Ending December 31 Principal Amount Interest1 Total

2007 $ $ $ 2008 2009 2010 57,451,312.50 57,451,312.50 2011 57,451,312.50 57,451,312.50 2012 57,451,312.50 57,451,312.50 2013 57,451,312.50 57,451,312.50 2014 57,451,312.50 57,451,312.50 2015 3,990,000.00 57,451,312.50 61,441,312.50 2016 2,100,000.00 57,251,812.50 59,351,812.50 2017 4,115,000.00 57,146,812.50 61,261,812.50 2018 5,720,000.00 56,941,062.50 62,661,062.50 2019 8,585,000.00 56,655,062.50 65,240,062.50 2020 11,655,000.00 56,204,350.00 67,859,350.00 2021 15,105,000.00 55,592,462.50 70,697,462.50 2022 18,790,000.00 54,799,450.00 73,589,450.00 2023 22,835,000.00 53,812,975.00 76,647,975.00 2024 26,985,000.00 52,614,137.50 79,599,137.50 2025 31,365,000.00 51,197,425.00 82,562,425.00 2026 37,645,000.00 49,550,762.50 87,195,762.50 2027 44,200,000.00 47,574,400.00 91,774,400.00 2028 51,110,000.00 45,253,900.00 96,363,900.00 2029 58,475,000.00 42,570,625.00 101,045,625.00 2030 66,145,000.00 39,354,500.00 105,499,500.00 2031 74,055,000.00 36,047,250.00 110,102,250.00 2032 82,380,000.00 32,344,500.00 114,724,500.00 2033 91,130,000.00 28,225,500.00 119,355,500.00 2034 101,395,000.00 23,669,000.00 125,064,000.00 2035 112,185,000.00 18,599,250.00 130,784,250.00 2036 123,525,000.00 12,990,000.00 136,515,000.00 2037 136,275,000.00 6,813,750.00 143,088,750.00 Total 1,129,765,000.00 1,279,916,862.50 2,409,681,862.50

______________________ 1 Net of capitalized interest on the Bonds. See "SOURCES AND USES OF FUNDS."

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THE ISSUER

Relationship to the District

SVFC is a nonprofit corporation duly formed and validly existing under the laws of the State of Arizona and was incorporated on March 8, 2007 for the purpose of acquiring, financing, and selling natural gas to the District. The District’s President and Vice President and the Chairman of the Audit Committee of the District’s Board of Directors serve on the Board of Directors of SVFC.

SVFC’s Limited Liability

SVFC will enter into the Supply Agreement with the District solely to facilitate the financing of the purchase of the Gas Supply. Under the Indenture, SVFC assigns its rights and interests under the Supply Agreement, the Prepaid Gas Agreement, the Commodity Swap Agreement and the Guarantee to the Trustee for the benefit of the owners of the Bonds. The owners of the Bonds will have no right to look to SVFC, or any of its non-pledged assets, for any payment due on the Bonds. Furthermore, none of the Supply Agreement, the Prepaid Gas Agreement, the Commodity Swap Agreement, the Guarantee and the Indenture creates a pecuniary liability on the part of any directors or officers of SVFC.

As of the date of this Official Statement, the transaction represented by the Bonds and the Subordinate Lien Bond, the Prepaid Gas Agreement, the Supply Agreement and the Commodity Swap Agreement represent the only significant business of SVFC. However, SVFC is permitted to enter into similar transactions with the District in the future.

Restriction on Additional Obligations

SVFC currently has no substantial assets or revenues other than those that are pledged to the payment of the Bonds. SVFC has covenanted in the Indenture that it will not issue any bonds, notes, debentures or other evidences of indebtedness of a similar nature, other than the Bonds and the Subordinate Lien Bond and bonds, notes or other obligations issued to refund outstanding bonds, or otherwise incur obligations other than in respect of the Commodity Swap Agreement, payable out of or secured by a security interest in or pledge or assignment of the Trust Estate. In connection with such covenant, SVFC will not create or cause to be created any lien or charge on the Trust Estate, other than the lien and charge created by the Indenture to secure the Bonds and the Subordinate Lien Bond, and the lien and charge securing (i) such refunding obligations, (ii) the Commodity Swap Agreement and (iii) the principal amount of any Reimbursement Obligation incurred in connection with either of the Surety Bonds (which may remain limited to Make-up Payments received).

THE DISTRICT

The District is an agricultural improvement district organized in 1937 under the laws of the State of Arizona. It operates the Salt River Project (the "Project"), a federal reclamation project, under contracts with the Salt River Valley Water Users’ Association (the "Association"), by which it has assumed the obligations and assets of the Association, including its obligations to the United States of America for the care, operation and maintenance of the Project. The District owns and operates an electric system (as described further in Appendix A to this Official Statement) which generates, purchases, transmits and distributes electric power and energy, and provides electric service to residential, commercial, industrial and agricultural power users in a 2,900 square mile service territory in parts of Maricopa, Gila and Pinal Counties, plus mine loads in an adjacent 2,400 square mile area of Gila and Pinal Counties. The Association operates an irrigation system as the District’s agent which is not part of

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the District’s electric system. For further information regarding the District see Appendix A and Appendix B to this Official Statement.

THE GAS SUPPLIER, THE GUARANTOR AND THE GUARANTEE

The Gas Supplier and the Guarantor

Set forth below is certain publicly available information with respect to the Gas Supplier and the Guarantor. The obligations of the Gas Supplier are limited to those set forth in the Prepaid Gas Agreement and the obligations of the Guarantor are limited to those set forth in the Guarantee. Neither the Gas Supplier nor the Guarantor has guaranteed, nor is either responsible for the payment of, the Bonds.

The Gas Supplier, Citigroup Energy Inc., is wholly-owned subsidiary of the Guarantor, Citigroup Inc. The payment obligations of the Gas Supplier under the Prepaid Gas Agreement are guaranteed by the Guarantor. The Guarantor is a diversified financial services holding company, which is subject to the information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "SEC"). For further information concerning the Gas Supplier and the Guarantor, see the consolidated financial statements of the Guarantor and its subsidiaries included in the Annual Report on Form 10-K of Citigroup Inc. for the fiscal year ended December 30, 2006, subsequently filed quarterly reports, and any other documents which are publicly available, including any financial statements of the Guarantor and its subsidiaries, that are included therein or attached as exhibits thereto, filed by Citigroup Inc. pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of the most recent Annual Report on Form 10-K, and prior to the termination of the offering of the Bonds. Citigroup Inc. files annual, quarterly and special reports, information statements and other information with the SEC under File No. 0000831001. Copies of Citigroup Inc.’s SEC filings (including Citigroup Inc.’s Annual Report on Form 10-K for the fiscal year ended December 30, 2006 and subsequently filed quarterly reports) are available (i) over the Internet at the SEC’s web site at http://www.sec.gov; and (ii) at the SEC’s public reference room in Washington D.C.

The Guarantee

Pursuant to the Guarantee, the Guarantor will unconditionally guarantee to SVFC the due and punctual payment of any and all amounts payable by the Gas Supplier, its successors and permitted assigns, to the extent such successors or permitted assigns are direct or indirect subsidiaries of the Guarantor. The Guarantor, pursuant to the Guarantee, covenants that the Guarantee will not be discharged except by complete payment of the amounts payable under the Prepaid Gas Agreement and the Guarantee.

CERTAIN INFORMATION REGARDING THE SWAP COUNTERPARTY

Set forth below is certain information regarding the Swap Counterparty that has been obtained from the Swap Counterparty. SVFC assumes no responsibility for such information and cannot guarantee the accuracy thereof.

Royal Bank of Canada (referred to in this section only as the "Bank") is a Schedule I bank under the Bank Act (Canada), which constitutes its charter. The Bank’s corporate headquarters are located at Royal Bank Plaza, 200 Bay Street, Toronto, Ontario, Canada M5J 2J5, and its head office is located at 1 Place Ville Marie, Montreal, Quebec, Canada H3C 3A9.

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The Bank and its subsidiaries operate under the master brand name of RBC. The Bank is Canada’s largest bank as measured by assets and market capitalization and is one of North America’s leading diversified financial services companies. It provides personal and commercial banking, wealth management services, insurance, corporate and investment banking, and transaction processing services on a global basis. The Bank and its subsidiaries employ approximately 70,000 full- and part-time employees who serve more than 15 million personal, business, public sector and institutional clients through offices in North America and 34 countries around the world.

The Bank had, on a consolidated basis, as at July 31, 2007, total assets of C$604.6 billion (approximately US$566.5 billion*), shareholders’ equity of C$24.5 billion (approximately US$23 billion*), and total deposits of C$376.3 billion (approximately US$352.6 billion*). The foregoing figures were prepared in accordance with Canadian generally accepted accounting principles and have been extracted and derived from, and are qualified by reference to, the Bank’s unaudited Interim Consolidated Financial Statements included in the Bank’s Report to Shareholders for the period ended July 31, 2007.

The long-term senior unsecured debt of the Bank has been assigned ratings of "AA-" (positive outlook) by Standard & Poor’s Ratings Services, "Aaa" (stable outlook) by Moody’s Investors Service and "AA" (stable outlook) by Fitch Ratings. The Bank’s common shares are listed on the Toronto Stock Exchange, the New York Stock Exchange and the Swiss Exchange under the trading symbol "RY." Its preferred shares are listed on the Toronto Stock Exchange.

Upon written request, and without charge, the Bank will provide a copy of its most recent publicly filed Annual Report on Form 40-F, which includes audited Consolidated Financial Statements, to any person to whom this Official Statement is delivered. Written requests should be directed to: Investor Relations, Royal Bank of Canada, 200 Bay Street West, 14th Floor, South Tower, Toronto, Ontario, Canada M5J 2J5.

The delivery of this Official Statement shall not create any implication that there has been no change in the affairs of the Bank since the date hereof or that the information contained or referred to herein is correct as at any time subsequent to such date.

CERTAIN INFORMATION REGARDING THE CREDIT FACILITY PROVIDER

MBIA Insurance Corporation ("MBIA") is the principal operating subsidiary of MBIA Inc., a New York Stock Exchange listed company (the "Company"). The Company is not obligated to pay the debts of or claims against MBIA. MBIA is domiciled in the State of New York and licensed to do business in and subject to regulation under the laws of all 50 states, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, the Virgin Islands of the United States and the Territory of Guam. MBIA, either directly or through subsidiaries, is licensed to do business in the Republic of France, the United Kingdom and the Kingdom of Spain and is subject to regulation under the laws of those jurisdictions. In February 2007, MBIA incorporated a new subsidiary, MBIA México, S.A. de C.V. ("MBIA Mexico"), through which it intends to write financial guarantee insurance in Mexico beginning in 2007. To date, MBIA Mexico has had no operating activity.

The principal executive offices of MBIA are located at 113 King Street, Armonk, New York 10504 and the main telephone number at that address is (914) 273-4545.

Regulation. As a financial guaranty insurance company licensed to do business in the State of

* As at July 31, 2007: C$1:00 =US$0.937

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New York, MBIA is subject to the New York Insurance Law which, among other things, prescribes minimum capital requirements and contingency reserves against liabilities for MBIA, limits the classes and concentrations of investments that are made by MBIA and requires the approval of policy rates and forms that are employed by MBIA. State law also regulates the amount of both the aggregate and individual risks that may be insured by MBIA, the payment of dividends by MBIA, changes in control with respect to MBIA and transactions among MBIA and its affiliates.

The Surety Bonds are not covered by the Property/Casualty Insurance Security Fund specified in Article 76 of the New York Insurance Law.

Financial Strength Ratings of MBIA. Moody’s Investors Service, Inc. rates the financial strength of MBIA "Aaa."

Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. rates the financial strength of MBIA "AAA."

Fitch Ratings rates the financial strength of MBIA "AAA."

Each rating of MBIA should be evaluated independently. The ratings reflect the respective rating agency’s current assessment of the creditworthiness of MBIA and its ability to pay claims on its policies of insurance. Any further explanation as to the significance of the above ratings may be obtained only from the applicable rating agency.

The above ratings are not recommendations to buy, sell or hold the Bonds, and such ratings may be subject to revision or withdrawal at any time by the rating agencies. Any downward revision or withdrawal of any of the above ratings may have an adverse effect on the market price of the Bonds. MBIA does not guaranty the market price of the Bonds nor does it guaranty that the ratings on the Bonds will not be revised or withdrawn.

MBIA Financial Information. As of December 31, 2006, MBIA had admitted assets of $10.9 billion (audited), total liabilities of $6.9 billion (audited), and total capital and surplus of $4.0 billion (audited) determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities. As of March 31, 2007, MBIA had admitted assets of $11.2 billion (unaudited), total liabilities of $7.0 billion (unaudited), and total capital and surplus of $4.2 billion (unaudited) determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities.

For further information concerning MBIA, see the consolidated financial statements of MBIA Inc. and its subsidiaries as of December 31, 2006 and December 31, 2005 and for each of the three years in the period ended December 31, 2006, prepared in accordance with generally accepted accounting principles, included in the Annual Report on Form 10-K of the Company for the year ended December 31, 2006 and the consolidated financial statements of MBIA Inc. and its subsidiaries as of March 31, 2007 and for the three month period ended March 31, 2007 and March 31, 2006 included in the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2007, which are hereby incorporated by reference into this Official Statement and shall be deemed to be a part hereof.

Copies of the statutory financial statements filed by MBIA Inc. with the State of New York Insurance Department are available over the Internet at the Company’s web site at http://www.mbia.com and at no cost, upon request to MBIA at its principal executive offices.

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Incorporation of Certain Documents by Reference. The following documents filed by the Company with the Securities and Exchange Commission (the "SEC") are incorporated by reference into this Official Statement:

(1) The Company’s Annual Report on Form 10-K for the year ended December 31, 2006; and

(2) The Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007.

Any documents, including any financial statements of MBIA Inc. and its subsidiaries that are included therein or attached as exhibits thereto, filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of the Company’s most recent Quarterly Report on Form 10-Q or Annual Report on Form 10-K, and prior to the termination of the offering of the Bonds offered hereby shall be deemed to be incorporated by reference in this Official Statement and to be a part hereof from the respective dates of filing such documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein, or contained in this Official Statement, shall be deemed to be modified or superseded for purposes of this Official Statement to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Official Statement.

The Company files annual, quarterly and special reports, information statements and other information with the SEC under File No. 1-9583. Copies of the Company’s SEC filings (including (1) the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, and (2) the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007) are available (i) over the Internet at the SEC’s web site at http://www.sec.gov; (ii) at the SEC’s public reference room in Washington D.C.; (iii) over the Internet at the Company’s web site at http://www.mbia.com; and (iv) at no cost, upon request to MBIA at its principal executive offices.

In the event MBIA were to become insolvent, any claims arising under a policy of financial guaranty insurance are excluded from coverage by the California Insurance Guaranty Association, established pursuant to Article 14.2 (commencing with Section 1063) of Chapter 1 of Part 2 of Division 1 of the California Insurance Code.

LITIGATION

SVFC

There is no litigation pending against, or to the knowledge of SVFC, threatened against or affecting, SVFC in any way questioning or in any manner affecting any proceeding or transaction relating to the issuance of the Bonds, including the commitments to deliver the Surety Bonds, the sale or delivery of the Bonds or the validity or enforceability of the Bonds, the Prepaid Gas Agreement, the Supply Agreement or the Commodity Swap Agreement.

The District

The District reports that there is no litigation pending against or, to its knowledge, threatened against it questioning or in any manner affecting the validity or enforceability of the Supply Agreement.

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In the normal course of business the District is a defendant in various legal actions. In District management’s opinion, except as otherwise set forth in Appendix A to this Official Statement, the ultimate resolution of these matters will not have a significant adverse affect on the District’s ability to maintain operations.

APPROVAL OF LEGAL MATTERS

Legal matters incidental to the authorization and issuance of the Bonds are subject to receipt of the opinion of Nixon Peabody LLP, as Bond Counsel, in substantially the form set forth in Appendix F to this Official Statement, which will be delivered with the Bonds. Certain legal matters will be passed upon for the Underwriter by Orrick, Herrington & Sutcliffe LLP, for SVFC by Jennings, Strouss & Salmon, P.L.C. and the District by Winston & Strawn LLP and Jennings, Strouss & Salmon, P.L.C.

TAX MATTERS

Federal Income Taxes

The Internal Revenue Code of 1986, as amended (the "Code"), imposes certain requirements that must be met subsequent to the issuance and delivery of the Bonds for interest thereon to be and remain excluded from gross income for Federal income tax purposes. Noncompliance with such requirements could cause the interest on the Bonds to be included in gross income for Federal income tax purposes retroactive to the date of issuance of the Bonds. Pursuant to the Indenture, the Prepaid Gas Agreement, the Supply Agreement and the Tax Certificate, SVFC and the District have covenanted to comply with the applicable requirements of the Code in order to maintain the exclusion of the interest on the Bonds from gross income for Federal income tax purposes pursuant to Section 103 of the Code. In addition, SVFC and the District have made certain representations and certifications in the Tax Certificate. Bond Counsel will not independently verify the accuracy of those representations and certifications.

In the opinion of Nixon Peabody LLP, Bond Counsel, under existing law and assuming compliance with the aforementioned covenants, and assuming the accuracy of certain representations and certifications made by SVFC and the District described above, interest on the Bonds is excluded from gross income for Federal income tax purposes under Section 103 of the Code. Bond Counsel is also of the opinion that such interest is not treated as a preference item in calculating the alternative minimum tax imposed under the Code with respect to individuals and corporations. Interest on the Bonds is, however, included in the adjusted current earnings of certain corporations for purposes of computing the alternative minimum tax imposed on such corporations.

State Taxes

Bond Counsel is also of the opinion that interest on the Bonds is exempt from income taxes imposed by the State of Arizona. Bond counsel expresses no opinion as to other Arizona or local tax consequences arising with respect to the Bonds nor as to the taxability of the Bonds or the income therefrom under the laws of any state other than Arizona.

Original Issue Discount

Bond Counsel is further of the opinion that the difference between the principal amount of the Bonds maturing December 1, 2032 and December 1, 2037; (collectively the "Discount Bonds") and the initial offering price to the public (excluding bond houses, brokers or similar persons or organizations acting in the capacity of underwriters or wholesalers) at which price a substantial amount of such Discount Bonds of the same maturity was sold constitutes original issue discount which is excluded from

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gross income for federal income tax purposes to the same extent as interest on the Bonds. Further, such original issue discount accrues actuarially on a constant interest rate basis over the term of each Discount Bond, and the basis of each Discount Bond acquired at such initial offering price by an initial purchaser thereof will be increased by the amount of such accrued original issue discount. The accrual of original issue discount may be taken into account as an increase in the amount of tax-exempt income for purposes of determining various other tax consequences of owning the Discount Bonds, even though there will not be a corresponding cash payment. Owners of the Discount Bonds are advised that they should consult with their own advisors with respect to the state and local tax consequences of owning such Discount Bonds.

Original Issue Premium

The Bonds maturing on December 1, 2015 through December 1, 2029 (collectively, the "Premium Bonds") are being offered at prices in excess of their principal amounts. An initial purchaser with an initial adjusted basis in a Premium Bond in excess of its principal amount will have amortizable bond premium which is not deductible from gross income for federal income tax purposes. The amount of amortizable bond premium for a taxable year is determined actuarially on a constant interest rate basis over the term of each Premium Bond based on the purchaser’s yield to maturity (or, in the case of Premium Bonds callable prior to their maturity, over the period to the call date, based on the purchaser’s yield to the call date and giving effect to any call premium). For purposes of determining gain or loss on the sale or other disposition of a Premium Bond, an initial purchaser who acquires such obligation with an amortizable bond premium is required to decrease such purchaser’s adjusted basis in such Premium Bond annually by the amount of amortizable bond premium for the taxable year. The amortization of bond premium may be taken into account as a reduction in the amount of tax-exempt income for purposes of determining various other tax consequences of owning such Bonds. Owners of the Premium Bonds are advised that they should consult with their own advisors with respect to the state and local tax consequences of owning such Premium Bonds.

Ancillary Tax Matters

Ownership of the Bonds may result in other federal tax consequences to certain taxpayers, including, without limitation, certain S corporations, foreign corporations with branches in the United States, property and casualty insurance companies, individuals receiving Social Security or Railroad Retirement benefits, individuals seeking to claim the earned income credit, and taxpayers (including banks, thrift institutions and other financial institutions) who may be deemed to have incurred or continued indebtedness to purchase or to carry the Bonds.

Commencing with interest paid in 2006, interest paid on tax-exempt obligations such as the Bonds is subject to information reporting to the Internal Revenue Service (the "IRS") in a manner similar to interest paid on taxable obligations. In addition, interest on the Bonds may be subject to backup withholding if such interest is paid to a registered owner that (a) fails to provide certain identifying information (such as the registered owner’s taxpayer identification number) in the manner required by the IRS, or (b) has been identified by the IRS as being subject to backup withholding.

Bond Counsel is not rendering any opinion as to any Federal tax matters other than those described in this Section. Prospective investors, particularly those who may be subject to special rules described above, are advised to consult their own tax advisors regarding the federal tax consequences of owning and disposing of the Bonds, as well as any tax consequences arising under the laws of any state or other taxing jurisdiction.

38

Changes in Law and Post Issuance Events

Legislative or administrative actions and court decisions, at either the federal or state level, could have an adverse impact on the potential benefits of the exclusion from gross income of the interest on the Bonds for Federal or state income tax purposes, and thus on the value or marketability of the Bonds. This could result from changes to Federal or state income tax rates, changes in the structure of Federal or state income taxes (including replacement with another type of tax), repeal of the exclusion of the interest on the Bonds from gross income for Federal or state income tax purposes, or otherwise. It is not possible to predict whether any legislative or administrative actions or court decisions having an adverse impact on the Federal or state income tax treatment of owners of the Bonds may occur. Prospective purchasers of the Bonds should consult their own tax advisers regarding such matters.

On May 21, 2007, the U.S. Supreme Court agreed to hear Davis v. Kentucky Dep’t of Revenue of the Finance and Admin. Cabinet, 197 S.W.3d 557 (2006), a case that has questioned the permissibility under the U.S. Constitution of the Commonwealth of Kentucky providing for a state income tax exemption for interest on obligations issued by Kentucky or its subdivisions while taxing interest on obligations of other states or their subdivisions. The laws of the state of Arizona currently result in such differing treatment, by exempting interest on obligations of Arizona and its subdivisions and instrumentalities while taxing the interest on obligations issued by other states or their subdivisions or instrumentalities.

Bond Counsel has not undertaken to advise in the future whether any events after the date of issuance and delivery of the Bonds may affect the tax status of interest on the Bonds. Bond Counsel expresses no opinion as to any Federal, state or local tax law consequences with respect to the Bonds, or the interest thereon, if any action is taken with respect to the Bonds or the proceeds thereof upon the advice or approval of other counsel.

CONTINUING DISCLOSURE

Pursuant to a Continuing Disclosure Agreement, SVFC will covenant for the benefit of the Owners and Beneficial Owners of the Bonds to provide certain financial information and operating data relating to SVFC by not later than 180 days after the end of SVFC’s fiscal years (presently, each April 30), commencing with the first fiscal year ending April 30, 2008 (the "Annual Report"), and to provide notices of the occurrence of certain enumerated events with respect to the Bonds, if material. The Continuing Disclosure Agreement provides that the Annual Report and any notices of such material events will be filed by or on behalf of SVFC with each nationally recognized municipal securities information repository and with the State information repository, if any, established by the State of Arizona. Under the Continuing Disclosure Agreement, the sole remedy for any Owner of a Bond upon an event of default is a lawsuit for specific performance in a court of competent jurisdiction. See "Appendix G –FORM OF CONTINUING DISCLOSURE AGREEMENT."

SVFC’s covenant is being made in order to assist the Underwriter in complying with the secondary market disclosure requirements of Rule 15c2-12 of the Securities and Exchange Commission.

FINANCIAL STATEMENTS

No financial statements for SVFC are included herein. The combined financial statements of the District, its subsidiaries and the Association as of and for the fiscal years ended April 30, 2007 and April 30, 2006 attached hereto as Appendix B have been audited by PricewaterhouseCoopers LLP, independent auditors, as stated in their report attached hereto as Appendix B.

39

FINANCIAL ADVISOR

The District has retained Public Financial Management ("PFM") as its financial advisor. Although PFM has assisted in the preparation of this Official Statement, PFM is not obligated to undertake and has not undertaken to make, an independent verification or to assume responsibility for the accuracy, completeness or fairness of the information contained in this Official Statement.

UNDERWRITING

Citigroup Global Markets Inc. (the "Underwriter") has agreed, subject to certain conditions, to purchase all, but not less than all, of the Bonds from SVFC at an aggregate purchase price, of $1,130,471,578.11, reflecting a net original issue premium of $5,224,432.00 and an underwriter’s discount of $4,517,853.89 from the initial public offering price set forth on the inside cover page of this Official Statement. The obligation of the Underwriter to purchase the Bonds is subject to certain terms and conditions set forth in the purchase contract entered into between the Underwriter and SVFC. The Underwriter is obligated to purchase all of the Bonds. The issuance of the Bonds in contingent on the issuance of the Subordinate Lien Bond.

CERTAIN RELATIONSHIPS

The Gas Supplier, Citigroup Energy Inc., is a wholly-owned subsidiary of Citigroup Inc. The Underwriter, Citigroup Global Markets Inc., is also a wholly-owned subsidiary of Citigroup Inc. The financial obligations of the Gas Supplier are guaranteed by Citigroup Inc., to the extent set forth in the Guarantee. Neither the Gas Supplier nor Citigroup Inc. has guaranteed or is responsible for the payment of the Bonds. The obligations of the Gas Supplier and, by virtue of the Guarantee, Citigroup Inc., are limited to those set forth in the Prepaid Gas Agreement and the Guarantee, respectively. Neither Citigroup Inc. nor the Gas Supplier takes any responsibility for the information set forth herein other than the information set forth under the caption "THE GAS SUPPLIER, THE GUARANTOR AND THE GUARANTEE."

RATINGS

Moody’s and S&P have given the ratings "Aa1" and "AA", respectively, to the Bonds. Such ratings reflect only the view of such organizations, and an explanation of the significance of such rating may be obtained only from the respective rating agency. There is no assurance that such ratings will be maintained for any given period of time, or that they will not be revised, downward, or be withdrawn entirely by the respective rating agency if, in its judgment, circumstances so warrant. Any such downward revision or withdrawal of such ratings may have adverse effect on the market price of the Bonds.

MISCELLANEOUS

References herein to the Indenture and certain other documents are brief discussions of certain provisions thereof. Such discussions do not purport to be complete, and reference is made to such documents for full and complete statements of such provisions.

Any statements made in this Official Statement involving matters of opinion or of projections, whether or not so expressly stated, are set forth as such and not as representations of fact, and no representation is made that any of the projections will be realized.

40

The execution and delivery of this Official Statement has been duly authorized by SVFC.

SALT VERDE FINANCIAL CORPORATION

By: /s/ John M. Williams, Jr.

Title: President By: /s/ David Rousseau

Title: Vice President

Attest: By: /s/ Terrill A. Lonon

Title: Corporate Secretary

APPENDIX A

INFORMATION RELATING TO THE SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT AND ITS ELECTRIC SYSTEM

Delivering More Than Power®

Gas Prepay Disclosure Appendix A

THE DISTRICT

The Salt River Project Agricultural Improvement and Power District (the “District”) is an

agricultural improvement district organized in 1937 under the laws of the State of Arizona. It operates the

Salt River Project (the “Project”), a federal reclamation project, under contracts with the Salt River Valley

Water Users' Association (the “Association”), by which it assumed the obligations and assets of the

Association, including its obligations to the United States of America for the care, operation and

maintenance of the Project. The District owns and operates an electric system (hereinafter described, the

“Electric System”) which generates, purchases, transmits and distributes electric power and energy, and

provides electric service to residential, commercial, industrial and agricultural power users in a 2,900

square mile service territory in parts of Maricopa, Gila and Pinal Counties, plus mine loads in an adjacent

2,400 square mile area in Gila and Pinal Counties. The Association, incorporated under the laws of the

Territory of Arizona in 1903, operates an irrigation system as agent of the District. The United States

retains a paramount right or claim in the Project that arises from the original construction and operation of

certain of the Project's electric and water facilities as a federal reclamation project. Although title to a

substantial portion of the District's property resides in the United States, the District possesses contractual

rights to the use, possession and revenues of the property.

Generation and sale of electrical power and energy represent the major portion of the District's

investment and revenues. Following a long-standing reclamation principle, a portion of electric revenues

available after the payment of required operating expenses and debt service is used to provide partial

support for water and irrigation operations, thereby keeping water storage, distribution and delivery

charges at reasonable levels.

The District and the Association are each governed by a public Board elected from among the

shareholders (landowners). The respective Boards establish the policies for management and conduct of

the business affairs of the District and the Association. The General Manager of the District has

management responsibilities for both the District and the Association.

As of April 30, 2007, District and Association full-time employees (full-time equivalent) totaled

approximately 4,388, including approximately 1,858 hourly employees represented by the International

Brotherhood of Electrical Workers, Local 266. The present labor contracts expire November 15, 2009.

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SUBSIDIARIES

The District has three wholly-owned taxable subsidiaries: SRP Captive Risk Solutions, Limited

(“CRS”), Papago Park Center, Inc. (“PPC”), and New West Energy Corporation (“NWE”). CRS is a

domestic captive insurer incorporated in January 2004 primarily to access property/boiler and machinery

insurance coverage under the Federal Terrorism Risk Insurance Act of 2002 for certified acts of terrorism.

PPC is a real estate management company. NWE was used at one time to market, at retail, energy

available to the District that was surplus to the needs of its retail customers, and energy that might have

been rendered surplus in Arizona by retail competition in the supply of generation, but is now inactive.

ITS ELECTRIC SYSTEM

The District provides electrical service to major populated sections of Maricopa County, as well

as portions of Pinal and Gila Counties. Except the City of Mesa, which operates its own system, all of the

cities within the District's service areas are served in part by the District and in part by Arizona Public

Service Company (“APS”). By agreement between the District and APS, the urban areas and the adjacent

suburban areas now served by the District's distribution system will continue to be so served even though

the latter may be annexed to a city in the future. The District also provides power directly for mining load

requirements, principally in Pinal and Gila Counties. The District obtains power and energy from its

wholly owned hydroelectric, renewable and thermal generating facilities, participation in jointly owned

thermal plants and power purchases. The District owns transmission and distribution facilities, shares in

certain other facilities under joint ownership arrangements, and purchases a small amount of transmission

service.

The District plans the addition of new generation based on a 12% reserve target. Because of the

restructuring of the electric utility industry and the significant financial exposure associated with carrying

excess reserves, the District has decided that a 12% reserve target represents an optimal planning target

that balances both economics and reliability.

The District’s largest source of energy during the fiscal year ended April 30, 2007, was thermal

generating facilities, which supplied 69.9% of the District’s total production. Hydroelectric generation

provided 2.6% of production, with 1.2% coming from the District’s own hydroelectric plants and 1.4%

coming from purchases from the Arizona Power Authority (“APA”) and the United States Department of

Energy, Western Area Power Administration (“WAPA”). The remaining 27.5% came from various

purchases and renewable resources. The following table provides more detail on District power sources.

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Fiscal Year Ending April 30, 2007 District Power Sources Net Production Capability

(MW)1 % of Total

Amount (MWh)2

% of Total

District Generation: One Hundred Percent Entitlement – Hydroelectric:

Roosevelt Dam...................................................................................... 36 0.4% 94,615 0.3% Mormon Flat Dam................................................................................. 68 0.8 89,937 0.2 Horse Mesa Dam .................................................................................. 149 1.8 178,651 0.5 Stewart Mountain Dam......................................................................... 13 0.2 44,125 0.1 Canal Plant (Crosscut) .......................................................................... 3 0.0 3,576 0.1 Canal Plant (South Consolidated) ........................................................ 1 0.0 2,059 0.0 Arizona Falls......................................................................................... 1 0.0 2,544 0.0

Subtotal............................................................................................. 271 3.3 415,507 1.2 One Hundred Percent Entitlement – Thermal:

Kyrene (Steam) ..................................................................................... 106 1.3 -1,115 0.0 Kyrene (Gas Turbine) ........................................................................... 165 2.0 3,886 0.0 Kyrene (Combined Cycle) .................................................................... 250 3.1 667,758 1.9 Agua Fria (Steam)................................................................................. 407 5.0 138,436 0.4 Agua Fria (Gas Turbine)....................................................................... 219 2.7 7,767 0.0 Santan Combined Cycle ....................................................................... 1,193 14.6 4,049,683 11.2 Desert Basin Combined Cycle.............................................................. 577 7.1 1,274,915 3.5 Coronado Generating Station ............................................................... 773 9.5 6,219,260 17.3

Subtotal............................................................................................. 3,690 45.2 12,360,590 34.3 One Hundred Percent Entitlement – Renewable:

Solar ...................................................................................................... 1 0.0 1,544 0.0 Fuel Cells .............................................................................................. 0 3 0.0 1,564 0.0 Alternative Fuels – Tri-Cities Landfill ................................................. 4 0.0 17,083 0.0

Subtotal............................................................................................. 5 0.1 20,191 0.1 Participation Plants:

Navajo Generating Station.................................................................... 489 6.0 3,828,029 10.6 Four Corners Generating Station Units 4&5........................................ 150 1.8 1,094,020 3.0 Mohave Generating Station .................................................................. 04 0.0 -6,653 0.0 Hayden Generating Station................................................................... 131 1.6 1,123,818 3.1 Craig Generating Station ...................................................................... 248 3.0 2,001,850 5.6 Palo Verde Nuclear Generating Station ............................................... 671 8.2 4,795,019 13.3

Subtotal............................................................................................. 1,689 20.7 12,836,083 35.6 Purchases and Receipts5:

APA – Arizona Power Authority.......................................................... 73 6 1.0 111,917 0.3 WAPA – Colorado River Storage Project ............................................ 98 7 1.2 250,135 0.7 WAPA – Parker-Davis Dams ............................................................... 49 8 0.6 149,730 0.4 WAPA – CAWCD/Navajo Surplus...................................................... 679 9 8.3 2,125,162 5.9 AEPCO – Arizona Electric Power Cooperative................................... 100 1.2 842,855 2.3 TEP – Tucson Electric Power Company .............................................. 100 1.2 820,528 2.3 TSGT – Tri-State Generation & Transmission .................................... 0 10 0.0 377,553 1.0 Renewables - Wind Power ................................................................... 50 0.6 61,600 0.2 Renewables - Geothermal Power ......................................................... 25 0.3 219,000 0.6 Renewables – Other.............................................................................. 0 11 0.0 216,400 0.6 Others.................................................................................................... 1,338 12 16.4 5,232,379 14.5

Subtotal 2,512 30.8 10,407,259 28.9 TOTAL13 8,167 100.0 36,039,630 100.0

1 Load capability during summer system peak. Winter capability may be greater. 2 Actual net production during the fiscal year ended April 30, 2007. Energy for pumped storage is not deducted. 3 Fuel cell capacity is 250 kW. 4 Mohave suspended operations at the end of 2005, and it is unknown whether the plant will return to operation. 5 Purchase and receipt capabilities vary month to month. Listed are the capabilities for the peak month. 6 Includes 38 MW wheeled for certain electrical/irrigation districts. 7 Includes 43 MW wheeled for certain electrical/irrigation districts. 8 Includes 17 MW wheeled for SCIP. 9 Net of CAWCD pumping load and losses totaling 58 MW that occurred coincident with system peak. 10 These resources became available after the summer system peak. Future capability is expected to be 100MW. 11 These resources became available after the summer system peak. 12 Short term purchases excluding 200 MW and 2,634,191 MWh of bookouts. 13 Totals may not add correctly due to rounding.

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The following table shows trends over the past five years ending April 30, 2007, for customers,

peak load and energy sales as supplied by the District.

Electric System Customers, Peak Load and Energy Requirements

Fiscal Year Ending April 30

2007 2006 2005 2004 2003 CUSTOMERS (1) Residential 830,735 809,235 778,123 747,019 721,425 Commercial and Small Industrial 79,435 74,649 71,542 69,102 66,259 Large Industrial 19 21 21 22 22 Mines 25 26 26 22 22 Agricultural Pumps 143 158 266 280 331 Public/Private Lighting 8,980 8,716 8,278 7,921 8,057 Interdepartmental 1 1 1 1 1 System Customers 919,338 892,806 858,257 824,367 796,117 Sales for Resale (2) 84 69 55 49 54 Total Customers 919,422 892,875 858,312 824,416 796,171 PEAK DEMAND (MW) (3) Net System Requirement 6,590 6,044 5,665 5,673 5,296 Total Load (4) 7,649 7,297 6,669 6,771 6,343 SALES (GWH) Residential 12,919 12,077 11,218 11,402 10,273 Commercial and Small Industrial 10,570 9,944 9,357 9,265 8,802 Large Industrial 1,620 1,584 1,526 1,694 1,782 Mines 1,227 1,140 1,184 1,170 1,264 Agricultural Pumps 34 38 46 51 53 Public/Private Lighting 198 181 173 178 175 Interdepartmental 107 88 145 175 180 System Sales 26,675 25,052 23,649 23,935 22,529 Sales for Resale (5) 9,831 11,824 11,867 9,871 12,637 Total Sales 36,506 36,876 35,516 33,806 35,166 Interchange Delivered 248 231 277 253 283 Wheeling Delivered 318 306 293 226 216 System Losses 1,459 1,422 1,444 1,389 1,280 Energy for Pumped Storage 143 191 325 345 215 Total Requirements 38,674 39,026 37,855 36,019 37,160

(1) At fiscal year end. (2) The number of sales varies depending on availability and market conditions. (3) Net system requirement includes remote losses. (4) Total load includes interruptible load transactions for historical years and sales for resale.

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ENVIRONMENTAL

Electric utilities are subject to a variety of federal, state and local environmental statutes and

regulations relative to air quality, water quality, hazardous waste disposal and other environmental

matters. Such requirements have resulted, and will continue to result, in increased costs associated with

operation of existing facilities. Further, these requirements are subject to change from continuing

legislative, regulatory and judicial actions.

The District recognizes the growing importance of these issues, particularly climate change, and

the implications they could have on its operations. The District closely monitors related developments at

the federal, state and regional levels. Federal legislation has been proposed which, among other things,

would cap or tax emissions of carbon dioxide from fossil fueled power plants. There have also been

several regional initiatives aimed at curbing greenhouse gas emissions. The District is assessing the risk

of these policy initiatives on its generation assets and is developing contingency plans to comply with

future laws and regulations restricting greenhouse gas emissions. Further, the District is aware of the

ongoing investigations into the financial reporting of several large energy companies and the potential

financial liabilities they may face due to the impact of carbon dioxide emissions. The District is also

following these developments.

There is no way to predict the impact of such initiatives or investigations on the District at this

time. Consequently, there is no assurance that facilities owned by the District will remain subject to the

regulations currently in effect, will always be in compliance with future regulations, or will always be

able to obtain all required operating permits. An inability to comply with environmental standards could

result in additional capital expenditures to comply, reduced operating levels, penalties, or the complete

shutdown of individual electric generating units not in compliance.

LITIGATION

In the normal course of business the District is a defendant in various legal actions. In

management’s opinion, except as otherwise noted below, the ultimate resolution of these matters will not

have a significant adverse effect on the District’s ability to maintain operations.

Coal Supply Litigation

Navajo Nation v. Peabody (US Dist. Court, D.C. District) - In June 1999, the Navajo Nation filed

a lawsuit in the United States District Court in Washington D.C., alleging that Peabody Western Coal

Company (“Peabody”) (the coal supplier for NGS and Mohave), Southern California Edison Company

(“SCE”) (operating agent for Mohave), the District (operating agent for NGS) and certain other

(5) Includes surplus sales that vary depending on availability and market conditions.

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defendants, induced the United States to breach its fiduciary duty to the Navajo Nation, and violated

federal racketeering statutes. The lawsuit arises out of negotiations culminating in 1987 with

amendments to the coal leases and related agreements. The suit alleges $600,000,000 in damages. The

plaintiffs also seek treble damages against the defendants, measured by amounts awarded under the

racketeering statutes. In addition, the plaintiffs claim punitive damages of not less than $1,000,000,000.

In March 2001, the Hopi Tribe intervened in the suit. The claims of both the Navajo Nation and

the Hopi Tribe were dismissed in their entirety with respect to the District, but the dismissal is appealable.

On February 9, 2005, the U.S. District Court granted a motion to stay the litigation until further order of

the court while the parties were in mediation with respect to this litigation and related business issues. On

June 1, 2007, the parties jointly filed a status report in the District Court, noting that at the suggestion of the

mediator, they intend to continue to engage in further mediation for the purpose of exploring whether

alternative development proposals could provide a basis for resolving this lawsuit and related issues. Another

status report must be filed with the District Court by October 7, 2007.

In an earlier case filed against the United States Government and based on similar allegations, the

U.S. Court of Appeals for the Federal Circuit has held that the Navajo Nation has a cognizable money-

mandating claim against the United States for breach of trust and that the government breached its duties.

The Federal Circuit remanded the case to the Court of Federal Claims for proceedings consistent with the

ruling.

Peabody Legal Fees Cases - Peabody claims it is entitled to reimbursement under both the NGS

Coal Supply Agreement and the Mohave Coal Supply Agreement for its costs associated with the defense

of the challenges by the Navajo Nation and Hopi Tribe to these coal leases (see above matters). Peabody

has filed two separate lawsuits against the NGS and Mohave Participants, respectively, seeking recovery

of these fees. The Mohave and NGS Participants dispute Peabody’s attempt to recover its legal costs

under the coal leases.

As for the Mohave fees, the District has been dismissed from the litigation and awarded its

attorney’s fees. On appeal, however, the case was remanded to determine whether the District should remain

in the lawsuit.

The Mohave Participants and Peabody executed a settlement agreement pursuant to which Peabody

granted the Mohave Participants a waiver for fees incurred prior to January 2006. However, as described

above, the lawsuit for fees arising after December 2005 continues.

In the NGS legal fees case, Peabody’s claims against the NGS Participants were dismissed.

Peabody appealed this ruling. On appeal, the trial court’s dismissal of the case was affirmed by the Arizona

Court of Appeals and review has been denied by the Arizona Supreme Court.

A-7

Peabody v. SRP (the St. Louis Case) - Peabody has also filed suit in St. Louis, Missouri against

the District and the other owners of NGS asserting claims against both the Participants and the District

relating to liability issues associated with the Navajo Nation v. Peabody case; alleged breach of the NGS

Coal Supply Agreement; alleged breach of indemnity obligations owed to Peabody as the alleged agent of

the NGS Participants; and claims of tortious interference with contracts and tortious interference with

business expectancies against the District. The claim seeks $500,000,000 and unspecified compensatory

damages, prejudgment interest, attorneys' fees and costs.

District v. Peabody (the RHCC/FRC case) – The NGS Participants are contesting their alleged

liability for mine closing, final reclamation, mine decommissioning and environmental monitoring costs,

and certain post-retirement health care and life insurance benefits that Peabody will pay or provide to its

employees after termination of the NGS Coal Supply Agreement and associated closure of the Kayenta

Mine. Neither the District’s responsibility nor the ultimate amount of liability, if any, can be determined

at this time. The District has determined there is a range of possible outcomes and has recorded losses at

the lower end of the range. Additional exposure to the District could occur if the outcome is in the higher

end of the range

The District is unable to predict the likely outcome of these coal supply litigation matters at this time

but does not believe that the final resolution of these matters will have material adverse effects on its

operations or financial condition.

U.S. Supreme Court Tax Case

In May 2007, the U.S. Supreme Court agreed to hear a case on the constitutionality of a state

exempting from its income tax interest on bonds issued by it or one of its political subdivisions, but not

interest on bonds issued by other states or their political subdivisions. Although this case involves the

Commonwealth of Kentucky, the State of Arizona has similar exemptions, so the decision by the Supreme

Court likely would affect Arizona and other states as well. It is too early to evaluate the effect of the decision

on the District or the holders of its outstanding tax-exempt obligations.

ELECTRIC PRICES

Under Arizona law, the District’s publicly elected Board has the authority to establish electric

prices. The District is required to follow certain procedures for public notice and a special Board meeting

before implementing any changes in the standard electric price plans.

The District is a summer peaking utility and for many years has made an effort to balance the

summer-winter load relationships through seasonal price differentials. In addition, the District prices on a

time-of-day basis for large commercial and industrial, and certain residential and small commercial, users.

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The District historically operated in a highly regulated environment in which it had an obligation

to deliver electric service to customers within its service area. In 1998 the Arizona Electric Power

Competition Act (the “Competition Act”) authorized competition in the retail sales of electric generation,

recovery of stranded costs, and competition in billing, metering and meter reading. While retail

competition was available to all customers by 2001, there were only a few customers who chose an

alternative energy provider. Those customers have since returned to their incumbent utilities. At this

time, there is no active retail competition within the District’s service territory or, to the knowledge of the

District, within the State of Arizona. However, during the past year, two retail energy service providers

and one meter service provider have reapplied to the Arizona Corporation Commission for authorization

to sell energy in Arizona. These cases are pending.

The District has a Fuel and Purchased Power Adjustment Mechanism (“FPPAM”) to allow for

semi-annual rate adjustments to recover increases in actual fuel costs and a Transmission Cost

Adjustment Factor (“TCAF”) to recover costs the District would incur if the District were required to

participate in regional transmission organizations. The District Board, on October 1, 2007, approved an

FPPAM increase, which will result in a 4.7% system average increase in prices, effective November 1,

2007. To date, no costs have been incurred or recovered through the TCAF.

In April 2005 the District Board authorized the creation of a Rate Stabilization Fund (“RSF”) to

be used in concert with the FPPAM to cover fuel related expenses and to stabilize future prices related to

fuel. Since the time of initial authorization, the District has funded the RSF three times, and transferred

$135,000,000, plus interest, from the RSF to the District’s General Fund to address a portion of fuel and

purchased power expenses for fiscal years 2007 and 2008. On October 1, 2007, the District Board

approved the transfer of an additional $30 million from the RSF to the General Fund effective November

1, 2007.

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FINANCIAL OPERATIONS

Below are presented selected financial statistics of the District for the five fiscal years

ended April 30 (in thousands):

Management’s Discussion of Operations – Fiscal Year 2008 For the three months ended July

31, 2007 and 2006, the District’s total operating revenues were $758 million and $699 million,

respectively. This represents an 8.4% increase between the two periods, due primarily to increased retail

and other revenues. The increase in retail revenues is the result of many factors, including continued

Item

April 30, 2007

April 30, 2006

April 30, 2005

April 30, 2004

April 30, 2003

Electric Revenues

$2,736,831 $2,794,025 $2,400,410 $2,156,754 $1,967,576

Operating Expenses (1)

1,900,035 1,948,830 1,559,973 1,437,865 1,304,043

Revenues from Operations

836,796 845,195 840,437 718,889 663,533

Interest and Other Income (Net)

77,051 55,459 29,443 18,803 10,096

Less: Rate Stabilization Fund

25,599 1,892 55,000 --- ---

Revenues Available for Debt Service

888,248 898,762 814,880 737,692 673,629

Debt Service Requirements: Revenue Bonds

241,546 337,980 322,383 360,704 298,846

Debt Service Requirements: Subordinated Debt

46,378 33,844 18,733 8,278 7,265

Total Debt Service

287,924 371,824 341,116 368,982 306,111

Coverage of Total Revenue Bond Debt Service by Revenues Available for Debt Service

3.78 2.66 2.70 2.05 2.25

Coverage of Total Debt Service by Revenues Available for Debt Service

3.09 2.42 2.39 2.00 2.20

Balance after Debt Services

600,324 526,938 473,764 368,710 367,518

Plus: Interest on Construction Fund

11,705 3,388 107 988 1,793

Less: Contribution in Lieu of Taxes

61,636 69,220 72,100 64,818 59,847

Less: Contributions to Water Operations

34,792 34,161 56,672 62,925 44,222

Less: Falling Water Charges

21,192 18,273 6,870 2,747 4,101

Balance Available for Corporate Purposes

$494,409 $408,672 $338,229 $239,208 $261,141

A-10

growth in the District’s customer base. The increase in other revenues is driven by the increase in

wholesale revenues.

Total wholesale revenues are 101% greater than first quarter last year. However, this result

reflects the volatility with mark-to-market contracts and the netting of certain purchases and sale of

energy as required accounting adjustments per Generally Accepted Accounting Principles ("GAAP").

Without these accounting adjustments, wholesale revenues were down 13% compared to the first quarter

last year. The decreased revenues resulted from a 22% decrease in wholesale sales volume compared to

the same quarter last year, which was partially offset by a 12% increase in the average wholesale energy

sales price, which is affected by natural gas prices.

The growth in total operating revenues for the period was offset by a significant increase in total

operating expenses. Total operating expenses for the quarter increased nearly 20 percent from the same

period last year. Fuel and purchased power expenses were the primary contributors with increases of

55.4% and 11.8%, respectively, compared to the same period last year and reflect required accounting

adjustments per GAAP. Without these adjustments, actual fuel expenses only increased by 12.7% and

purchased power increased by 8.3%.

Interest income experienced an increase of nearly 35% this quarter versus the same quarter last

year. Higher interest rates, better investment performance, and increased fund balances resulting from

reinvestment of prior gains have contributed to the increase.

The effects of the above activities contributed to net revenues for the quarter of nearly $47

million, 52.2% less than the same quarter last year.

For additional interim financial data, see "Summary Combined Financial Data" and "Summary

Condensed Combined Balance Sheet" herein.

A-11

Summary Combined Financial Data (1) ($000's — Unaudited)

Condensed Combined Statements of Net Revenues

Three Months Ended July 31,

2007 2006 Operating Revenues: Electric .................................................................................. $ 655,729 $ 640,033 Water ..................................................................................... 4,117 2,733 Other...................................................................................... 98,146 56,595 Total Operating Revenues(2) 757,992 699,361 Operating Expenses: Fuel........................................................................................ 225,504 145,096 Purchased Power ................................................................... 184,435 165,006 Operations(2)......................................................................... 114,471 110,110 Maintenance .......................................................................... 58,537 53,807 Depreciation .......................................................................... 90,735 84,057 Taxes and Tax Equivalents.................................................... 26,552 26,394 Total Operating Expenses................................................... 700,234 584,470 Net Operating Revenues.......................................................... 57,758 114,891 Other Income Interest Income ........................................................................

22,686

16,867

Other Income (deductions), net (1,860) (34) Total Other Income.................................................................. 20,826 16,833 Net Financing Costs ................................................................ 31,918 34,105 NET REVENUES ................................................................... $ 46,666 $ 97,619

__________ (1) The unaudited combined financial data reflects the combined net revenues of the District and the Association and should be

read in conjunction with the Notes to the Combined Financial Statements attached hereto as Appendix B. (2) Inter-company transactions eliminated.

A-12

Condensed Combined Balance Sheet (1) ($000's — Unaudited)

July 31 July 31 2007 2006 ASSETS Utility Plant, at Original Cost...........................................................

$ 10,109,205

$ 9,467,521

Less: Accumulated Depreciation...................................................... 4,494,541 4,232,641 5,614,664 5,234,880 Other Property and Investments ....................................................... 998,269 1,023,256 Current Assets Cash and Cash Equivalents ............................................................

371,919

467,725

Rate Stabilization Fund .................................................................. 30,000 0 Temporary Investments .................................................................. 118,785 205,435 Current Portion, Segregated Funds................................................. 86,000 78,790 Receivables, Net............................................................................. 247,551 236,019 Fuel Stocks ..................................................................................... 32,326 33,057 Materials and Supplies ................................................................... 117,870 98,456 Other............................................................................................... 49,620 74,954 1,054,071 1,194,436 Deferred Charges.............................................................................. 467,485 285,882 TOTAL ASSETS ............................................................................. $ 8,134,489 $ 7,738,454 CAPITALIZATION AND LIABILITIES Capitalization Accumulated Net Revenues, beginning of year ........

$ 3,606,896

$ 3,140,862

Net Revenues year-to-date ............................................................. 46,666 97,619 Other Comprehensive Income........................................................ 127 (13,361) Accumulated Net Revenues ........................................................... $ 3,653,689 $ 3,225,120 Long-Term Debt............................................................................... 3,040,046 3,193,333 TOTAL CAPITALIZATION........................................................... 6,693,735 6,418,453 Current Liabilities Current Portion, Long-Term Debt...................... 146,146 131,346 Accounts Payable ........................................................................... 183,901 128,203 Accrued Taxes and Tax Equivalents .............................................. 76,075 75,330 Accrued Interest ............................................................................. 15,475 15,560 Customer Deposits ......................................................................... 73,814 69,628 Other............................................................................................... 149,866 185,525 645,279 605,592 Deferred Credits ............................................................................... 795,475 714,409 TOTAL CAPITALIZATION AND LIABILITIES.......................... $ 8,134,489 $ 7,738,454

__________ (1) The unaudited combined financial data reflects the combined balance sheet of the District and the Association and should be

read in conjunction with the Notes to the Combined Financial Statements attached hereto as Appendix B. RATINGS

Commercial Paper Electric System Revenue Bonds P-1 (Moody's Investors Service) Aa1 (Moody's Investors Service) A-1+ (Standard & Poor's Ratings Group) AA (Standard & Poor's Ratings Group)

APPENDIX B

AUDITED FINANCIAL STATEMENTS OF THE SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, ITS SUBSIDIARIES AND THE SALT RIVER VALLEY

WATER USERS’ ASSOCIATION FOR YEARS ENDED APRIL 30, 2007 AND APRIL 30, 2006

B-1

SALT RIVER PROJECT

COMBINED FINANCIAL STATEMENTS AS

OF APRIL 30, 2007 AND 2006 TOGETHER WITH REPORT OF

INDEPENDENT AUDITORS

B-2

Report of Independent Auditors

To the Board of Directors of the Salt River Project Agricultural Improvement and Power District and the Board of Governors of the Salt River Valley Water Users’ Association In our opinion, the accompanying combined balance sheets and the related combined statements of net revenues and comprehensive income (loss), and cash flows present fairly, in all material respects, the financial position of Salt River Project Agricultural Improvement and Power District and its subsidiaries and the Salt River Valley Water Users’ Association (collectively, “SRP”) at April 30, 2007 and 2006, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of SRP’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

June 15, 2007

B-3

SALT RIVER PROJECT COMBINED BALANCE SHEETS

APRIL 30, 2007 AND 2006

(Thousands) ASSETS 2007 2006 UTILITY PLANT

Plant in service - Electric $ 8,596,738 $ 8,311,459 Irrigation 283,065 274,029 Common 472,244 443,533

Total plant in service 9,352,047 9,029,021 Less – Accumulated depreciation on plant in service (4,419,510) (4,167,664) 4,932,537 4,861,357 Plant held for future use 3,283 3,283 Construction work in progress 511,580 309,674 Nuclear fuel, net 45,955 42,156 5,493,355 5,216,470

OTHER PROPERTY AND INVESTMENTS Non-utility property and other investments 137,837 121,313 Segregated funds, net of current portion 877,171 677,652 1,015,008 798,965

CURRENT ASSETS Cash and cash equivalents 495,150 465,947 Rate Stabilization Fund 82,273 56,892 Temporary investments 137,058 152,604 Current portion of segregated funds 83,000 79,010 Receivables, net of allowance for doubtful accounts 226,456 189,013 Fuel stocks 26,902 28,540 Materials and supplies 106,740 92,543 Other current assets 57,524 62,668 1,215,103 1,127,217

DEFERRED CHARGES AND OTHER ASSETS 422,266 306,321 $ 8,145,732 $ 7,448,973

CAPITALIZATION AND LIABILITIES LONG-TERM DEBT $ 3,041,408 $ 2,893,017 ACCUMULATED NET REVENUES AND OTHER COMPREHENSIVE INCOME

3,606,896

3,140,862

TOTAL CAPITALIZATION 6,648,304 6,033,879 CURRENT LIABILITIES

Current portion of long-term debt 146,148 131,346 Accounts payable 219,027 162,804 Accrued taxes and tax equivalents 75,135 72,757 Accrued interest 47,646 45,407 Customers’ deposits 73,909 65,522 Other current liabilities 159,745 217,409 721,610 695,245

DEFERRED CREDITS AND OTHER NON-CURRENT LIABILITIES 775,818 719,849 COMMITMENTS AND CONTINGENCIES (Notes 5,7,8,9,10, and 11)

$ 8,145,732

$ 7,448,973

The accompanying notes are an integral part of these combined financial statements.

B-4

SALT RIVER PROJECT COMBINED STATEMENTS OF NET REVENUES AND COMPREHENSIVE INCOME

FOR THE YEARS ENDED APRIL 30, 2007 AND 2006

(Thousands)

2007 2006 OPERATING REVENUES

Retail Electric $ 2,054,652 $ 1,885,912 Water 12,893 12,036 Other 563,188 624,022

Total operating revenues 2,630,733 2,521,970 OPERATING EXPENSES

Power purchased 475,349 453,549 Fuel used in electric generation 615,961 605,078 Other operating expenses 439,338 461,367 Maintenance 236,646 205,193 Depreciation and amortization 348,643 313,562 Taxes and tax equivalents 97,607 100,953

Total operating expenses 2,213,544 2,139,702 Net operating revenues 417,189 382,268

OTHER INCOME (EXPENSES) Interest income 86,765 53,807 Gain on Sale of Available for Sale Securities Other income, net

- 3,459

97,041 8,118

Total other income, net 90,224 158,966 Net revenues before financing costs 507,514 541,234

FINANCING COSTS Interest on bonds 122,093 117,069 Capitalized interest (9,110) (11,971) Amortization of bond discount/premium and issuance expenses (6,181) (7,932) Interest on other obligations 32,821 28,668

Net financing costs 139,623 125,834

NET REVENUES 367,790 415,400

OTHER COMPREHENSIVE INCOME 98,244 10,901

COMPREHENSIVE INCOME $ 466,034 $ 426,301


B-5

SALT RIVER PROJECT COMBINED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED APRIL 30, 2007 AND 2006

(Thousands)

2007 2006

CASH FLOWS FROM OPERATING ACTIVITIES Net revenues $ 367,790 $ 415,400 Adjustments to reconcile net revenues to net cash provided by

operating activities Depreciation, amortization and accretion 348,643 313,562 Amortization of net bond discount/premium and issuance expenses (6,181) (7,933) Gain on sale of capital assets (4,809) (8,124)

Decrease (increase) in - Fuel stocks and materials & supplies (12,559) (6,222) Receivables, including unbilled revenues, net (37,443) 31,807 Other current assets 5,144 15,991 Deferred charges and other assets (147,372) 3,288

Increase (decrease) in - Accounts payable 56,223 (9,197) Accrued taxes and tax equivalents 2,378 3,783 Accrued interest 2,239 1,407 Current liabilities (49,277) 57,984 Deferred credits and other non-current liabilities 217,602 9,674

Net cash provided by operating activities 742,378 821,420 CASH FLOWS FROM INVESTING ACTIVITIES

Additions to utility plant, net (650,520) (432,027) Proceeds from disposition of assets 43,512 10,731 Purchases of investments (1,494,805) (1,171,189) Sales and maturities of securities 1,290,228 944,203 Transition gain from sale of available-for-sale securities - 97,041 Net Change in temporary investments (70,360) (124,361)

Net cash used for investing activities (881,945) (675,602) CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from issuance of revenue bonds 299,963 343,844 Repayment of long-term debt, including refundings (131,193) (312,144)

Net cash used for financing activities 168,770 31,700 NET INCREASE IN CASH AND CASH EQUIVALENTS 29,203 177,518

BALANCE AT BEGINNING OF YEAR IN CASH AND CASH EQUIVALENTS

465,947

288,429

BALANCE AT END OF YEAR IN CASH AND CASH EQUIVALENTS $ 495,150 $ 465,947 SUPPLEMENTAL INFORMATION:

Cash Paid for Interest (Net of capitalized interest) $ 143,565 $ 132,359 Non-cash Financing Activities

Loss on bond retirement $ - $ (1,951)


B-6

SALT RIVER PROJECT

NOTES TO COMBINED FINANCIAL STATEMENTS

APRIL 30, 2007 AND 2006

(1) BASIS OF PRESENTATION:

The Company The Salt River Project Agricultural Improvement and Power District (the District) is an agricultural improvement district organized in 1937 under the laws of the State of Arizona. It operates the Salt River Project (the Project), a federal reclamation project, under contracts with the Salt River Valley Water Users’ Association (the Association), by which it has assumed the obligations and assets of the Association, including its obligations to the United States of America for the care, operation and maintenance of the Project. The District owns and operates an electric system that generates, purchases, transmits and distributes electric power and energy, and provides electric service to residential, commercial, industrial and agricultural power users in a 2,900 square mile service territory in parts of Maricopa, Gila and Pinal Counties, plus mine loads in an adjacent 2,400 square mile area in Gila and Pinal Counties. The Association, incorporated under the laws of the Territory of Arizona in 1903, operates an irrigation system as the agent of the District.

Possession and Use of Utility Plant The United States of America retains a paramount right or claim in the Project that arises from the original construction and operation of certain of the Project’s electric and water facilities as a federal reclamation project. Rights to the possession and use of, and to all revenues produced by, these facilities are evidenced by contractual arrangements with the United States of America.

Principles of Combination The accompanying combined financial statements reflect the combined accounts of the Association and the District (together referred to as SRP). The District’s financial statements are consolidated with its three wholly-owned taxable subsidiaries: SRP Captive Risk Solutions, Limited (CRS), Papago Park Center, Inc. (PPC) and New West Energy Corporation (New West Energy). Also included in the consolidation is the district's former wholly-owned subsidiary, Springerville Four, LLC (Springerville Four) which was dissolved in April 2007. CRS is a domestic captive insurer incorporated in January 2004 primarily to access property/boiler and machinery insurance coverage under the Federal Terrorism Risk Insurance Act of 2002 for certified acts of terrorism. PPC is a real estate management company. New West Energy was used at one time to market, at retail, energy available to the District that was surplus to the needs of its retail customers, and energy that might have been rendered surplus in Arizona by retail competition in the supply of generation, but is now inactive. Springerville Four was a limited liability company that until February 1, 2007 held certain rights to construct a fourth unit at Springerville Generating Station. Such rights were assigned to the District on that date, and Springerville Four was subsequently dissolved in April 2007. All material inter-company transactions and balances have been eliminated.

B-7

Regulation and Pricing Policies

Under Arizona law, the District’s publicly elected Board of Directors (the Board) has the authority to establish electric prices. The District is required to follow certain public notice and special Board meeting procedures before implementing any changes in the standard electric price plans. (2) SIGNIFICANT ACCOUNTING POLICIES:

Basis of Accounting

The accompanying combined financial statements are presented in conformity with accounting principles generally accepted in the United States of America (GAAP) and reflect the pricing policies of the Board. The District’s “regulated” operations apply Statement of Financial Accounting Standards No. 71, “Accounting for the Effects of Certain Types of Regulation” (SFAS No. 71), while “non-regulated” operations follow GAAP for enterprises in general. Classification of regulated and non-regulated operations is determined in accordance with applicable GAAP accounting guidelines. By virtue of SRP operating a federal reclamation project under contract, with the federal government’s pre-emptive rights, asset ownership and certain approval rights, SRP is considered for financial reporting purposes to follow accounting standards as set forth by the Federal Accounting Standards Advisory Board (FASAB). Entities reporting in accordance with the standards issued by the Financial Accounting Standards Board (FASB) prior to October 19, 1999 (the date the American Institute of Certified Public Accountants (AICPA) designated the FASAB as the accounting standard setting body for entities under the federal government) are permitted to continue to report in accordance with those standards. Consequently, SRP’s financial statements are reported in accordance with FASB standards. The preparation of financial statements in compliance with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and disclosures of contingencies. Actual results could differ from the estimates.

Utility Plant

Utility plant is stated at the historical cost of construction, less any impairment losses. Capitalized construction costs include labor, materials, services purchased under contract, and allocations of indirect charges for engineering, supervision, transportation and administrative expenses and capitalized interest or an allowance for funds used during construction (AFUDC). AFUDC is the estimated cost of funds used to finance plant additions and is recovered in prices through depreciation expense over the useful life of the related asset. The cost of property that is replaced, removed or abandoned, together with removal costs, less salvage, is charged to accumulated depreciation. Composite rates of 4.67% and 4.51% were used in fiscal years 2007 and 2006 to calculate interest on funds used to finance construction work in progress, resulting in $9.1 million and $12.0 million of interest capitalized, respectively.

B-8

Depreciation expense is computed on the straight-line basis over the estimated useful lives of the various classes of plant assets. The following table reflects the District’s average depreciation rates on the average cost of depreciable assets, for the fiscal years ended April 30: 2007 2006 Average electric depreciation rate

3.58%

3.51%

Average irrigation depreciation rate 1.93% 2.07% Average common depreciation rate 6.35% 5.36%

Bond Expense Bond discount/premium and issuance expenses are amortized using the effective interest method over the terms of the related bond issues.

Allowance for Doubtful Accounts The District has provided for an allowance for doubtful accounts of $13.0 million and $12.7 million as of April 30, 2007 and 2006, respectively.

Nuclear Fuel The District amortizes the cost of nuclear fuel using the units-of-production method. The units-of-production method is an amortization method based on actual physical usage. The nuclear fuel amortization and the disposal expense are components of fuel expense. Accumulated amortization of nuclear fuel at April 30, 2007 and 2006 was $408.2 million and $389.1 million, respectively.

Asset Retirement Obligations SRP adopted Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (SFAS No. 143), on May 1, 2003. SFAS No. 143 requires the recognition and measurement of liabilities for legal obligations associated with the retirement of tangible long-lived assets. Under the standard, these liabilities are recognized at fair value as incurred and capitalized as part of the cost of the related tangible long-lived assets. Accretion of the liabilities, due to the passage of time, is an operating expense and the capitalized cost is depreciated over the useful life of the long-lived asset. Retirement obligations associated with long-lived assets included within the scope of SFAS No. 143 are those for which a legal obligation exists under enacted laws, statutes, and written or oral contracts, including obligations arising under the doctrine of promissory estoppel. The District has identified retirement obligations for the Palo Verde Nuclear Generating Station (PVNGS), Navajo Generating Station (NGS), Four Corners Generating Station (Four Corners) and certain other assets. Amounts recorded under SFAS No. 143, are subject to various assumptions and determinations, such as determining whether an obligation exists to remove assets, estimating the fair value of the costs of removal, estimating when final removal will occur, and determining the credit-adjusted, risk-free interest rates to be utilized on discounting future liabilities. Changes that may arise over time with regard to these assumptions and determinations will change amounts recorded in the future as expense for asset retirement obligations.

B-9

A summary of the asset retirement obligation activity of the District for the year ended April 30, 2007, is included below (in millions):

Balance, May 1, 2006 $ 184.0 Liabilities incurred (0.3) Accretion expense 11.3 Balance, April 30, 2007 $ 195.0

In accordance with regulations of the Nuclear Regulatory Commission, the District maintains a trust for the decommissioning of PVNGS. Decommissioning funds of $196.4 million and $172.8 million, stated at market value, as of April 30, 2007 and 2006, respectively, are held in the trust and are classified as segregated funds in the accompanying Combined Balance Sheets. Unrealized gains on decommissioning fund assets of $17.0 million and $5.6 million at April 30, 2007 and 2006, respectively, are included in deferred credits and other non-current liabilities in the accompanying Combined Balance Sheets.

Regulatory Accounting The District accounts for the financial effects of the regulated portion of its operations in accordance with the provisions of SFAS No. 71, which requires cost-based, rate-regulated utilities to reflect the impacts of regulatory decisions in their financial statements. Regulatory assets for spent nuclear fuel storage are amortized over the life of the nuclear plant. Bond defeasance regulatory assets are amortized over different periods, beginning in fiscal year 1997 and ending in fiscal year 2031. Regulatory assets are included in deferred charges and other assets on the accompanying Combined Balance Sheets.

Accounting for Energy Risk Management Activities The District has an energy risk management program to limit exposure to risks inherent in normal energy business operations. The goal of the energy risk management program is to measure and minimize exposure to market risks, credit risks and operational risks. Specific goals of the energy risk management program include reducing the impact of market fluctuations on energy commodity prices associated with customer energy requirements, excess generation and fuel expenses, in addition to meeting customer pricing needs, and maximizing the value of physical generating assets. The District employs established policies and procedures to meet the goals of the energy risk management program using various physical and financial instruments, including forward contracts, futures, swaps and options. Certain of these transactions are accounted for under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (SFAS No. 133). Under SFAS No. 133, derivatives are recorded in the balance sheet as either an asset or liability measured at their fair value. The standard also requires changes in the fair value of the derivative be recognized each period in current earnings or other comprehensive income depending on the purpose for using the derivative and/or its qualification, designation and effectiveness as a hedging transaction. Many of the District’s contractual agreements qualify for the normal purchases and sales exception allowed under SFAS No. 133 and are not recorded at market value. (For further explanation of the effects of SFAS No. 133 on SRP's financial results, see Note (3), ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES.)

B-10

Concentrations of Credit Risk The use of contractual arrangements to manage the risks associated with changes in energy commodity prices creates credit risk exposure resulting from the possibility of nonperformance by counterparties pursuant to the terms of their contractual obligations. In addition, volatile energy prices can create significant credit exposure from energy market receivables and mark-to-market valuations. The District has a credit policy for wholesale counterparties, and continuously monitors credit exposures, routinely assesses the financial strength of its counterparties, minimizes credit risk by dealing primarily with creditworthy counterparties, entering into standardized agreements which allow netting of exposures to and from a single counterparty, and by requiring letters of credit, parent guarantees or other collateral when it does not consider the financial strength of a counterparty sufficient.

Income Taxes The District is exempt from federal and Arizona state income taxes. Accordingly, no provision for income taxes has been recorded for the District in the accompanying combined financial statements. The District has three wholly-owned taxable subsidiaries: CRS, PPC and New West Energy. The District had a fourth wholly-owned subsidiary, Springerville Four, until its assets were assigned to the District on February 1, 2007, and it was formally dissolved in April 2007. The tax effect of these subsidiaries’ operations on the combined financial statements is immaterial.

Cash Equivalents The District treats short-term temporary cash investments with original maturities of three months or less as cash equivalents, except for those short-term investments that are set aside for a specific purpose, such as amounts held in the Rate Stabilization Fund or as part of the segregated funds.

Rate Stabilization Fund In April 2005, the District transferred $55 million into the Rate Stabilization Fund (RSF) to be used in concert with the Fuel and Purchased Power Adjustment Mechanism (FPPAM) to cover fuel related expenses and to stabilize future prices related to fuel, as well as for any other purposes required or permitted by the Board’s Supplemental Resolution dated September 10, 2001 authorizing an Amended and Restated Resolution Concerning Revenue Bonds (Bond Resolution), during fiscal years 2006 and 2007. In accordance with Board action taken on March 30, 2006, the District transferred the $55 million, plus interest earnings back to the General Fund on May 5, 2006 to help cover under-collected fuel costs, thereby reducing the need for an upward increase in the FPPAM. In July 2006, the Board approved an additional $80 million deposit into the RSF for the same purposes and on the same terms and conditions as the initial deposit except that the authorization was extended through fiscal year 2008. The transfer to the RSF was completed in September 2006. In March 2007, the Board approved the transfer of the $80 million and related earnings from the RSF back to the General Fund and the transfer was completed on May 1, 2007. (See Note (9), REGULATORY ISSUES, The Changing Regulatory Environment, for additional information on the FPPAM.)

B-11

Revenue Recognition The District recognizes revenue when billed and accrues estimated revenue for electricity delivered to customers that has not yet been billed. Other operating revenue consists primarily of revenue from marketing and trading electricity.

Materials and Supplies, and Fuel Stocks Materials and supplies are stated at lower of market or average cost. Fuel stocks are stated at lower of market or weighted average cost.

Recently Issued Accounting Standards FASB has issued the following Statements of Financial Accounting Standards (SFAS) that may have an impact on SRP: In September 2006, the FASB issued SFAS 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes methods for measuring fair value by applying one of three observable market techniques (market approach, income approach or cost approach) and expands required disclosures about fair value measurements. The provisions of this standard are effective for SRP on May 1, 2008. SRP is assessing the impact of adopting this standard on its financial statements. Also in September 2006, the FASB issued SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Post-Retirement Plans.” SFAS 158 requires an employer to recognize over funded or under funded status of the plan, measure defined benefit plan assets and obligations as of the date of the employer's statement of financial position, and disclose additional information in the footnotes. The provisions of this standard are effective for fiscal years ending after June 15, 2007; accordingly, SRP will adopt the provisions of this standard on April 30, 2008 and is evaluating the impact of adopting this standard on its financial statements. (3) ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: SRP follows SFAS No. 133, as amended, which requires that entities recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Changes in the fair value of derivative financial instruments are either recognized periodically in net revenues or accumulated net revenues (as a component of other comprehensive income), depending on whether or not the derivative meets specific hedge accounting criteria. The criteria include a requirement for hedge effectiveness, which is measured based on the relative changes in fair value between the derivative contract and the hedged item over time. Changes in the fair value resulting from ineffectiveness are recognized immediately in net revenues. The District enters into contracts for electricity, natural gas and other energy commodities to meet the expected needs of its retail customers. The District sells excess capacity during periods when it is not needed to meet retail requirements. The District’s energy risk management program uses various physical and financial contracts to hedge exposures to fluctuating commodity prices. The District examines contracts at inception to determine the appropriate accounting treatment. If a contract does not meet the derivative criteria, or if it qualifies for the SFAS No. 133 normal purchases and sales scope exception, the District accounts for the contract using settlement accounting (costs and revenues are recorded when physical delivery occurs). Contracts that qualify as a derivative but do not meet the SFAS No. 133 normal purchases and sales scope exception are further examined by the

B-12

District to determine if they qualify for cash flow hedge accounting. If a contract does not meet the hedging criteria in SFAS No. 133, the District recognizes the changes in the fair value of the derivative instrument in net revenues each period (mark-to-market). If the contract does qualify for hedge accounting, changes in the fair value are recorded as assets or liabilities and as a component of other comprehensive income. The District formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to the forecasted transactions. The District also formally assesses (both at the hedge’s inception and on an ongoing basis) whether the derivatives used in hedging transactions have been effective in offsetting changes in cash flow of hedged items and whether those derivatives may be expected to remain effective in future periods. When it is determined that a derivative is not (or has ceased to be) effective as a hedge, the District discontinues hedge accounting prospectively, as discussed below. The District discontinues hedge accounting when: (1) it determines that the derivative is no longer effective in offsetting changes in cash flows of a hedged item; (2) the derivative expires or is sold, terminated or exercised; (3) it is no longer probable that the forecasted transaction will occur; or (4) management determines that designating the derivative as a hedging instrument is no longer appropriate. When the District discontinues hedge accounting because it is no longer probable that the forecasted transaction will occur in the originally expected period, the gain or loss on the derivative is reclassified into net revenues. If the derivative remains outstanding, the District will carry the derivative at its fair value in the Combined Balance Sheets, recognizing changes in the fair value in current-period net revenues. The following table summarizes the District’s derivative-related assets and liabilities at April 30 (in thousands): 2007 2006 Other current assets $ 40,024 $ 45,901 Deferred charges and other assets 40,813 50,323 Other current liabilities (18,624) (63,937) Deferred credits and other non-current liabilities (9,085) (38,976) Long-term debt 1,855 - Net asset (liability) $ 54,983 $ (6,689)

The electric industry engages in an activity called “book-out,” under which some energy purchases are netted against sales, and power does not actually flow in settlement of the contract. As a result of these transactions, the District nets the impacts of these financially settled contracts, which reduced revenues and purchase power expense by $150.4 million and $290.5 million for fiscal years 2007 and 2006, respectively, but which did not impact net revenues or cash flows.

B-13

(4) ACCUMULATED NET REVENUES AND OTHER COMPREHENSIVE INCOME: The following table summarizes accumulated net revenues and other comprehensive income (in thousands):

Accumulated AccumulatedNet Revenues

Minimum pension liability

Unrealized gain on available-for-

sale securities Total

Net Revenues and Other

Comprehensive Income

BALANCE, April 30, 2005 2,786,926$ (114,700)$ 42,335$ (72,365)$ 2,714,561$

Net Revenues 415,400 415,400

Other Comprehensive Income - 41,400 - 41,400 - Unrealized gain on available-for-sale securities - - 24,663 24,663 -

Reclassification of realized gain to income - - (55,162) (55,162) - Total Other Comprehensive Income - 41,400 (30,499) 10,901 10,901

BALANCE, April 30, 2006 3,202,326$ (73,300)$ 11,836$ (61,464)$ 3,140,862$

Net Revenues 367,790 - - - 367,790

Other Comprehensive Income - 73,300 24,944 98,244 98,244

BALANCE, April 30, 2007 3,570,116$ -$ 36,780$ 36,780$ 3,606,896$

Accumulated Other Comprehensive Income (Loss)

(5) LONG-TERM DEBT: Long-term debt consists of the following at April 30 (in thousands): Interest

Rate

2007

2006 Revenue bonds (mature through 2037) 4.0 – 6.0% $ 2,394,926 $ 2,213,584 Unamortized bond (discount) premium 53,105 53,099 Total revenue bonds outstanding 2,448,031 2,266,683 Finance lease 2.25 - 5.30% 266,380 282,680 Commercial paper 3.6 - 4.0% 475,000 475,000 Total long-term debt 3,189,411 3,024,363 Unamortized interest rate swap 2.25 - 5.00% (1,855) - Less-current portion (146,148) (131,346)

Total long-term debt, net of current portion $ 3,041,408 $ 2,893,017

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The annual maturities of long-term debt (excluding commercial paper, unamortized mini-revenue bond accretion, and unamortized bond discount/premium) as of April 30, 2007, due in fiscal years ending April 30, are as follows (in thousands):

Revenue Bonds

Finance Lease

2008 $ 130,133 $ 16,015 2009 153,101 17,780 2010 115,855 16,790 2011 108,480 19,950 2012 Thereafter

103,430 1,777,545

17,455 178,390

$ 2,388,544 $ 266,380

Revenue Bonds Revenue bonds are secured by a pledge of, and a lien on, the revenues of its electric system, after deducting operating expenses, as defined in the bond resolution. Under the terms of the amended and restated bond resolution, effective in January 2003, the District is no longer required to make monthly deposits to an externally trusteed debt service fund for the payment of future principal and interest. However, the District is continuing to make debt service deposits to a non-trusteed segregated fund. Included in segregated funds in the accompanying Combined Balance Sheets are $150.7 million and $146.7 million of debt service related funds as of April 30, 2007 and 2006, respectively. The District has $45.3 million of mini-revenue bonds outstanding, which are redeemable at the option of the bondholder under certain circumstances. Based on historical redemptions made on these bonds, management believes there are sufficient funds available to cover potential redemptions in any year. The debt service coverage ratio, as defined in the Bond Resolution, is used by bond rating agencies to help evaluate the financial viability of the District. For the years ended April 30, 2007 and 2006, the debt service coverage ratio was 3.09 and 2.42, respectively. Interest and the amortization of the bond discount, premium and issue expense on the various issues results in an effective rate of 4.97% over the remaining term of the bonds. The District has authorization to issue additional Electric System Revenue Bonds totaling $1.2 billion principal amount and Electric System Refunding Revenue Bonds totaling $4.0 billion principal amount. In September 2005, the District issued $327.1 million Electric System Revenue Bonds; $301.9 million of the net proceeds from these bonds are being used to fund distribution capital requirements and $43.7 million of the net proceeds were used to retire outstanding revenue bonds with an aggregate par amount of $41.0 million. The bond retirement is expected to reduce total debt payments over the life of the bonds by $5.2 million and is expected to result in present value savings of approximately $2.6 million. This transaction resulted in a net loss for accounting purposes of approximately $2.0 million, which was deferred and will be amortized over the life of the bonds to be refunded.

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In July 2006, the District issued an additional $296.0 million Electric System Revenue Bonds. The net proceeds from these bonds are being used to fund distribution capital requirements.

Finance Lease In December 2003, the District entered into a lease-purchase agreement (Desert Basin Lease-Purchase Agreement) with Desert Basin Independent Trust (DBIT) to finance the acquisition of the Desert Basin Generating Station (Desert Basin) located in Central Arizona. In a concurrent transaction, $282.7 million in fixed-rate Certificates of Participation (COPs) were issued pursuant to a Trust Indenture, between Wilmington Trust Company, as trustee, and DBIT, to fund the acquisition of Desert Basin and other electric system assets of the District. Investors in the COPs obtained an interest in the lease payments made by the District to DBIT under the Desert Basin Lease-Purchase Agreement. Due to the nature of the Desert Basin Lease-Purchase Agreement, the District has recorded a lease-finance liability to DBIT with the same terms as the COPs. In connection with the issuance of the COPs, the District entered into an interest rate swap transaction with Morgan Stanley Capital Services. This transaction consisted of a 6-year, $75.0 million fixed-to-floating swap (annual $25.0 million notional maturities expiring on December 1, 2007 through 2009, respectively) versus the Bond Market Association (BMA) Municipal Index. The fixed-receiver rate on the swap is 3.001%. Through the swap, the District was able to create synthetic variable rate debt and take advantage of the relationship between intermediate-term, tax-exempt borrowing costs and BMA-based, fixed-receiver swap rates. In addition, the swap to variable rate also enables the District to increase its short-term, variable rate debt portfolio. The interest rate swap is accounted for as a derivative. (For further explanation of the effects of SFAS No. 133 on the District’s financial results see Note (3), ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES.)

Commercial Paper The District has outstanding $475.0 million of commercial paper consisting of $375.0 million Series B Commercial Paper and $100.0 million Series C Commercial Paper. The issues have an average weighted interest rate to the District of 3.69%. The commercial paper matures not more than 270 days from the date of issuance and is an unsecured obligation of the District. The District has the ability to refinance the outstanding commercial paper on a long-term basis in connection with its revolving line of credit that supports the commercial paper and is available through December 7, 2009. As such, the District has classified the commercial paper as long-term debt in the Combined Balance Sheets as of April 30, 2007. While the revolving credit agreement contains covenants that could prohibit borrowing under certain conditions, management believes financing would be available. The District has never borrowed under the agreement and management does not expect to do so in the future. Alternative sources of funds to support the commercial paper program include existing funds on hand or the issuance of alternative debt, such as revenue bonds.

Line-of-Credit Agreements The District has a $475.0 million revolving line-of-credit agreement that supports the $475.0 million commercial paper program. The agreement has various covenants, with which management believes the District was in compliance at April 30, 2007.

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(6) FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions were used to estimate the fair value for each class of financial instruments identified in the following items in the accompanying Combined Balance Sheets.

Investments in Marketable Securities The District invests in U.S. government obligations, certificates of deposit and other marketable investments. Such investments are classified as other investments, segregated funds, cash and cash equivalents or temporary investments in the accompanying Combined Balance Sheets depending on the purpose and duration of the investment. The fair value of marketable securities with original maturities greater than one year is based on published market data. The carrying amount of marketable securities with original maturities of one year or less approximates their fair value because of their short-term maturities.

Long-Term Debt The fair value of the District’s revenue bonds, including the current portion, was estimated by using pricing scales from independent sources. The carrying amount of commercial paper approximates the fair value because of its short-term maturity. As of April 30, 2007 and 2006, the carrying amounts were $3.2 million and $3.0 million, respectively, and the estimated fair values were $3.3 million and $3.1 million, respectively.

Other Current Assets and Liabilities The carrying amounts of receivables, accounts payable, customers’ deposits and other current liabilities in the accompanying Combined Balance Sheets approximate fair value because of their short-term maturities.

Accounting for Debt and Equity Securities The District applies SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” in accounting for its investments in debt and equity securities. The District’s investments in debt securities are reported at amortized cost if the intent is to hold the security to maturity. The District’s amortized cost and fair value of held-to-maturity securities was $603.8 million and $604.7 million, respectively, at April 30, 2007 and $484.3 million and $483.0 million, respectively, at April 30, 2006. At April 30, 2007, the District’s investments in debt securities have maturity dates ranging from May 1, 2007, to January 14, 2014. Other debt and equity securities are reported at market, with unrealized gains or losses included as a separate component of accumulated net revenues and other comprehensive income or deferred credits and other non-current liabilities. (See Note (2), SIGNIFICANT ACCOUNTING POLICIES, Asset Retirement Obligation, for discussion on accounting for the unrealized gains or losses on decommissioning fund assets.) The District’s investments in debt and equity securities are included in temporary investments, segregated funds and non-utility property and other investments in the accompanying Combined Balance Sheets.

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The amortized cost, gross unrealized gains and losses, and fair value of available-for-sale debt and marketable equity securities at April 30, 2007 and 2006 were (in thousands):

Amortized Cost

Gross Unrealized

Gains

Gross Unrealized

Losses Fair ValueEquity securities 348,884$ 53,992$ (6,334)$ 396,542$ Fixed-income securities 234,195 8,148 (1,929) 240,414

Total available-for-sale securities 583,079$ 62,140$ (8,263)$ 636,956$

Amortized Cost

Gross Unrealized

Gains

Gross Unrealized

Losses Fair ValueEquity securities 302,932$ 25,373$ (5,135)$ 323,170$ Fixed-income securities 206,050 287 (3,001) 203,336

Total available-for-sale securities 508,982$ 25,660$ (8,136)$ 526,506$

2007

2006

At April 30, 2007 and 2006, net unrealized gains on available-for-sale debt and marketable equity securities included in accumulated other comprehensive income were $24.9 million and $24.7 million, respectively, for the fiscal year. The proceeds from sale of available-for-sale securities were $344.4 million and $224.7 million, and the net realized gains were $28.0 million and $113.3 million, at April 30, 2007 and 2006, respectively. The weighted-average cost basis is applied when computing realized gain or loss on available-for-sale securities. The following table presents the current fair value and the associated gross unrealized losses only on investments in securities with gross unrealized losses at April 30, 2007 and 2006. The table also discloses whether these securities have had gross unrealized losses for less than twelve months, or for twelve months or longer.

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2007 (in thousands) Fair Value

Gross Unrealized

Losses Fair Value

Gross Unrealized

Losses Fair Value

Gross Unrealized

Losses

Available-for-sale securitiesEquity securities 37,089$ (4,218)$ 5,587$ (2,116)$ 42,676$ (6,334)$ Fixed-income securities 117,561 (1,929) - - 117,561 (1,929)

Total securities with gross unrealized losses 154,650$ (6,147)$ 5,587$ (2,116)$ 160,237$ (8,263)$

2006 (in thousands) Fair Value

Gross Unrealized

Losses Fair Value

Gross Unrealized

Losses Fair Value

Gross Unrealized

Losses

Available-for-sale securitiesEquity securities 56,900$ (5,135)$ -$ -$ 56,900$ (5,135)$ Fixed-income securities 96,608 (3,001) - - 96,608 (3,001)

Total securities with gross unrealized losses 153,508$ (8,136)$ -$ -$ 153,508$ (8,136)$

Securities with gross unrealized lossesLess than 12 months 12 months or greater Total

Less than 12 months 12 months or greater Total

Securities with gross unrealized losses

Management evaluates securities for other-than-temporary impairment on an annual basis considering numerous factors, and their relative significance varies case-by-case. Factors considered when determining whether impairment is other-than-temporary include the length of time and extent to which the fair value has been less than cost; the financial condition and near-term prospects of the issuer; and the District’s intent and ability to hold the security in order to allow for an anticipated recovery in fair value. If, based upon an analysis of each of the above factors, it is determined that the impairment is other-than-temporary, the carrying value of the security is written down to fair value, and a loss is recognized through earnings. (7) EMPLOYEE BENEFIT PLANS AND INCENTIVE PROGRAMS:

Defined Benefit Pension Plan and Other Postretirement Benefits SRP’s Employees’ Retirement Plan (the Plan) covers substantially all employees. The Plan is funded entirely from SRP contributions and the income earned on invested Plan assets. The District made a contribution of $70.0 million and $60.0 million in fiscal years 2007 and 2006, respectively. SRP provides a non-contributory defined benefit medical plan for retired employees and their eligible dependents (contributory for employees hired January 1, 2000 or later) and a non-contributory defined benefit life insurance plan for retired employees. Employees are eligible for coverage if they retire at age 65 or older with at least five years of vested service under the Plan (ten years for those hired January 1, 2000 or later), or any time after attainment of age 55 with a minimum of ten years of vested service under the Plan (20 years for those hired January 1, 2000 or later). The funding policy is discretionary and is based on actuarial determinations. The unrecognized transition obligation is being amortized over 20 years, beginning in 1994.

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The following tables outline changes in benefit obligations, plan assets, the funded status of the plans and amounts included in the combined financial statements as of April 30, based on January 31 valuation dates (in thousands): Pension Benefits Postretirement Benefits 2007 2006 2007 2006 Change in benefit obligation:

Benefit obligation at beginning of year $1,096,700 $ 1,017,000 $ 510,700 $ 442,200 Service cost 32,800 31,800 12,000 11,300 Interest cost 62,000 57,500 28,500 25,100 Amendments 500 - - 200 Acturial loss (24,100) 24,500 (23,500) 45,600 Benefits paid (37,100) (34,100) (14,200) (13,700)

Benefit obligation at end of year $1,130,800 $ 1,096,700 $ 513,500 $ 510,700

Change in plan assets:

Fair value of plan assets at beginning of year $ 928,900 $ 795,300 $ - $ - Actual return on plan assets 100,800 107,700 - - Employer contributions 70,000 60,000 14,300 13,600 Benefits paid (37,100) (34,100) (14,300) (13,600)

Fair value of plan assets at end of year $1,062,600 $ 928,900 $ - $ -

Funded status $ (68,200) $ (167,800) $ (513,500) $ (510,700) Unrecognized transition obligation - - 18,700 21,800 Unrecognized net actuarial loss 171,600 239,200 183,500 219,200 Unrecognized prior service cost 16,300 18,000 6,800 7,600 Post January 31 contributions - - 4,500 3,800 Net asset (liability) recognized $119,700 $ 89,400 ($300,000) $ (258,300)

Amounts recognized in Combined Balance Sheets:

Prepaid benefit cost $ 119,700 $ 89,400 $ - $ - Additional minimum liability - (91,300) - -

Net additional minimum liability 119,700 (1,900) - - Accrued benefit liability - - (300,000) (258,300) Intangible asset - 18,000 - - Accumulated other comprehensive income - 73,300 - -

Net asset (liability) recognized $ 119,700 $ 89,400 ($ 300,000) $ (258,300)

The following table outlines the projected benefit obligation and accumulated benefit obligation in excess of Plan assets as of April 30, based on January 31 valuation dates (in thousands): 2007 2006 Projected benefit obligation $ 1,130,800 $ 1,096,700 Accumulated benefit obligation $ 966,400 $ 930,800 Fair value of Plan assets $ 1,062,600 $ 928,900 The District internally funds its other postretirement benefits obligation. At April 30, 2007 and 2006, $424.7 million and $339.5 million of segregated funds, respectively, were designated for this purpose.

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The weighted average assumptions used to calculate actuarial present values of benefit obligations at April 30 were as follows: Pension Benefits Postretirement Benefits 2007 2006 2007 2006

Discount rate 6.0% 5.75% 6.0% 5.75%

Rate of compensation increase 4.0% 4.0% 4.0% 4.0% Weighted average assumptions used to calculate net periodic benefit costs were as follows: Pension Benefits Postretirement Benefits 2007 2006 2007 2006

Discount rate 5.75% 5.75% 5.75% 5.75%

Expected return on Plan assets 8.25% 8.25% N/A N/A

Rate of compensation increase 4.0% 4.0% 4.0% 4.0% For employees who retire at age 65 or younger, for measurement purposes, a 9% annual increase before attainment of age 65 and an 11% annual increase on and after attainment of age 65 in per capita costs of health care benefits were assumed during 2006; these rates were assumed to decrease uniformly until equaling 5% in all future years. Components of net periodic benefit costs for the years ended April 30, are as follows (in thousands): Pension Benefits Postretirement Benefits 2007 2006 2007 2006

Service cost $ 32,800 $ 31,800 $ 12,000 $ 11,300 Interest cost 62,000 57,500 28,500 25,100 Expected return on Plan assets (73,300) (66,400) - - Amortization of transition obligation - - 3,100 4,100 Recognized net actuarial loss 16,000 14,200 12,600 11,000 Amortization of prior service cost 2,300 2,300 700 100

Net periodic benefit cost $39,800 $ 39,400 $56,900 $ 51,600 Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one-percentage-point change in the assumed health care cost trend rates would have the following effect (in thousands): One

Percentage Point

Increase

One Percentage

Point Decrease

Effect on total service cost and interest cost components $ 6,400 $ (5,700) Effect on postretirement benefit obligation $ 72,600 $ (63,300)

Plan Assets The Board has established an investment policy for Plan assets and has delegated oversight of such assets to a compensation committee (the Committee). The investment policy sets forth the objective of providing for future pension benefits by targeting returns consistent with a stated tolerance of risk. The investment policy is based on analysis of the characteristics of the Plan sponsors, actuarial factors, current Plan condition, liquidity needs, and legal requirements. The primary investment strategies are

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diversification of assets, stated asset allocation targets and ranges, and external management of Plan assets. The Committee determines the overall target asset allocation ratio for the Plan and defines the target asset allocation ratio deemed most appropriate for the needs of the Plan and the risk tolerance of the District. The Plan’s weighted-average asset allocations at April 30, based on January 31 valuations, are as follows: Target

Allocations

2007

2006 Equity securities 65.0% 65.8% 66.0% Debt securities 25.0% 23.6% 25.3% Real estate 10.0% 10.6% 8.7%

Total 100.0% 100.0% 100.0% The investment policy allows for a tolerance range of plus or minus 5% from the stated target asset allocation.

Long Term Rate of Return The expected return on Plan assets is based on a review of the Plan asset allocations and consultations with a third-party investment consultant and the Plan actuary, considering market and economic indicators, historical market returns, correlations and volatility, and recent professional or academic research. As history has demonstrated, markets may decline and increase dramatically; however, the expected rate of return on the Plan assets is reasonable given its asset allocation in relation to historical and expected future performance.

Employer Contributions The District expects to contribute $50.0 million to the Plan over the next valuation period.

Benefits Payments The District expects to pay benefits in the amounts as follows (in thousands): 2008 $40,856 2009 $44,268 2010 $48,104 2011 $52,108 2012 $55,935 2013 through 2017 $346,560

Defined Contribution Plan SRP’s Employees’ 401(k) Plan (the 401(k) Plan) covers substantially all employees. The 401(k) Plan receives employee pre-tax and post-tax contributions and partial employer matching contributions. Employer matching contributions to the 401(k) Plan were $12.3 million and $11.2 million during fiscal years 2007 and 2006, respectively.

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Employee Incentive Compensation Program SRP has an incentive compensation program covering substantially all regular employees. The incentive compensation amount is based on achievement of pre-established targets. An accrual of $29.2 million and $28.6 million for fiscal years ended April 30, 2007 and 2006, respectively, is included in other current liabilities in the accompanying Combined Balance Sheets. This liability is stated net of receivables from participants in jointly-owned electric plants of $1.5 million and $2.7 million at April 30, 2007 and 2006, respectively. (8) INTERESTS IN JOINTLY-OWNED ELECTRIC UTILITY PLANTS: The District has entered into various agreements with other electric utilities for the joint ownership of electric generating and transmission facilities. Each participating owner in these facilities must provide for the cost of its ownership share. The District’s share of expenses of the jointly-owned plants is included in operating expenses in the accompanying Combined Statements of Net Revenues. The following table reflects the District’s ownership interest in jointly-owned electric utility plants as of April 30, 2007 (in thousands): Generating Station

Ownership

Share

Plant in Service

Accumulated Depreciation

Construction Work

In Progress Four Corners (NM) (Units 4 & 5) 10.00% $ 108,568 $ (95,213) $ 3,651 Mohave (NV) (Units 1 & 2) 20.00% 131,803 (129,377) - NGS (AZ) (Units 1, 2 & 3) 21.70% 356,712 (288,421) 3,000 Hayden (CO) (Unit 2) 50.00% 117,089 (90,835) 747 Craig (CO) (Units 1 & 2) 29.00% 267,900 (175,399) 2,642 PVNGS (AZ) (Units 1, 2 & 3) 17.49% 1,261,488 (909,854) 39,957 $ 2,243,560 $ (1,689,099) $ 49,997 The Mohave Generating Station (Mohave) ceased operations on December 31, 2005, pending installation of new environmental controls and resolution of other operating issues. (See Note (9), REGULATORY ISSUES, Mohave Generating Station, for a discussion of matters pertaining to Mohave.) There remains approximately $2.4 million in net plant value at Mohave for the switchyard and transmission line still used to route power to other inter-tied systems. (9) REGULATORY ISSUES:

Fundamental Changes in the Electric Utility Industry The District historically operated in a highly regulated environment in which it had an obligation to deliver electric service to customers within its service area. In 1998, the Arizona Electric Power Competition Act (the Act) authorized competition in the retail sales of electric generation, recovery of stranded costs, and competition in billing, metering and meter reading. While retail competition was available to all customers by 2001, there were only a few customers who chose an alternative energy provider. Those customers have since returned to their incumbent utilities. At this time, there is no active retail competition within the District’s service territory or, to the knowledge of the District, within the State of Arizona. However, during the past year, two retail

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energy service providers and one meter service provider have reapplied to the Arizona Corporation Commission for authorization to sell energy in Arizona. These cases are pending, and a hearing on the first application is scheduled for July 31, 2007. In 1996, the Federal Energy Regulatory Commission (FERC), which regulates the wholesale electric utility industry under the authority of various statutes, issued Orders 888 and 889 requiring transmitting “public utilities” (as defined in the Federal Power Act), to provide nondiscriminatory transmission services to entities seeking to effect wholesale power transactions, and to grant equal access to information concerning the pricing and availability of transmission services. The District is not a public utility under the Federal Power Act but historically has complied with these requirements voluntarily. The Energy Policy Act of 2005 (the “Energy Policy Act”) expanded FERC jurisdiction by granting FERC discretionary authority to regulate the non-rate terms and conditions, and to a lesser extent, rates, under which unregulated transmitting utilities (including the District) provide wholesale transmission services. The Energy Policy Act explicitly prohibits FERC from requiring unregulated transmitting utilities to take actions that would violate a private activity bond rule. On February 16, 2007, FERC issued Order 890, completing a nearly two-year effort to revise and update Order 888 on open access to transmission lines. In Order 890, FERC declined to generically implement the discretionary authority over unregulated transmitting utilities (including the District). FERC determined the authority would be used on a case-by-case basis. The elements of Order 890 that apply to the District, or that the District will voluntarily comply with, include increased standardization in the calculation of available transmission capacity and regional transmission planning processes. The District does not expect the changes in Order 890 to result in significant adverse impacts on its operations.

The Changing Regulatory Environment The District has fully opened its service area to competition in generation and billing, metering and meter reading. The District’s electric distribution area remains regulated by its Board, and the District will not provide distribution services in the distribution areas of other utilities. The District’s price plans have been unbundled since 1999. In May 2002, the District implemented a Fuel & Purchased Power Adjustment Mechanism (FPPAM) to allow for semi-annual rate adjustments to recover increases in actual fuel costs. The District has had several increases in the price of fuel and purchased power since the FPPAM was implemented. (See Note (2), SIGNIFICANT ACCOUNTING POLICIES, Rate Stabilization Fund, for additional information.) In June 2004, the District introduced a Transmission Cost Adjustment Factor (TCAF) to recover costs the District would incur if the District were required to participate in regional transmission organizations. To date, no costs have been incurred or recovered through the TCAF. On October 2, 2006, the District Board approved a 2.3% system average fuel and purchased power increase under the FPPAM beginning November 1, 2006. The increase was needed to address an under-recovery of retail fuel and purchased power expenses. The increase is expected to generate annual revenues of approximately $46.0 million. Through a surcharge to the District’s transmission and distribution customers, the District recovers the costs of programs benefiting the general public, such as discounted rates for the elderly or impoverished, efficiency programs, demand-side management measures, renewable energy

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programs, economic development, research and development and nuclear decommissioning, including the cost of spent fuel storage. In its October 2005 pricing approval, the Board approved additional funding for renewable energy programs, energy efficiency and energy conservation effective beginning November 1, 2005. These surcharges continue to be separately identified and included in the District’s price plans for the regulated portion of its operations.

Mohave Generating Station The District and the other Participants in Mohave entered into a settlement with the Sierra Club, the Grand Canyon Trust, and the National Parks Conservation Association, that required the installation of certain pollution abatement equipment by the end of 2005 to continue operating Mohave as a coal-fired electric generating facility. (See Note (11), CONTINGENCIES, Air Quality, for additional information on air quality issues.) In addition, the initial term of the agreement with Peabody Western Coal Company (Peabody) to supply coal to Mohave expired at the end of 2005 and the Hopi Tribe demanded that the pumping of water from the Navajo Aquifer for the slurry pipeline serving Mohave cease. The Mohave Participants refused to commit to install pollution abatement equipment without reasonable assurance that water would be available to enable the delivery of coal to the plant. Consequently, the plant suspended operations at the end of 2005. The Mohave Participants, the Navajo Nation, the Hopi Tribe and Peabody have been participating in mediation for an alternative source of water for the mine and the slurry pipeline if the life of Mohave were extended and to resolve other related issues. However, Southern California Edison Company (SCE), operating agent for Mohave, as well as the other two Participants, the Los Angeles Department of Water and Power and Nevada Power Company, advised the District in June 2006 that they did not intend to proceed with efforts to extend the life of Mohave. The mediation efforts continued, but subsequent efforts of SCE to sell the plant as a coal-fired plant, and the District's efforts to acquire the other Participants' interests in the plant, were unsuccessful. The District continues to evaluate its options but is not certain if, and when, a resolution would be reached that would allow the District to continue ownership in Mohave as a coal-fired generation source. The District has included funding in its Capital Improvement Program to cover the costs of alternate resources and has already replaced a portion of the energy it would have received had Mohave continued operations. The District is considering several options for replacing the balance of the capacity if Mohave is not reopened. (See Note (11), CONTINGENCIES, Coal Supply Litigation, for a discussion of other related issues.) During fiscal year 2003, faced with the complex and contentious issues involved in the mediation noted above, and the potential closure of the plant at the end of 2005, the Board authorized the recovery of the balance of the District’s investment in Mohave in its revenue requirements prior to the closure of the plant. Consequently, a write-down of the plant’s carrying value of $66.2 million was recorded in fiscal year 2003, and an additional $5.2 million and $6.6 million of impairment was recorded in fiscal years 2005 and 2004, respectively. In accordance with accounting standards for rate-regulated enterprises (SFAS No. 71), a regulatory asset was established for $78.0 million, based on the District’s expectation that any un-recovered book value at the end of 2005 would be recovered in future rates. At April 30, 2007 and 2006, the Mohave net regulatory asset was $67.6 million and $75.4 million, respectively, and is included in deferred charges and other assets on the accompanying Combined Balance Sheets. The Mohave asset is being recovered over a ten-year period which began in fiscal year 2006.

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Deferred Charges and Deferred Credits Deferred charges and other assets consist primarily of the following at April 30 (in thousands): 2007 2006

Bond defeasance regulatory asset $ 86,638 $ 90,818

Mohave Generating Station regulatory asset 67,605 75,406

Spent nuclear fuel storage regulatory asset 21,753 21,842

Derivatives market valuation 40,813 50,323

Prepaid pension benefit cost 119,700 -

Deferred lease asset 32,639 -

Pension intangible asset - 18,001

Other 53,118 49,931

$ 422,266 $ 306,321 If events were to occur making full recovery of these regulatory assets no longer probable, the District would be required to write off the remaining balance of such assets as a one-time charge to net revenues. Deferred credits and other non-current liabilities consist primarily of the following at April 30 (in thousands): 2007 2006

Asset retirement obligation $ 195,005 $ 183,965

Accrued postretirement benefit liability 300,000 258,065

Additional pension minimum liability - 1,890

Accrued decommissioning costs 17,045 5,597

Provision for contract losses 53,059 66,339

Deferred lease income 32,440 -

Derivatives market valuation 9,085 38,976

Accrued spent nuclear fuel storage 24,586 24,245

Accrued environmental issues 83,973 78,511

Other 60,625 62,261 $ 775,818 $ 719,849

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(10) COMMITMENTS:

Improvement Program The Improvement Program represents the District’s six-year plan for major construction projects and capital expenditures for existing generation, transmission, distribution and irrigation assets. For the 2008-2013 time period, the District estimates capital expenditures of approximately $7.0 billion. Major construction projects include construction of Unit 4 at Springerville Generating Station, funding for a new 600 MW baseload generation resource, continued participation in the Southeast Valley Transmission Project and other key generation, distribution and transmission projects.

Long-Term Power Contracts The District entered into three contracts, collectively, with the United States Bureau of Reclamation (United States), the Western Area Power Administration and the Central Arizona Water Conservation District (CAWCD) for the long-term sale, through September 2011, of power and energy associated with the United States’ entitlement to NGS. The amount of energy available to the District varies annually and is expected to decline over the life of the contracts. The District pays a fixed amount under the contracts, pays the cost of NGS generation and other related costs, and supplies energy at cost to CAWCD for Central Arizona Project facilities. The fixed portion of the District’s payment obligations under the three contracts totals $47.0 million annually through fiscal year 2011, and $19.6 million thereafter. Of the total obligation, $25.2 million annually through fiscal year 2011 and $10.5 million thereafter are unconditionally payable regardless of the availability of power. Payments under these contracts totaled $94.4 million and $91.5 million in fiscal years 2007 and 2006, respectively. The District entered into two other long-term power purchase agreements to obtain a portion of its projected load requirements through 2011 and has an agreement in place for the extension of one of the agreements through May 2016. Minimum payments under these contracts are $38.0 million annually through fiscal year 2011 and $1.9 million thereafter. Total payments under these two contracts, including the minimum payments, were $71.0 million and $68.4 million in fiscal years 2007 and 2006, respectively. In conjunction with the impairment analysis performed on generation-related operations, the District has recorded provisions for losses on these contracts. The provisions recorded in August 1998, of $163.7 million, are being amortized over the life of the contracts, commencing January 1, 1999. Amortization of $13.3 million has been reflected as a reduction in purchased power expense in fiscal years 2007 and 2006. The remaining liability at April 30, 2007 of $53.0 million is included in deferred credits and other non-current liabilities in the Combined Balance Sheets. In addition, beginning on September 1, 2006, the District has 100 MW of capacity from Springerville Generating Station Unit 3, pursuant to a 30-year power purchase agreement. Minimum payments under this contract are $26.1 million annually through fiscal year 2012 and $677.3 million thereafter. Total payments on this contract during the year ended April 30, 2007 were $23.8 million, including minimum payments.

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Fuel Supply At April 30, 2007, minimum payments under long-term coal supply contract commitments are estimated to be $169.1 million in fiscal year 2008, $169.1 million in fiscal year 2009, $169.1 million in fiscal year 2010, $170.1 million in fiscal year 2011, $115.6 million in fiscal year 2012 and $420.6 million thereafter. In May 2006, the District sold a natural gas pipeline to El Paso Natural Gas Company (EPNG). The District maintains options to purchase an ownership interest in the pipeline and also holds a perpetual right of first refusal with EPNG if EPNG desires to sell the pipeline. Accordingly, the District recorded a deferred asset and an offsetting deferred income amount in the accounting records. The deferred asset will be depreciated and the deferred income recognized over the life of the Santan Generating Station, which is the generating station served by the pipeline. The April 30, 2007 balances of the deferred asset and deferred income are $32.6 million and $32.4 million, respectively, and included in deferred charges and other assets, and deferred credits and other non-current liabilities, respectively, in the Combined Balance Sheets.

Springerville Generating Station In 2001 the District entered into an agreement with UniSource Energy Development Company (UniSource) for the joint development of two additional coal-fired generating units (Units 3 and 4), approximately 400 MW each in size, to be located at the existing Springerville (Arizona) Generating Station. Under an amendment to the agreement, dated October 20, 2003, the District entered into a 30-year power purchase agreement (the PPA) to purchase 100 MW of capacity from Unit 3, which was developed by Tri-State Generation and Transmission Association, Inc. Unit 3 was placed in service in September 2006, beginning the 30-year term of the PPA. In addition, the District received the right to construct the fourth unit (Unit 4) at any time during the term of the PPA. The District originally held such rights in a wholly-owned subsidiary, Springerville Four, but such rights were assigned to the District on February 1, 2007. The District has begun construction of Unit 4 and expects it to be in service by the end of calendar year 2009. As of April 30, 2007, the District has recognized $128.6 million of construction costs which are included in construction work in progress in the Combined Balance Sheets. The Springerville 4 Project is anticipated to cost approximately $790.5 million. UniSource’s affiliate, Tucson Electric Power Company, operates Units 1, 2 and 3 and will operate Unit 4 upon completion. (11) CONTINGENCIES:

Nuclear Insurance Under existing law, public liability claims arising from a single nuclear incident are limited to $10.8 billion. PVNGS Participants insure for this potential liability through commercial insurance carriers to the maximum amount available ($300.0 million) with the balance covered by an industry-wide retrospective assessment program as required by the Price-Anderson Act. If losses at any nuclear power plant exceed available commercial insurance, the District could be assessed retrospective premium adjustments. The maximum assessment per reactor per nuclear incident under the retrospective program is $100.6 million including a 5% surcharge, applicable in certain circumstances, but not more than $15.0 million per reactor may be charged in any one year for each incident.

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Based on the District’s ownership share of PVNGS, the maximum potential assessment would be $52.8 million, including the 5% surcharge, but would be limited to $7.9 million per incident in any one year.

Spent Nuclear Fuel Under the Nuclear Waste Policy Act of 1982, the District pays $0.001 per kWh on its share of net energy generation at PVNGS to the U.S. Department of Energy (DOE). The DOE was responsible for the selection and development of a repository for permanent storage and disposal of spent nuclear fuel not later than December 31, 1998. However, the DOE has announced that it will delay submitting an application to construct a permit repository at Yucca Mountain until 2008. A decision on licensing is not expected until at least 2010 and the facility is unlikely to open until at least 2017. Because of the significant delays in the DOE’s schedule, it cannot be determined when the DOE will accept waste from PVNGS or from the other owners of spent nuclear fuel. It is unlikely, due to PVNGS’ position in DOE’s queue for receiving spent fuel, that Arizona Public Service Company (APS), the operating agent of PVNGS, will be able to initiate shipments to DOE during the licensed life of PVNGS. Accordingly, APS has constructed an on-site dry cask storage facility to receive and store PVNGS spent fuel. The facility stored its first cask in March 2003. Fifty-three casks are now stored on site. The District’s share of on-site interim storage at PVNGS is estimated to be $35.1 million for costs to store spent nuclear fuel from inception of the plant through fiscal year-end 2007, and $2.8 million per year going forward. These costs have been included in the District’s regulated operations price plans for transmission and distribution.

Coal Supply Litigation Navajo Nation v. Peabody (US Dist. Court, D.C. District) – In June 1999, the Navajo Nation filed a lawsuit in the United States District Court in Washington D.C. (the “U.S. District Court”), alleging that Peabody (the coal supplier for NGS), Southern California Edison Company (operating agent for Mohave), the District (operating agent for NGS) and certain individual defendants, induced the United States to breach its fiduciary duty to the Navajo Nation, and violated federal racketeering statutes. The lawsuit arises out of negotiations culminating in 1987 with amendments to the coal leases and related agreements. The suit alleges $600.0 million in damages. The plaintiffs also seek treble damages against the defendants, measured by any amounts awarded under the racketeering statutes. In addition, the plaintiffs claim punitive damages of not less than $1.0 billion. In March 2001, the Hopi Tribe intervened in the suit. The claims of both the Navajo Nation and the Hopi Tribe were dismissed in their entirety with respect to the District, but the dismissal is appealable. On February 9, 2005, the U.S. District Court granted a motion to stay the litigation until further order of the court while the parties were in mediation with respect to this litigation and related business issues. On June 1, 2007, the parties jointly filed a status report in the District Court, noting that at the suggestion of the mediator, they intend to continue to engage in further mediation for the purpose of exploring whether alternative development proposals could provide a basis for resolving this lawsuit and related issues. Another status report must be filed with the District Court by October 7, 2007. Navajo Nation v. United States (Court of Federal Claims) – Previously, the Navajo Nation had filed a suit against the United States Government based on similar allegations. The lawsuit was dismissed, but on appeal, it was reinstated and the Court of Appeals, in August 2001, held that the

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United States had breached its fiduciary duty under certain specific statutes to the Navajo Nation, and that a claim for damages was within the jurisdiction of the Court of Federal Claims. In March 2003, the United States Supreme Court, reversed the decision of the Court of Appeals and remanded the case for further proceedings consistent with its opinion. Instead of dismissing the case, the Court of Appeals remanded the case to the Court of Federal Claims and ordered that court to determine whether other statutes and regulations impose enforceable fiduciary duties upon the United States in connection with Peabody’s leases and, if so, whether the United States breached such duties. Following remand, the Court of Federal Claims again dismissed the case in its entirety. That decision is now on appeal to the United States Court of Appeals for the Federal Circuit. Peabody Legal Fees Cases – Peabody claims it is entitled to reimbursement under both the NGS Coal Supply Agreement and the Mohave Coal Supply Agreement for its costs associated with the defense of the challenges by the Navajo Nation and Hopi Tribe to these coal leases (see above matters). Peabody has filed two separate lawsuits against the NGS and Mohave Participants, respectively, seeking recovery of these fees. The Mohave and NGS Participants dispute Peabody’s attempt to recover its legal costs under the coal leases. As for the Mohave fees, the District has been dismissed from the litigation and awarded its attorney’s fees. On appeal, however, the case was remanded to determine whether the District should remain in the lawsuit. The Mohave Participants and Peabody executed a settlement agreement pursuant to which Peabody granted the Mohave Participants a waiver for fees incurred prior to January 2006. However, as described above, the lawsuit for fees arising after December 2005 continues. In the NGS legal fees case, Peabody’s claims against the NGS Participants were dismissed. Peabody appealed this ruling. On appeal, the trial court’s dismissal of the case was affirmed by the Arizona Court of Appeals and review has been denied by the Arizona Supreme Court. Peabody v. SRP (the St. Louis Case) – Peabody has also filed suit in St. Louis, Missouri against the District and the other owners of NGS asserting claims against both the Participants and the District relating to liability issues associated with the Navajo Nation Lawsuit, alleged breach of the NGS Coal Supply Agreement, breach of indemnity obligations owed to Peabody as the alleged agent of the NGS Participants, and claims of tortious interference with contracts and tortious interference with business expectancies against the District. The claim seeks $500.0 million and unspecified compensatory damages, prejudgment interest, attorneys’ fees and costs. District v. Peabody – The NGS Participants are contesting their alleged liability for mine closing, final reclamation, mine decommissioning and environmental monitoring costs, and certain post retirement health care and life insurance benefits that Peabody will pay or provide to its employees after termination of the NGS Coal Supply Agreement and associated closure of the Kayenta Mine. Neither the District’s responsibility nor the ultimate amount of liability, if any, can be determined at this time. The District has determined there is a range of possible outcomes and has recorded losses at the lower end of the range. Additional exposure to the District could occur if the outcome is in the higher end of the range. The District is unable to predict the likely outcome of the coal supply litigation matters at this time but does not believe that the final resolution of these matters will have material adverse effects on its operations or financial condition.

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Environmental

SRP is subject to numerous legislative, administrative and regulatory requirements relative to air quality, water quality, hazardous waste disposal and other environmental matters. SRP conducts ongoing environmental reviews of its properties for compliance and to identify those properties it believes may require remediation. Such requirements have resulted, and will continue to result, in increased costs associated with the operation of existing properties. In September 2003, the District received notice from the U.S. Environmental Protection Agency (EPA) that it is potentially liable under the Comprehensive Environmental Response, Compensation and Liability Act as an owner and operator of a facility (the 16th St. facility) within the Motorola 52nd Street Superfund Site. The District may be liable for past costs incurred and for future work to be conducted within the Superfund Site. Investigation and evaluation of this potential liability are in the preliminary stages, but initial soil vapor investigations indicate some contamination on site. Further soil and groundwater investigations will take place during 2007. The District is unable at this time to predict the outcome, but believes that it has adequate reserves for this potential liability. The EPA is continuing its national enforcement initiative under the New Source Review (NSR) provisions of the Clean Air Act (CAA). This initiative is focused on determining whether companies failed to disclose major repairs or alterations to facilities that, in the opinion of the EPA, would have required the installation of new pollution control equipment. The District has been contacted by the EPA as part of this initiative and negotiations are ongoing. The District anticipates a satisfactory resolution that would include new emissions limits and installation of new pollution control technology at CGS. Several species listed as “endangered” or “threatened” under the Endangered Species Act (ESA) have been discovered in and around Roosevelt and Horseshoe Dams. As provided in the ESA, the District entered into formal consultation with the United States Fish and Wildlife Service (USFWS), and developed a Habitat Conservation Plan (Plan), which allows full operation of Roosevelt Dam and Reservoir, provided the District established habitats for the species in other areas or through other measures. The District is engaged in similar consultations with the USFWS to obtain a permit for operation of the Horseshoe and Bartlett Dams on the Verde River. The USFWS issued a permit for operation of Roosevelt Dam in 2003, and the District anticipates receiving a permit for operations on the Verde River by March 2008.

Air Quality In December 1999, the participants in Mohave Generating Station settled a lawsuit alleging numerous and continuing violations of opacity and sulfur dioxide standards. Under the terms of the settlement, the participants were required to install by January 1, 2006, a sulfur dioxide scrubber and other pollution control equipment. Major plant modifications, including emissions controls, are required for continued operation as a coal-fired plant. Capital costs were estimated at $1 billion, of which the District’s share would be $211.3 million. These costs were included in capital contingencies portion of the 2007-2012 Improvement Program. However, as discussed in Note (9) REGULATORY ISSUES, Mohave Generating Station, the uncertainty in post-2005 coal and water supply caused the Mohave Participants to be unwilling to make the necessary investments and funding was removed from the District's 2008-2013 Improvement Program.

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Electric utilities are subject to continuing environmental regulation. Federal, state and local standards and procedures that regulate the environmental impact of electric utilities are subject to change. These changes may arise from continuing legislative, regulatory and judicial action regarding such standards and procedures. Consequently, there is no assurance that facilities owned by the District will remain subject to the regulations currently in effect, will always be in compliance with future regulations, or will always be able to obtain all required operating permits. An inability to comply with environmental standards could result in additional capital expenditures to comply, reduced operating levels, or the complete shutdown of individual electric generating units not in compliance. Although the prospect for new Clean Air Act legislation in 2007 is low, as a result of the legislative and regulatory initiatives, the District is planning emission reductions at its coal-fired power plants. The EPA issued final regulations for the control of mercury emissions from coal-fired generating stations in May 2005. Arizona has opted into the federal mercury program and imposed additional mercury emissions limitations which will require the District to install additional controls at CGS and Springerville Unit 4 to achieve 90% mercury removal. In addition, the District is participating in EPA development of a rule to regulate mercury emissions on the Navajo Reservation, where the District owns an interest in two generation stations, NGS and Four Corners, and additional controls are highly likely at both plants. The District is still evaluating compliance options and cannot yet estimate the associated costs. In June 2005, the EPA also issued final amendments to its July 1999 regional haze rule. These amendments apply to the provisions of the regional haze rule that require emissions controls known as Best Available Retrofit Technology (BART) for coal-fired power plants and other industrial facilities that emit air pollutants that reduce visibility. The amendments include final guidelines for states to use in determining which facilities must install controls and the types of controls that facilities must use. States must complete the BART determinations for eligible facilities by the end of 2007. BART controls must be installed five years after the EPA approves a state’s BART determination. The District has financial interests in several coal-fired power plants that may be subject to the new BART requirements. The District recognizes the growing importance of the issues concerning climate change (global warming) and the implications they could have on its operations, so it is closely monitoring related developments at the federal, state and regional levels. Federal legislation has been proposed which would, among other things, cap or tax emissions of carbon dioxide from fossil fuel power plants. There have also been several regional initiatives aimed at curbing greenhouse gas emissions. The District is assessing the risk of these policy initiatives on its generation assets and is developing contingency plans to comply with future laws and regulations restricting greenhouse gas emissions. There is no way to predict the impact of such initiatives on the District at this time. The California Legislature has enacted laws that could impact the District. Under one such law, the California Public Utilities Commission and the California Energy Commission must implement regulations that, among other things, prohibit procurement of electricity from a coal-fired power plant for five years or longer and restrict investments in coal-fired plants. The Los Angeles Department of Water and Power (LADWP), one of the participants in NGS, and SCE, a participant in Four Corners Units 4 and 5, are subject to the regulations and may be precluded from approving certain expenditures at the plants, including capital improvements. The regulations except expenditures for "routine maintenance"; however, no definition is provided. Another of the recent laws could impact the District's ability to sell excess generation into California. If this law and its implementing regulations mean that no purchaser of energy in California could purchase energy

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generated by a coal-fired plant, the District could lose California as a market for its wholesale generation; however, the District has other options for marketing its wholesale generation. The District is monitoring and participating in the development of these regulations to determine the full extent of their impact on the District and the plants in which it has an interest. There is no way to predict the impact of this law on the District at this time.

Natural Gas Supply The District had a contract with El Paso Natural Gas Company for the transportation of natural gas on a full-requirements basis. FERC converted the full requirements contract to a contract with monthly limits. A Phoenix area shipper, whose full-requirements contract was also converted, asked FERC to reallocate transportation costs among all of the Phoenix area shippers. FERC denied this request. The shipper then filed a petition for rehearing with FERC which is still pending. If the shipper is successful, the approximate impact to the District could be as much as $20.0 million.

Voluntary Contributions in Lieu of Taxes The Arizona Department of Revenue (ADOR) challenged the District’s exclusion of contributions in aid of construction (CIAC) in calculating the total value of District property for purposes of computing voluntary contributions in lieu of taxes (in-lieu contributions) paid by the District. While the District obtained a favorable ruling from the Arizona State Board of Equalization, the Arizona Tax Court subsequently rendered a favorable decision to the ADOR on appeal. The District appealed the decision of the Arizona Tax Court to the Arizona Court of Appeals. The Court of Appeals ruled in the District’s favor on January 19, 2006. The ADOR then filed a petition for review of this decision with the Arizona Supreme Court, which was denied. At issue had been the District's liability for approximately $13.8 million plus interest for fiscal years 2003 (four months), 2004 (12 months), and 2005 (eight months). In fiscal year 2007, the District recognized $15.5 million of income due to the reversal of previously recorded reserves resulting in the reduction of other operating expenses in the accompanying combined financial statements as of April 30. For calendar years 2005 and forward, legislation was passed that codifies the exclusion of CIAC from the in-lieu contributions formula.

California Energy Market Issues Numerous FERC proceedings are addressing various aspects of the California energy market “crisis” of 2000 through 2001. Several of these proceedings involve potential refunds. Because the District bought from and sold power to the California energy market, the District has been drawn into many of the proceedings. However, the District was a net buyer in the California market during the time periods being scrutinized, and believes it is entitled to refunds if any are ordered and has received approximately $20.5 million in refunds to date. In June 2007, FERC approved an additional $1.7 million refund which the District expects to receive in July or August 2007.

Indian Matters From time to time, SRP is involved in litigation and disputes with various Indian tribes on issues concerning regulatory jurisdiction, royalty payments, taxes and water rights, among others (see Coal Supply Litigation and Air Quality above). Resolution of these matters may result in increased operating expenses.

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Water Rights The District and the Association are parties to a state water rights adjudication proceeding encompassing the entire Gila River System (the Gila River Adjudication). This proceeding is pending in the Superior Court for the State of Arizona, Maricopa County, and will eventually result in the determination of all conflicting rights to water from the Gila River and its tributaries, including the Salt and Verde Rivers. The District and the Association are unable to predict the ultimate outcome of this proceeding. The United States, on behalf of the Gila River Indian Community (GRI Community), filed a lawsuit in 1982 in the Federal District Court, District of Arizona, to protect the water right claims of the GRI Community. The Association is among the many defendants named in this lawsuit. The lawsuit claims that the defendants’ use of surface water and groundwater violates the GRI Community’s rights to water in certain specified areas, and requests a decree specifying the GRI Community’s rights, injunctive relief to stop the alleged illegal use of water by the defendants, and damages for increased costs to the GRI Community from, among other things, having to deepen its wells. This lawsuit has been stayed pending the outcome of the Gila River Adjudication. In 2004, the U.S. Congress enacted the Arizona Water Rights Settlement Act of 2004, which, when fully implemented, will resolve the claims of the GRI Community listed above as well as many of the claims in the Gila River Adjudication. However, there are many conditions precedent to the full effectiveness and enforceability of the act and its associated agreements. In 1978, a water rights adjudication was initiated in the Apache County Superior Court with regard to the Little Colorado River System. The District has filed its claim to water rights in this proceeding, which includes a claim for groundwater being used in the operation of CGS. The District is unable to predict the ultimate outcome of this proceeding, but believes an adequate water supply for CGS will remain available.

Other Litigation In the normal course of business, SRP is exposed to various litigations or is a defendant in various litigation matters. In management’s opinion, the ultimate resolution of these matters will not have a material adverse effect on SRP’s financial position or results of operations.

Self-Insurance The District maintains various self-insurance retentions for certain casualty and property exposures. In addition, the District has insurance coverage for amounts in excess of its self-insurance retention levels. The District provides reserves based on management’s best estimate of claims, including incurred but not reported claims. In management’s opinion, the reserves established for these claims are adequate and any changes will not have a material adverse effect on the District’s financial position or results of operations.

APPENDIX C

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SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE

The following is a brief summary of certain provisions of the Indenture. Such summary does not

purport to be complete, and reference is made to the entire Indenture for full and complete statements of such summarized provisions and all provisions of the Indenture. Copies of the definitive form of the Indenture are available as described under the caption "INTRODUCTION" of the Official Statement.

DEFINITIONS

Section 1.01 Definitions. The following terms, for all purposes of the Indenture, have the following meanings:

"Accountant’s Certificate" means a certificate signed by an independent certified public accountant or a firm of independent certified public accountants, selected by SVFC, who may be the accountant or firm of accountants who regularly audit the books of SVFC.

"Act" means the Arizona Nonprofit Corporation Act, A.R.S. 10-3101, et seq.

"Administrative Fee" has the meaning given such term in the Supply Agreement.

"Amortized Value" means, with respect to any Series 2007 Senior Lien Bond to be redeemed, the principal amount of such Series 2007 Senior Lien Bond multiplied by the price of such Series 2007 Senior Lien Bond expressed as a percentage, calculated based on the industry standard method of calculating bond prices (as such industry standard prevails on the date of delivery of the Series 2007 Bonds), with a delivery date equal to the date of redemption, a maturity date equal to the stated maturity date of such Series 2007 Senior Lien Bond and a yield equal to such Series 2007 Senior Lien Bond’s original reoffering yield, which, in the case of certain dates, produces the amounts for all of the Series 2007 Senior Lien Bonds set forth in Schedule III to the Indenture.

"Annual Transaction Report" has the meaning ascribed thereto in Section 7.09(b) of the Indenture.

"Authorized Denominations" means, with respect to the Series 2007 Senior Lien Bonds, $5,000 and any integral multiple thereof.

"Authorized Officer" means each of the President, Vice President and Treasurer of SVFC and any other officer or employee of SVFC authorized to perform specific acts or duties by resolution duly adopted by SVFC.

"Beneficial Owner" means, with respect to Bonds registered in the Book-Entry System, any Person who acquires a beneficial ownership interest in a Bond held by the Securities Depository.

"Book-Entry System" means the system maintained by the Securities Depository and described in Section 3.09 of the Indenture.

"Board" means the Board of Directors of SVFC.

"Bond" or "Bonds" means any of SVFC’s Senior Gas Revenue Bonds, Series 2007 and Subordinate Gas Revenue Bonds, Series 2007 authorized by Section 2.01 of the Indenture and any bonds issued pursuant to the Indenture to refund any of such Series 2007 Bonds.

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"Bond Counsel" means an attorney or firms of attorneys of recognized national standing in the field of law relating to municipal bonds and the exclusion of interest on municipal bonds from gross income for federal income tax purposes selected by SVFC.

"Bond Payment Date" means each date on which (a) interest on the Bonds is due and payable or (b) principal of Bonds is due and payable by reason of scheduled maturity, mandatory sinking fund redemption, acceleration, or otherwise.

"Bond Register" means the books for the registration of the ownership and the transfer of ownership of the Bonds maintained by the Trustee pursuant to Section 3.04 of the Indenture.

"Business Day" means any day excluding (a) a Saturday or Sunday, any day on which banks located in the State of Arizona or the State of New York, are required or authorized by law or other governmental action to be closed, and (b) any day on which the New York Mercantile Exchange or the Trustee is closed.

"Cede" means Cede & Co., the nominee of DTC, and any successor nominee of DTC with respect to the Bonds pursuant to Section 3.09 of the Indenture.

"Commodity Swap" means the ISDA Master Agreement, Schedule and Confirmation between SVFC and Royal Bank of Canada, or any replacement agreement permitted by Section 2.04(b) of the Indenture, pursuant to which SVFC will pay to the Commodity Swap Counterparty an index-based floating price and the Commodity Swap Counterparty will pay to SVFC a fixed price in relation to the daily quantities of Gas to be delivered under the Prepaid Gas Agreement.

"Commodity Swap Counterparty" means, with respect to the initial Commodity Swap, Royal Bank of Canada, a Schedule 1 bank under the Bank Act of Canada, and any successor to the foregoing, or, if any such Commodity Swap is replaced or assigned, the counterparty to such replacement Commodity Swap satisfying the requirements of Section 2.04 of the Indenture.

"Commodity Swap Payment Fund" means the Commodity Swap Payment Fund established in Section 5.02 of the Indenture.

"Commodity Swap Payments" means, as of each scheduled payment date specified in a Commodity Swap, the net amount payable to the Commodity Swap Counterparty by SVFC.

"Commodity Swap Receipts" means, as of each scheduled payment date specified in a Commodity Swap, the net amount payable to SVFC by the Commodity Swap Counterparty.

"Continuing Disclosure Agreements" means the Continuing Disclosure Agreement, dated October 25, 2007, between SVFC and the Trustee relating to the Series 2007 Senior Lien Bonds and the Continuing Disclosure Agreement, dated October 25, 2007, between SVFC and the Trustee relating to the Series 2007 Subordinate Lien Bonds, as the same may be amended and supplemented in accordance with their respective terms.

"Controlling Party" means (a) while any Senior Lien Bonds are Outstanding, the Owners of a majority in aggregate principal amount of the Senior Lien Bonds then Outstanding; and (b) while any Subordinate Lien Bonds are Outstanding and no Senior Lien Bonds are Outstanding, the Owners of a majority in aggregate principal amount of the Subordinate Lien Bonds then Outstanding.

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"Costs of Issuance" means all items of expense directly or indirectly payable by or reimbursable to SVFC and related to the original authorization, execution, sale and delivery of Series 2007 Bonds or related to the original authorization, execution, and delivery of the Commodity Swap, including but not limited to advertising and printing costs, costs of preparation and reproduction of documents, including disclosure documents and documents, initial fees and charges (including counsel fees) of the Trustee; legal fees and charges, financial advisor fees and expenses, fees and expenses of other consultants and professionals, rating agency fees, fees and charges for preparation, execution, transportation and safekeeping of Series 2007 Bonds; policy premiums and other amounts due to a Senior Lien Reserve Account Credit Facility Provider in connection with any Senior Lien Reserve Account Credit Facility (but not any reimbursement payments in respect of any amounts advanced under a Senior Lien Reserve Account Credit Facility or interest accrued on such amounts); policy premiums and other amounts due to a Working Capital Reserve Account Credit Facility Provider in connection with any Working Capital Reserve Account Credit Facility (but not any reimbursement payments in respect of any amounts advanced under a Working Capital Reserve Account Credit Facility or interest accrued on such amounts);and any other cost, charge or fee in connection with the authorization, issuance, sale or original delivery of Series 2007 Bonds and the entry into the Commodity Swap.

"Cost of Issuance Fund" means the Cost of Issuance Fund established in to Section 5.02 of the Indenture.

"Defaulted Interest" has the meaning given to such term in Section 3.08 of the Indenture.

"Defeasance Securities" means (a) Government Obligations and (b) time deposits and certificates of deposit to the extent that such deposits or certificates of deposit are Qualified Investments, and such interest-bearing time deposits or certificates of deposit which must not be subject to redemption or repayment prior to their maturity or due date other than at the option of the depositor or holder thereof or as to which an irrevocable notice of redemption or repayment, or irrevocable instructions have been given to call for redemption or repayment, of such time deposits or certificates of deposit on a specified redemption or repayment date has been given and such time deposits or certificates of deposit are not otherwise subject to redemption or repayment prior to such specified date other than at the option of the depositor or holder thereof, and which are fully secured by Government Obligations to the extent not insured by the Federal Deposit Insurance Corporation.

"Depository" means any bank, trust company, national banking association, savings and loan association, savings bank or other banking association, having trust powers, selected by SVFC as a depository of moneys and securities held under the provisions of the Indenture, and may include the Trustee.

"District" means the Salt River Project Agricultural Improvement and Power District, an agricultural improvement district and a political subdivision of the State under the Constitution and laws of the State.

"DTC" means The Depository Trust Company, New York, New York, and its successors and assigns.

"Early Redemption Date" means the date which is the fifteenth day of the month following the month in which the Early Termination Date is established pursuant to the Prepaid Gas Agreement.

"Early Termination Date" means the Early Termination Date for the Prepaid Gas Agreement established in accordance with the Prepaid Gas Agreement.

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"Early Termination Payment Date" means the date which is three (3) Business Days after the Early Termination Date.

"Event of Default" has the meaning given to such term in Section 8.01 of the Indenture.

"Favorable Opinion of Bond Counsel" means an Opinion of Bond Counsel to the effect that an action proposed to be taken is not prohibited by the Indenture or the laws of the State and will not adversely affect the Tax-Exempt Status of the Series 2007 Bonds or any other Bonds issued under this Indenture as Tax-Exempt securities.

"Fiscal Year" means (a) the twelve (12) Month period beginning on May 1 of each year and ending on the next April 30, or (b) such other twelve (12) Month period established by SVFC from time to time, upon Written Notice to the Trustee, as its fiscal year.

"Forward Purchase Agreement" means each written agreement among the Trustee, SVFC and a Qualified Provider to purchase securities which are Qualified Investments for a Fund or Account with moneys to be deposited in such Fund or Account during the term of such agreement.

"Fund" or "Funds" means, as the case may be, each or all of the Funds established in Section 5.02 of the Indenture.

"Gas" has the meaning set forth for such term in the Supply Agreement.

"Gas Supplier" means Citigroup Energy Inc., a Delaware corporation, as party to the Prepaid Gas Agreement, and any successor thereto.

"Gas Supply" means SVFC’s purchase of Gas pursuant to the Prepaid Gas Agreement, and the purchase of any Gas to replace Gas not delivered as required pursuant to the Prepaid Gas Agreement.

"Government Obligations" means

(a) Non-callable obligations which are: (i) direct obligations of (including obligations issued or held in book-entry form on the books of) the Department of Treasury of the United States of America; or (ii) obligations unconditionally guaranteed as to principal and interest by the United States of America; or (iii) evidences of ownership interests in such direct or unconditionally guaranteed obligations;

(b) Any bonds or other obligations of any state of the United States of America or of any agency, instrumentality or local governmental unit of any such state which: (i) are not callable at the option of the obligor prior to maturity or as to which irrevocable notice has been given by the obligor to call such bonds or obligations on the date specified in the notice; (ii) are rated in the highest Rating Category of S&P and Moody’s; and (iii) are fully secured as to principal and interest and redemption premium, if any, by a fund consisting only of cash or obligations described in clause (a) above, which fund may be applied only to the payment of interest when due, principal of and redemption premium, if any, on such bonds or other obligations on the maturity date or dates thereof or the specified redemption date or dates pursuant to such irrevocable notice, as appropriate; and

(c) Any other bonds, notes or obligations of the United States of America or any agency or instrumentality thereof which, if deposited with the Trustee for the purpose described in Section 12.01(c) of the Indenture, will result in a rating on the Bonds which are

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deemed to have been paid pursuant to Section 12.01(c) of the Indenture that is in the highest Rating Category of each Rating Agency that is then maintaining a rating on such Bonds.

"Guarantee" means the Guarantee, dated October 1, 2007, from Citigroup Inc. guaranteeing the payment obligations of the Gas Supplier under the Prepaid Gas Agreement or any Alternate Guarantee (as defined in the Prepaid Gas Agreement) delivered pursuant to the terms of the Prepaid Gas Agreement.

"Indenture" means the Trust Indenture, dated as of October 1, 2007, by and between Salt Verde Financial Corporation and U.S. Bank National Association, as from time to time amended or supplemented by Supplemental Indentures in accordance with the terms of the Indenture.

"Interest Payment Date" means, with respect to the Series 2007 Bonds, June 1 and December 1 of each year, commencing December 1, 2007.

"Internal Revenue Code" means the Internal Revenue Code of 1986.

"Issuer Administrative Fee" has the meaning given to such term in the Prepaid Gas Agreement.

"Make-up Payment" means each payment that has been received by SVFC or the Trustee from the District under the Supply Agreement to make up for a prior payment default thereunder or from the Commodity Swap Counterparty under the Commodity Swap to make up for a prior payment default thereunder, in each case when the receipt of such payment occurs after a draw on the Senior Lien Bonds Debt Service Reserve Account has been made to pay debt service on the Series 2007 Senior Lien Bonds or after a draw on the Working Capital Reserve Fund has been made to pay a Commodity Swap Payment; provided, that such amount must be only in respect of the principal amount of any draw and interest thereon and must not include any fees, costs or other charges (including attorneys’ fees or other collection related fees and costs) due to the Senior Lien Reserve Account Credit Facility Provider or the Working Capital Reserve Account Credit Facility Provider.

"MBIA" means MBIA Insurance Corporation.

"Month" means a calendar month.

"Moody’s" means Moody’s Investors Service, Inc., its successors and assigns, and, if such corporation no longer performs the functions of a securities rating agency, "Moody’s" will be deemed to refer to any other nationally recognized securities rating agency designated by SVFC.

"Operating Fund" means the Operating Fund established in Section 5.02 of the Indenture.

"Opinion of Bond Counsel" means a written opinion of Bond Counsel addressed to SVFC and delivered to the Trustee.

"Opinion of Counsel" means an opinion signed by an attorney or firm of attorneys (who may be counsel to SVFC) selected by SVFC.

"Outstanding," when used with reference to Bonds, means as of any date, Bonds theretofore or thereupon being authenticated and delivered under the Indenture except:

(a) Bonds cancelled (or portions thereof deemed to have been cancelled) by the Trustee at or prior to such date;

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(b) Bonds in lieu of or in substitution for which other Bonds have been authenticated and delivered pursuant to Article III or Section 4.05 or Section 11.06 of the Indenture; and

(c) Bonds deemed to have been paid as provided in Section 12.01 of the Indenture.

"Owner" means any Person who is the registered owner of any Bond or Bonds.

"Participants" means those broker-dealers, banks and other financial institutions from time to time for which DTC holds Bonds as Securities Depository.

"Person" means any natural person, firm, association, partnership, corporation or public body.

"Prepaid Gas Agreement" means the Agreement for Purchase and Sale of Natural Gas, dated as of October 12, 2007, between SVFC and the Gas Supplier, as the same may be amended from time to time.

"Prepayment" means the prepayment for the Gas Supply required by Section 4 of the Prepaid Gas Agreement.

"Project Fund" means the Project Fund established in Section 5.02 of the Indenture.

"Qualified Investments" means any of the following investments, if and to the extent that the same are at the time legal investments of SVFC’s funds:

(a) Government Obligations;

(b) Bonds, debentures, notes and other evidences of indebtedness issued or guaranteed by any of the following non-full faith and credit United States government agencies or corporations:

(1) Federal Home Loan Bank System – senior debt obligations;

(2) Federal Home Loan Mortgage Corporation – participation certificates and senior debt obligations;

(3) Federal National Mortgage Association – mortgage-backed securities and senior debt obligations; and

(4) Resolution Funding Corporation;

(c) Repurchase agreements or collateralized guaranteed investment contracts entered into with entities rated in one of the three highest Rating Categories of a Rating Agency so long as the obligation of the obligated party is secured by a perfected pledge of securities described in (a) or (b) above;

(d) Guaranteed investment contracts or similar agreements providing for a specified rate of return over a specified time period with entities rated at least Aa3 by Moody’s and AA- by S&P;

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(e) Direct general obligations of a state of the United States, or a political subdivision or instrumentality thereof, having general taxing powers and rated in either of the two (2) highest Rating Categories of a Rating Agency; or

(f) Money market funds registered under the federal Investment Company Act of 1940, whose shares are registered under the federal Securities Act of 1933, and having a rating by S&P of AAA-m-G or AAA-m or a rating by Moody’s of Aaa including funds for which the Trustee or its affiliates provide investment or other management services.

"Qualified Provider" means a financial institution which is a domestic or foreign bank, broker-dealer, or insurance company having a long-term debt rating in one of the two highest Rating Categories by Moody’s and S&P or whose obligations under a Forward Purchase Agreement are guaranteed by an entity having a long-term debt rating in one of the two highest Rating Categories by Moody’s and S&P; provided that if such bank, broker-dealer, or insurance company (or, if applicable, its guarantor) is no longer rated at least Aa3 by Moody’s or AA- by S&P, the Trustee and SVFC are to require such bank, broker-dealer, or insurance company to post such collateral or make such other security arrangements as SVFC is to determine are appropriate for its interests, and upon the posting of such collateral or the making of such other security arrangements as SVFC is to determine are appropriate for its interests, such bank, broker-dealer, or insurance company will continue to be a Qualified Provider.

"Rating Agency" means each of Moody’s and S&P or any other rating agency so designated in a Supplemental Indenture.

"Rating Category" means one or more of the generic rating categories of a Rating Agency, without regard to any refinement or gradation of such rating category or categories by a numerical modifier, plus or minus signs, or otherwise.

"Rebate Fund" means the Rebate Fund established in Section 5.02 of the Indenture.

"Rebate Requirements" means those portions of moneys or securities held in any Fund under the Indenture that are required to be paid to the United States Treasury Department under the requirements of Section 148(f) of the Internal Revenue Code.

"Redemption Fund" means the Redemption Fund established in Section 5.02 of the Indenture.

"Redemption Price" means, with respect to any Bond, the amount payable upon redemption thereof pursuant to such Bond or the Indenture other than any amounts due as accrued but unpaid interest.

"Regular Record Date" has the meaning given to such term in Section 3.08 of the Indenture.

"Reimbursement Agreement" means either financial guaranty agreement entered into by and between SVFC and either of the Senior Lien Reserve Account Credit Facility Provider and the Working Capital Reserve Account Credit Facility Provider.

"Reimbursement Obligation" means each repayment obligation of SVFC arising under a Reimbursement Agreement due to a draw on the related surety bond and any interest accrued thereon.

"Required Replacement Amount" has the meaning given to such term in the Prepaid Gas Agreement.

"Revenue Fund" means the Revenue Fund established in Section 5.02 of the Indenture.

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"Revenues" means: (a) all revenues, income, rents, user fees or charges, and receipts derived or to be derived by SVFC from or attributable or relating to the ownership of the Gas Supply, including all revenues attributable or relating to the Gas Supply or to the payment of the costs thereof received or to be received by SVFC under the Supply Agreement, the Prepaid Gas Agreement, the Guarantee or otherwise payable to it for the sale and/or transportation of Gas or otherwise with respect to the Gas Supply; (b) interest received or to be received on any moneys or securities (other than moneys or securities held in the Rebate Fund, the Operating Fund or the Termination Fund) held pursuant to this Indenture and paid or required to be paid into the Revenue Fund; and (c) any Commodity Swap Receipts received by SVFC; but excluding from subsection (a) above the following items: (i) any Termination Amount; (ii) any Required Replacement Amount; (iii) amounts paid by or on behalf of SVFC for the mandatory redemption of Bonds pursuant to Section 4.01(b); (iv) the Issuer Administrative Fee; and (v) the Administrative Fee.

"S&P" means Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., its successors and assigns, and, if such entity no longer performs the functions of a securities rating agency, "S&P" will be deemed to refer to any other nationally recognized securities rating agency designated by SVFC.

"Scheduled Debt Service Deposits" means the required Monthly deposits to the Senior Lien Bonds Debt Service Fund or Subordinate Lien Bonds Debt Service Fund, as applicable, or the required cumulative deposits in respect of the principal and interest payments coming due on the Senior Lien Bonds or Subordinate Lien Bonds, as applicable, on each Interest Payment Date, mandatory sinking fund redemption payment date, or scheduled date for payment of maturing principal, all as set forth on Schedule I-A to the Indenture with respect to the Series 2007 Senior Lien Bonds and on Schedule I-B to the Indenture with respect to the Series 2007 Subordinate Lien Bonds.

"Securities Depository" means DTC, or its nominee, and its successors and assigns.

"Senior Lien Bonds" means SVFC’s Outstanding Senior Gas Revenue Bonds, Series 2007 issued pursuant to the Indenture and any Bonds issued on a parity therewith to refund or refinance obligations of SVFC incurred in connection with the Gas Supply.

"Senior Lien Bonds Debt Service Fund" means the Senior Lien Bonds Debt Service Fund established in Section 5.02 of the Indenture.

"Senior Lien Bonds Debt Service Reserve Requirement" means, with respect to the Series 2007 Senior Lien Bonds, the amount of $92,210,216, which consists of $29,030,000 to be deposited in cash to the credit of the Senior Lien Bonds Debt Service Reserve Account upon the issuance and delivery of the Series 2007 Bonds and $63,180,216 represented by the amount available to be drawn under the Senior Lien Reserve Account Credit Facility to be deposited to the credit of the Senior Lien Bonds Debt Service Reserve Account upon the issuance and delivery of the Series 2007 Bonds.

"Senior Lien Reserve Account Credit Facility" means the debt service reserve account surety bond provided by the Senior Lien Reserve Account Credit Facility Provider for deposit to the credit of the Senior Lien Bonds Debt Service Reserve Account.

"Senior Lien Reserve Account Credit Facility Provider" means MBIA.

"Series 2007 Bond" or "Series 2007 Bonds" means any of SVFC’s Senior Gas Revenue Bonds, Series 2007 or Subordinate Gas Revenue Bonds, Series 2007, authorized by Section 2.01 of the Indenture.

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"Series 2007 Senior Lien Bonds" means SVFC’s Senior Gas Revenue Bonds, Series 2007, authorized by Section 2.01 of the Indenture.

"Series 2007 Subordinate Lien Bonds" means SVFC’s Subordinate Gas Revenue Bonds, Series 2007, authorized by Section 2.01 of the Indenture.

"Special Record Date" has the meaning given to such term in Section 3.08 of the Indenture.

"State" means the State of Arizona.

"Supply Agreement" means the Natural Gas Supply Agreement, dated October 12, 2007, between SVFC and the District, as the same may be amended from time to time.

"Subordinate Lien Bonds" means SVFC’s Outstanding Subordinate Gas Revenue Bonds, Series 2007 issued pursuant to the Indenture and any Bonds issued on a parity therewith to refund or refinance obligations of SVFC incurred in connection with the Gas Supply.

"Subordinate Lien Bonds Debt Service Fund" means the Subordinate Lien Bonds Debt Service Fund established in Section 5.02 of the Indenture.

"Supplemental Indenture" means any indenture supplemental to or amendatory of the Indenture executed and delivered by SVFC and the Trustee in accordance with Article X of the Indenture.

"SVFC" means Salt Verde Financial Corporation, a nonprofit corporation of the State, duly formed and validly existing under the Act, and its successors and assigns.

"Tax Certificate" means the Tax Certificate as to Arbitrage and the Provisions of Section 141-150 of the Internal Revenue Code of 1986, dated as of the date of issuance and delivery of the Series 2007 Bonds.

"Tax-Exempt" means, with respect to any bonds, notes or other evidences of indebtedness, including the Bonds, that the status of such securities is such that interest thereon is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum income tax imposed on individuals and corporations, with the exception that, for purposes of computing alternative minimum tax imposed on certain corporations (as defined for federal income tax purposes) such interest is taken into account in determining adjusted current earnings.

"Tax-Exempt Status of the Bonds" means that the interest on the Bonds is Tax-Exempt.

"Termination Amount" has the meaning given to such term in the Prepaid Gas Agreement.

"Termination Fund" means the Termination Fund established in Section 5.02 of the Indenture.

"Trustee" means U.S. Bank National Association, and its successor or successors and any other corporation or national banking association which may at any time be substituted in its place pursuant to the Indenture.

"Trust Estate" means (a) the proceeds of the sale of the Bonds, (b) all right, title and interest of SVFC in, to and under the Prepaid Gas Agreement, the Guarantee, the Supply Agreement and the Commodity Swap Agreement, (c) the Revenues (including any portions thereof constituting Make-up Payments), (d) any Termination Amount, and (e) all Funds and Accounts established by the Indenture and

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held by the Trustee (other than the Rebate Fund and the Operating Fund) including the investment income, if any, thereof; subject with respect to clauses (a), (c), (d) and (e) to the provisions of the Indenture permitting the application thereof for the purposes and on the terms and conditions set forth in the Indenture.

"U.S. Government Securities Business Day" means any day except for a Saturday, a Sunday, or a day on which the Securities Industry and Financial Markets Association recommends that the fixed income departments of its members be closed for the entire day for purposes of trading U.S. government securities.

"Working Capital Reserve Fund" means the Working Capital Reserve Fund established in Section 5.02 of the Indenture.

"Working Capital Reserve Account Credit Facility" means the working capital reserve account surety bond provided by the Working Capital Reserve Account Credit Facility Provider for deposit to the credit of the Working Capital Reserve Fund.

"Working Capital Reserve Account Credit Facility Provider" means MBIA.

"Working Capital Reserve Requirement" means ,with respect to the Series 2007 Bonds, the amount of $23,175,900, to be deposited to the credit of the Working Capital Reserve Fund upon the issuance and delivery of the Series 2007 Bonds.

"Written Certificate of SVFC," "Written Direction of SVFC," "Written Notice of SVFC," "Written Request of SVFC" and "Written Statement of SVFC" each mean an instrument in writing signed on behalf of SVFC by an Authorized Officer thereof. Any such instrument and any supporting opinions or certificates may, but need not, be combined in a single instrument with any other instrument, opinion or certificate, and the two or more so combined are to be read and construed so as to form a single instrument. Any such instrument may be based, insofar as it relates to legal, accounting or engineering matters, upon the opinion or certificate of counsel, consultants, accountants or engineers, unless the Authorized Officer signing such Written Certificate, Direction, Notice, Request or Statement knows, or in the exercise of reasonable care should know, that the opinion or certificate with respect to the matters upon which such Written Certificate, Direction, Notice, Request or Statement may be based, as aforesaid, is erroneous. The same Authorized Officer, or the same counsel, consultant, accountant or engineer, as the case may be, need not certify to all of the matters required to be certified under any provision of the Indenture, but different Authorized Officers, counsel, consultants, accountants or engineers may certify to different matters, respectively.

PROVISIONS REGARDING COMMODITY SWAP

In connection with the Gas Supply, SVFC is to enter into the initial Commodity Swap with the initial Commodity Swap Counterparty. The following provisions apply to the initial Commodity Swap and any replacement Commodity Swap:

(i) The method for the calculation of the Commodity Swap Payments and Commodity Swap Receipts, as applicable, and the scheduled payment dates therefor are set forth in Schedule II to the Indenture.

(ii) Commodity Swap Payments are to be made by the Trustee on behalf of SVFC out of the Commodity Swap Payment Fund on a parity with the payment of principal of and interest on the Senior Lien Bonds.

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(iii) Commodity Swap Receipts received by the Trustee from or on behalf of SVFC are to be deposited directly into the Revenue Fund.

(iv) SVFC may replace any Commodity Swap then in effect only in accordance with Section 32.20 of the Prepaid Gas Agreement.

PAYMENTS ON BONDS

Medium of Payment; Form and Date; Letters and Numbers. (a) The Bonds are to be payable, with respect to interest, principal and Redemption Price, in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts.

Payment of Interest on Bonds; Interest Rights Preserved. Interest on any Bond which is payable, and is punctually paid or duly provided for, on any Interest Payment Date is to be paid to the Person in whose name that Bond is registered at the close of business on the date (the "Regular Record Date") which is the 15th day of the Month next preceding such Interest Payment Date.

Any interest on any Bond which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date ( "Defaulted Interest") will forthwith cease to be payable to the Person who was the Owner on the relevant Regular Record Date; and such Defaulted Interest is to be paid by SVFC to the Person in whose name the Bond is registered at the close of business on a date (the "Special Record Date") for the payment of such Defaulted Interest, which is to be fixed in the following manner. SVFC is to notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Bond and the date of the proposed payment, and SVFC is to deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as described in this Section of the Indenture. Thereupon the Trustee is to fix a Special Record Date for the payment of such Defaulted Interest, which is to be not more than 15 or less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee is to promptly notify SVFC of such Special Record Date and, in the name and at the expense of SVFC, cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first class postage prepaid, to each Owner at its address as it appears upon the Bond Register, not less than 10 days prior to such Special Record Date.

Subject to the foregoing provisions of this Section of the Indenture, each Bond delivered under the Indenture upon registration of transfer of or in exchange for or in lieu of any other Bond is to carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Bond.

Payment of Redeemed Bonds. Notice having been given in the manner provided in Section 4.04 of the Indenture and not rescinded, the Bonds or portions thereof so called for redemption will become due and payable on the redemption date so designated at the applicable Redemption Price, plus interest accrued and unpaid to the redemption date, and, upon presentation and surrender thereof at the office specified in such notice, such Bonds, or portions thereof, are to be paid at the Redemption Price, plus interest accrued and unpaid to the redemption date. If there is drawn for redemption less than all of a Bond, SVFC is to execute and the Trustee is to authenticate and deliver, upon the surrender of such Bond, without charge to the Owner thereof, for the unredeemed balance of the principal amount of the Bonds so surrendered, Bonds of like maturity in any of the Authorized Denominations. If, on the redemption date, moneys for the redemption of all the Bonds or portions thereof of any like maturity to be redeemed, together with unpaid accrued interest to the redemption date, are held by the Trustee so as to be available therefor on said date, and if notice of redemption has been given as aforesaid and not rescinded, then,

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from and after the redemption date interest on the Bonds or portions thereof of so called for redemption will cease to accrue and become payable. If said moneys are not so available on the redemption date, such Bonds or portions thereof will continue to bear interest until paid at the same rate as they would have borne had they not been called for redemption. Upon the payment of the Redemption Price of and any unpaid accrued interest on the Bonds being redeemed, each check or other transfer of funds issued for such purpose is to bear the CUSIP number identifying, by maturity, the Bonds being redeemed with the proceeds of such check or other transfer.

PLEDGE OF THE INDENTURE

The Pledge Effected by the Indenture. (a) The Bonds shall be special obligations of SVFC payable solely from, and secured as to the payment of the principal and Redemption Price thereof, and interest thereon, in accordance with their terms and the provisions of this Indenture solely by, the Trust Estate. Under the Indenture, the Trust Estate is pledged and assigned and SVFC has granted a security interest therein for the payment of the principal and Redemption Price of and interest on the Bonds in accordance with their terms, subject only to the provisions of this Indenture permitting the application thereof for the purposes and on the terms and conditions set forth in this Indenture. The pledge of and security interest in the Trust Estate in respect of the Senior Lien Bonds, the Commodity Swap, and any Reimbursement Obligation (subject to the limitations set forth in Sections 5.06(d) and (e) of the Indenture) is senior and superior to the pledge of and security interest in the Trust Estate to secure the payment of the principal of and interest on the Subordinate Lien Bonds, and the pledge of the Trust Estate in respect of the Subordinate Lien Bonds is junior and subordinate to the pledge of and security interest in the Trust Estate to secure the payment of the principal of and interest on the Senior Lien Bonds, the Commodity Swap, and any Reimbursement Obligations (subject to the limitations set forth in Sections 5.06(d) and (e) of the Indenture). Certain Funds and Accounts established hereunder (and under a Supplemental Indenture) may be, as provided in the Indenture (or in such Supplemental Indenture), solely for the benefit of the Owners of the Senior Lien Bonds, and certain Funds and Accounts established hereunder (and under a Supplemental Indenture) may be, as provided in the Indenture (or in such Supplemental Indenture), solely for the benefit of the Owners of the Subordinate Lien Bonds. The Series 2007 Subordinate Lien Bonds are payable from the Revenues only after application of the Revenues to the payment of SVFC obligations of a higher priority as established by this Indenture. The payment of principal of the Series 2007 Subordinate Lien Bonds is secured solely by cash available from time to time in the Senior Lien Bonds Debt Service Reserve Account (including amounts restored therein from Make-up Payments), subject to the provisions of Section 5.07(a) of the Indenture.

(b) The Bonds are not payable from, or secured by a legal or equitable pledge of, or lien or charge upon, any property of SVFC or any of its income or receipts except the Revenues and the other funds pledged therefor pursuant to the Indenture, which pledge is subject to the provisions of the Indenture permitting the application of the Revenues and such other funds for the purposes and on the terms and conditions set forth in the Indenture. Neither the faith and credit nor the taxing power of the State, the District or any other public agency is pledged to the payment of the principal or Redemption Price of, or the interest on, the Bonds. The issuance of the Bonds will not directly, indirectly or contingently obligate the State or any political subdivision thereof, including the District to levy or pledge any form of taxation or to make any appropriation for the payment of the Bonds. The payment of the principal or Redemption Price of, or interest on, the Bonds does not constitute a debt, liability or obligation of the State or any public agency, including the District.

(c) Nothing contained in the Indenture is to be construed to prevent SVFC from acquiring, constructing or financing through the issuance of its bonds, notes or other evidences of indebtedness any facilities or supplies of Gas other than the Gas Supply; provided, that such bonds, notes or other evidences of indebtedness will not be payable out of or secured by the Trust Estate, and neither the cost of

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such facilities or supplies of Gas nor any expenditure in connection therewith or with the financing thereof will be payable from the Trust Estate.

SECURITY FOR DEPOSITS

All moneys held by the Trustee and SVFC under the provisions of the Indenture are to constitute trust funds, and the Trustee and SVFC may deposit such moneys with one or more Depositories in trust for said parties. All moneys deposited under the provisions of the Indenture with the Trustee, SVFC or any Depository are to be held in trust and applied only in accordance with the provisions of the Indenture.

All moneys held under the Indenture by the Trustee, SVFC or any Depository are to be held in such manner as may then be required by applicable Federal or State laws and regulations and applicable state laws and regulations of the state in which such Depository is located, regarding security for, or granting a preference in the case of, the deposit of public or trust funds or, in the absence of such laws and regulations, are to be either (i) continuously or fully insured by the Federal Deposit Insurance Corporation, or (ii) continuously and fully secured, to the extent not insured by the Federal Deposit Insurance Corporation, by lodging with the Trustee or SVFC, as custodian, as collateral security, Qualified Investments having a market value (exclusive of accrued interest) not less than the amount of such moneys (or portion thereof not insured by the Federal Deposit Insurance Corporation); provided, however, that, to the extent permitted by law, it will not be necessary for the Trustee to give security under this subsection of the Indenture for the deposit of any moneys with them held in trust and set aside by them for the payment of the principal or Redemption Price of or interest on any Bonds, or for the Trustee, SVFC or any Depository to give security for any moneys which are to be represented by obligations or certificates of deposit purchased as an investment of such moneys.

INVESTMENT OF FUNDS

Moneys held in any Fund or Account established hereunder, other than moneys in the Termination Fund which are to be held uninvested, are to be invested and reinvested to the fullest extent practicable in Qualified Investments which mature or are payable not later than such times as will be necessary to provide moneys when needed for payments to be made from such Fund; provided, however, that moneys held in (i) the Senior Lien Bonds Debt Service Fund, or any Account or Subaccount therein, (ii) the Subordinate Lien Bonds Debt Service Fund, or any Account or Subaccount therein, or (iii) the Working Capital Reserve Fund, are to be invested and reinvested only in guaranteed investment contracts or similar agreements described in clause (e) of the definition of Qualified Investments or pursuant to a Forward Purchase Agreement. The Trustee is to make all such investments of moneys held by it in accordance with a Written Direction of SVFC. In making any investment in any Qualified Investments with moneys in any Fund or Account held by the Trustee, SVFC may instruct the Trustee to combine such moneys with moneys in any other Fund or Account held by the Trustee, but solely for purposes of making such investment in such Qualified Investments. In the absence of such a Written Direction of SVFC, the Trustee is to invest in securities described in clause (f) of the definition of Qualified Investments. For investment purposes, the Trustee may commingle the moneys in the Funds and Accounts established under the Indenture and held by it (other than the Rebate Fund, the Senior Lien Bonds Debt Service Fund and the Subordinate Lien Bonds Debt Service Fund) but is to account for each separately.

The Trustee is authorized under the Indenture to enter into Forward Purchase Agreements with one or more Qualified Providers at the Written Direction of SVFC for the investment of amounts in any Fund or Account in Qualified Investments for such Fund or Account. The Trustee is to apply any upfront payment made by a Qualified Provider in connection with entering into a Forward Purchase Agreement as set forth in a Written Direction of SVFC.

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Interest (net of that which represents a return of accrued interest paid in connection with the purchase of any investment and, at the discretion of SVFC, net of any amount thereof required to be rebated to the United States of America which, at the written direction of SVFC is to be transferred to the Rebate Fund to pay Rebate Requirements, and including any amounts in excess of the purchase price thereof received in connection with the sale or termination of any investment prior to the stated maturity thereof) earned on any moneys or investments in any Fund or Account established under the Indenture is to be immediately deposited into the Operating Fund; provided, however, that unless and until an Early Termination Date is established, interest earned on any moneys or investments in the Senior Lien Bonds Capitalized Interest Account, the Subordinate Lien Bonds Capitalized Interest Account, and the Senior Lien Bonds Debt Service Reserve Account, as well as any other amounts in the Senior Lien Bonds Debt Service Fund and the Subordinate Lien Bonds Debt Service Fund specified in the Tax Certificate as being required to be deposited in the Revenue Fund, are to be deposited in the Revenue Fund.

Nothing in the Indenture is to prevent any Qualified Investments acquired as investments of or security for Funds held under the Indenture from being issued or held in book-entry form on the books of the Department of the Treasury of the United States.

Nothing in the Indenture is to preclude the Trustee from investing or reinvesting moneys that it holds in the Funds or Accounts established pursuant to the Indenture through its bond department; provided, however, that SVFC may, in its discretion, direct that such moneys be invested or reinvested in a manner other than through such bond department. The Trustee may act as principal or agent in the acquisition or disposition of any Qualified Investment.

To the extent any Qualified Investment is insured, guaranteed or otherwise supported by any secondary facility, the Trustee is to make a claim under such facility at such time as is required to receive payment thereunder not later than the date required to make any necessary deposit pursuant to Section 5.06 of the Indenture or otherwise under Article V of the Indenture.

Valuation and Sale of Investments. Obligations purchased as an investment of moneys in any Fund or Account created under the provisions of the Indenture are to be deemed at all times to be a part of such Fund or Account, and any profit realized from the liquidation of such investment is to be credited to such Fund or Account, and any loss resulting from the liquidation of such investment is to be charged to the respective Fund or Account.

In computing the amount in any Fund or Account created under the provisions of the Indenture for any purpose provided in the Indenture, obligations purchased as an investment of moneys therein are to be valued at the lower of market value or the cost thereof. The Trustee will furnish the Corporation periodic cash transaction statements which include detail for all investment transactions made by the Trustee under the Indenture. The accrued interest paid in connection with the purchase of any obligation is to be included in the value thereof until interest on such obligation is paid. Such computation is to be determined as of the last day of SVFC’s Fiscal Year and at such other times as SVFC is to determine. Guaranteed investment contracts or similar agreements are to be valued at their face value to the extent that they provide for withdrawals without market adjustment or penalty when they are required to provide payment pursuant to the Indenture.

Except as otherwise provided in the Indenture, the Trustee is to sell at the best price obtainable, or present for redemption, any obligation so purchased as an investment whenever it is to be requested so to do by a Written Request of SVFC. Whenever it is necessary in order to provide moneys to meet any payment or transfer from any Fund or Account held by the Trustee or SVFC, the Trustee or SVFC is to sell at the best price obtainable or present for redemption such obligation or obligations designated by an Authorized Officer necessary to provide sufficient moneys for such payment or transfer; provided,

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however, that if SVFC fails to provide such designation promptly after request thereof by the Trustee, the Trustee may in its discretion select the obligation or obligations to be sold or presented for redemption.

The Trustee will not be liable or responsible for any loss resulting from any such investment, sale or presentation for redemption made in the manner provided above. SVFC acknowledges that to the extent regulations of the Comptroller of the Currency or other applicable regulatory entity grant SVFC the right to receive brokerage confirmations of security transactions made by the Trustee as they occur, SVFC specifically waives receipt of such confirmations to the extent permitted by law.

PARTICULAR COVENANTS OF SVFC

SVFC covenants and agrees with the Trustee and the Owners as follows:

Payment of Bonds. SVFC is to duly and punctually pay or cause to be paid, but solely from the Trust Estate, the principal or Redemption Price, if applicable, of every Bond and the interest thereon, at the dates and places and in the manner provided in the Bonds, according to the true intent and meaning thereof.

Extension of Payment of Bonds. SVFC is not permitted to directly or indirectly extend or assent to the extension of the date of maturity of any of the Bonds or the time of payment of any claims for interest by the purchase or funding of such Bonds or claims for interest or by any other arrangement, and in case the date of maturity of any of the Bonds or the time for payment of any such claims for interest is extended, such Bonds or claims for interest will not be entitled, in case of any default under the Indenture, to the benefit of the Indenture or to any payment out of Revenues or Funds established by the Indenture, including the investment income, if any, thereof, pledged under the Indenture or the moneys (except moneys held in trust for the payment of particular Bonds or claims for interest pursuant to the Indenture) held by the Trustee, except subject to the prior payment of the principal of all Bonds Outstanding the maturity of which has not been extended and of such portion of the accrued interest on the Bonds as is not represented by such extended claims for interest.

Offices for Servicing Bonds. SVFC must at all times maintain one or more agencies where Bonds may be presented for payment. Under the Indenture, SVFC appoints the Trustee as the paying agent for the Bonds and the Trustee accepts such appointment. The Trustee must at all times maintain one or more agencies where Bonds may be presented for registration or transfer and where notices, demands and other documents may be served upon SVFC in respect of the Bonds or of the Indenture, and the Trustee must continuously maintain or make arrangements to provide such services.

Further Assurance. At any and all times SVFC must, as far as it may be authorized by law, comply with any reasonable request of the Trustee to pass, make, do, execute, acknowledge and deliver all and every such further resolutions, acts, deeds, conveyances, assignments, transfers and assurances as may be necessary or desirable for the better assuring, conveying, granting, pledging, assigning and confirming all and singular the rights, Revenues and other moneys, securities and funds pledged, or intended so to be, or which SVFC may become bound to pledge, under the Indenture.

Power to Issue Bonds and Pledge the Trust Estate. SVFC is duly authorized under all applicable laws to create and issue the Bonds and to execute and deliver the Indenture and to pledge the Trust Estate, in the manner and to the extent provided in the Indenture. The pledge of the Trust Estate and the lien thereon in respect of the Subordinate Lien Bonds is in all respects to be junior and subordinate to the pledge of the Trust Estate and the lien thereon established under the Indenture in respect of the Senior Lien Bonds, the Commodity Swap Payments and the principal amount of any Reimbursement Obligation. Except to the extent otherwise provided in the Indenture, the Trust Estate will be free and clear of any

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pledge, lien, charge or encumbrance thereon or with respect thereto prior to, or of equal rank with or, subordinate to, the security interest, the pledge and assignment created by the Indenture in respect of the Senior Lien Bonds, the Commodity Swap Payments and the principal amount of any Reimbursement Obligation, and all action on the part of SVFC to that end has been and will be duly and validly taken. The Bonds and the provisions of the Indenture are and will be the valid and legally enforceable special obligations of SVFC in accordance with their terms and the terms of the Indenture. SVFC will at all times, to the extent permitted by law, defend, preserve and protect the pledge of the Revenues and other moneys, securities and funds pledged under the Indenture and all the rights of the Owners under the Indenture against all claims and demands of all Persons whomsoever.

Power to Fix and Collect Fees and Charges for the Sale of Gas. SVFC has, and, to the extent permitted by law, will have as long as any Bonds are Outstanding, good right and lawful power to fix, establish, maintain and collect fees and charges for the sale and transportation of Gas or otherwise with respect to the Gas Supply, subject to the terms of the Supply Agreement.

Creation of Liens; Recording and Filing. (a) SVFC must not issue any bonds, notes, debentures or other evidences of indebtedness of similar nature, other than the Bonds and bonds, notes or other obligations issued to refund Outstanding Bonds, or otherwise incur obligations other than the Commodity Swap and any Reimbursement Obligations, payable out of or secured by a security interest in or pledge or assignment of the Trust Estate and must not create or cause to be created any lien or charge on the Trust Estate other than the lien and charge created by the Indenture, the lien and charge to secure such refunding obligations, the Commodity Swap, and the Reimbursement Obligations. In connection with the foregoing, with the written consent of the Gas Supplier in accordance with the Prepaid Gas Agreement and, in the case of a partial refunding, upon receipt by SVFC from each Rating Agency then rating the Bonds of written evidence that upon the issuance of such refunding Bonds, all Outstanding Senior Lien Bonds or Subordinate Lien Bonds, as applicable, will continue to be assigned at least the same or equivalent ratings (including the same or equivalent numerical or other modifiers within a Rating Category), SVFC may issue Bonds on a parity with the Outstanding Senior Lien Bonds to refund and refinance any Bonds.

The Indenture constitutes a "security agreement" within the meaning of the Uniform Commercial Code-Secured Transactions of the State. The security interest of the Trustee, as created by the Indenture in the Trust Estate is to be perfected by the filing of financing statements at the Written Direction of SVFC in the office of the Secretary of State of the State in the City of Phoenix, Arizona and in the office of the Maricopa County Recorder, which financing statements shall be in accordance with the Uniform Commercial Code-Secured Transactions of the State. Subsequent to the foregoing recordation and filings, SVFC is to take such action as is necessary to preserve the lien and security interest of the Indenture. Any such filings or recordings are to be prepared by SVFC and delivered to the Trustee on a timely basis accompanied by any fees or requisite charges and, if requested by the Trustee, an Opinion of Counsel. The Trustee is to thereupon effect any such filings and recordings in said office of the Secretary of State and in said office of the Maricopa County Recorder, and promptly notify SVFC and the District of any such filings.

Enforcement and Amendment of Documents. (a) SVFC is to collect or cause to be collected and forthwith cause to be deposited in the Revenue Fund all amounts payable to it pursuant to the Supply Agreement and all other Revenues. SVFC is to enforce the provisions of the Supply Agreement, as well as any other contract or contracts entered into relating to the Gas Supply, and duly perform its covenants and agreements thereunder. SVFC will not consent or agree to or permit any termination or rescission of or amendment to or otherwise take any action under or in connection with the Supply Agreement which will impair the ability of SVFC to comply during the current or any future year with the provisions of the Indenture; provided, that this provision of the Indenture is not intended to prevent SVFC from otherwise

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taking any action under or in connection with the Supply Agreement which is expressly permitted pursuant to the provisions thereof. A copy of the Supply Agreement certified by an Authorized Officer is to be filed with the Trustee, and a copy of any such amendment certified by an Authorized Officer is to be filed with the Trustee.

SVFC is to enforce the provisions of the Prepaid Gas Agreement and duly perform its covenants and agreements thereunder and is to enforce the provisions of the Guarantee. The Trustee is to promptly notify SVFC of any payment default that has occurred and is continuing on the part of the Gas Supplier under the Prepaid Gas Agreement or the guarantor under the Guarantee with respect to moneys (from either source) to be deposited into the Revenue Fund as specified in the Prepaid Gas Agreement. SVFC will not consent or agree to or permit any rescission of or amendment to or otherwise take any action under or in connection with the Prepaid Gas Agreement or the Guarantee which will in any manner materially impair or materially adversely affect the rights of SVFC thereunder or the rights or security of the Trustee or the Owners. A copy of the Prepaid Gas Agreement certified by an Authorized Officer is to be filed with the Trustee, and a copy of any such amendment certified by an Authorized Officer is to be filed with the Trustee.

SVFC irrevocably appoints the Trustee as its agent to issue notices and to take any other actions that SVFC is required or permitted to take under (i) the Supply Agreement to terminate the Supply Agreement upon the default of the District thereunder, (ii) the Prepaid Gas Agreement to designate an Early Termination Date; (iii) the Guarantee to request funds under such Guarantee immediately upon an uncured failure by the Gas Supplier to pay a Gas Payment; and (iv) the Commodity Swap Agreement to terminate the Commodity Swap Agreement upon the occurrence of an event authorizing SVFC to take such action; in the event that the Trustee has actual knowledge of any event or circumstance which requires or permits SVFC to issue notices or take actions related to the matters covered by clauses (i) through (iv) and SVFC has not issued any such notice or taken any such action, the Trustee is to promptly issue such notice or take such action as agent for SVFC. Notwithstanding this grant of agency power, SVFC is to retain, in the absence of any conflicting action by the Trustee, the right to exercise any rights for which it has appointed the Trustee as its agent in accordance with the foregoing; provided however, if an Event of Default has occurred, the Trustee will have the right to notify SVFC to cease exercising any rights and, upon receipt of such notice with a copy provided to the District under the Supply Agreement, the Gas Supplier under the Prepaid Gas Agreement, the guarantor under the Guarantee, and the Commodity Swap Counterparty under the Commodity Swap Agreement, the Trustee will have exclusive authority to exercise all rights of SVFC under the Supply Agreement, the Prepaid Gas Agreement and the Guarantee, and the Commodity Swap Agreement, and to collect and apply all amounts payable thereunder, until such time as the Trustee issues a subsequent notice providing otherwise. As used in Section 7.08(c) of the Indenture, "actual knowledge" of the Trustee means written notice received by an officer of the Trustee at the corporate trust department of the Trustee at the address set forth in Section 12.09 of the Indenture, or such other address designated in writing by the Trustee.

SVFC is to collect or cause to be collected and forthwith cause to be deposited in the Revenue Fund all Commodity Swap Receipts or other amounts payable to it pursuant to the Commodity Swap. SVFC is to enforce the provisions of the Commodity Swap and duly perform its covenants and agreements thereunder. SVFC will not consent or agree to or permit any termination or rescission of or amendment to or otherwise take any action under or in connection with any Commodity Swap which will impair the ability of SVFC to comply during the current or any future year with the provisions of the Indenture. A copy of each Commodity Swap certified by an Authorized Officer is to be filed with the Trustee, and a copy of any amendment to a Commodity Swap certified by an Authorized Officer is to be filed with the Trustee.

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Upon the failure of the Gas Supplier to pay any amount due under the Prepaid Gas Agreement, the Trustee is to immediately make a demand for the payment of such amount by the guarantor under the Guarantee.

SVFC must not (i) assign or consent to any assignment by the other party thereto of the Prepaid Gas Agreement or the Supply Agreement or (ii) consent to any assignment of the Guarantee unless, prior to the effectiveness of any assignment, SVFC and the Trustee have obtained written confirmation from both Moody’s and S&P that such assignment will not result in any reduction in or withdrawal of the outstanding rating on the Bonds.

Accounts and Reports. SVFC is to keep or cause to be kept with respect to the Gas Supply proper books of record and account (separate from all other records and accounts) in accordance with generally accepted accounting principles, as such may be modified by the provisions of the Indenture, in which complete and correct entries are to be made of its transactions relating to the Gas Supply, the amount of Revenues and the application thereof and each Fund or Account established under the Indenture and relating to its costs and charges under the Supply Agreement and any other contracts for the sale or purchase of Contract Gas, and which, together with the Prepaid Gas Agreement and all contracts and all other books and papers of SVFC relating to the Gas Supply, will, subject to the terms thereof, at all times during regular business hours, with no less than five (5) days’ notice to SVFC, be subject to the inspection of the Trustee and the Owners of an aggregate of not less than 5% in principal amount of the Bonds then Outstanding or their representatives duly authorized in writing.

The Trustee is to advise SVFC promptly after the end of each Month of the respective transactions during such Month relating to each Fund and Account held by it under the Indenture. The Trustee is to provide an annual summary of all such monthly reports (the "Annual Transaction Report") no later than sixty (60) days after the end of each of SVFC’s Fiscal Years.

SVFC is to file with the Trustee (i) forthwith upon becoming aware of any Event of Default or default in the performance by SVFC of any covenant, agreement or condition contained in the Indenture, a Written Certificate of SVFC and specifying such Event of Default or default and (ii) within 180 days after the end of each Fiscal Year, commencing with the first Fiscal Year ending following the issuance of the Bonds, a Written Certificate of SVFC signed by an appropriate Authorized Officer stating whether, to the best of such Officer’s knowledge and belief, SVFC has kept, observed, performed and fulfilled its covenants and obligations contained in the Indenture and that there does not exist at the date of such certificate any default by SVFC under the Indenture or any Event of Default or other event which, with the giving of notice or the lapse of time specified in Section 8.01 of the Indenture, or both, would become an Event of Default, or, if any such default or Event of Default or other event exists, specifying the same and the nature and status thereof.

The reports, statements and other documents required to be furnished to the Trustee pursuant to any provisions of the Indenture are to be available for the inspection of Owners at the office of the Trustee and are to be mailed to each Owner who files a written request therefor with SVFC. SVFC may charge each Owner requesting such reports, statements and other documents a reasonable fee to cover reproduction, handling and postage.

Payment of Taxes and Charges. SVFC will from time to time duly pay and discharge, or cause to be paid and discharged, all taxes, assessments and other governmental charges, or required payments in lieu thereof, lawfully imposed upon the properties of SVFC or upon the rights, revenues, income, receipts, and other moneys, securities and funds of SVFC when the same become due (including all rights, moneys and other property transferred, assigned or pledged under the Indenture), and all lawful claims for labor and material and supplies, except those taxes, assessments, charges or claims which

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SVFC is in good faith to contest by proper legal proceedings if SVFC in all such cases has set aside on its books reserves deemed adequate by SVFC with respect thereto.

Tax Covenants. SVFC covenants in the Indenture that it will not take any action, or fail to take any action, or permit any action to be taken on its behalf or cause or permit any circumstance within its control to arise or continue, if any such action or inaction would adversely affect the Tax-Exempt Status of the Bonds under Section 103 of the Internal Revenue Code and the applicable Treasury Regulations promulgated thereunder. Without limiting the generality of the foregoing, SVFC covenants that it will comply with the instructions and requirements of the Tax Certificate. This covenant is to survive payment in full or defeasance of the Bonds.

In the event that at any time SVFC is of the opinion that for purposes of this Section of the Indenture it is necessary or helpful to restrict or limit the yield on the investment of any moneys held by the Trustee under the Indenture, SVFC is to so instruct the Trustee in writing as to the specific actions to be taken, and the Trustee is to take such action as specified in such instructions.

Notwithstanding any other provisions of this Section of the Indenture, if SVFC provides to the Trustee an Opinion of Bond Counsel that any specified action required under this Section of the Indenture is no longer required or that some further or different action is required to maintain the Tax-Exempt Status of the Bonds, SVFC and the Trustee may conclusively rely upon such opinion in complying with the requirements of this Section of the Indenture and of the Tax Certificate, and the covenants under the Indenture will be deemed to be modified to that extent.

Notwithstanding any other provision of the Indenture to the contrary, upon SVFC’s failure to observe or refusal to comply with the above covenants, the Controlling Party, or the Trustee acting on its behalf pursuant to the Controlling Party’s written request and direction, will be entitled to the rights and remedies provided to the Owners under the Indenture, other than the right (which, under the Indenture, is abrogated solely in regard to SVFC’s failure to observe or refusal to comply with the covenants of this Section of the Indenture) to declare the principal of any Senior Lien Bonds then Outstanding, and the interest accrued thereon, to be due and payable immediately; which such right will be held and exercisable only by the owners of not less than 100% of the Outstanding Senior Lien Bonds; provided, that, for purposes of the Indenture, such right to accelerate the payment of Bonds will never vest in the owners of the Outstanding Subordinate Lien Bonds notwithstanding that no Senior Lien Bond remains Outstanding or otherwise. In connection with any action taken by it under this Section of the Indenture, the Trustee will have the benefit of all of the protective provisions set forth in Article IX of the Indenture.

General. (a) SVFC must at all times maintain its existence and do and perform or cause to be done and performed all acts and things required to be done or performed by or on behalf of SVFC under the provisions of the Act and the Indenture.

SVFC is not to consolidate or amalgamate with, or merge with or into, or transfer all or substantially all its assets to, or reorganize, reincorporate or reconstitute into or as, another entity unless, (i) prior to such event, SVFC receives confirmation from the Commodity Swap Counterparty that such event does not trigger a termination event under Section 5(b)(iv) of the Commodity Swap then in effect; (ii) at the time of such consolidation, amalgamation, merger, transfer, reorganization, reincorporation or reconstitution, the resulting, surviving or transferee entity assumes all the obligations of SVFC under the Commodity Swap; and (iii) prior to such event SVFC and the Trustee receive written confirmation from both Moody’s and S&P that such event will not result in any reduction in or withdrawal of the then outstanding rating on the Bonds.

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SVFC must not take any action, or fail to take any action, or permit any action to be taken on its behalf or cause or permit any circumstance within its control to arise or continue, if any such action or inaction would adversely affect the ratings on the Senior Lien Bonds.

Upon the date of authentication and delivery of any of the Series 2007 Bonds, SVFC has determined that all conditions, acts and things required by law and the Indenture to exist, to have happened and to have been performed precedent to and in connection with the issuance of such Series 2007 Bonds exist, have happened and have been performed in due time, form and manner, and the issuance of such Series 2007 Bonds, together with all other obligations of SVFC, comply in all respects with the applicable laws of the State.

To the extent permitted by law, so long as any Bond remains Outstanding, SVFC agrees (i) not to file a petition for relief under Title 11 of the United States Code, as amended, and any successor statute or statutes having substantially the same function or any other insolvency law or seeking to adjudicate it a bankrupt or insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency, or reorganization or relief of debtors and (ii) that it will not voluntarily take any action or fail to take any action the result of which is to enable or permit or create circumstances which enable or permit any other person to take any action relating to the institution in respect of SVFC of an involuntary case or similar proceeding under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or seeking a decree or order appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for SVFC and/or the rents, fees, charges or other revenues of SVFC, or seeking a decree or order for the dissolution, liquidation or winding up of SVFC and its affairs or a decree or order finding or determining that SVFC is unable to meet its debts as such debts mature.

SVFC covenants and agrees that, in the event that the Commodity Swap terminates and such termination is accompanied by a failure to replace the Commodity Swap within the applicable period specified in Section 32.20 of the Prepaid Gas Agreement, SVFC will immediately exercise its rights to establish an Early Termination Date under Section 24.1 of the Prepaid Gas Agreement.

SVFC will not amend its Articles of Incorporation as in effect on the date of issuance of the Series 2007 Bonds unless SVFC and the Trustee have received, prior to the effectiveness of any amendment, written confirmation from both Moody’s and S&P that the effectiveness of such amendment will not result in any reduction in or withdrawal of the then outstanding rating on the Bonds.

EVENTS OF DEFAULT AND REMEDIES

Events of Default. Any one or more of the following constitute an Event of Default under the Indenture while any Senior Lien Bond remains Outstanding:

(a) default has been made in the due and punctual payment of the principal or Redemption Price of any Senior Lien Bond when and as the same became due and payable, whether at maturity or by call for redemption, or otherwise;

(b) default has been made in the due and punctual payment of any installment of interest on any Senior Lien Bond when and as such interest installment became due and payable;

(c) default has been made by SVFC in the performance or observance of any other of the covenants, agreements or conditions on its part in the Indenture or in the Senior Lien Bonds contained, and such default continues for a period of 60 days or, if such default cannot

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reasonably be remedied within such 60 day period, such longer period so long as diligent efforts are being made to remedy such default, after written notice thereof specifying such default and requiring that it must be remedied and stating that such notice is a "Notice of Default" under the Indenture is given to SVFC by the Trustee or to SVFC and to the Trustee by the Owners of not less than 10% in principal amount of the Senior Lien Bonds Outstanding;

(d) SVFC commences a voluntary case or similar proceeding under any applicable bankruptcy, insolvency or other similar law in effect at the time of the execution and delivery of the Indenture of thereafter (provided, however, that such event will not constitute an Event of Default under the Indenture unless, in addition, (i) SVFC is unable to meet its debts with respect to the Gas Supply as such debts mature or (ii) any plan of adjustment or other action in such proceeding would affect in any way the Revenues or the Gas Supply), or authorizes, applies for or consents to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator or similar official for the Gas Supply, or any part thereof, and/or the rents, fees, charges or other revenues therefrom, or makes any general assignment for the benefit of creditors, or makes a written declaration or admission to the effect that it is unable to meet its debts with respect to the Gas Supply as such debts mature, or authorizes or takes any action in furtherance of any of the foregoing;

(e) a court having jurisdiction in the premises enters a decree or order for relief in respect of SVFC in an involuntary case or similar proceeding under any applicable bankruptcy, insolvency or other similar law now in effect at the time of the execution and delivery of the Indenture of thereafter (provided, however, that such event will not constitute an Event of Default under the Indenture unless, in addition, (i) SVFC is unable to meet its debts with respect to the Gas Supply as such debts mature or (ii) any plan of adjustment or other action in such proceeding would affect in any way the Revenues or the Gas Supply), or a decree or order appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for the Gas Supply, or any part thereof, and/or the rents, fees, charges or other revenues therefor, or a decree or order for the dissolution, liquidation or winding up of SVFC and its affairs or a decree or order finding or determining that SVFC is unable to meet its debts with respect to the Gas Supply as such debts mature, and any such decree or order remains unstayed and in effect for a period of 60 consecutive days; and

(f) there occurs any other Event of Default specified in a Supplemental Indenture with respect to Bonds issued on a parity with the Senior Lien Bonds issued to refund or refinance Outstanding Bonds.

In the case of an Event of Default described in clause (a) or (b) above, the Trustee must, without further action, declare the principal of all the Senior Lien Bonds then Outstanding, and the interest accrued thereon, to be due and payable immediately, anything in the Indenture or in the Bonds to the contrary notwithstanding (but subject, however, at all times to the proviso in Section 7.11(d) of the Indenture). In the case of an Event of Default described in clause (c), (d), (e) or (f) above, unless the principal amount of all the Senior Lien Bonds have already become due and payable, the Trustee or the Controlling Party (after notice to the Trustee) may bring a suit in any court of competent jurisdiction to compel specific performance. The right of the Trustee or of the Controlling Party to make any such declaration as aforesaid, however, is subject to the condition that if, at any time before the Senior Lien Bonds have matured by their terms, all overdue installments of interest upon the Senior Lien Bonds, together with the reasonable fees, charges, expenses and liabilities of the Trustee, and all other sums then payable by SVFC under the Indenture (except the principal of, and interest accrued since the next preceding Interest Payment Date on, the Senior Lien Bonds due and payable solely by virtue of such declaration) has either been paid by or for the account of SVFC or provision satisfactory to the Trustee

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has been made for such payment, and all defaults under the Senior Lien Bonds or under the Indenture (other than the payment of principal and interest due and payable solely by reason of such declaration) have been made good or have been secured to the satisfaction of the Trustee or provision deemed by the Trustee to be adequate has been made therefor, then and in every such case the Controlling Party, by written notice to SVFC and to the Trustee, may rescind such declaration and annul such default in its entirety, or, if the Trustee has acted itself, and if there has not been theretofore delivered to the Trustee written directions to the contrary by the Controlling Party, then any such declaration will ipso facto be deemed to be rescinded and any such default will ipso facto be deemed to be annulled, but no such rescission or annulment will extend to or affect any subsequent default or impair or exhaust any right or power consequent thereon.

While any Senior Lien Bond remains Outstanding, nothing in Section 8.01 of the Indenture will impair or restrict the rights of the Owners of the Subordinate Lien Bonds under Section 8.06(b) of the Indenture. Subject at all times to the proviso in Section 7.11(d) of the Indenture, at such time as there are no Senior Lien Bonds (or Bonds issued pursuant to a Supplemental Indenture on a parity with the Senior Lien Bonds) Outstanding, "Senior Lien Bonds" as used in the provisions of Section 8.01 of the Indenture will be deemed to be replaced with the words "Subordinate Lien Bonds" and the "Controlling Party" will be that which is identified in clause (b) of the definition of such term.

Accounting and Examination of Records After Default. SVFC covenants that if an Event of Default has happened and has not been remedied, the books of record and accounts of SVFC and all other records relating to the Gas Supply will at all times during regular business hours be subject to the inspection and use of the Trustee and of its agents and attorneys.

Application of Moneys After Default; Enforcement of Agreements. SVFC covenants that if an Event of Default happens and has not been remedied, SVFC, upon the demand of the Trustee, will (i) to the extent not previously so granted, grant to the Trustee the rights and remedies afforded SVFC in the Supply Agreement, the Prepaid Gas Agreement and the Guarantee and (ii) pay over or cause to be paid over to the Trustee all Revenues which are not paid directly to the Trustee as promptly as practicable after receipt thereof. During the continuance of an Event of Default, the Trustee is to continue to apply all Revenues received by the Trustee pursuant to any right given or action taken under the provisions of this Article and any moneys in the Funds and Accounts held by the Trustee under the Indenture as provided in Article V.

If and whenever all overdue installments of interest on all Senior Lien Bonds, together with the reasonable charges, expenses and liabilities of the Trustee, and all other sums payable by SVFC under the Indenture, including the principal and Redemption Price of and accrued unpaid interest on all Senior Lien Bonds which are then payable by declaration or otherwise, are either paid by or for the account of SVFC, or provisions satisfactory to the Trustee have been made for such payment, and all defaults under the Indenture or the Senior Lien Bonds have been made good or secured to the satisfaction of the Trustee or provision deemed by the Trustee to be adequate have been made therefor, thereupon SVFC, the Trustee and the Owners of the Senior Lien Bonds are to be restored, respectively, to their former positions and rights under the Indenture. No such restoration of SVFC, the Trustee and the Owners of the Senior Lien Bonds to their former positions and rights will extend to or affect any subsequent default under the Indenture or impair any right consequent thereon. Subject at all times to the proviso in Section 7.11(d) of the Indenture, at such time as there are no Senior Lien Bonds (or Bonds issued pursuant to a Supplemental Indenture on a parity with the Senior Lien Bonds) Outstanding, "Senior Lien Bonds" as used in the provisions of Section 8.03(b) of the Indenture will be deemed to be replaced with the words "Subordinate Lien Bonds."

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Appointment of Receiver. The Trustee will have the right, upon the happening of an Event of Default, to apply in an appropriate proceeding for the appointment of a receiver of the Gas Supply.

Proceedings Brought by Trustee. If an Event of Default happens and has not been remedied, then and in every such case, the Trustee, by its agents and attorneys, may proceed, and upon written request of the Controlling Party must proceed, to protect and enforce its rights and the rights of the Owners under the Indenture forthwith by a suit or suits in equity or at law, whether for the specific performance of any covenant contained in the Indenture, or in aid of the execution of any power granted in the Indenture, or for an accounting against SVFC as if SVFC were the trustee of an express trust, or in the enforcement of any other legal or equitable right as the Trustee, being advised by counsel, deems most effectual to enforce any of its rights or to perform any of its duties under the Indenture.

All rights of action under the Indenture may be enforced by the Trustee without the possession of any of the Bonds or the production thereof at the trial or other proceedings, and any such suit or proceedings instituted by the Trustee is to be brought in its name.

The Controlling Party may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee; provided, that the Trustee has the right to decline to follow any such direction if the Trustee is advised by counsel that the action or proceeding so directed may not lawfully be taken, or if the Trustee in good faith determines that the action or proceeding so directed would involve the Trustee in personal liability or be unjustly prejudicial to the Owners not parties to such direction.

Upon commencing a suit in equity or upon other commencement of judicial proceedings by the Trustee to enforce any right under the Indenture, the Trustee will be entitled to exercise any and all rights and powers conferred in the Indenture and provided to be exercised by the Trustee upon the occurrence of any Event of Default.

Regardless of the happening of an Event of Default, the Trustee has power to, but unless requested in writing by the Controlling Party and furnished with reasonable security and indemnity, is under no obligation to, institute and maintain such suits and proceedings as it may be advised are necessary or expedient to prevent any impairment of the security under the Indenture by any acts which may be unlawful or in violation of the Indenture, and such suits and proceedings as the Trustee is advised are necessary or expedient to preserve or protect its interests and the interests of the Owners.

Restriction on Owner’s Action. No Owner of any Bond has or will have any right to institute any suit, action or proceeding at law or in equity for the enforcement of any provision of the Indenture or the execution of any trust under the Indenture or for any remedy under the Indenture, unless such Owner (i) has previously given to the Trustee written notice of the happening of an Event of Default, as provided in this Article, and the Controlling Party has filed a written request with the Trustee to take such action, (ii) has offered it reasonable opportunity, either to exercise the powers granted in the Indenture or by the laws of the State or to institute such action, suit or proceeding in its own name, and (iii) has offered to the Trustee adequate security and indemnity against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee has refused to comply with such request for a period of 60 days after receipt by it of such notice, request and offer of indemnity, it being understood and intended that no one or more Owners of Bonds has or will have any right in any manner whatever by its or their action to affect, disturb or prejudice the pledge and security interest created by the Indenture, or to enforce any right under the Indenture, except in the manner therein provided; and that all proceedings at law or in equity to enforce any provision of the Indenture are to be instituted, had and maintained in the manner provided in the Indenture and for the equal benefit of all Owners of the Outstanding Bonds, subject only to the provisions of Section 7.02 of the Indenture.

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Nothing in the Indenture or in the Bonds contained will affect or impair the obligation of SVFC, which is absolute and unconditional, to pay, but only from the Trust Estate, in accordance with the terms of the Indenture (including the specific pledge of and security interest in the Trust Estate granted by the Indenture for the benefit of the Owners of the Senior Lien Bonds and the subordinate pledge of and security interest in the Trust Estate granted by the Indenture for the benefit of the Owners of the Subordinate Lien Bonds), at the respective dates of maturity and places therein expressed the principal or Redemption Price of and interest on the Bonds to the respective Owners thereof, or affect or impair the right of action, which is also absolute and unconditional, of any Owner to enforce such payment of its Bond. Under the Indenture, the payment of the principal of the Subordinate Lien Bonds is secured only by the cash available from time to time in the Senior Lien Bonds Debt Service Reserve Account.

Remedies Not Exclusive. No remedy by the terms of the Indenture conferred upon or reserved to the Trustee or the Owners is intended to be exclusive of any other remedy, but each and every such remedy is to be cumulative and is to be in addition to every other remedy given under the Indenture or existing at law or in equity or by statute on or after the date of execution and delivery of the Indenture.

SUPPLEMENTAL INDENTURES AND AMENDMENTS

Supplemental Indentures Not Requiring Consent of Owners. SVFC and the Trustee may from time to time, subject to the conditions and restrictions in the Indenture contained, enter into a Supplemental Indenture or Indentures, in form satisfactory to the Trustee, which will thereafter form a part of the Indenture, without the consent of the Owners for any one or more of the following purposes:

(a) To cure any ambiguity, supply any omission, or cure or correct any defect or inconsistent provision in the Indenture;

(b) To insert such provisions clarifying matters or questions arising under the Indenture as are necessary or desirable and are not contrary to or inconsistent with the Indenture as theretofore in effect;

(c) To make any other modification or amendment of the Indenture which will not have a material adverse effect on the Owners;

(d) To add to the covenants and agreements of SVFC in the Indenture, other covenants and agreements to be observed by SVFC which are not contrary to or inconsistent with the Indenture as theretofore in effect;

(e) To add to the limitations and restrictions in the Indenture, other limitations and restrictions to be observed by SVFC which are not contrary to or inconsistent with the Indenture as theretofore in effect;

(f) To authorize, in compliance with all applicable law, Bonds to be issued in the form of coupon Bonds registrable as to principal only and, in connection therewith, specify and determine the matters and things relative to the issuance of such coupon Bonds, including provisions relating to the timing and manner of provision of any notice required to be given under the Indenture to the Owners of such coupon Bonds, which are not contrary to or inconsistent with the Indenture as theretofore in effect, or to amend, modify or rescind any such authorization, specification or determination at any time prior to the first authentication and delivery of such coupon Bonds;

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(g) To provide for the execution of a Commodity Swap in accordance with the provisions of the Indenture;

(h) To confirm, as further assurance, any security interest, pledge or assignment under, and the subjection to any security interest, pledge or assignment created or to be created by, the Indenture of the Revenues or of any other moneys, securities or funds;

(i) To add to the Events of Default in the Indenture additional Events of Default;

(j) To add to the Indenture any provisions relating to the application of interest earnings on any Fund under the Indenture required by law to preserve the Tax-Exempt Status of the Bonds;

(k) To evidence the appointment of a successor Trustee;

(l) If the Senior Lien Bonds affected by such change are rated by a Rating Agency, to make any change upon receipt of written evidence from the applicable Rating Agency that upon the effectiveness of the proposed change, all Outstanding Senior Lien Bonds will continue to be assigned at least the same or equivalent ratings (including the same or equivalent numerical or other modifiers within a Rating Category); or

(m) To authorize one of more series of Bonds to be issued under the Indenture pursuant to Section 2.06 of the Indenture, and, in connection therewith, specify and determine any matters required pursuant to Article II of the Indenture, and also any other matters and things relative to such Bonds which are not contrary to or inconsistent with the Indenture as theretofore in effect;

In making any determination as described above under subsection (c), under the Indenture, SVFC and the Trustee may rely upon an Opinion of Counsel and/or certificates of investment bankers or other financial professionals or consultants.

Each Supplemental Indenture authorized by this Section of the Indenture will become effective as of the date of its execution and delivery by SVFC and the Trustee or such later date as is to be specified in such Supplemental Indenture.

Supplemental Indentures Effective With Consent of Senior Lien Bond Owners. At any time or from time to time, and subject to the proviso set forth in Section 10.03(f) of the Indenture, a Supplemental Indenture may be entered into by SVFC and the Trustee subject to notice to and consent by the Owners of the Senior Lien Bonds in accordance with and subject to the provisions of Article XI, which Supplemental Indenture, upon compliance with the provisions of said Article XI, will become fully effective in accordance with its terms as provided in said Article XI.

The Indenture must not be modified or amended in any respect except as provided in and in accordance with and subject to the provisions of this Article X and, if applicable, Article XI. Nothing contained in this Article X or, if applicable, Article XI is to affect or limit the right or obligation of SVFC to adopt, make, do, execute, acknowledge or deliver any resolution, act or other instrument pursuant to the provisions of Section 7.04 or Section 7.07 of the Indenture or the right or obligation of SVFC to execute and deliver to the Trustee any instrument which elsewhere in the Indenture it is provided is to be delivered to the Trustee.

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Any Supplemental Indenture referred to and permitted or authorized by Section 10.01 of the Indenture may be entered into between SVFC and the Trustee without the consent of any of the Owners, but will become effective only on the conditions, to the extent and at the time provided in said Section. The copy of every Supplemental Indenture is to be accompanied by an Opinion of Counsel stating that such Supplemental Indenture has been duly and lawfully executed in accordance with the provisions of the Indenture, is authorized or permitted by the Indenture, and is a valid and binding obligation of SVFC; provided, that such Opinion may take exception as to the effect of, or for restrictions or limitations imposed by or resulting from, bankruptcy, insolvency, debt adjustment, moratorium, reorganization or other similar laws affecting creditors’ rights generally and judicial discretion and the valid exercise of the sovereign police powers of the State and of the constitutional power of the United States of America and may state that no opinion is being rendered as to the availability of any particular remedy.

No Supplemental Indenture is to change or modify any of the rights or obligations of the Trustee without its written assent thereto; provided, however, this Section of the Indenture will not affect the rights of the Senior Lien Bond Owners or SVFC to remove the Trustee as provided in Section 9.07 of the Indenture. No Supplemental Indenture (or other amendment to the Indenture) is to change or modify (i) the order of priority of deposits to the Senior Lien Bonds Debt Service Account, the Commodity Swap Payment Fund or the Subordinate Lien Bonds Debt Service Account as set forth in clauses (i) through (v) of Section 5.06(a), respectively, or (ii) the priority of the application of funds following an Event of Default as set forth in Section 8.03 of the Indenture, unless the prior written consent of the Commodity Swap Counterparty has been obtained, or (iii) the proviso set forth in Section 7.11(d) of the Indenture. No Supplemental Indenture (or other amendment to the Indenture) that impairs or restricts the rights of the Owners of the Outstanding Subordinate Lien Bonds may be approved without the prior consent of the Owners of the Outstanding Subordinate Lien Bonds. At such time as there are no Senior Lien Bonds (or Bonds issued pursuant to a Supplemental Indenture on a parity with the Senior Lien Bonds) Outstanding, "Senior Lien Bond Owners" as used in the provisions of Article X of the Indenture is to be deemed to be replaced with the words "Subordinate Lien Bond Owners."

Powers of Amendment. Any modification or amendment of the Indenture and of the rights and obligations of SVFC and of the Owners of the Bonds under the Indenture, in any particular set forth in Section 10.02 of the Indenture, may be made by a Supplemental Indenture, with the written consent, given as provided in Section 11.03 of the Indenture, of the Controlling Party; provided, however, that if such modification or amendment will, by its terms, not take effect so long as any Bonds of any specified like maturity remain Outstanding, the consent of the Owners of such Bonds will not be required and such Bonds will not be deemed to be Outstanding for the purpose of any calculation of Outstanding Bonds under this Section of the Indenture. No such modification or amendment is to permit a change in the terms of redemption or maturity of the principal of any Bond or of any installment of interest thereon or a reduction in the principal amount or the Redemption Price thereof or in the rate of interest thereon without the consent of the Owner of the affected Bond, or reduce the percentages or otherwise affect the classes of Bonds the consent of the Owners of which is required to effect any such modification or amendment, or change or modify any of the rights or obligations of the Trustee without its written assent thereto.

Consent of Owners. SVFC and the Trustee may at any time enter into a Supplemental Indenture making a modification or amendment permitted by the provisions of Section 11.02 of the Indenture to take effect when and as provided in Section 11.03 of the Indenture. A copy of such Supplemental Indenture (or brief summary thereof or reference thereto in form approved by the Trustee), together with a request to Senior Lien Bond Owners for their consent thereto in form satisfactory to the Trustee, is to be mailed by SVFC to the Owners (but failure to mail such copy and request will not affect the validity of the Supplemental Indenture when consented to as provided in Section 11.03 of the Indenture). Such Supplemental Indenture will not be effective unless and until there has been filed with the Trustee (a) the

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written consents of Owners of the percentages of Outstanding Bonds specified in Section 11.02 of the Indenture and (b) an Opinion of Counsel stating that such Supplemental Indenture has been duly and lawfully executed by SVFC in accordance with the provisions of the Indenture, is authorized or permitted by the Indenture, and is a valid and binding obligation of SVFC, subject to any applicable bankruptcy, insolvency or other laws affecting creditors’ rights generally, and which opinion of counsel may state that no opinion is being rendered as to the availability of any particular remedy. Each such consent is effective only if accompanied by proof of the holding, at the date of such consent, of the Bonds with respect to which such consent is given, which proof is to be such as is permitted by Section 12.02 of the Indenture. A certificate or certificates executed by the Trustee and filed with the Trustee and SVFC stating that it has examined such proof and that such proof is sufficient in accordance with Section 12.02 of the Indenture will be conclusive that the consents have been given by the Owners of the Bonds described in such certificate or certificates of the Trustee. Any such consent is irrevocable and binding upon the Owner of the Bonds giving such consent and, anything in Section 12.02 of the Indenture to the contrary notwithstanding, upon any subsequent Owner of such Bonds and of any Bonds issued in exchange therefor (whether or not such subsequent Owner thereof has notice of such consent). At any time after the Owners of the required percentages of Bonds have filed their consents to the Supplemental Indenture (or have deemed to have consented to such Supplemental Indenture), the Trustee is to make and file with the Trustee and SVFC a written statement that the Owners of such required percentages of Bonds have consented to, such Supplemental Indenture. Such written statements will be conclusive evidence that such consents have been received. At any time thereafter, notice stating in substance that the Supplemental Indenture (which may be referred to as a Supplemental Indenture entered into by SVFC and the Trustee on a stated date, a copy of which is on file with the Trustee) has been consented to by the Owners of the required percentages of Bonds and will be effective as provided in Section 11.03 of the Indenture, may be given to Owners by the Trustee by mailing such notice to Owners (but failure to mail such notice will not prevent such Supplemental Indenture from becoming effective and binding as in Section 11.03 of the Indenture provided). A record, consisting of the certificates or statements required or permitted by Section 11.03 of the Indenture to be made by the Trustee, will be proof of the matters therein stated.

Exclusion of Bonds. Bonds owned or held by or for the account of SVFC are not to be deemed Outstanding for the purpose of consent or other action or any calculation of Outstanding Bonds provided for in this Article XI, and SVFC will not be entitled with respect to such Bonds to give any consent or take any other action provided for in this Article XI. At the time of any consent or other action taken under this Article XI, SVFC is to furnish the Trustee a certificate of an Authorized Officer, upon which the Trustee may rely, describing all Bonds so to be excluded.

DEFEASANCE

Defeasance. (a) If SVFC pays or causes to be paid, or there is otherwise paid, to the Owners of all Bonds the principal or Redemption Price, if applicable, thereof and interest due or to become due thereon, at the times and in the manner stipulated in the Bonds and in the Indenture, then the pledge of and security interest in the Trust Estate, and all covenants, agreements and other obligations of SVFC to the Owners made under the Indenture, will thereupon cease, terminate and be discharged and satisfied. In such event, the Trustee is to cause an accounting for such period or periods as is requested by SVFC to be prepared and filed with SVFC and, upon the request of SVFC, is to execute and deliver to SVFC all such instruments as may be desirable to evidence such discharge and satisfaction, and the Trustee is to pay over or deliver to SVFC all moneys or securities held by it pursuant to the Indenture which are not required for the payment of principal or Redemption Price, if applicable, of or interest on Bonds not theretofore surrendered for such payment or redemption. If SVFC pays or causes to be paid, or there is otherwise paid, to the Owners of any Bonds the principal or Redemption Price, if applicable, thereof and interest due or to become due thereon, at the times and in the manner stipulated therein and in the

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Indenture, such Bonds will cease to be entitled to any lien, benefit or security under the Indenture, and all covenants, agreements and obligations of SVFC to the Owners of such Bonds will thereupon cease, terminate and be discharged and satisfied except for remaining rights of registration of transfer and exchange of Bonds.

Bonds or interest installments for the payment or redemption of which moneys have been set aside and held in trust by the Trustee (through deposit by SVFC of funds for such payment or redemption or otherwise) at the maturity or redemption date thereof will be deemed to have been paid within the meaning and with the effect expressed in this Section of the Indenture.

Subject to the provisions of subsection (d) of Section 12.01 of the Indenture, any Outstanding Bonds will prior to the maturity or redemption date thereof be deemed to have been paid within the meaning and with the effect expressed in the Indenture if (i) in case any of said Bonds are to be redeemed on any date prior to their maturity, SVFC has given to the Trustee irrevocable instructions accepted in writing by the Trustee to mail as provided in Article IV of the Indenture notice of redemption of such Bonds (other than Bonds which have been purchased by the Trustee at the direction of SVFC or purchased or otherwise acquired by SVFC and delivered to the Trustee as thereinafter provided prior to the mailing of such notice of redemption) on said date, (ii) there has been deposited with the Trustee either moneys (including moneys withdrawn and deposited pursuant to Section 5.07(d) of the Indenture) in an amount which is sufficient, or Defeasance Securities (including any Defeasance Securities issued or held in book-entry form on the books of the Department of the Treasury of the United States) the principal of and the interest on which when due will provide moneys which, together with the moneys, if any, deposited with the Trustee at the same time, will be sufficient (as evidenced by an Accountant’s Certificate), to pay when due the principal or Redemption Price, if applicable, of and the interest due and to become due on said Bonds on or prior to the redemption date or maturity date thereof, as the case may be, and (iii) in the event said Bonds are not to be redeemed or paid within the next succeeding 60 days, SVFC has given the Trustee in form satisfactory to it irrevocable instructions to mail following the deposit of funds with the Trustee, as soon as practicable, a notice to the Owners of such Bonds at their last addresses appearing upon the Bond Register at the close of business on the last Business Day of the Month preceding the Month for which notice is mailed that the deposit required by (ii) above has been made with the Trustee and that said Bonds are deemed to have been paid in accordance with Section 12.01 of the Indenture and stating such maturity or redemption date upon which moneys are expected, subject to the provisions of subsection (d) of Section 12.01 of the Indenture, to be available for the payment of the principal or Redemption Price, if applicable, on said Bonds (other than Bonds which have been purchased by the Trustee at the direction of SVFC or purchased or otherwise acquired by SVFC and delivered to the Trustee as provided in the Indenture prior to the mailing of the notice of redemption referred to in clause (i)). Any notice of redemption mailed pursuant to the preceding sentence of the Indenture with respect to Bonds which constitute less than all of the Outstanding Bonds of any maturity is to specify the letter and number or other distinguishing mark of each such Bond. The Trustee is to, if so directed by SVFC (A) prior to the maturity date of Bonds deemed to have been paid in accordance with Section 12.01 of the Indenture which are not to be redeemed prior to their maturity or (B) prior to the mailing of the notice of redemption referred to in clause (i) above with respect to any Bonds deemed to have been paid in accordance with Section 12.01 of the Indenture which are to be redeemed on any date prior to their maturity, apply moneys deposited with the Trustee in respect of such Bonds and redeem or sell Defeasance Securities so deposited with the Trustee and apply the proceeds thereof to the purchase of such Bonds and, the Trustee is to immediately thereafter cancel all such Bonds so purchased; provided, however, that the moneys and Defeasance Securities remaining on deposit with the Trustee after the purchase and cancellation of such Bonds (or the deemed cancellation thereof) are to be sufficient (as evidenced by an Accountant’s Certificate) to pay when due the maturing principal or Redemption Price, if applicable, and interest due or to become due on all Bonds not so purchased and in respect of which such moneys and Defeasance Securities are being held by the Trustee, on or prior to the

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redemption date or maturity date thereof, as the case may be. If, at any time (1) prior to the maturity date of Bonds deemed to have been paid in accordance with Section 12.01 of the Indenture which are not to be redeemed prior to their maturity date or (2) prior to the mailing of the notice of redemption referred to in clause (i) with respect to any Bonds deemed to have been paid in accordance with Section 12.01 of the Indenture which are to be redeemed on any date prior to their maturity, SVFC is to purchase or otherwise acquire any such Bonds and deliver such Bonds to the Trustee prior to their maturity date or redemption date, as the case may be, the Trustee will immediately cancel all such Bonds so delivered; such delivery of Bonds to the Trustee is to be accompanied by directions from SVFC to the Trustee as to the manner in which such Bonds are to be applied against the obligation of the Trustee to pay or redeem Bonds deemed paid in accordance with Section 12.01 of the Indenture. The directions given by SVFC to the Trustee referred to in the preceding sentences will also specify the portion, if any, of such Bonds so purchased or delivered and cancelled or deemed cancelled to be applied against the obligation of the Trustee to pay Bonds deemed paid in accordance with this Section 12.01 of the Indenture upon their maturity date or dates and the portion, if any, of such Bonds so purchased or delivered and cancelled or deemed cancelled to be applied against the obligation of the Trustee to redeem Bonds deemed paid in accordance with Section 12.01 of the Indenture on any date or dates prior to their maturity. In the event that on any date as a result of any purchases, acquisitions and cancellations or deemed cancellations of Bonds as provided in Section 12.01 of the Indenture the total amount of moneys and Defeasance Securities remaining on deposit with the Trustee under Section 12.01 of the Indenture is in excess of the total amount which would have been required to be deposited with the Trustee on such date in respect of the remaining Bonds in order to satisfy clause (ii) of subsection (c) of Section 12.01 of the Indenture (as evidenced by an Accountant’s Certificate), the Trustee is to, if requested by SVFC, pay the amount of such excess to SVFC free and clear of any trust, lien, security interest, pledge or assignment securing said Bonds or otherwise existing under the Indenture. Except as otherwise provided in subsections (c) and (d) of Section 12.01 of the Indenture, neither Defeasance Securities nor moneys deposited with the Trustee pursuant to this Section of the Indenture nor principal or interest payments on any such Defeasance Securities are to be withdrawn or used for any purpose other than, and are to be held in trust for, the payment of the principal or Redemption Price, if applicable, and interest on said Bonds; provided that any cash received from such principal or interest payments on such Defeasance Securities deposited with the Trustee, (x) to the extent such cash will not be required at any time for such purpose (as evidenced by an Accountant’s Certificate), is to be paid over to SVFC as received by the Trustee, free and clear of any trust, lien or pledge securing said Bonds or otherwise existing under the Indenture, and (y) to the extent such cash will be required for such purpose at a later date, is to be, to the extent practicable, reinvested in Defeasance Securities maturing at times and in amounts sufficient (as evidenced by an Accountant’s Certificate), together with the other funds and Defeasance Securities then held by the Trustee for such purpose to pay when due the principal or Redemption Price, if applicable, and interest to become due on said Bonds on or prior to such redemption date or maturity date thereof, as the case may be, and interest earned from such reinvestments is to be paid over to SVFC, as received by the Trustee, free and clear of any trust, lien, security interest, pledge or assignment securing said Bonds or otherwise existing under the Indenture.

Anything in the Indenture to the contrary notwithstanding, any moneys held by the Trustee in trust for the payment and discharge of any of the Bonds which remain unclaimed for two years after the date when such Bonds have become due and payable, either at their stated maturity dates or by call for earlier redemption, if such moneys were held by the Trustee at such date, or for two years after the date of deposit of such moneys if deposited with the Trustee after the said date when such Bonds became due and payable, are to be, at the Written Request of SVFC, repaid by the Trustee to SVFC, as its absolute property and free from trust, and the Trustee will thereupon be released and discharged with respect thereto and the Owners can look only to SVFC for the payment of such Bonds; provided, however, that before being required to make any such payment to SVFC the Trustee is required to, at the expense of SVFC, mail by first class mail, postage prepaid, to the Owners of such Bonds at the addresses of such

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Owners in the Bond Register as of the date which is 30 days prior to the date of mailing of such notice, a notice that said moneys remain unclaimed and that, after a date named in said notice, which date is to be not less than 30 days after the date of the mailing of such notice, the balance of such moneys then unclaimed will be returned to SVFC.

MISCELLANEOUS

Evidence of Signatures of Owners and Ownership of Bonds. (a) Any request, consent or other instrument which the Indenture may require or permit to be signed and executed by the Owners may be in one or more instruments of similar tenor and, except as otherwise provided in Section 11.03, is to be signed or executed by such Owners in person or by their attorneys appointed in writing. Proof of (1) the execution of any such instrument, or of an instrument appointing any such attorney, or (2) the holding by any Person of the Bonds will be sufficient for any purpose of the Indenture (except as otherwise therein expressly provided) if made in the following manner, or in any other manner satisfactory to the Trustee, which may nevertheless in its discretion require further or other proof in cases where it deems the same desirable. The fact and date of the execution by any Owner or its attorney of such instruments may be proved by a guarantee of the signature thereon by a bank or trust company or by the certificate of any notary public or other officer authorized to take acknowledgments of deeds, that the Person signing such request or other instrument acknowledged to him the execution thereof, or by an affidavit of a witness of such execution, duly sworn to before such notary public or other officer. Where such execution is by an officer of a corporation or association or a member of a partnership, on behalf of such corporation, association or partnership, such signature, guarantee, certificate or affidavit will also constitute sufficient proof of its authority.

The ownership of Bonds and the amount, numbers and other identification, and date of holding the same, are to be proved by the Bond Register.

Any request or consent by the Owner of any Bond will bind all future Owners of such Bond in respect of anything done or suffered to be done by SVFC or the Trustee in accordance therewith.

No Recourse on the Bonds. None of the members of SVFC, the members of the Board of Directors of SVFC, any person executing a Bond, or any officer or employee of SVFC is to be held liable personally for the principal or Redemption Price of, or interest on, the Bonds or be subject to any personal liability or accountability by reason of the issuance of the Bonds or in respect of any undertaking by SVFC under the Indenture.

APPENDIX D

D-1

SUMMARY OF CERTAIN PROVISIONS OF THE PREPAID GAS AGREEMENT

The following is a summary of certain provisions of the Prepaid Gas Agreement. Such summary is not intended to be definitive, and reference is made to the Prepaid Gas Agreement in its entirety for the complete terms thereof. Certain provisions of the Prepaid Gas Agreement are described in other portions of this Official Statement. Capitalized terms used in this summary that are not otherwise defined in this summary have the meanings ascribed to such terms elsewhere in this Official Statement or in the Prepaid Gas Agreement; except that in this Appendix D the term "Issuer" shall refer to the Salt Verde Financial Corporation and the term "Participant" shall refer to the Salt River Project Agricultural Improvement and Power District.

Definitions

"Additional Supply Agreements" means one or more supply agreements for Gas entered into by Participant where: (i) such Gas is to be supplied from a prepaid Gas transaction; (ii) the prepayment is made from the proceeds of Tax-Exempt securities; and (iii) each of the supply agreements contains provisions requiring that such Gas be applied to a Qualifying Use ratably with the Prepaid Gas.

"Affiliate" means, with respect to any person, any other person (other than an individual) that, directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, such person. For purposes of the foregoing definition, "control" means, with respect to entities with outstanding capital stock or other equity interests having ordinary voting power, the direct or indirect ownership of more than fifty percent (50%) of the outstanding capital stock or other equity interests having ordinary voting power; provided, however, Participant and Issuer are not be considered Affiliates.

"Alternate Delivery Point" means each delivery point for the delivery and receipt of Prepaid Gas agreed to by the parties other than the Primary Delivery Point.

"Alternate Guarantee" has the meaning given such term under the caption "Security for Performance of Obligations."

"Anticipatory Tax Event Gas" means, while the Supply Agreement is in effect and during each Anticipatory Tax Event Period, the amount of the Prepaid Gas to be delivered during such Anticipatory Tax Event Period less the amount of such Prepaid Gas specified in a Retention Notice; provided, however, that, for purposes of Gas Supplier’s remarketing obligations under the Prepaid Gas Agreement, "Anticipatory Tax Event Gas" means, while the Supply Agreement is in effect and during each Anticipatory Tax Event Period, the amount of the Prepaid Gas to be delivered in each Delivery Month which begins during such Anticipatory Tax Event Period less the amount of such Prepaid Gas specified in a Retention Notice.

"Anticipatory Tax Event Period" means each period of time: (a) commencing five (5) Business Days after the delivery of a Qualifying Use Report indicating that the Non-Qualifying Prepaid Gas is equal to 80% or more of the Non-Qualifying Use Limit and (b) terminating on the earliest to occur of: (i) the termination of the Supply Agreement or (ii) the occurrence of a Tax Event or (iii) the delivery of a Qualifying Use Report indicating that the Non-Qualifying Prepaid Gas is equal to 60% or less of the Non-Qualifying Use Limit; provided, however, that the conclusion of an Anticipatory Tax Event Period has no effect on the sale or delivery of Prepaid Gas remarketed by Gas Supplier during such Anticipatory Tax Event Period for delivery at a time which is after the conclusion of such Anticipatory Tax Event Period.

D-2

"Bankruptcy Event" is to be deemed to occur if the party in question (a) files a petition for relief under Title 11 of the United States Code, as amended, and any successor statute or statutes having substantially the same function or any other insolvency law or seeking to adjudicate it a bankrupt or insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors or fails to file an answer or other pleading denying the material allegations of any such proceeding filed against it; (b) takes any corporate action to authorize or effect any of the foregoing actions; (c) generally fails to pay, or admits in writing its inability to pay, its debts as such debts become due; (d) applies for, seeks or consents to, or acquiesces in, the appointment of a custodian, receiver, trustee, examiner, liquidator or similar official for it or for any material portion of its assets; (e) benefits from or is subject to the entry of an order for relief under any bankruptcy or insolvency law; (f) makes an assignment for the benefit of creditors; (g) fails, within sixty (60) days after the commencement of any proceeding against it seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, to have such proceeding dismissed, or to have all orders or proceedings thereunder affecting the operations or the business of the person stayed; or (h) fails, within sixty (60) days after the appointment, without the consent or acquiescence of the person, of any custodian, receiver, trustee, examiner, liquidator or similar official for it or for any material portion of its assets, to have such appointment vacated.

"Bonds" means Issuer’s Senior Gas Revenue Bonds, Series 2007, and Subordinate Gas Revenue Bonds, Series 2007, issued pursuant to the Indenture.

"British Thermal Unit" or "Btu" means the amount of energy required to raise the temperature of one (1) pound of water one degree Fahrenheit (1 degree F) at sixty degrees Fahrenheit (60 degrees F) at standard atmospheric and gravitational conditions.

"Business Day" means any Day excluding: (a) Saturday, Sunday and any Day on which banks located in the State of Arizona or the State of New York are required or authorized by law or other governmental action to close and (b) any Day on which the New York Mercantile Exchange or the Trustee is closed.

"Central Clock Time" means Central Daylight Time when daylight savings time is in effect and Central Standard Time when daylight savings time is not in effect. Unless otherwise specified in the Prepaid Gas Agreement, all references to time refer to Central Clock Time.

"Claims" means all losses, liabilities, or claims, including reasonable attorneys’ fees and costs of court, from any and all persons arising from or out of claims of title, payment, personal injury or property damage in connection with the Prepaid Gas.

"Closing" means the satisfaction of the conditions to each party’s obligation to begin performance under the Prepaid Gas Agreement as set forth therein.

"Contract Price" means, with respect to a Delivery Month, an amount per MMBtu of Gas equal to the Index Price for such Delivery Month less the discount specified in the Prepaid Gas Agreement.

"Contract Year" means each period from the first Day of May of a calendar year to and including the last Day of April of the succeeding calendar year during the term of the Prepaid Gas Agreement; provided that the first Contract Year is to commence October 1, 2007 and end April 30, 2008.

"Cover Standard" means, with respect to a failure of Gas Supplier to deliver, or Issuer to receive, Prepaid Gas, that the performing party use commercially reasonable efforts to purchase or sell (as

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applicable) Gas quantities at a price reasonable for the delivery or production area, as applicable, consistent with: (1) amount of notice provided by the nonperforming party; (2) the immediacy of Issuer’s Gas consumption needs or Gas Supplier’s Gas sales requirements, as applicable; (3) the quantities involved; and (4) anticipated length of failure by the nonperforming party.

"Credit Rating" means with respect to a person, any public rating of the senior, unsecured, unenhanced indebtedness or deposits of such person from any Rating Agency.

"Daily Contract Quantity" means the quantity of Prepaid Gas in MMBtu’s required to be delivered by Gas Supplier and received by Issuer on each Gas Day of each Delivery Month during the Delivery Period, as set forth in the Prepaid Gas Agreement.

"Daily Notice Time" means, with respect to Gas to be remarketed by Gas Supplier pursuant to the Prepaid Gas Agreement, (a) the earlier of (i) 7:00 a.m. on the Day which is one (1) Day prior to the Day on which such Gas is to be remarketed or (ii) four (4) hours prior to nominations leaving control of the nominating party for the first timely nomination cycle for the Transporter at the applicable Delivery Point; or (b) such other time as to be agreed upon by the parties.

"Daily Voluntary Remarket Gas" means Voluntary Remarket Gas other than Monthly Voluntary Remarket Gas and as to which Gas Supplier has received a Remarketing Notice by the Daily Notice Time.

"Day" means a period of twenty-four consecutive hours, beginning at midnight on a calendar day and ending immediately before midnight on the next succeeding calendar day.

"Delivery Default" means Gas Supplier’s failure on any Gas Day, for any reason other than Force Majeure, to deliver to the applicable Delivery Point the quantity of Prepaid Gas required to be delivered to such Delivery Point on such Gas Day.

"Delivery Month" means a Month during the Delivery Period in which Prepaid Gas deliveries and receipts are to be made.

"Delivery Period" means the period from and including the Delivery Start Date to and including the first to occur of the Scheduled Termination Date or the Early Termination Date.

"Delivery Point(s)" means the Primary Delivery Point and each Alternate Delivery Point.

"Delivery Start Date" means May 1, 2008.

"Early Termination Date" has the meaning given such term under the caption "Early Termination Date."

"Excess Gas Event" has the meaning given such term under the caption "Termination Events – Termination Event at Option of SVFC."

"FERC" means the Federal Energy Regulatory Commission and any successor thereto.

"Firm" means that either party may interrupt its performance without liability only to the extent that such performance is prevented for reasons of Force Majeure; provided, however, that during Force Majeure interruptions, the party invoking Force Majeure may be responsible for any Imbalance Charges

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as set forth in the Prepaid Gas Agreement related to its interruption after the nomination is made to the Transporter and until the change in deliveries and/or receipts is confirmed by the Transporter.

"Force Majeure" has the meaning given such term under the caption "Force Majeure."

"Gas" means all natural gas, casing head gas and associated gaseous (but not liquid) hydrocarbons.

"Gas Day" means a period of twenty-four (24) consecutive hours, coextensive with "day" as defined by the Receiving Transporter in a particular transaction. If, through standardizing business practices in the industry, or for any other reason, either FERC or one or more Transporters change the definition of a day as applicable to the delivery of Prepaid Gas, such change applies to the definition of Gas Day; provided that in the event a Receiving Transporter changes the definition of a day, the definition of Gas Day can be changed only with respect to Gas delivered through such Receiving Transporter.

"Gas Payments" includes payments required to be made by Gas Supplier in connection with a Delivery Default, an event of Force Majeure and the Termination Amount.

"Gas Supplier Billing Statement" has the meaning given such term under the caption "Billing and Payment - Invoices."

"Gas Supplier Remediation Period" means each Anticipatory Tax Event Period, each Tax Event Period and each period during which any Proceeds Subject to Remediation remain in the Remediation Fund for more than twelve months after the applicable Receipt Date.

"Gas Supplier Swap Agreement" means, the natural gas price swap transaction between Gas Supplier and the Swap Counterparty under an ISDA Master Agreement, as amended, evidenced by a confirmation dated October 12, 2007, on a notional quantity equal to the Monthly Contract Quantity for each Delivery Month, including any replacement thereof pursuant to the Prepaid Gas Agreement.

"Gas Supply" shall have the meaning given such term in the Indenture.

"Guarantor" means Citigroup Inc. or any successor thereto and the provider of any Alternate Guarantee or any successor thereto.

"Guarantee" means the Guarantee issued by the Guarantor to the Issuer and the Trustee securing Gas Supplier’s payment obligations under the Prepaid Gas Agreement, which is in substantially the form of an exhibit to the Prepaid Gas Agreement.

"Highest Price" means, with respect to any purchase or sale of Gas (except the initial purchase or sale of Prepaid Gas) or electricity to be made, such price as a reasonably prudent business would, in the protection of its own interest, consider the highest price obtainable under the conditions affecting such purchase or sale, including without limitation, the amount of notice to make such purchase or sale, the duration and type of the purchase or sale, the competitive environment in which such purchase or sale occurs, the availability and associated costs of alternate markets and the risks associated with such purchase or sale.

"Imbalance Charges" means any fees, penalties, costs or charges (in cash or in kind) assessed by a Transporter for failure to comply with the Transporter’s balance and/or nomination requirements.

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"Index Price" means, with respect to the price of Gas, the price published as the first of month index for the Month in which such Gas is delivered, stated in U.S. Dollars, and published under the table "Prices of Spot Gas Delivered to Pipelines" for "El Paso Natural Gas Co., San Juan Basin" as reported by Platts, a McGraw-Hill Companies publication, in the relevant issue of Inside FERC’s Gas Market Report or as such published first of month index for such other Delivery Point as to be agreed upon by the parties in the event an Alternate Delivery Point is established.

"ISDA" means the International Swaps and Derivatives Association Inc.

"Issuer Administrative Fee" means $0.05 per MMBtu.

"Issuer Billing Statement" has the meaning given such term under the caption "Billing and Payment - Invoices."

"Issuer Swap Agreement" means, the natural gas price swap transaction between Issuer and the Swap Counterparty, under an ISDA Master Agreement with the Swap Counterparty, as amended, on a notional quantity equal to the Monthly Contract Quantity for each Delivery Month, including any replacement thereof made in accordance with the Prepaid Gas Agreement.

"Market Disruption Event" means, with respect to an index, any of the following events: (a) the failure of the index to announce or publish information necessary for determining an applicable index price; (b) the failure of trading to commence or the permanent discontinuation or material suspension of trading in the relevant options contract or commodity on the exchange or market acting as the index; (c) the temporary or permanent discontinuance or unavailability of the index; (d) the temporary or permanent closing of any exchange acting as the index; or (e) a material change in the formula for or the method of determining an applicable index price.

"Minimum Price" means: (i) with respect to Daily Voluntary Remarket Gas and Prepaid Gas remarketed pursuant to the Prepaid Gas Agreement, the Spot Price less a discount of $0.10 per MMBtu or such larger discount as may be agreed to by Issuer; (ii) with respect to Monthly Voluntary Remarket Gas, Anticipatory Tax Event Gas and Tax Event Gas, the Index Price less a discount of $0.10 per MMBtu or such larger discount as may be agreed to by Issuer; and (iii) with respect to Termination Gas, the Contract Price.

"MMBtu" means one million (1,000,000) Btus.

"Month" or "Monthly" means a period beginning at 9:00 a.m. on the first Day of a calendar month and ending immediately preceding 9:00 a.m. on the first Day of the next succeeding calendar month. If, through standardizing business practices in the industry, or for any other reason, either FERC or one or more Transporters change the definition of a month as applicable to the delivery of Prepaid Gas, such change can apply to the definition of Month; provided that in the event a Receiving Transporter changes the definition of a month, the definition of Month can be changed only with respect to Prepaid Gas delivered through such Receiving Transporter.

"Monthly Contract Quantity" means the quantity of Gas in MMBtus calculated as the product of the Daily Contract Quantity for a Delivery Month, as set forth in the Prepaid Gas Agreement, times the number of Days in that Delivery Month.

"Monthly Notice Time" means with respect to any Month: (a) 5:00 p.m. on the Day which is three (3) Days prior to the last Day of exchange trading for Henry Hub Natural Gas Futures Contracts on the New York Mercantile Exchange for deliveries in such Month; or (b) in the event there is a change in such

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last day of exchange trading or there is a suspension or termination of trading for Henry Hub Natural Gas Futures Contracts on the New York Mercantile Exchange, an appropriate substitute date for such last day of exchange trading agreed to in writing by the parties; or (c) in the event there is a change in such last day of exchange trading or there is a suspension or termination of trading for Henry Hub Natural Gas Futures Contracts on the New York Mercantile Exchange, and an appropriate substitute date for such last day of exchange trading is not agreed to in writing by the parties, the date which is six (6) Business Days prior to the first day of such Month.

"Monthly Voluntary Remarket Gas" means all or a portion of the Daily Contract Quantity to be delivered on each Gas Day during a Delivery Month specified by Issuer in a Remarketing Notice received by Gas Supplier by the Monthly Notice Time.

"Moody’s" means Moody’s Investors Service, Inc. or any successor.

"Non-Qualifying Prepaid Gas" means, as of any date: (a) the total volume of Prepaid Gas delivered or deemed delivered by Gas Supplier, including for purposes of this definition Replacement Gas acquired by Issuer or Participant, through such date which Gas was applied to a Non-Qualifying Use, less (b) the sum of (i) the volume of such Gas that has been remarketed for a Non-Qualifying Use if the Proceeds Subject to Remediation of such remarketing have been applied to a Remediation Use as of such date plus (ii) the volume of such Gas which has been remarketed for a Non-Qualifying Use if the Proceeds Subject to Remediation of such remarketing have been applied to, or set aside for, the redemption of Bonds pursuant to the Prepaid Gas Agreement as of such date.

"Non-Qualifying Use" means a use of Prepaid Gas delivered or deemed delivered by Gas Supplier for other than a Qualifying Use.

"Non-Qualifying Use Limit" means 3,795,684 MMBtus.

"Operating Fund" has the meaning given such term in the Indenture.

"Participant" means Salt River Project Agricultural Improvement and Power District, an agricultural improvement district and a political subdivision of the State of Arizona established and existing under the Constitution and laws of the State of Arizona.

"Payment Date" has the meaning given such term under the caption "Billing and Payment – Invoices."

"Postponed Delivery Schedule" has the meaning given such term under the caption "Delivery and Receipt."

"Prepaid Gas" means the aggregate amount of Gas to be delivered by Gas Supplier, and received by Issuer, under the Prepaid Gas Agreement during the Delivery Period.

"Prepayment" means the amount of money to be paid to the Gas Supplier from the proceeds of the Bonds in consideration of Gas Supplier’s agreement to deliver the Prepaid Gas under the Prepaid Gas Agreement.

"Primary Delivery Point" means El Paso Natural Gas Co., San Juan Non-Bondad.

"Prime Rate" means, as of any time, the then current interest rate published in The Wall Street Journal as the prime rate of interest, as it may be adjusted from time to time.

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"Proceeds Subject to Remediation" means the Remarketing Proceeds (whether the remarketing is by Participant, by Issuer, or by Gas Supplier) for other than a Qualifying Use, together with all interest and other investment income on such Remarketing Proceeds which is not to be rebated to the United States of America.

"Qualified Substitute Counterparty" has the meaning given such term under the caption "Miscellaneous – Qualified Substitute Counterparty."

"Qualifying Use" has the meaning given such term in Treasury Regulation Section 1.148-1(e)(2)(iii)(A)(2); and provided that the use does not give rise to "private business use" as defined in Treasury Regulation Section 1.141-3 and provided further that a use that is otherwise a Qualifying Use will not be so treated unless a Qualifying Use Certificate is provided by the buyer of Prepaid Gas, or buyer of Gas or electricity for a Remediation Use, in either case, other than Issuer or Participant.

"Qualifying Use Certificate" means a certificate or other instrument, including the confirmation of a purchase and sale transaction, containing the information, agreements and representations signed by the buyer (other than Issuer or Participant) of: (a) Prepaid Gas which is remarketed by any person for a Qualifying Use; and (b) Gas or electricity purchased with Proceeds Subject to Remediation which is sold for a Remediation Use.

"Qualifying Use Report" has the meaning given such term under the caption "Remediation Provisions – Qualifying Use Report."

"Rating Agency" means Moody’s or S&P.

"Receipt Date" means, with respect to Remarketing Proceeds, whether remarketed by Gas Supplier, Participant or Issuer, the date of receipt by Participant of such proceeds.

"Receipt Default" means Issuer’s failure on any Gas Day, for any reason other than Force Majeure, to take delivery at the applicable Delivery Point of the quantity of Prepaid Gas required to be received at such Delivery Point on such Gas Day from Gas Supplier.

"Receiving Transporter" means the Transporter receiving Prepaid Gas at a Delivery Point or, absent such a Receiving Transporter, the Transporter delivering Prepaid Gas at a Delivery Point.

"Redemption Fund" has the meaning given such term in the Indenture.

"Remaining Scheduled Term" means the period from the Early Termination Date to the Scheduled Termination Date.

"Remarketing Notice" means a written notice to remarket Prepaid Gas delivered by Issuer to Gas Provider pursuant to the Prepaid Gas Agreement specifying that portion of the Prepaid Gas which Gas Supplier is to remarket.

"Remarketing Proceeds" means the proceeds received in connection with remarketed Prepaid Gas less, if such Gas has been remarketed by Gas Supplier, the Supplier Administrative Fee; provided, however, if the price at which any Termination Gas is remarketed pursuant to the Prepaid Gas Agreement less the Supplier Administrative Fee is less than the Contract Price, the Supplier Administrative Fee will be reduced to the extent necessary so that Remarketing Proceeds of such remarketed Termination Gas is equal the Contract Price.

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"Remarketing Protocols" has the meaning given such term under the caption "Gas Supplier Remarketing Provisions – Remarketing Protocols."

"Remediation Fund" means that certain fund so designated with respect to the Bonds and held by Participant, which is established pursuant to the Supply Agreement.

"Remediation Use" means, with respect to the proceeds of the remarketing of Prepaid Gas for a Non-Qualifying Use, including Proceeds Subject to Remediation, any of the following: (a) the purchase of Gas with such proceeds and the use of such Gas for a Qualifying Use (as evidenced by a Qualifying Use Certificate, where applicable); (b) application of such proceeds by Participant to the purchase of Gas which Gas is used by Participant for a Qualifying Use; (c) application of such proceeds to the purchase of electricity in compliance with Treasury Regulation Section 1.148-1(e)(2)(iii)B)(2); or (d) application of such proceeds for any other use that preserves the Tax Exempt Status of the Bonds or the Tax-Exempt status of interest on securities relating to an Additional Supply Agreement, in each case, as determined in accordance with an opinion of the Tax Counsel for such bonds.

"Replacement Gas" means any Gas acquired by Issuer to replace Prepaid Gas for which there has been a Delivery Default, including any such Prepaid Gas for which a cash out price is charged by any Transporter.

"Required Replacement Amount" means, as of any time, the present value of expected savings over the Remaining Scheduled Term, less any savings that could reasonably be expected to be obtained through a substitute gas prepayment transaction under the market conditions existing as of such time and for the Remaining Scheduled Term, calculated in the manner described in Exhibit E to the Prepaid Gas Agreement; provided that the minimum Required Replacement Amount shall be an amount equal to the present value of the product obtained by multiplying (a) the amount of Prepaid Gas to be delivered during the Remaining Scheduled Term by (b) $.05 per MMBtu and using a discount factor equal to the one month LIBOR index as of such time plus 75 basis points.

"Retention Notice" means, with respect to any Delivery Month during an Anticipatory Tax Event Period or a Tax Event Period, a written notice delivered by Issuer to Gas Supplier by the Monthly Notice Time for such Month: (a) specifying the portion of the Daily Contract Quantity to be delivered each Day during such Delivery Month that is to be used by Participant for a Qualifying Use; and (b) instructing Gas Supplier not to remarket, pursuant to the Prepaid Gas Agreement as applicable, such portion of the Daily Contract Quantity.

"Revenue Fund" has the meaning given such term in the Indenture.

"S&P" means Standard & Poor’s Rating Services, a Division of The McGraw-Hill Companies, Inc. or any successor.

"Scheduled Gas" means the quantity of Gas confirmed by Transporters for movement, transportation, storage or management.

"Scheduled Termination Date" means October 31, 2037.

"Spot Price" means, with respect to the price of Gas, the price published as the Spot Price Index for the Day on which such Gas is delivered; provided, if there is no single price published as the Spot Price Index for a relevant location for such Day, but there is published a range of prices, then the Spot Price is to be the average of the high and low prices. If no price or range of prices is published for such Day, then the Spot Price is to be the average of the following: (a) the price (determined as stated above)

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for the first Day for which a price or range of prices is published that next precedes the relevant Day; and (b) the price (determined as stated above) for the first Day for which a price or range of prices is published that next follows the relevant Day.

"Spot Price Index" means, with respect to Gas to be delivered on any Day, the "Daily Midpoint" price set forth in Gas Daily (published by Platts), or any successor publication, in the column "Daily Price Survey" under the listing applicable to the geographic location closest in proximity to the Delivery Point(s) for such Gas for the relevant Day.

"Supply Agreement" means that certain Natural Gas Supply Agreement, between Issuer and Participant, dated the date of the Prepaid Gas Agreement, as the same may be amended and supplemented.

"Supplier Administrative Fee" means, subject to the applicable provisions of the Prepaid Gas Agreement, $0.02 per MMBtu.

"Swap Counterparty" means Royal Bank of Canada and any other person that becomes a counterparty to Issuer under an Issuer Swap Agreement and to Gas Supplier under a Gas Supplier Swap Agreement, respectively, pursuant to the Prepaid Gas Agreement.

"Tax Counsel" means an attorney or firm of attorneys of recognized national standing in the field of law relating to municipal bonds, and the Tax-Exempt status of such bonds for federal income tax purposes, selected by Issuer.

"Taxes" means any and all ad valorem, property, severance, pipeline, utility, sales, use, environmental, and other taxes, governmental charges and fees imposed by federal, state or local government entities on or in connection with the severance, processing, transportation, sale and purchase of Gas, but excludes all taxes based on net income, net worth and all franchise, license and similar taxes based on income or otherwise required for the maintenance of corporate existence.

"Tax Event Gas" means, during each Tax Event Period while the Supply Agreement is in effect, the amount of the Prepaid Gas to be delivered during such Tax Event Period less the amount of such Prepaid Gas specified in a Retention Notice; provided, however, that, for purposes of Gas Supplier’s remarketing obligations under the Prepaid Gas Agreement, "Tax Event Gas" means, during each Tax Event Period while the Supply Agreement is in effect, the amount of the Prepaid Gas to be delivered: (i) during the period from the commencement of such Tax Event Period to the end of the Delivery Month in which such commencement occurs and (ii) during each Delivery Month which begins during such Tax Event Period less the amount of such Prepaid Gas specified in a Retention Notice.

"Tax Event Period" means each period from the delivery by Gas Supplier of a Qualifying Use Report indicating the Non-Qualifying Prepaid Gas is equal to 90% or more of the Non-Qualifying Use Limit to the delivery of a Qualifying Use Report indicating that the Non-Qualifying Prepaid Gas is less than 80% of the Non-Qualifying Use Limit.

"Tax-Exempt" means, with respect to any bonds, notes or other evidences of indebtedness, including the Bonds, that the status of such securities is such that interest thereon is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum income tax imposed on individuals and corporations, with the exception that, for purposes of computing alternative minimum tax imposed on certain corporations (as defined for federal income tax purposes) such interest is taken into account in determining adjusted current earnings.

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"Tax-Exempt Status of the Bonds" means that the interest on the Bonds is Tax-Exempt.

"Term" has the meaning given such term under the caption "Term."

"Termination Amount" means, as of any Early Termination Date, amount set forth in the Prepaid Gas Agreement for the Month in which the Early Termination Date occurs.

"Termination Event" means an event described under the caption "Termination Events."

"Termination Fund" has the meaning given such term in the Indenture.

"Termination Gas" means that portion of the Prepaid Gas, if any, to be delivered by Gas Supplier after the termination of the Supply Agreement.

"Third Party" means any person other than Issuer, any Affiliate of Issuer, Participant, any Affiliate of Participant, Gas Supplier or any Affiliate of Gas Supplier.

"Transporters" means the Gas pipeline companies, or local distribution companies, acting in the capacity of a transporter, transporting Prepaid Gas for Gas Supplier or Issuer immediately upstream or downstream, respectively, of the Delivery Point for any Prepaid Gas delivered and includes any person receiving Prepaid Gas at a Delivery Point.

"Trustee" means U.S. Bank National Association, as trustee under the Indenture, and any successor trustee under the Indenture.

"Voluntary Remarket Gas" means Prepaid Gas which Issuer requests Gas Supplier to remarket in a Remarketing Notice delivered pursuant to the Prepaid Gas Agreement while the Supply Agreement is in effect other than during a Tax Event Period.

References and Construction

Unless otherwise specified, any reference in the Prepaid Gas Agreement to time shall refer to Central Clock Time.

The terms "remarket" and "remarketing" and other forms thereof used in the Prepaid Gas Agreement with respect to Prepaid Gas and the Gas Supplier means that the Gas Supplier shall use commercially reasonable efforts to sell such Prepaid Gas in accordance with the Prepaid Gas Agreement at the Highest Price. Prepaid Gas shall be considered "remarketed" when it has been sold by Gas Supplier to a Third Party, or purchased by Gas Supplier, as provided in the Prepaid Gas Agreement.

The phrases "so long as the Supply Agreement is in effect" and "when the Supply Agreement is in effect" and any similar phrase used in the Prepaid Gas Agreement refers to the period from the effective date of the Supply Agreement to the date when Gas Supplier receives notice from Issuer or the Trustee that the Supply Agreement has been terminated.

Term

The Prepaid Gas Agreement shall be effective from the date of execution and, except as provided in the Prepaid Gas Agreement, shall continue in effect until the Scheduled Termination Date, unless terminated earlier pursuant to the terms of the Prepaid Gas Agreement (the "Term").

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Delivery And Receipt

Subject to mutually agreed-upon postponements Gas Supplier shall deliver and Issuer shall receive, on a Firm basis, the Prepaid Gas on each Gas Day of each Delivery Month in the applicable Daily Contract Quantity on the terms and conditions of the Prepaid Gas Agreement. A party has the right at any time to request the postponement of the delivery of a specified portion of the Prepaid Gas to be delivered under the Prepaid Gas Agreement on any Gas Day in a Delivery Month to such other Gas Day in such Delivery Month and on such terms as shall be agreed to by the parties (a "Postponed Delivery Schedule").

Delivery Default

For each Gas Day in which a Delivery Default occurs, Gas Supplier shall pay Issuer an amount equal to the product of (a) the quantity of the Gas that Gas Supplier failed to deliver times (b) the sum of the Index Price plus the Issuer Administrative Fee, to which product shall be added:

(i) If Issuer, utilizing the Cover Standard, has obtained Replacement Gas for the Prepaid Gas not delivered by Gas Supplier: the product of (a) the positive difference, if any, obtained by subtracting the Index Price from the price paid by Issuer for such Replacement Gas, including any additional transportation and related charges incurred as a result of the Delivery Default times (b) the quantity of the Prepaid Gas that Gas Supplier failed to deliver; or

(ii) If the above provisions are not applicable, the product of (a) the positive difference, if any, obtained by subtracting the Index Price from any cash out price charged Issuer by any Transporter or if a cash out price was not charged by a Transporter, the Spot Price times (b) the quantity of the Prepaid Gas that Gas Supplier failed to deliver.

Gas Supplier may request a Postponed Delivery Schedule for the Prepaid Gas relating to a Delivery Default in accordance with the Prepaid Gas Agreement. Except with respect to the payment of Imbalance Charges, with respect to Termination Events, the remedies set forth above shall be Issuer’s sole and exclusive remedies for any Delivery Default.

Receipt Failure

Notwithstanding a Receipt Default with respect to any portion of the Prepaid Gas, such portion of the Prepaid Gas shall be deemed delivered to Issuer for purposes of, and shall not be included in any calculation of undelivered Prepaid Gas with respect to Termination Events. Gas Supplier shall Remarket all Prepaid Gas as to which there is a Receipt Default for delivery on the earliest day on or after the date of the Receipt Default on which Gas Supplier can deliver such Prepaid Gas to a buyer.

Issuer may request a Postponed Delivery Schedule for the Prepaid Gas relating to the Receipt Default. Except with respect to the payment of Imbalance Charges, the remedies set forth above shall be Gas Supplier’s sole and exclusive remedies for any Receipt Default.

Gas Supplier Remarketing Provisions

Voluntary Remarket Gas. Gas Supplier shall remarket the Daily Voluntary Remarket Gas and Monthly Voluntary Remarket Gas in accordance with the Remarketing Protocols. If Gas Supplier does not receive a Remarketing Notice with respect to any portion of the Prepaid Gas by the Daily Notice Time, Gas Supplier shall have no obligation to remarket Prepaid Gas as Voluntary Remarket Gas and Gas

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Supplier shall be obligated to deliver, and Issuer shall be obligated to receive, Prepaid Gas in accordance with the Prepaid Gas Agreement.

Anticipatory Tax Event Gas. After the Monthly Notice Time for each Delivery Month which begins during an Anticipatory Tax Event Period, Gas Supplier shall remarket, in accordance with the Remarketing Protocols, the Anticipatory Tax Event Gas to be delivered during such Delivery Month. Prior the Monthly Notice Time for each Delivery Month which begins during an Anticipatory Tax Event Period, Issuer may reduce the amount of the Prepaid Gas constituting Anticipatory Tax Event Gas for such Delivery Month by delivering a Retention Notice to Gas Supplier specifying the amount of the Daily Contract Quantity to be delivered each Gas Day during such Delivery Month and which shall not constitute Anticipatory Tax Event Gas which amount shall be the same for each Gas Day in such Delivery Month. Prior to the Daily Notice Time Issuer may deliver a Remarketing Notice with respect to any Prepaid Gas included in a Retention Notice in which case such Prepaid Gas shall be remarketed by Gas Supplier as Daily Voluntary Remarket Gas.

Tax Event Gas. During each Delivery Month in which a Tax Event Period commences, Gas Supplier shall remarket all the Tax Event Gas to be delivered during the portion of such Delivery Month remaining after such commencement. After the Monthly Notice Time for each Delivery Month that begins during a Tax Event Period, Gas Supplier shall remarket all the Tax Event Gas to be delivered during such Delivery Month. Gas Supplier shall remarket the Tax Event Gas in accordance with the Remarketing Protocols except that no remarketing for a Non-Qualifying Use shall be considered available unless Issuer and Gas Supplier have received an opinion of Tax Counsel that such remarketing will not adversely affect the Tax-Exempt Status of the Bonds.

Prior the Monthly Notice Time for each Delivery Month which begins during a Tax Event Period, Issuer may reduce the amount of the Prepaid Gas constituting Tax Event Gas for such Delivery Month by delivering a Retention Notice to Gas Supplier specifying the amount of the Daily Contract Quantity to be delivered each Gas Day during such Delivery Month which shall not constitute Tax Event Gas which amount shall be the same for each Gas Day in such Delivery Month. Prior to the Daily Notice Time Issuer may deliver a Remarketing Notice with respect to any Prepaid Gas included in a Retention Notice in which case such Prepaid Gas shall be remarketed by Gas Supplier as Voluntary Remarket Gas except that no remarketing for a Non-Qualifying Use shall be considered available unless Issuer and Gas Supplier have received an opinion of Tax Counsel that such remarketing will not adversely affect the Tax-Exempt Status of the Bonds.

Termination Gas. During the Delivery Month, if any, in which the Supply Agreement is terminated, Gas Supplier shall remarket the Termination Gas to be delivered during the portion of such Delivery Month remaining after such termination. After the Monthly Notice Time for each Month that begins after the termination of the Supply Agreement, Gas Supplier shall remarket the Termination Gas to be delivered during such Delivery Month. Gas Supplier shall remarket the Termination Gas in accordance with the Remarketing Protocols with the following exceptions:

except during a Tax Event Period, if the Highest Price obtainable in remarketing any Termination Gas in accordance with the Remarketing Protocols is less than the Minimum Price, Gas Supplier shall purchase such Termination Gas at a price equal to the Minimum Price;

except as provided in subsection (c) below, during a Tax Event Period, Gas Supplier shall remarket the Termination Gas in accordance with the Remarketing Protocols except that no remarketing for a Non-Qualifying Use shall be considered available unless Issuer and Gas Supplier have received an opinion of Tax Counsel that such remarketing will not adversely affect the Tax-Exempt Status of the Bonds; and

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if during a Tax Event Period Gas Supplier cannot remarket the Termination Gas in accordance with subsection (b) above at a price not less than the Minimum Price, Gas Supplier shall purchase such Termination Gas at a price equal to the Minimum Price.

Remarketing Protocols. In remarketing Prepaid Gas, except as otherwise provided in the Prepaid Gas Agreement, Gas Supplier shall proceed in accordance with the following procedures (the "Remarketing Protocols").

Gas Supplier shall remarket the Prepaid Gas for a Qualifying Use at the Highest Price; provided that:

If the Highest Price identified by Gas Supplier in remarketing Prepaid Gas for a Qualifying Use is less than the Minimum Price, and a higher price is available by remarketing the Prepaid Gas to a Third Party for a Non-Qualifying Use, Gas Supplier shall remarket the Prepaid Gas at the Highest Price for a Non-Qualifying Use; and

If the Highest Price identified by Gas Supplier in remarketing Prepaid Gas for a Qualifying Use is less than the Minimum Price, and a higher price is not available by remarketing the Prepaid Gas for a Non-Qualifying Use, Gas Supplier shall remarket the Prepaid Gas for a Qualifying Use at the Highest Price notwithstanding that such Highest Price is below the Minimum Price.

Gas Supplier shall remarket all Monthly Voluntary Remarket Gas, Anticipatory Tax Event Gas, Tax Event Gas to be delivered in each Delivery Month which begins during a Tax Event Period and Termination Gas to be delivered in each Delivery Month which begins after the termination of the Supply Agreement as follows: (1) the remarketing shall be for the entire applicable Delivery Month; and (2) the remarketing shall be for each Gas Day during such Delivery Month in the amount of the Daily Contract Quantity constituting the Monthly Voluntary Remarket Gas, Anticipatory Tax Event Gas, Tax Event Gas or Termination Gas, as applicable.

Gas Supplier shall remarket all Daily Voluntary Remarket Gas, Tax Event Gas to be delivered in each Delivery Month in which a Tax Event Period begins and Termination Gas to be delivered in the Delivery Month in which the termination of the Supply Agreement occurs as follows: (1) the remarketing shall be for the applicable Gas Day; (2) the remarketing shall be for the amount of the Daily Contract Quantity constituting the Daily Voluntary Remarket Gas, Tax Event Gas or Termination Gas, as applicable.

Records of Remarketing; Qualifying Use Certificate. Gas Supplier will maintain books and records regarding each remarketing of Prepaid Gas pursuant to the Prepaid Gas Agreement and shall provide Issuer, the Participant and the Trustee with a monthly report, by the tenth day of the month next following the month to which the report relates, showing: the date of such remarketing; the name of the buyer; the Remarketing Proceeds; and whether such remarketing was for a Qualifying Use or a Non-Qualifying Use. Each party agrees to obtain a Qualifying Use Certificate in connection with each sale of Prepaid Gas for a Qualifying Use executed by each buyer of such Prepaid Gas other than Participant.

Provisions Relating to Remarketing. For purposes of the Prepaid Gas Agreement, all Prepaid Gas remarketed shall be deemed to be Prepaid Gas delivered by Gas Supplier and received by Issuer. In Gas Supplier’s remarketing of Prepaid Gas and sales of Gas or electricity for a Remediation Use, all sales shall be as agent of Issuer or Participant with sales for Qualifying Use and of Gas or electricity for a Remediation Use being made to protect the Tax-Exempt Status of the Bonds. Gas Supplier shall not make any remarketing sales of Prepaid Gas for a Qualifying Use or sales of Gas or electricity for a Remediation Use pursuant to contracts which preclude such arrangement; provided that

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any provision in a contract to the effect that Gas Supplier is acting on its own behalf and has and is conveying good and merchantable title to the Gas shall not be construed as inconsistent with the applicable remarketing provisions of the Prepaid Gas Agreement.

Remediation Provisions

Remediation Provisions in Supply Agreement. Issuer shall cause the Supply Agreement to provide all of the following:

(a) Whenever any Proceeds Subject to Remediation exist, Participant shall establish and maintain, or reestablish and maintain, the Remediation Fund until the earlier of: (i) the time when no bonds remain outstanding under the Indenture, or (ii) the time when any remaining funds have been transferred from the Remediation Fund to the Redemption Fund.

(b) Participant shall deposit in the Remediation Fund all Proceeds Subject to Remediation. No other moneys shall be deposited in the Remediation Fund. Participant shall withdraw amounts in the Remediation Fund only in connection with (i) a Remediation Use (ii) in connection with the redemption of bonds outstanding under the Indenture (iii) to pay any rebate due under Section 148 of the Code, or (iv) as permitted pursuant to an opinion of Tax Counsel that such use will not adversely affect the Tax-Exempt Status of the Bonds.

(c) Participant shall use commercially reasonable efforts to cause all Proceeds Subject to Remediation in the Remediation Fund to be applied for a Remediation Use within twelve months of the applicable Receipt Date.

(d) Whenever Participant can apply Gas for a Qualifying Use, Participant shall first apply Prepaid Gas delivered for such Qualifying Use and whenever Participant can apply Gas or electricity for a Remediation Use, after applying Prepaid Gas delivered for a Qualifying Use, Participant will next apply Proceeds Subject to Remediation in the Remediation Fund to such Remediation Use; provided that, if required by Additional Supply Agreements, the Participant may apply Gas delivered under the Prepaid Gas Agreement and such Additional Supply Agreement, and the proceeds of the remarketing thereof, to Qualifying Uses and apply Gas and electricity to Remediation Uses on a pro rata basis.

(e) in the event that any Proceeds Subject to Remediation remain on deposit in the Remediation Fund for twenty-one (21) months after the applicable Receipt Date, and at the time of the termination of the Supply Agreement, the Participant shall transfer such Proceeds Subject to Remediation and any other funds identified by Tax Counsel as required to be transferred to the Redemption Fund in order to preserve the Tax-Exempt Status of the Bonds, to the Trustee for deposit in the Redemption Fund to be applied to the redemption of Bonds as directed by Issuer and approved by Tax Counsel as preserving the Tax-Exempt Status of the Bonds.

Qualifying Use Report. On or before the 15th Day of each Month, or if such Day is not a Business Day, the next succeeding Business Day, Gas Supplier shall provide to Issuer and Participant a written report (the "Qualifying Use Report") which includes: a calculation of the Non-Qualifying Prepaid Gas as of the last Day of the preceding Month and the percentage of such Non-Qualifying Prepaid Gas to the Non-Qualifying Use Limit.

Remediation by Gas Supplier. During each Gas Supplier Remediation Period, Gas Supplier shall use commercially reasonable efforts to cause all Proceeds Subject to Remediation on deposit in the Remediation Fund to be applied for a Remediation Use. Gas Supplier shall use commercially reasonable efforts to sell the Gas and electricity purchased with Proceeds Subject to Remediation for a Remediation

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Use at the Highest Price but in any event no less than the price Gas Supplier paid for the Gas or electricity purchased with the Proceeds Subject to Remediation, less a discount of not exceeding $0.05 per MMBtu, unless the Issuer agrees to a higher discount, or a discount per megawatt hour of electricity not exceeding $3.00 per MWh, unless the Issuer agrees to a higher discount. Gas Supplier shall provide Issuer and Participant with notice of each purchase and sale for a Remediation Uses and monthly reports of such purchases and sales.

If a monthly report indicates that the aggregate amount of all sales is greater than aggregate amount of all purchases by Gas Supplier in connection with Remediation Uses, Gas Supplier shall pay such difference to Participant. If a monthly report indicates that the aggregate amount of all such purchases is greater than the aggregate amount of all such sales by Gas Supplier in connection with Remediation Uses, the Supply Agreement shall require the Participant to pay such difference to Gas Supplier.

Force Majeure

Party’s Obligations. Except with regard to a party’s obligation to make payment(s), including without limitation its responsibility for Imbalance Charges, neither party shall be liable to the other for failure to perform an obligation under the Prepaid Gas Agreement to the extent such failure was caused by Force Majeure.

Force Majeure shall mean any cause not reasonably within the control of the party claiming the benefits of the Force Majeure, including but not limited to: (a) physical events such as acts of God, landslides, lightning, earthquakes, fires, storms or storm warnings, such as hurricanes, which result in evacuation of affected area, floods, washouts, explosions, breakage or accident or necessity of repairs to machinery or equipment or lines of pipe; (b) weather related events affecting an entire geographic region, such as low temperatures which cause freezing or failure of wells or lines of pipe; (c) interruption and/or curtailment of Firm transportation and/or storage by Transporters; (d) acts of others such as strikes, lockouts or other industrial disturbances, riots, sabotage, insurrections, wars or acts of terror; and (e) governmental actions such as necessity for compliance with any court order, law, statute, ordinance, regulation, or policy having the effect of law promulgated by a governmental authority having jurisdiction. Gas Supplier and Issuer shall make reasonable efforts to avoid adverse impacts of a Force Majeure and to resolve the event or occurrence once it has occurred in order to resume performance.

Neither party shall be entitled to the benefit of the provisions of Force Majeure to the extent performance is affected by any or all of the following circumstances: (a) the curtailment of interruptible or secondary Firm transportation unless primary, in-path, Firm transportation is also curtailed; (b) the party claiming excuse failed to remedy the condition and to resume the performance of such covenants or obligations with reasonable dispatch; (c) economic hardship, including, without limitation, Gas Supplier’s ability to sell Gas at a higher or more advantageous price than the price payable, Issuer’s ability to purchase Gas at a lower or more advantageous price than the price payable, or a regulatory agency disallowing, in whole or in part, the pass through of costs resulting from the Prepaid Gas Agreement; (d) the loss of Issuer’s market or Issuer’s inability to use or resell Gas purchased, except, in either case, as provided in the Prepaid Gas Agreement; or (e) the loss or failure of Gas Supplier’s Gas supply or depletion of reserves, except, in either case, as provided in the Prepaid Gas Agreement.

Gas Supplier Payments for Events of Force Majeure. During any Delivery Month in which all or a portion of the Monthly Contract Quantity is not delivered or received due to Force Majeure, Gas Supplier shall pay Issuer an amount equal to the product of (a) the quantity of the Monthly Contract Quantity not taken because of the Force Majeure and (b) the Index Price. Payment of such amount shall

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satisfy Gas Supplier’s obligation to deliver, and Issuer’s obligation to receive, the Gas which was not delivered or received due to Force Majeure.

Delivery and Acceptance

Gas Supplier shall deliver the Prepaid Gas to the applicable Delivery Points, for account of Issuer, in the respective quantities of Gas specified for each Delivery Point as determined with and under the conditions set forth in the Prepaid Gas Agreement. Subject to Issuer’s prior written approval and Gas Supplier’s payment of incremental costs, Gas Supplier may deliver Prepaid Gas at Alternate Delivery Points. Issuer may request, subject to Gas Supplier’s written approval and Issuer’s payment of incremental costs, delivery of Prepaid Gas at Alternate Delivery Points.

Title, Liability and Warranty

Unless otherwise specifically agreed by the parties, title to Prepaid Gas delivered or deemed delivered under the Prepaid Gas Agreement shall pass from Gas Supplier to Issuer at the applicable Delivery Point for such Gas. Gas Supplier shall have responsibility for and assume any liability with respect to Prepaid Gas delivered upstream from the applicable Delivery Point for such Prepaid Gas. Issuer shall have responsibility for and assume any liability with respect to Prepaid Gas actually delivered to Issuer at and downstream of the applicable Delivery Point for such Gas. Gas Supplier warrants that it will have the right to convey and will transfer good and merchantable title to all Gas sold and delivered by it to Issuer, free and clear of all liens, encumbrances, and claims. Except as expressly provided in the Prepaid Gas Agreement, all other warranties, express or implied, including and warranty of merchantability or of fitness for any particular purpose, are disclaimed.

As between Gas Supplier and Issuer, Gas Supplier will be liable for all Claims to the extent that such arise from the failure of Prepaid Gas delivered by Gas Supplier to meet the quality requirements of the Prepaid Gas Agreement.

Transportation

As between the parties, Gas Supplier shall have the sole responsibility for transporting Prepaid Gas to the applicable Delivery Point and Issuer shall have the sole responsibility for transporting Prepaid Gas from the applicable Delivery Point.

Nominations

Gas Supplier and Issuer shall coordinate their nomination activities, giving sufficient time to meet the deadlines of affected Transporters. Each party shall give the other party timely prior notice, sufficient to meet the requirements of all Transporters involved in the transaction of the quantities of Gas to be delivered and purchased each Gas Day. Should either party become aware that actual deliveries at the Delivery Points are greater or less than that required by the terms of the Prepaid Gas Agreement, such party shall promptly notify the other party; provided that any failure to give such notice, or any delay in giving such notice, shall not affect a party’s obligations under the Prepaid Gas Agreement.

Imbalances

The parties shall use commercially reasonable efforts to avoid the imposition of any Imbalance Charges. If Issuer or Gas Supplier receives an invoice from a Transporter that includes Imbalance Charges, the parties shall determine the validity as well as the cause of such Imbalance Charges. If such Imbalance Charges were incurred as a result of Issuer’s receipt of quantities of Gas greater than or less

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than the Scheduled Gas, the Issuer shall pay such Imbalance Charges or reimburse Gas Supplier for such Imbalance Charges paid by Gas Supplier. If the Imbalance Charges were incurred as a result of Gas Supplier’s delivery of quantities of Gas greater than or less than the Scheduled Gas, then Gas Supplier shall pay for such Imbalance Charges or reimburse Issuer for such Imbalance Charges paid by Issuer.

Quality and Measurement

Gas delivered under the Prepaid Gas Agreement shall meet all pressure, pipeline quality and heat specifications as defined in the gas tariff filed by applicable Transporters and accepted by FERC as applicable to Gas at the respective Delivery Points. Gas delivered shall be measured by Transporters at the respective Delivery Points where possible and, in all other instances shall be measured by the operators of the facilities at the Delivery Points and reported to the Transporters. The Btu content of the Gas delivered under the Prepaid Gas Agreement shall be determined each Month based upon the measurements and calculations made by applicable Transporters in accordance with the gas tariff approved for such Transporter by FERC.

Taxes

Gas Supplier shall pay or cause to be paid all Taxes on or with respect to the Gas prior to the Delivery Point(s). Issuer shall pay or cause to be paid all Taxes on or with respect to the Gas at the Delivery Point(s) and after the Delivery Point(s). The Prepayment includes full reimbursement for, and Gas Supplier is liable for and shall pay or cause to be paid, all Taxes with respect to the Gas prior to the Delivery Point(s). If a party is required to remit or pay Taxes that are the other party’s responsibility under the Prepaid Gas Agreement, the party responsible for such Taxes shall promptly reimburse the other party for such Taxes. Any party entitled to an exemption from any such Taxes or charges shall furnish the other party any necessary documentation thereof.

Billing and Payment

Invoices. On or before the 10th Day of each Month, from June 1, 2008 to and including the Month following the final Month of the Term of the Prepaid Gas Agreement, Issuer shall prepare and deliver to Gas Supplier and the Trustee a statement (the "Issuer Billing Statement") specifying all amounts payable by Gas Supplier to Issuer relating to Gas required to be delivered and received in the preceding Month and all other charges incurred during the preceding Month, other than Gas Payments and Remarketing Proceeds, including Taxes, Imbalance Charges, transportation charges, Replacement Gas charges and indemnification payments and any other amounts payable by Gas Supplier.

On or before the 15th Day of each Month, from June 1, 2008 to and including the Month following the final Month of the Term of the Prepaid Gas Agreement, Gas Supplier shall prepare and deliver to Issuer, Participant and the Trustee a statement (the "Gas Supplier Billing Statement") specifying: (a) all amounts payable by Gas Supplier to Issuer as Gas Payments relating to Gas required to be delivered and received in the preceding Month; (b) all amounts payable by Gas Supplier to Issuer as Remarketing Proceeds relating to the remarketing of Gas required to be delivered and received in the preceding Month; and (c) all other charges incurred during the preceding Month, including, Taxes, Imbalance Charges, transportation charges and indemnification payments and other amounts payable pursuant to Section 10.2 or 10.3 of the Prepaid Gas Agreement.

On or before the 15th Day of each Month, from June 1, 2008 to and including the Month following the final Month of the Term of the Prepaid Gas Agreement, Gas Supplier shall prepare and deliver to Issuer, Participant and the Trustee an invoice with respect to amounts accruing during the preceding Month. In preparing such invoice, all amounts, charges and adjustments contained in the Issuer

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Billing Statement shall be netted against all amounts, charges and adjustments, other than Gas Payments and Remarketing Proceeds, contained in the Gas Supplier Billing Statement such that a single payment with respect to such amounts, charges and adjustments, other than Gas Payments and Remarketing Proceeds, shall be made by the party owing the net amount.

Unless a different time of payment is specified in the Prepaid Gas Agreement for a particular payment, payments due shall be made by the party owing the payment on the 25th Day of the Month next succeeding the Month in which Gas is delivered or deemed delivered under the Prepaid Gas Agreement, Gas is remarketed, Gas or electricity is purchased and sold for a Remediation Use, or the other transaction or event giving rise to such payment occurred ("Payment Date"); provided that if the Payment Date is not a Business Day, payment is due on the next succeeding Business Day. All payments shall be made in immediately available United States funds by wire transfer. All payments by Gas Supplier shall be made to the Trustee for deposit in the Revenue Fund except as follows: the Termination Amount shall be paid to the Trustee for deposit in the Termination Fund; the Required Replacement Amount, if any, shall be paid to Issuer for deposit in the Operating Fund; the Issuer Administrative Fee, if any, shall be paid to Issuer for deposit in the Operating Fund; Proceeds Subject to Remediation shall, while the Supply Agreement is in effect, be paid to Participant for deposit in the Remediation Fund; and net amounts owed by Gas Supplier from sales of Gas or electricity by Gas Supplier in a Month for Remediation Uses while the Supply Agreement is in effect shall be paid to Participant.

Disputed Amounts. Gas Supplier shall pay the invoiced amount for all Gas Payments in the manner set forth in the Prepaid Gas Agreement on an absolutely net basis free of any deductions and without abatement, diminution or setoff whatsoever irrespective of any defense or any rights of setoff, recoupment or counterclaim Gas Supplier might otherwise have against the other party or any other person.

If the invoiced party, in good faith, disputes the amount of any invoice received under the Prepaid Gas Agreement, or any part thereof, other than any invoice for a Gas Payment, the invoiced party will pay such amount as it concedes to be correct; provided, however, if the invoiced party disputes the amount due, it must, on or before the Payment Date, provide written notice to the other party and the Trustee of the disputed amount and supporting documentation acceptable in industry practice to support amount paid or disputed. The parties shall then confer and attempt to resolve the disputed amount by agreement. In the event the parties are unable to resolve such dispute, either party may pursue any remedy available at law or in equity to enforce its rights with respect to such disputed amount.

Interest on Unpaid Payments. If the invoiced party fails to remit the full amount payable when due, interest on the unpaid portion shall accrue from the date due until the date of payment at a rate equal to the lower of (i) Prime Rate, plus two percent per annum; or (ii) the maximum applicable lawful interest rate.

Indemnification

Indemnities of Gas Supplier. Regardless of any investigation made at any time by or on behalf of Issuer or any information Issuer may have, and regardless of the presence or absence of insurance, Gas Supplier, to the extent permitted by applicable law, shall indemnify and hold harmless Issuer and all Affiliates, officers, directors, and employees of Issuer from and against any and all Claims caused by, arising out of, resulting from, or relating in any way to, and to pay Issuer and all Affiliates, officers, directors, and employees of Issuer any sum that such person pays or becomes obligated to pay on account of: (a) any adverse Claim by any person based on title to or interest in the Gas sold or the proceeds from the sale thereof; or (b) any claim by any person for injury to or death of any person, persons, or other living things, or loss or destruction or property, arising from any act or accident occurring with respect to

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Gas to be delivered when title to the Gas sold is vested in Gas Supplier, including, without limitation, acts or accidents arising out of the sole, joint, or concurrent negligence (but not the gross negligence, willful misconduct, or bad faith) of SVFC.

Indemnities of Issuer. Regardless of any investigation made at any time by or on behalf of Gas Supplier or any information Gas Supplier may have, and regardless of the presence or absence of insurance, Issuer, to the extent permitted by applicable law, shall indemnify and hold harmless Gas Supplier and all Affiliates, officers, directors, and employees of Gas Supplier from and against any and all Claims caused by, arising out of, resulting from, or relating in any way to, and to pay Gas Supplier and all Affiliates, officers, directors, and employees of Gas Supplier any sum that such person pays or becomes obligated to pay on account of: (a) any adverse Claim by any person based on title to or interest in the Gas delivered or the proceeds from the sale thereof; or (b) any claim by any person for injury to or death of any person, persons, or other living things, or loss or destruction of property, arising from any act or accident with respect to gas to be delivered occurring when title to the gas sold is vested in issuer, including, without limitation, acts or accidents arising out of the sole, joint, or concurrent negligence (but not the gross negligence, willful misconduct, or bad faith) of Gas Supplier.

Security for Performance of Obligations

The payment obligations of Gas Supplier arising under the Prepaid Gas Agreement shall be guaranteed by the Guarantor pursuant to the Guarantee. At the Closing, the Issuer shall cause the executed Guarantee to be delivered to the Trustee. Only in the event that during the Term of the Prepaid Gas Agreement the Credit Ratings of the Guarantor or the provider of any Alternate Guarantee are reduced below "A3" from Moody’s and "A-" from S&P, or such Credit Ratings are withdrawn or suspended or the Guarantee or any Alternate Guarantee ceases to be in effect for any reason, Gas Supplier shall either (a) provide an alternate guarantee, surety bond or similar instrument on terms substantially the same as the Guarantee, issued by a guarantor or an insurer or insurers or financial institution, reasonably acceptable to Issuer (provided that Issuer shall not unreasonably withhold its acceptance of such guarantor, insurer or financial institution), with a Credit Rating of not less than "A3" from Moody’s and "A-" from S&P, respectively (an "Alternate Guarantee") or (b) perform all obligations required to be performed by it as pledgor under the Credit Support Annex to the Prepaid Gas Agreement.

Any Alternate Guarantee provided by Gas Supplier pursuant to the Prepaid Gas Agreement must be delivered to Issuer, together with (i) an opinion of counsel in form and substance satisfactory to Issuer and (ii) written confirmation from both Moody’s and S&P that such Alternate Guarantee will not result in any reduction in or withdrawal of the then outstanding ratings on the Bonds, to effect such substitution, and Issuer is to return the then existing Guarantee or Alternate Guarantee to Gas Supplier within five (5) Business Days after receipt of the acceptable Alternate Guarantee, opinion of counsel and confirmations of ratings.

Termination Events

Termination Event at Option of Issuer. A Termination Event shall be deemed to have occurred at the option of Issuer upon the occurrence of any of the following events:

Gas Supplier, and Guarantor on Gas Supplier’s behalf, fail to pay either: (a) any Gas Payment as invoiced or (b) any undisputed amount due other than a Gas Payment, in each case by 11:00 a.m. on the second Business Day following receipt by Gas Supplier from Issuer, Participant or Trustee of notice of such failure.

A Bankruptcy Event occurs with respect to Gas Supplier or Guarantor.

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Failure to provide an Alternate Guaranty or collateral by the fifth Business Day following receipt by Gas Supplier of notice of such failure.

Any representation or warranty given by Gas Supplier shall prove to have been false or misleading when made and such misrepresentation or warranty has had or could reasonably be expected to have a material adverse effect on Gas Supplier’s ability to perform its obligations under the Prepaid Gas Agreement related to the delivery of Gas or the making of payments.

Any representation or warranty given by Guarantor in the Guarantee shall prove to have been false or misleading when made and such misrepresentation or warranty has had or could reasonably be expected to have a material adverse effect on Guarantor’s ability to make payments under the Guarantee.

For reasons other than Force Majeure or a Receipt Default, Gas Supplier delivers (a) no Prepaid Gas (other than Replacement Gas) for a period of five (5) consecutive Gas Days for which Prepaid Gas is required to be delivered, or (b) less than fifty percent (50%) of the Prepaid Gas (other than Replacement Gas) required to be delivered on any particular Gas Day for ten (10) cumulative Gas Days during any Contract Year during the Term of the Prepaid Gas Agreement.

The termination of the Gas Supplier Swap Agreement due to Gas Supplier’s default together with the failure to replace the Gas Supplier Swap Agreement in accordance with the Prepaid Gas Agreement.

The occurrence of an Excess Gas Event. An "Excess Gas Event" means that subsequent to the issue date of the Bonds and after a Tax Event has occurred, due to events that occurred (or did not occur) or other changes in expectations, the remaining Prepaid Gas to be delivered is no longer required for Qualifying Uses as evidenced exclusively by the following: (i) Issuer or (while the Supply Agreement is in effect) Participant is unable to apply the Gas then remaining to be delivered for a Qualifying Use and (ii) Gas Supplier does not remarket Gas as set forth in the Prepaid Gas Agreement.

The termination of Issuer Swap Agreement for reasons other than Issuer’s default together with the failure to replace the Issuer Swap Agreement in accordance with the Prepaid Gas Agreement.

Termination Event at Option of Gas Supplier. A Termination Event shall be deemed to have occurred at the option of Gas Supplier upon the occurrence of any of the following events:

The termination of Supplier’s Swap Agreement for reasons other than Gas Supplier’s default together with the failure to replace the Gas Supplier Swap Agreement in accordance with the Prepaid Gas Agreement.

The termination of the Issuer Swap Agreement due to Issuer’s nonpayment together with the failure to replace the Issuer Swap Agreement in accordance with the Prepaid Gas Agreement.

Early Termination Date

Right to Establish Early Termination Date. Upon a Termination Event, Issuer may, but shall not be obligated to, establish a date that is the Early Termination Date and shall immediately provide notice to Gas Supplier and Trustee specifying the relevant Termination Event and the Early Termination Date. Upon a Termination Event, Gas Supplier may, but shall not be obligated to, establish a date that is the Early Termination Date and shall immediately provide notice to Issuer, Participant and Trustee specifying the relevant Termination Event and the Early Termination Date. In any case, the termination date so established shall be referred to as the "Early Termination Date", and the Term of the Prepaid Gas Agreement shall cease on the Early Termination Date; provided, however, that certain payment

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obligations of both the Gas Supplier and the Issuer under the Prepaid Gas Agreement shall survive after the Early Termination Date.

Early Termination Date. If the notice of an Early Termination Date is delivered, the Early Termination Date shall be the last day of the Month in which such notice is delivered.

Payments on Early Termination

Within five (5) Business Days following the Early Termination Date, each party will submit to the other and the Trustee an invoice specifying any and all amounts known to be owed to it (and, with respect to payments other than Gas Payments, not disputed pursuant to the Prepaid Gas Agreement) by the other party under the terms of the Prepaid Gas Agreement (other than the Termination Amount and the Required Replacement Amount, if applicable, payable as provided in Sections 25.2 and 25.3 of the Prepaid Gas Agreement as appropriate), whether or not such amounts are otherwise then due and payable, including without limitation (a) invoiced amounts, and (b) uninvoiced amounts and/or amounts payable for physical deliveries or settlements that occurred prior to the Early Termination Date, and the applicable party shall pay the amount so specified as provided in the Prepaid Gas Agreement.

Within three Business Days following the Early Termination Date, Gas Supplier will deposit the Termination Amount with the Trustee for deposit in the Termination Fund and, if applicable, the Required Replacement Amount with the Issuer for deposit in the Operating Fund.

Assignment

The terms and provisions of the Prepaid Gas Agreement shall extend to and be binding upon the parties, their respective heirs, successors, assigns, and legal representatives; provided, however, neither party shall assign the Prepaid Gas Agreement without the prior written consent of the other party (and any purported assignment without such consents shall be void), except that Issuer shall be permitted to assign its interest in the Prepaid Gas Agreement and in the Guarantee to the Trustee pursuant to the Indenture without the consent of Gas Supplier. Whenever an assignment or a transfer of a party’s interest in the Prepaid Gas Agreement requires the written consent of the other party, the assigning or transferring party’s assignee or transferee shall expressly assume, in writing, the duties and obligations under the Prepaid Gas Agreement of the assigning or transferring party, and upon such assignment or transfer and assumption of the duties and obligations, assigning or transferring party shall furnish or cause to be furnished to the other party a true and correct copy of such assignment or transfer and assumption of duties and obligations. Except in the case of the assignments to the Trustee, upon furnishing such copy, the assigning or transferring party shall be relieved of all of its obligations to be performed after furnishing such copy.

Source of Issuer’s Payments

Other than the Prepayment which shall be payable solely from the proceeds of SVFC’s bonds, Issuer shall make the payments required of it by the Prepaid Gas Agreement solely from (a) payments made by Participant to or for the benefit of Issuer pursuant to the Supply Agreement; (b) payments made by the Swap Counterparty to or for the benefit of Issuer pursuant to the Issuer Swap Agreement; and (c) amounts on deposit in the Operating Fund (as such term is defined in the Indenture), to the extent such amounts are available therefor under the Indenture.

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Market Disruption

If a Market Disruption Event has occurred with respect to a price index that is referenced both in the Prepaid Gas Agreement and in the Issuer Swap Agreement then the replacement price shall be determined in accordance with the market disruption procedures set forth in the Issuer Swap Agreement. If a Market Disruption Event has occurred with respect to a price index that is not referenced in the Issuer Swap Agreement and no alternative is otherwise provided, the parties shall negotiate in good faith to agree on a replacement price (or a method for determining the price at issue), and if the parties have not so agreed on or before the 14th Business Day following the first trading day on which the Market Disruption Event occurred or existed, then the replacement price shall be determined by the majority of a panel of three (3) independent dealers in the Gas market. The parties shall each select one dealer and the two (2) dealers selected by the parties shall mutually agree on the third dealer.

Miscellaneous

Regulatory Authorities. The Prepaid Gas Agreement shall be subject to all valid applicable state, federal and local laws, rules and regulations; provided, that either party shall be entitled to regard all laws, rules and regulations issued by any federal, state or local regulatory body as valid and may act in accordance therewith until such time as the same may be held invalid by final judgment in a court of competent jurisdiction. Nothing shall be taken to preclude Issuer or Gas Supplier or both from contesting the validity of any such laws, rules or regulations.

Covenants of the Parties Regarding Federal Tax Issues. Notwithstanding anything to the contrary, the parties agree to comply with any certifications made to, or procedures required by, Tax Counsel to protect the Tax Exempt Status of the Bonds regarding the sale, delivery, purchase or receipt of Gas, the application of any proceeds therefrom, or any related matters; provided that, with respect to Gas Supplier, such certifications or procedures are made or required (as applicable) at or prior to the Closing.

Qualified Substitute Counterparty. For purposes of the following provisions of the Prepaid Gas Agreement, Event of Default, Defaulting Party, Termination Event, Unpaid Amount, Affected Party and Early Termination Date have the meanings specified in the respective Issuer Swap Agreement and Gas Supplier Swap Agreement.

If any Event of Default described in Section 5(a)(i) or Section 5(a)(vii)(1), (3), (5), (6) or, to the extent analogous thereto, (8) of the Issuer Swap Agreement occurs where the Swap Counterparty is the Defaulting Party or Affected Party, Issuer and Gas Supplier are to immediately and in good faith endeavor to identify a substitute counterparty (i) willing to execute a replacement swap agreement for each of the Issuer Swap Agreement and the Gas Supplier Swap Agreement with such Defaulting Party or Affected Party, and (ii) that is not subject to any event, default or event of default, law, rule, order, judgment, agreement or any other circumstance that would cause it to be the "Defaulting Party" or the "Affected Party" under Section 5 of the Issuer Swap Agreement or the Gas Supplier Swap Agreement upon its execution of such replacement swap agreement (such a substitute counterparty, a "Qualified Substitute Counterparty"). Upon identification of such a Qualified Substitute Counterparty by either Issuer or Gas Supplier, neither party is to unreasonably withhold its consent to entering into a replacement swap agreement with respect to the Issuer Swap Agreement or the Gas Supplier Swap Agreement, as applicable, with such Qualified Substitute Counterparty, and, after obtaining such consent, each of Issuer and Gas Supplier is to execute a replacement swap agreement with respect to the Issuer Swap Agreement or Gas Supplier Swap Agreement, as applicable, with the Qualified Substitute Counterparty; provided, however, that no such replacement swap agreement is to become effective unless (i) the effective date of the new Issuer Swap Agreement represented by such replacement will be executed and effective within thirty (30) Days of the Early Termination Date established for the prior Issuer Swap Agreement; (ii) the

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Issuer Swap Agreement and the Gas Supplier Swap Agreement in effect after such replacement will have substantially the same terms as the Issuer Swap Agreement and the Gas Supplier Swap Agreement in effect prior to such replacement; and (iii) Gas Supplier, Issuer and the Trustee will have received written confirmation from both Moody’s and S&P that such replacement will not result in any reduction in or withdrawal of the then outstanding ratings on the Bonds.

If any Termination Event, Additional Termination Event or Event of Default occurs (a) under the Issuer Swap Agreement (other than an Event of Default described in Section 5(a)(i) or Section 5(a)(vii)(1), (3), (5), (6) or, to the extent analogous thereto, (8) of the Issuer Swap Agreement) or the Gas Supplier Swap Agreement where the Swap Counterparty is the Defaulting Party or Affected Party, (b) under the Issuer Swap Agreement where the Issuer is the Defaulting Party or Affected Party, or (c) under the Gas Supplier Swap Agreement where the Gas Supplier is the Defaulting Party or Affected Party, Issuer and Gas Supplier are to immediately and in good faith endeavor to identify a Qualified Substitute Counterparty (as defined above). Upon identification of such a Qualified Substitute Counterparty by either Issuer or Gas Supplier, neither party is to unreasonably withhold its consent to entering into a replacement swap agreement with respect to the Issuer Swap Agreement or the Gas Supplier Swap Agreement, as applicable, with such Qualified Substitute Counterparty, and, after obtaining such consent, each of Issuer and Gas Supplier is to execute a replacement swap agreement with respect to the Issuer Swap Agreement or Gas Supplier Swap Agreement, as applicable, with the Qualified Substitute Counterparty; provided, however, that no such replacement swap agreement is to become effective unless (i) the new Issuer Swap Agreement represented by such replacement will be in place and effective on the day that Issuer has established as the Early Termination Date for the prior Issuer Swap Agreement; (ii) on the effective date of the new Issuer Swap Agreement all amounts required to have been paid to the Trustee under the prior Issuer Swap Agreement on or prior to the termination of the prior Issuer Swap Agreement and all amounts required to be paid to the Trustee under the new Issuer Swap Agreement on such date will have been paid to the Trustee without regard to the source of such payment; (iii) the replacement Issuer Swap Agreement and the Gas Supplier Swap Agreement will have substantially the same terms as the Issuer Swap Agreement and the Gas Supplier Swap Agreement in effect prior to such replacement; and (iv) Gas Supplier, Issuer and the Trustee will have received written confirmation from both Moody’s and S&P that such replacement shall not result in any reduction in or withdrawal of the then outstanding ratings on the Bonds.

Notwithstanding anything in the Prepaid Gas Agreement to the contrary, neither party will have any obligation to enter into a replacement swap agreement with a Qualified Swap Counterparty in accordance with this forgoing provisions unless the party is able to terminate the existing Issuer Swap Agreement or Gas Supplier Swap Agreement, as applicable, without liability for any payment (other than payment of any Unpaid Amount).

Participant. Issuer has entered into the Supply Agreement with Participant pursuant to which Issuer has sold all of the Gas to be delivered to Participant with Participant taking title to such Gas at applicable Delivery Points. While the Supply Agreement is in effect, Participant is an express third-party beneficiary under the Prepaid Gas Agreement. In addition, upon the failure of Issuer to take any action required or permitted to be taken by Issuer or to enforce any right granted to Issuer, Gas Supplier agrees that Participant may take such action or enforce such right directly on its own behalf. Upon the termination of the Supply Agreement, all references to the Participant in the Prepaid Gas Agreement shall be null and void and of no further force and effect except with respect to the payments of amounts payable to Participant which accrued prior to such termination.

While the Supply Agreement is in effect, Participant may, as agent of Issuer or on its own behalf, provide any notice, consents, reports, calculations or other communication to be taken or provided by Issuer. While the Supply Agreement is in effect, Gas Supplier may rely on all notices, consents, reports,

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calculations and other communications from Participant to Gas Supplier with respect to the Gas to be delivered under the Prepaid Gas Agreement as if such notices, consents, reports, calculations and other communications had been given by Issuer.

Supply Agreement. Issuer shall collect or cause to be collected and forthwith cause to be deposited in the Revenue Fund all amounts payable to it pursuant to the Supply Agreement, other than the Administrative Fee, which shall be deposited in the Operating Fund, or otherwise payable to it with respect to the Gas Supply or any part thereof. Issuer shall enforce the provisions of the Supply Agreement, as well as any other contract or contracts entered into relating to the Gas Supply, and duly perform its covenants and agreements thereunder. Issuer shall promptly exercise its right to suspend or terminate all Gas deliveries under the Supply Agreement if Participant fails to pay when due any amounts owed to Issuer thereunder. Except to the extent permitted by the Supply Agreement, Issuer will not consent or agree to or permit any termination or rescission of, or amendment to, the Supply Agreement without the prior written consent of Gas Supplier. Issuer shall cause the Supply Agreement to provide that Gas Supplier is an express third-party beneficiary of Issuer’s rights under the Supply Agreement.

Refunding Bonds. In the event that the Bonds are refunded but have not actually been paid, all provisions of the Prepaid Gas Agreement relating to the Tax-Exempt Status of the Bonds shall be deemed to apply to the refunding bonds to the extent required by Bond Counsel to render its opinion that the refunding bonds are Tax-Exempt. Issuer agrees not to issue any refunding bonds without the prior written consent of Gas Supplier if, in the reasonable opinion of Gas Supplier, the issuance of such refunding bonds could adversely affect the application of any provision of the Prepaid Gas Agreement to Gas Supplier.

APPENDIX E

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SUMMARY OF CERTAIN PROVISIONS OF THE SUPPLY AGREEMENT

Set forth below is a summary of certain provisions of the Supply Agreement. This summary does not purport to be complete, and reference is made to the definitive form of the Supply Agreement, copies of which are available as described under the caption "INTRODUCTION" of the Official Statement, for a more complete description thereof. The following terms will have the following meanings when used to describe the Supply Agreement.

"Administrative Fee" means, with respect to a Delivery Month, $0.09 per MMBtu of Gas or such higher amount per MMBtu of Gas as may be agreed to by SVFC and the District from time to time as may be necessary for SVFC to pay administrative or other expenses in connection with the Indenture, the Bonds, the Issuer Swap Agreement, the Prepaid Gas Agreement or this Agreement (including but not limited to expenses in connection with the redemption of Bonds, indemnification payments, fees and expenses of the Trustee, accountants, attorneys, Gas consultants and others, rebate and other payments to the United States with respect to the Bonds and fees and expenses in connection litigation and/or government investigations and audits).

"Contract Gas" means that portion of the Prepaid Gas to be delivered by SVFC to the District and received by the District under the Supply Agreement during the Term of the Supply Agreement.

"Contract Price" means, with respect to a Delivery Month, an amount per MMBtu of Gas equal to the Index Price for such Delivery Month less $0.825 per MMBtu.

"Daily Contract Quantity" means the quantity of Contract Gas in MMBtus required to be delivered by SVFC and received by the District on each Gas Day of each Delivery Month during the Delivery Period, all as set forth in an exhibit to the Supply Agreement.

"Delivery Month" means a Month during the Delivery Period in which Contract Gas deliveries and receipts are to be made under the Supply Agreement.

"Delivery Period" means the period from and including the Delivery Start Date to and including the first to occur of the Scheduled Termination Date or the Early Termination Date.

"Delivery Start Date" means May 1, 2008.

"District Receipt Failure" means the District’s failure on any Gas Day, for any reason other than Force Majeure, to take delivery at the applicable Delivery Point of the quantity of Contract Gas required to be received at such Delivery Point on such Gas Day from SVFC.

"Gas Day" means a period of twenty-four (24) consecutive hours, coextensive with "day" as defined by the Receiving Transporter in a particular transaction. If, through standardizing business practices in the industry, or for any other reason, either FERC. or one or more Transporters change the definition of a day as applicable to the delivery of Contract Gas under the Supply Agreement, such change is to apply to the definition of Gas Day in the Supply Agreement; provided that in the event a Receiving Transporter changes the definition of a day, the definition of Gas Day in the Supply Agreement is to be changed only with respect to Contract Gas delivered through such Transporter.

"Issuer Swap Agreement" shall have the meaning given such term in the Prepaid Gas Agreement.

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"Month" or "Monthly" means a period beginning at 9:00 a.m. on the first Day of a calendar month and ending immediately preceding 9:00 a.m. on the first Day of the next succeeding calendar month. If, through standardizing business practices in the industry, or for any other reason, either FERC or one or more Transporters change the definition of month as applicable to the Delivery of Contract Gas under the Supply Agreement, such change is to apply to the definition of Month in the Supply Agreement; provided that in the event a Receiving Transporter changes the definition of a month, the definition of Month in the Supply Agreement is to be changed only with respect to Contract Gas delivered through such Receiving Transporter.

"SVFC Delivery Default" means the SVFC’s failure on any Gas Day, for any reason other than Force Majeure, to deliver to the applicable Delivery Point the quantity of Contract Gas required to be delivered to such Delivery Point on such Gas Day pursuant to the Supply Agreement.

"Term" means the period of time that the Supply Agreement is effective, which commences on the date of execution and, except as provided therein with respect to certain expenses, continues in effect until October 31, 2037, unless terminated earlier due to certain defaults, as set forth therein, or the termination of the Prepaid Gas Agreement.

Delivery and Receipt Obligations

Beginning on the Delivery Start Date and on each Gas Day thereafter during the remaining Term of the Supply Agreement, SVFC is to deliver, or cause to be delivered, and the District is to receive, on a Firm basis, the Daily Contract Quantity pursuant to the terms of the Supply Agreement.

SVFC Delivery Default

If an SVFC Delivery Default is anticipated or upon the occurrence of an SVFC Delivery Default, the party that first learns of such anticipated SVFC Delivery Default or SVFC Delivery Default is to notify the other party and the Gas Supplier of such default promptly by telephone or facsimile transmission; provided that any failure to give such notice, or any delay in giving such notice, will not affect the District’s rights under the Supply Agreement. The District will have no obligation to pay for any of the Contract Gas that was not delivered as a result of an SVFC Delivery Default. Except with respect to the payment of Imbalance Charges pursuant to the Supply Agreement, the aforementioned remedies are the District’s sole and exclusive remedies under the Supply Agreement for any SVFC Delivery Default.

District Receipt Failure

If a District Receipt Failure is anticipated or upon the occurrence of a District Receipt Failure, the party that first learns of such anticipated District Receipt Failure or District Receipt Failure is to notify the other party and the Gas Supplier of such failure promptly by telephone or facsimile transmission; provided that any failure to give such notice, or any delay in giving such notice, will not affect District’s rights under the Supply Agreement. Notwithstanding a District Receipt Failure with respect to any portion of the Contract Gas, the District will be liable for the Contract Price for all Contract Gas as to which there is a District Receipt Failure. Pursuant to the Prepaid Gas Agreement, upon the failure of SVFC to receive any Gas to be delivered thereunder for any reason other than Force Majeure, the Gas Supplier is obligated to remarket Prepaid Gas pursuant to the Prepaid Gas Agreement. As a District Receipt Failure under the Supply Agreement will cause the Gas Supplier to be obligated to remarket Prepaid Gas in accordance with the provisions described in the preceding sentence and make payments under the Prepaid Gas Agreement relating to such remarketed Gas, SVFC has agreed in the Supply Agreement to credit against the Contract Price payments due from the District in any Month with respect

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to District Receipt Failures the amount paid by the Gas Supplier in such Month (other than amounts deposited or to be deposited in the Remediation Fund) with respect to SVFC’s failures to receive any Prepaid Gas to be delivered thereunder in such Month for any reason other than Force Majeure, up to the amount of such Contract Price payments due from the District. Notwithstanding a payment by Gas Supplier and any related remarketing of Gas pursuant to the Prepaid Gas Agreement with respect to any portion of the Contract Gas, such Contract Gas will be deemed to have been delivered by SVFC to the District under the Supply Agreement and remarketed on the District’s behalf. The District will be liable for the Contract Price for all Gas so remarketed. Except with respect to the payment of Imbalance Charges pursuant to the Supply Agreement, the aforementioned remedies are the sole and exclusive remedies of the parties under the Supply Agreement for any District Receipt Failure.

Remarketing Provisions

To maintain the Tax-Exempt Status of the Bonds, and except as permitted by Treasury Regulation Section 1.148-1(e)(2)(iii)(A)(2) and as otherwise approved by an opinion of Tax Counsel as preserving the Tax-Exempt Status of the Bonds, the District is obligated to apply, or caused to be applied, the Contract Gas for a Qualifying Use.

Remarketing by SVFC

Pursuant to the Prepaid Gas Agreement, SVFC is to remarket Voluntary Remarket Gas at the request of SVFC on the terms and conditions set forth therein. In the Supply Agreement, SVFC authorizes the District, on SVFC’s behalf, to exercise SVFC’s rights to request the Gas Supplier to remarket Prepaid Gas and agrees to cause the Gas Supplier to apply the Remarketing Proceeds of all Prepaid Gas so remarketed in accordance with the "Manner of Payment" provisions of the Prepaid Gas Agreement. Notwithstanding a remarketing of Gas at the option of SVFC under the Prepaid Gas Agreement with respect to any portion of the Contract Gas, such Contract Gas is deemed to have been delivered by SVFC to the District under the Supply Agreement and remarketed on the District’s behalf and as District’s agent. The District will be liable for the Contract Price for all Gas so remarketed, subject to any credits that may be applied as described above under "District Receipt Failure".

Pursuant to certain other provisions of the Prepaid Gas Agreement, the Gas Supplier is required to remarket Gas on the terms and conditions set forth therein. SVFC is to cause the Gas Supplier to apply the Remarketing Proceeds of all Gas so remarketed in accordance with the "Manner of Payment" provisions of the Prepaid Gas Agreement. Notwithstanding a required remarketing of Prepaid Gas pursuant to of the Gas Purchase Agreement with respect to any portion of the Prepaid Gas which to be delivered under the Supply Agreement as Contract Gas, such Gas will be deemed to have been delivered by SVFC to the District under the Supply Agreement and remarketed on the District’s behalf and as the District’s agent. The District will be liable for the Contract Price for all Gas so remarketed, subject to any credits that may be applied as described above under "District Receipt Failure".

Remarketing by District.

Subject to the Qualifying Use provisions of the Supply Agreement, the District may remarket any Contract Gas delivered thereunder. In connection with any such remarketing, the District is to comply with the requirements of the Supply Agreement, as follows: The District is to maintain books and records regarding each remarketing of Gas undertaken by it and provide SVFC, the Gas Supplier and the Trustee with a written report, by the 10th Day of each Month following a Month in which the District remarketed Contract Gas, showing (i) the date of such remarketing; (ii) the name of the buyer; (iii) the Remarketing Proceeds; and (iv) whether such remarketing was for a Qualifying Use or a Non-Qualifying Use. The District is to use commercially reasonable efforts to identify buyers of Gas who will apply the remarketed

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Gas to a Qualifying Use and remarket all gas for a Qualifying Use if the Remarketing Price is equal to or greater than the Remarketing Price in remarketing such gas for a Non-Qualifying Use. The use of Gas remarketed under the Supply Agreement for a Qualifying Use is in all cases to be evidenced by a Qualifying Use Certificate delivered by the District relating to such Gas.

Remediation Provisions

a. Whenever any Proceeds Subject to Remediation exist, District is to establish and maintain, or reestablish and maintain, a special fund (the "Remediation Fund") until the earlier of (i) the time when no Bonds remain outstanding or (ii) the time when any remaining funds have been transferred from the Remediation Fund to the Redemption Fund in accordance with Section 8.1(g) of the Supply Agreement (summarized in subsection "g." below). The obligation to establish and maintain the Remediation Fund will survive the termination of the Supply Agreement.

b. The District is to deposit in the Remediation Fund all Proceeds Subject to Remediation. No other moneys are to be deposited in the Remediation Fund. The District is to withdraw amounts in the Remediation Fund only in connection with (i) a Remediation Use in accordance with Section 8.1(d) of the Supply Agreement (summarized in subsection "d." below) or Remediation by the Gas Supplier, (ii) in connection with the redemption of Bonds in accordance with Section 8.1(g) of the Supply Agreement, (iii) to pay any rebate due under Section 148 of the Code, or (iv) as permitted pursuant to an opinion of Tax Counsel that such use will not adversely affect the Tax-Exempt Status of the Bonds.

c. The District is to use commercially reasonable efforts to cause all Proceeds Subject to Remediation in the Remediation Fund to be applied for a Remediation Use within twelve months of applicable Receipt Date.

d. Whenever the District can apply Gas for a Qualifying Use, the District is to first apply Contract Gas delivered under the Supply Agreement for such Qualifying Use and whenever the District can apply Gas or electricity for a Remediation Use, after applying Contract Gas delivered under the Supply Agreement for such Qualifying Use, the District is to then apply Proceeds Subject to Remediation in the Remediation Fund to acquire Gas or electricity for such Remediation Use; notwithstanding the foregoing provisions of Section 8.1(d) of the Supply Agreement, in the event the District has entered into one or more Additional Supply Agreements, the District may: (i) use Gas delivered under such Additional Supply Agreements for a Qualifying Use on a pro rata basis with the Prepaid Gas for a Qualifying Use; and (ii) the District may apply remarketing proceeds (and interest and other income or such amounts that are not required to be rebated) of Gas delivered or deemed delivered under the Additional Supply Agreements which were not applied for a Qualifying Use to a Remediation Use on a pro rata basis with the application to a Remediation Use of Proceeds Subject to Remediation in the Remediation Fund. For purposes of Section 8.1(d) of the Supply Agreement, a pro rata basis means, as of any time, an allocation based on the total amount of Contract Gas to be delivered under the Supply Agreement over its stated term compared to the total amount of Gas to be delivered over their stated terms under those Additional Supply Agreements as to which, at such time, there is a Shared Remediation Period.

e. Proceeds Subject to Remediation in the Remediation Fund are to be deemed expended and allocated to expenditures in order of the deposit of applicable Remarketing Proceeds on a first-in, first-out basis; provided that for this purpose interest and other income earned on the amounts in the Remediation Fund are to be treated as received on the date that those amounts were deposited in the Remediation Fund.

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f. During each Gas Supplier Remediation Period, all of the following will apply: (i) the Gas Supplier will be the party with primary authority to apply amounts in the Remediation Fund to a Remediation Use, subject to the right of the District to deliver a Reservation Notice in accordance with Section 8.1(f) of the Supply Agreement (summarized in this subsection "f.") and subject to the transfer of such funds pursuant to Section 8.1(g) of the Supply Agreement; (ii) the District is to make all Proceeds Subject to Remediation in the Remediation Fund available to the Gas Supplier to the extent necessary for the Gas Supplier to carry out its obligations to apply amounts in the Remediation Fund for Remediation Uses; (iii) the District is to provide Gas Supplier a Reservation Notice with respect to the amount in the Remediation Fund that the District expects to apply for a Remediation Use during such Month; provided that no such Reservation Notice may be given to the extent that after making the purchases provided in such Reservation Notice, there will not be sufficient funds on deposit in the Remediation Fund to provide for all purchases of Gas or electricity by the Gas Supplier which are both unsettled and described in the reports provided by the Gas Supplier pursuant to Section 8.3.2 of the Prepaid Gas Agreement.

g. In the event that any Proceeds Subject to Remediation remain on deposit in the Remediation Fund for twenty-one (21) months after the applicable Receipt Date and at the time of termination of the Supply Agreement, the District is to transfer such Proceeds Subject to Remediation and any other funds identified by Tax Counsel as required to be transferred to the Redemption Fund in order to preserve the Tax-Exempt Status of the Bonds, to the Trustee for deposit in the Redemption Fund to be applied to the redemption of Bonds as directed by SVFC and approved by Tax Counsel as preserving the Tax-Exempt Status of the Bonds.

Section 8.3 of the Prepaid Gas Agreement provides for the Gas Supplier to take certain actions at specified times to apply amounts in the Remediation Fund for Remediation Uses. In order to accommodate the Gas Supplier’s taking such actions, the provisions of Section 8.1 of the Prepaid Gas Agreement not otherwise expressly included in Section 8 of the Supply Agreement are incorporated by reference into the Supply Agreement, including the definitions of defined terms, as if set forth in full in the Supply Agreement. The District agrees in the Supply Agreement to make the moneys in the Remediation Fund available to the Gas Supplier in connection with the Gas Supplier taking any action under Section 8.3 of the Prepaid Gas Agreement. The District further agrees in the Supply Agreement to take each action contemplated on the part of the District pursuant to Section 8.1 of the Prepaid Gas Agreement, including providing Retention Notices and notices of the anticipated use of moneys in the Remediation Fund, set forth in such Section 8.1. SVFC agrees in the Supply Agreement not to consent to a larger discount other than that specified in Section 8.3.1 of the Prepaid Gas Agreement without the prior written consent of the District.

Payments in Connection with Gas Supplier Remediation. Upon receipt of the report required by Section 8.3.2 of the Prepaid Gas Agreement, the District is to withdraw from the Remediation Fund the aggregate amount of purchases indicated in such report. If the report required by Section 8.3.2 of the Prepaid Gas Agreement indicates that the aggregate amount of all purchases by the Gas Supplier under said Section 8.3.2 is greater than the aggregate amount of all sales pursuant to said section, the District is to pay such difference to the Gas Supplier, from amounts withdrawn from the Remediation Fund, on the 25th Day of such Month, or if such Day is not a Business Day, on the next succeeding Business Day by the wire transfer of immediately available United States funds. Such payments by the District will not be subject to the netting provisions of the Supply Agreement.

Force Majeure

Except with regard to a party’s obligation to make payment(s) due under the Supply Agreement, neither party will be liable to the other for failure to perform an obligation under the Supply Agreement to the extent such failure was caused by Force Majeure. Under the Supply Agreement, "Force Majeure" has

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the same meaning as that given in the Prepaid Gas Purchase Agreement. However, the party claiming Force Majeure is not to be excused from its responsibility for Imbalance Charges due under the Supply Agreement.

SVFC and the District are to make reasonable efforts to avoid the adverse impacts of any event of Force Majeure and to resolve the impacts of an event of Force Majeure once it has occurred in order to resume performance under the Supply Agreement.

Defaults and Remedies

SVFC Defaults. Subject to the provisions of the Supply Agreement limiting remedies and damages, in the event of a default by SVFC under any covenant, agreement, or obligation in the Supply Agreement, the District may bring any suit, action, or proceeding at law or in equity, including without limitation mandamus, injunction, and action for specific performance, as the District determines may be necessary or appropriate to enforce SVFC’s performance of any covenant, agreement, or obligation in the Supply Agreement.

District Material Default. Each of the following events constitutes a "District Material Default" under the Supply Agreement:

(a) The District fails to pay within two (2) Business Days of when the same is due under the Supply Agreement, any amounts payable by the District to SVFC pursuant to the Supply Agreement; or

(b) A Bankruptcy Event has occurred with respect to the District.

Remedies for District Material Default. In the event of any District Material Default, SVFC will, with written notice to the District, immediately terminate the Supply Agreement and upon such termination all obligations of SVFC to deliver Gas to the District under the Supply Agreement will cease; provided, however, that, in the case of a District Material Default described in the preceding clause (a), if the District has paid the defaulted amount together with any interest accrued thereon within fifteen (15) days of the date of such termination, no notice of redemption of Bonds has at the time been issued by the Trustee, and no Early Termination Date has occurred, the Supply Agreement (including the obligations of SVFC to deliver Gas to the District under the Supply Agreement) will immediately be reinstated.

Liability of District for Delivered Gas. In the event of the termination of the Supply Agreement as a result of a District Material Default, the District will have no liability for any damages or settlement amounts with respect to Gas to be delivered under the Supply Agreement after such termination, but the District will remain obligated to pay the Contract Price payments for all unpaid Gas delivered under the Supply Agreement prior to such termination and interest thereon as provided in the Supply Agreement, whether or not District has received an invoice for such Gas.

District Defaults Generally. Subject to the provisions of the Supply Agreement limiting remedies and damages, in the event of any default by the District under any covenant, agreement, or obligation in the Supply Agreement, other than a District Material Default, SVFC may bring any suit, action, or proceeding at law or in equity, including without limitation mandamus, injunction, and action for specific performance, as SVFC determines may be necessary or appropriate to enforce the District’s performance of any covenant, agreement, or obligation in the Supply Agreement.

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Source of District’s Payments

The District agrees to make the payments it is required to make under the Supply Agreement from the revenues of its electric system, and only from such revenues, and as a charge against such revenues, as an operating expense of its electric system and as a cost of fuel for its electric generating units; provided, that the District, in its discretion, may apply any legally available monies to the payment of amounts due under the Supply Agreement. The District covenants and agrees in the Supply Agreement that it will establish, maintain, and collect rates and charges for its electric system so as to provide revenues sufficient, together with all available electric system revenues, to enable the District to pay to SVFC all amounts payable under the Supply Agreement and to pay all other amounts payable from the revenues of the District’s electric system, and to maintain any required reserves. The District further covenants and agrees that it will enforce the payment of any and all accounts owing to the District for the sale of electricity or the provision of transmission, distribution or other services to its customers. The District further covenants and agrees that in any future bond issue, certificate of participation issue, interest rate swap agreement, commodity swap agreement or any other financing or financial transaction undertaken by, or on behalf of, the District in connection with its electric system, the District will not pledge or encumber the revenues of its electric system through a gross revenue pledge or in any other way which creates a prior or superior obligation to its obligation to make payments under the Supply Agreement.

Termination of Supply Agreement

Notwithstanding anything in the Supply Agreement to the contrary, the Supply Agreement will automatically terminate, without the necessity of any action by, or notice to, either party upon the termination of the Prepaid Gas Agreement.

Covenants of the Parties Regarding Federal Tax Issues

Notwithstanding anything in the Supply Agreement to the contrary, the parties thereto agree to comply with any certifications made to, or procedures required by, Tax Counsel to protect the Tax-Exempt Status of the Bonds regarding the sale, delivery, purchase or receipt of Gas pursuant to the terms of the Supply Agreement, the application of any Proceeds Subject to Remediation or any other proceeds in connection with the Gas, and any other matters affecting the Tax-Exempt Status of the Bonds.

Special Obligations of SVFC

Notwithstanding anything to the contrary contained in the Supply Agreement: (i) the obligation of SVFC to deliver Gas under the Supply Agreement at any Delivery Point on any Gas Day is limited to the delivery of Gas which SVFC receives under the Prepaid Gas Agreement at such Delivery Point on such Gas Day; (ii) the obligation of SVFC to pay any amount under the Supply Agreement or to give credits against amounts due from the District under the Supply Agreement is limited to amounts SVFC receives under the Prepaid Gas Agreement or otherwise available to SVFC in connection with the transaction for which such payment or credit relates and which are on deposit in the Operating Fund; (iii) any imbalance, transportation, tax, indemnification and other Miscellaneous Charges for which SVFC is responsible under the Gas Purchase Agreement are to be considered imbalance, transportation, tax, indemnification and other Miscellaneous Charges incurred by SVFC under the Supply Agreement; and (iv) any event of Force Majeure affecting the delivery of Gas by the Gas Supplier under the Prepaid Gas Agreement will be considered an event of Force Majeure affecting SVFC with respect to the delivery of Gas under the Supply Agreement, and SVFC promptly forwarding to the District notices and information from the Gas Supplier concerning an event of Force Majeure upon receipt thereof will be sufficient notice and information relating thereto for purposes of the Supply Agreement.

APPENDIX F

FORM OF OPINION OF BOND COUNSEL

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[NIXON PEABODY LLP LETTERHEAD]

______, 2007

Board of Directors Salt Verde Financial Corporation 1600 North Priest Drive Tempe, Arizona 85281

Re: Salt Verde Financial Corporation Senior Gas Revenue Bonds, Series 2007 Ladies and Gentlemen:

We have acted as bond counsel in connection with the issuance by Salt Verde Financial Corporation, a nonprofit corporation of the State of Arizona (“Salt Verde”), of $1,129,765,000 aggregate principal amount of its Senior Gas Revenue Bonds, Series 2007 (the “Senior Lien Bonds”), dated the date of delivery. The Senior Lien Bonds are being issued pursuant to a Trust Indenture (the “Indenture”), dated as of October 1, 2007, by and between Salt Verde and U.S. Bank National Association, as trustee (the “Trustee”) to finance the prepayment for an approximately thirty-year supply of natural gas to be delivered to Salt Verde, fund certain reserves and pay issuance and other costs relating to such financing. In addition to the Senior Lien Bonds, the Corporation is simultaneously issuing $29,030,000 aggregate principal amount of its Subordinate Gas Revenue Bonds under the Indenture. Capitalized terms used and not otherwise defined herein have the respective meanings given to them in the Indenture. This letter is provided only in connection with the Senior Lien Bonds.

In our capacity as bond counsel, we have examined the law and such documents, records, opinions and other instruments to the extent we deemed necessary to enable us to render the opinions set forth herein, including the Indenture; the Agreement for the Purchase and Sale of Natural Gas (the “Prepaid Gas Agreement”), dated October 12, 2007 between Salt Verde and Citigroup Energy Inc.; the Natural Gas Supply Agreement (the “Supply Agreement”), dated October 12, 2007 between Salt Verde and Salt River Project Agricultural Improvement and Power District, an Agricultural Improvement District and political subdivision of the State of Arizona (the “District”); the ISDA Master Agreement, Schedule, Confirmation and Credit Support Annex, dated October 12, 2007 between Salt Verde and Royal Bank of Canada; the ISDA Master Agreement, Schedule, Confirmation and Credit Support Annex, dated October 12, 2007 between Citigroup Energy Inc. and Royal Bank of Canada; the Arbitrage and Use of Proceeds Certificate and the provisions of Section 141-150 of the Internal Revenue Code of 1986, dated the date hereof, relating to the Senior Lien Bonds (the “Tax Certificate”); the certified Articles of Incorporation and Bylaws of Salt Verde; resolutions of Salt Verde relating to the Senior Lien Bonds and to the agreements to which Salt Verde is a party; resolutions of the District relating to the creation of Salt Verde and to the agreements to which the District is a party; certificates of Salt Verde, the District, the Trustee and others; and opinions of counsel to Salt Verde, the District, the Trustee and others, including, but not limited to, the opinion of

Salt Verde Financial Corporation , 2007 Page 2

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Jennings, Strouss & Salmon P.L.C., counsel to Salt Verde, as to certain matters governed by the laws of the State of Arizona. In rendering the following opinions we have assumed the genuineness of all signatures, the authenticity of all documents tendered to us as originals and the conformity to original documents of all documents submitted to us as certified or photostatic copies.

As to questions of fact material to our opinions, we have relied upon the certified proceedings and other certifications of public officials furnished to us without undertaking to verify the same by independent investigation.

We have not been engaged or undertaken to review the accuracy, completeness or sufficiency of the Official Statement of Salt Verde or any other offering materials relating to the Senior Lien Bonds, and we express no opinion as to any such matters.

Based on and subject to the foregoing, and in reliance thereon, as of the date hereof, we are of the following opinions:

1. The Senior Lien Bonds constitute valid and binding special obligations of Salt Verde.

2. The Indenture has been duly executed and delivered by, and constitutes the valid and binding obligation of, Salt Verde. The Indenture creates a valid pledge, to secure the payment of the principal of and interest on the Senior Lien Bonds, of the Trust Estate, which pledge is subject to the provisions of the Indenture permitting the application of the Trust Estate for the purposes and on the terms and conditions set forth therein.

3. The Senior Lien Bonds are not payable from, or secured by a legal or equitable pledge of, or lien or charge upon, any property of Salt Verde or any of its income or receipts except the Revenues and the other funds pledged therefor pursuant to the Indenture, which pledge is subject to the application of the Revenues and such other funds for the purposes and on the terms and conditions set forth in the Indenture. Neither the faith and credit nor the taxing power of the State of Arizona, the District or any other public agency is pledged to the payment of the principal or Redemption Price of, or the interest on, the Senior Lien Bonds, and the issuance of the Senior Lien Bonds shall not directly, indirectly or contingently obligate the State of Arizona or any political subdivision thereof, including the District, to levy or pledge any form of taxation or to make any appropriation for the payment of the Senior Lien Bonds. The payment of the principal or Redemption Price of, or interest on, the Senior Lien Bonds does not constitute a debt, liability or obligation of the State of Arizona or any public agency, including the District, other than the special obligation of Salt Verde as provided in the Indenture.

4. The Internal Revenue Code of 1986 (the “Code”) sets forth certain requirements which must be met subsequent to the issuance and delivery of the Senior Lien Bonds for interest thereon to be and remain excluded from gross income for Federal income tax purposes. Noncompliance with such requirements could cause the interest on the Senior Lien Bonds to be


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included in gross income for Federal income tax purposes retroactive to the date of issue of the Senior Lien Bonds. Pursuant to the Tax Certificate, each of Salt Verde and the District has covenanted to comply with the applicable requirements of the Code in order to maintain the exclusion of the interest on the Senior Lien Bonds from gross income for Federal income tax purposes pursuant to Section 103 of the Code. In addition, Salt Verde has made certain representations and certifications in the Indenture and the Prepaid Gas Agreement, and each of Salt Verde and the District has made certain representations and certifications in the Supply Agreement and the Tax Certificate. We have not independently verified the accuracy of those certifications and representations.

Under existing law, assuming compliance with the tax covenants described herein and the accuracy of the aforementioned representations and certifications, interest on the Senior Lien Bonds is excluded from gross income for Federal income tax purposes under Section 103 of the Code. We are also of the opinion that such interest is not treated as a preference item in calculating the alternative minimum tax imposed under the Code with respect to individuals and corporations. Interest on the Senior Lien Bonds is, however, included in the adjusted current earnings of certain corporations for purposes of computing the alternative minimum tax imposed on such corporations.

We are further of the opinion that the difference between the principal amount of the Senior Lien Bonds maturing December 1, 2032, and December 1, 2037 (collectively, the “Discount Senior Lien Bonds”) and the initial offering price to the public (excluding bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters or wholesalers) at which price a substantial amount of such Discount Senior Lien Bonds of the same maturities were sold constitutes original issue discount which is excluded from gross income for Federal income tax purposes to the same extent as interest on the Senior Lien Bonds. Further, such original issue discount accrues actuarially on a constant interest rate basis over the term of each Discount Senior Lien Bond, and the basis of each Discount Senior Lien Bond acquired at such initial offering price by an initial purchaser thereof will be increased by the amount of such accrued original issue discount. The accrual of original issue discount may be taken into account as an increase in the amount of tax-exempt income for purposes of determining various other tax consequences of owning the Discount Senior Lien Bonds, even though there will not be a corresponding cash payment.

Under existing law, interest on the Senior Lien Bonds is exempt from income taxation by the State of Arizona.

Except as stated in the preceding four paragraphs, we express no opinion as to any other Federal, state or local tax consequences of the ownership or disposition of the Senior Lien Bonds. Furthermore, we express no opinion as to any Federal, state or local tax law consequences with respect to the Senior Lien Bonds, or the interest thereon, if any action is taken with respect to the Senior Lien Bonds or the proceeds thereof upon the advice or approval of other counsel.


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It is to be understood that the rights and obligations under the Senior Lien Bonds, the Indenture, the Prepaid Gas Agreement, the Supply Agreement and the Tax Certificate and their enforceability may be subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors’ rights heretofore or hereafter enacted to the extent constitutionally applicable and that their enforcement may also be subject to the exercise of judicial discretion in appropriate cases. We express no opinion with respect to any indemnification, contribution, penalty, choice of law, choice of forum or waiver provisions contained in the foregoing documents, nor do we express any opinion with respect to the state or quality of title to or interest in any of the assets described in, or as subject to the lien of, the Indenture or the accuracy of the description contained therein of, or the remedies available to enforce liens on, any of such assets.

Certain agreements, requirements and procedures contained or referred to in the Indenture, the Prepaid Gas Agreement, the Supply Agreement, the Tax Certificate and other relevant documents may be changed and certain actions (including, without limitation, defeasance of Senior Lien Bonds) may be taken or omitted under the circumstances and subject to the terms and conditions set forth in such documents. No opinion is expressed herein as to any Senior Lien Bond or the interest thereon if any such change occurs or action is taken or omitted upon the advice or approval of counsel other than ourselves.

By rendering the foregoing opinions, we do not undertake to advise you of any changes in laws or facts which may occur or come to our attention after the date hereof.

Our services as bond counsel to Salt Verde have been limited to rendering the foregoing opinions based on our review of such proceedings and documents as we deem necessary to approve the validity of the Senior Lien Bonds and the tax-exempt status of interest thereon.

Very truly yours,

APPENDIX G

FORM OF CONTINUING DISCLOSURE AGREEMENT

CONTINUING DISCLOSURE AGREEMENT

Between

SALT VERDE FINANCIAL CORPORATION

and

U.S. BANK NATIONAL ASSOCIATION as trustee

$1,129,765,000 Salt Verde Financial Corporation Senior Gas Revenue Bonds, Series 2007

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THIS CONTINUING DISCLOSURE AGREEMENT (the “Agreement”), dated as of October

____, 2007, by and between Salt Verde Financial Corporation (“SVFC”), an Arizona non-profit corporation, and U.S. Bank National Association, Phoenix, Arizona, as trustee (the “Trustee”) for the $1,129,765,000 Salt Verde Financial Corporation Senior Gas Revenue Bonds, Series 2007 to be issued by SVFC (the “Bonds”);

W I T N E S S E T H:

WHEREAS, SVFC intends to issue the Bonds under a Trust Indenture, dated as of October 1, 2007 between SVFC and the Trustee.

WHEREAS, on November 10, 1994 the Securities and Exchange Commission (the “Commission”) adopted Release Number 34-34961 (the “Release”) which amended Rule 15c2-12 ("Rule 15c2-12"), originally adopted by the Commission on June 28, 1989;

WHEREAS, Rule 15c2-12 requires that prior to acting as a broker, dealer or municipal securities dealer (the “Participating Underwriter”) for the Bonds, a Participating Underwriter must comply with the provisions of Rule 15c2-12;

WHEREAS, Rule 15c2-12 further provides, among other things, that a Participating Underwriter shall not purchase or sell SVFC’s Bonds unless the Participating Underwriter has reasonably determined that SVFC and any “obligated person” (within the meaning of Rule 15c2-12, as amended) have undertaken, either individually or in combination with others, in a written agreement for the benefit of Bondholders, to provide certain information relating to SVFC, any “obligated person” and the Bonds, to the Repositories described herein below;

WHEREAS, this Agreement is being executed and delivered by SVFC and the Trustee for the benefit of the Bondholders, Beneficial Owners of the Bonds and the Trustee in order to comply with Rule 15c2-12 issued by the Commission;

WHEREAS, SVFC hereby agrees to provide the information described herein below with respect to itself and the District;

NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, SVFC and the Trustee agree as follows:

Section 1. Definitions

“Annual Financial Information” shall mean the information specified in Section 3 hereof.

“Beneficial Owner” shall mean any person which (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any of the Bonds (including persons holding Bonds through nominees, depositories or other intermediaries), or (b) is treated as the owner of any Bonds for federal income tax purposes.

“Bondholder” or “Holder” shall mean any registered owner of Bonds and any Beneficial Owner of Bonds who provides evidence satisfactory to the Trustee of such status.

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“Central Post Office” – shall mean the internet based electronic filing system run by the Municipal Advisory Council of Texas and recognized as such by the Commission and currently identified at www.DisclosureUSA.org.

“Independent Accountant” shall mean, with respect to SVFC, any firm of certified public accountants appointed by SVFC.

“Official Statement” shall mean the Official Statement of SVFC, dated October __, 2007, relating to the issuance of the Bonds.

“Repository” shall mean, at any time, each then existing nationally recognized municipal securities information repository, as recognized from time to time by the Commission for the purposes referred to in Rule 15c2-12. Repositories currently are identified on the Commission website at: http://www.sec.gov/info/municipal/nrmsir.htm.

“Rule 15c2-12” shall mean Rule 15c2-12 under the Securities Exchange Act of 1934, as amended through the date of this Agreement.

“State” shall mean the State of Arizona.

“State Repository” shall mean any public or private repository or entity designated by the State as a state information depository for the purpose of Rule 15c2-12 and recognized as such by the Commission. As of the date of this Agreement, there is no State Repository.

Capitalized terms not otherwise defined herein shall have the meaning ascribed thereto in the Indenture.

Section 2. Obligation to Provide Continuing Disclosure

SVFC hereby undertakes for the benefit of the Holders of the Bonds to provide:

A. to each Repository and to the State Repository, if any, or to the Central Post Office, no later than 180 days after the end of each fiscal year, commencing with the fiscal year ending April 30, 2008: 1. the Annual Financial Information relating to such fiscal year together with audited financial statements of SVFC and the District for such fiscal year if audited financial statements are then available; provided, however, that if audited financial statements of SVFC and the District are not then available, the unaudited financial statements of SVFC and the District shall be submitted with the Annual Financial Information and the audited financial statements shall be delivered to each Repository and to the State Repository, if any, when they become available (but in no event later than 350 days after the end of such fiscal year); or 2. notice to each Repository or to the Municipal Securities Rulemaking Board, and to the State Repository, if any, of SVFC’s failure, if any, to provide any of the information described in Section A.1. hereinabove;

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B. to each Repository or to the Municipal Securities Rulemaking Board, and to the State Repository, if any, or to the Central Post Office, in a timely manner, notice of any of the following events with respect to the Bonds, if material:

1. any Event of Default resulting from principal and interest payment delinquencies on the Bonds;

2. any non-payment related Event of Default;

3. unscheduled draws on the Senior Lien Bonds Debt Service Reserve Account under the Indenture reflecting financial difficulties;

4. unscheduled draws on credit enhancements, if any, reflecting financial difficulties under the Indenture;

5. substitution of credit or liquidity providers, if any, or their failure to perform; 6. adverse tax opinions or events affecting the tax-exempt status of the Bonds; 7. amendments of or modifications to the rights of Bondholders;

8. giving of notice of redemption of Bonds (which does not include regularly scheduled or mandatory sinking fund redemptions effectuated in accordance with the Indenture);

9. defeasance of the Bonds;

10. release, substitution, or sale of property, if any, securing repayment of the Bonds; and

11. rating changes on the Bonds.

The Trustee shall notify SVFC upon the occurrence of any of the eleven events listed in this Section 2.B. promptly upon becoming aware of the occurrence of any such event. The Trustee shall not be deemed to have become aware of the occurrence of any such event unless an officer in its corporate trust department actually becomes aware of the occurrence of any such event. SVFC shall notify the Trustee upon the transmittal of any such information.

Nothing in this Agreement shall prevent SVFC from disseminating any information in addition to that required hereunder. If SVFC disseminates any such additional information, nothing herein shall obligate SVFC to update such information or include it in any future materials disseminated.

Section 3. Annual Financial Information

Annual Financial Information shall include updated financial and operating information, in each case updated through the last day of the District’s prior fiscal year unless otherwise noted, relating to the following information contained in Appendix A to the Official Statement:

(i) information as to any changes in the District’s customers, peak loads and energy requirements in substantially the same level of detail as found in Appendix A; (ii) an update of the information listing District power sources and participation interests in power generating facilities in substantially the same level of detail found in Appendix A;

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(iii) such narrative explanation as may be necessary to avoid misunderstanding and to assist the reader in understanding the presentation of financial information and operating data concerning, and in judging the financial condition of, SVFC and the District.

Any or all of the items listed above may be incorporated by reference from other documents, including official statements pertaining to debt issued by SVFC or the District, which have been submitted to each of the Repositories and the State Repository, if any, or the Commission. If the document incorporated by reference is a final official statement (within the meaning of Rule 15c2-12), it must also be available from the Municipal Securities Rulemaking Board. SVFC shall clearly identify each such other document so incorporated by reference. It is sufficient for the purposes of Rule 15c2-12 and this Agreement that the Annual Financial Information to be provided pursuant to Section 2.A. and Section 3 hereof be submitted to each of the Repositories, the State Repository, if any, or the Commission no more than once annually.

The requirements contained in this Section 3 are intended to set forth a general description of the type of financial information and operating data to be provided; such descriptions are not intended to state more than general categories of financial information and operating data; and where the provisions of this Section 3 call for information that no longer can be generated or is no longer relevant because the operations to which it related have been materially changed or discontinued, a statement to that effect shall be provided.

Section 4. Financial Statements

SVFC's and the District's annual financial statements for each fiscal year shall be prepared in accordance with generally accepted accounting principles in effect from time to time. Such financial statements shall be audited by an Independent Accountant. All or any portion of SVFC's or the District's audited or unaudited financial statements may be incorporated by specific reference to any other documents which have been filed with (i) the Repositories and the State Repository, if any, or (ii) the Commission; provided, however, that if the document is an official statement, it shall have been filed with the Municipal Securities Rulemaking Board and need not have been filed elsewhere.

Section 5. Remedies

If SVFC shall fail to comply with any provision of this Agreement, then the Trustee or any Holder may, but shall not be obligated to, enforce, for the equal benefit and protection of all Holders similarly situated, by mandamus or other suit or proceeding at law or in equity, this Agreement against SVFC and any of the officers, agents and employees of SVFC, and may compel SVFC or any such officers, agents or employees to perform and carry out their duties under this Agreement; provided, however, that the sole remedy hereunder shall be limited to an action to compel specific performance of the obligations of SVFC hereunder and no person or entity shall be entitled to recover monetary damages hereunder under any circumstances; provided, further, that any challenge to the adequacy of any information provided pursuant to Section 2 shall be brought only by the Trustee or the Holders of 25% of the aggregate principal amount of the Bonds then outstanding which are affected thereby. Failure to comply with any provision of this Agreement shall not constitute an Event of Default under the Indenture.

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Section 6. Parties in Interest

This Agreement is executed and delivered for the sole benefit of the Holders, the Beneficial Owners and the Trustee. No other person shall have any right to enforce the provisions hereof or any other rights hereunder.

Section 7. Termination

This Agreement shall remain in full force and effect until such time as all principal, redemption premiums, if any, and interest on the Bonds shall have been paid in full or legally defeased pursuant to the Indenture (a “Legal Defeasance”); provided, however, that if Rule 15c2-12 (or successor provision) shall be amended, modified or changed so that all or any part of the information currently required to be provided thereunder shall no longer be required to be provided thereunder, then this Agreement shall be amended to provide that such information shall no longer be required to be provided hereunder; and provided, further, that if and to the extent Rule 15c2-12 (or successor provision), or any provision thereof, shall be declared by a court of competent and final jurisdiction to be, in whole or in part, invalid, unconstitutional, null and void or otherwise inapplicable to the Bonds, then the information required to be provided hereunder, insofar as it was required to be provided by a provision of Rule 15c2-12 so declared, shall no longer be required to be provided hereunder. Upon any Legal Defeasance, SVFC shall provide notice of such defeasance to each Repository, the State Repository, if any, and the Municipal Securities Rulemaking Board. Such notice shall state whether the Bonds have been defeased to maturity or to redemption and the timing of such maturity or redemption. Upon any other termination pursuant to this Section 7, SVFC shall provide notice of such termination to each Repository or to the Municipal Securities Rulemaking Board, and to the State Repository, if any.

Section 8. Amendment; Change; Modification

Without the consent of any Holders (except to the extent expressly provided below), SVFC and the Trustee at any time and from time to time may enter into any amendments or changes to this Agreement for any of the following purposes:

(i) to comply with or conform to Rule 15c2-12 or any amendments thereto or authoritative interpretations thereof by the Commission or its staff (whether required or optional) which are applicable to this Agreement; (ii) to add a dissemination agent for the information required to be provided hereby and to make any necessary or desirable provisions with respect thereto; (iii) to evidence the succession of another person to SVFC and the assumption by any such successor of the covenants of SVFC hereunder; (iv) to add to the covenants of SVFC for the benefit of the Holders, or to surrender any right or power herein conferred upon SVFC; or (v) for any other purpose as a result of a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature, or status of SVFC, or type of business conducted; provided that (1) this Agreement, as amended, would have complied with the requirements of Rule 15c2-12 at the time of the offering of the Bonds, after taking into account any amendments or authoritative interpretations of Rule 15c2-12, as well as any change in circumstances, (2) the amendment or change either (a) does not materially impair the interest of Holders, as determined by bond counsel, or the interest of the Trustee or (b) is approved by the vote or consent of Holders of a majority in outstanding

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principal amount of the Bonds affected thereby at or prior to the time of such amendment or change and (3) the Trustee receives an opinion of bond counsel that such amendment is authorized or permitted by this Agreement.

The Annual Financial Information for any fiscal year containing any amendment to the operating data or financial information for such fiscal year shall explain, in narrative form, the reasons for such amendment and the impact of the change on the type of operating data or financial information in the Annual Financial Information being provided for such fiscal year. If a change in accounting principles is included in any such amendment, such Annual Financial Information, respectively, shall present a comparison between the financial statements or information prepared on the basis of the amended accounting principles. Such comparison shall include a qualitative discussion of the differences in the accounting principles and the impact of the change in the accounting principles on the presentation of the financial information. To the extent reasonably feasible such comparison shall also be quantitative. A notice of any such change in accounting principles shall be sent to each Repository or to the Municipal Securities Rulemaking Board, and to the State Repository, if any.

Section 9. Duties of the Trustee

A. The duties of the Trustee under this Agreement shall be limited to those expressly assigned to it hereunder. SVFC agrees to indemnify and save harmless the Trustee and its officers, directors, employees and agents, for, from and against any loss, expense and liabilities that it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including reasonable attorneys’ fees and expenses) of defending against any claim of liability, but excluding liabilities due to the Trustee’s gross negligence or willful misconduct. The obligations of SVFC under this Section 9 shall survive resignation or removal of the Trustee, payment of the Bonds or termination of this Agreement.

B. No earlier than one day, nor later than 30 days, following the end of each fiscal year of SVFC (ending April 30, unless SVFC notifies the Trustee otherwise), the Trustee will notify SVFC of its obligation to provide the Annual Financial Information in the time and manner described herein; provided, however, that any failure by the Trustee to notify SVFC under this Section 9.B shall not affect SVFC’s obligation hereunder, and the Trustee shall not be responsible in any way for such failure.

C. The Trustee shall be under no obligation to report any information to any Repository, any State Repository, if any, the Municipal Securities Rulemaking Board or any Holder. If an officer of the Trustee obtains actual knowledge of the occurrence of an event described in Section 2.B.1. through 2.B.11. hereunder, whether or not such event is material, the Trustee will notify SVFC of such occurrence; provided, however, that any failure by the Trustee to notify SVFC under this Section 9.C. shall not affect SVFC’s obligation hereunder, and the Trustee shall not be responsible in any way for such failure.

Section 10. Governing Law

THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE DETERMINED WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAW, AND THE LAWS OF THE UNITED STATES OF AMERICA, AS APPLICABLE. Any action for enforcement of this Agreement shall be taken in a state or federal court, as appropriate, located in Maricopa County, Arizona. To the fullest extent permitted by law, SVFC and the Trustee each hereby irrevocably waives any and all rights to a trial by jury, and covenants and agrees that it will not request a trial by jury, with respect to any legal proceeding arising out of or relating to this Agreement.

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Section 11. No Previous Non-Compliance

SVFC represents that it has not previously entered into written contracts or agreements of the type referenced in paragraph (b)(5)(i) of Rule 15c2-12.

Section 12. Counterparts

This Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers as of the date first above written.

SALT VERDE FINANCIAL CORPORATION By: ________________________________ U.S. BANK NATIONAL ASSOCIATION as Trustee By: ________________________________

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APPENDIX H

SCHEDULE OF AMORTIZED VALUE OF THE BONDS

Amortized Value Amortized Value Amortized Value Amortized

Value 10/25/07 1,134,989,432 5/1/15 1,131,235,163 11/1/22 1,075,561,749 6/1/30 783,295,361

12/1/07 1,135,009,200 6/1/15 1,131,233,782 12/1/22 1,075,564,054 7/1/30 783,301,006 1/1/08 1,134,922,743 7/1/15 1,131,133,840 1/1/23 1,056,688,809 8/1/30 783,322,393 2/1/08 1,134,855,997 8/1/15 1,131,052,626 2/1/23 1,056,628,406 9/1/30 783,359,522 3/1/08 1,134,810,502 9/1/15 1,130,995,746 3/1/23 1,056,581,040 10/1/30 783,404,522 4/1/08 1,134,785,550 10/1/15 1,130,957,424 4/1/23 1,056,555,237 11/1/30 783,470,908 5/1/08 1,134,779,024 11/1/15 1,130,933,736 5/1/23 1,056,543,796 12/1/30 783,622,135 6/1/08 1,134,795,393 12/1/15 1,130,933,605 6/1/23 1,056,551,115 1/1/31 717,482,780 7/1/08 1,134,707,158 1/1/16 1,126,849,772 7/1/23 1,056,467,875 2/1/31 717,508,489 8/1/08 1,134,639,982 2/1/16 1,126,769,939 8/1/23 1,056,401,084 3/1/31 717,541,408 9/1/08 1,134,595,386 3/1/16 1,126,710,426 9/1/23 1,056,359,235 4/1/31 717,584,665

10/1/08 1,134,569,418 4/1/16 1,126,667,723 10/1/23 1,056,325,258 5/1/31 717,646,421 11/1/08 1,134,565,217 5/1/16 1,126,652,225 11/1/23 1,056,318,553 6/1/31 717,716,951 12/1/08 1,134,576,657 6/1/16 1,126,652,672 12/1/23 1,056,330,800 7/1/31 717,728,241 1/1/09 1,134,487,104 7/1/16 1,126,549,614 1/1/24 1,033,416,150 8/1/31 717,748,305 2/1/09 1,134,424,841 8/1/16 1,126,469,618 2/1/24 1,033,360,010 9/1/31 717,782,788 3/1/09 1,134,377,996 9/1/16 1,126,409,007 3/1/24 1,033,320,364 10/1/31 717,830,126 4/1/09 1,134,351,155 10/1/16 1,126,370,338 4/1/24 1,033,298,203 11/1/31 717,893,446 5/1/09 1,134,340,298 11/1/16 1,126,347,796 5/1/24 1,033,296,988 12/1/31 718,006,928 6/1/09 1,134,350,290 12/1/16 1,126,352,463 6/1/24 1,033,307,847 1/1/32 643,963,219 7/1/09 1,134,266,042 1/1/17 1,124,150,889 7/1/24 1,033,231,532 2/1/32 643,981,802 8/1/09 1,134,195,896 2/1/17 1,124,068,601 8/1/24 1,033,175,542 3/1/32 644,018,967 9/1/09 1,134,154,510 3/1/17 1,124,009,323 9/1/24 1,033,131,997 4/1/32 644,063,426

10/1/09 1,134,120,321 4/1/17 1,123,970,382 10/1/24 1,033,108,561 5/1/32 644,119,998 11/1/09 1,134,115,691 5/1/17 1,123,952,162 11/1/24 1,033,106,589 6/1/32 644,183,864 12/1/09 1,134,123,083 6/1/17 1,123,947,817 12/1/24 1,033,124,171 7/1/32 644,191,859 1/1/10 1,134,038,644 7/1/17 1,123,850,142 1/1/25 1,006,067,180 8/1/32 644,214,439 2/1/10 1,133,968,320 8/1/17 1,123,767,782 2/1/25 1,006,016,960 9/1/32 644,245,136 3/1/10 1,133,922,573 9/1/17 1,123,706,009 3/1/25 1,005,989,878 10/1/32 644,290,418 4/1/10 1,133,888,900 10/1/17 1,123,664,600 4/1/25 1,005,973,208 11/1/32 644,349,462 5/1/10 1,133,881,218 11/1/17 1,123,638,689 5/1/25 1,005,976,214 12/1/32 644,423,091 6/1/10 1,133,894,767 12/1/17 1,123,640,795 6/1/25 1,005,999,625 1/1/33 562,054,382 7/1/10 1,133,801,341 1/1/18 1,119,428,951 7/1/25 1,005,930,622 2/1/33 562,076,962 8/1/10 1,133,735,416 2/1/18 1,119,347,425 8/1/25 1,005,875,217 3/1/33 562,105,187 9/1/10 1,133,685,858 3/1/18 1,119,284,674 9/1/25 1,005,843,096 4/1/33 562,150,348

10/1/10 1,133,655,004 4/1/18 1,119,245,971 10/1/25 1,005,828,067 5/1/33 562,201,154 11/1/10 1,133,647,170 5/1/18 1,119,225,885 11/1/25 1,005,830,882 6/1/33 562,263,250 12/1/10 1,133,654,578 6/1/18 1,119,220,187 12/1/25 1,005,853,634 7/1/33 562,274,540 1/1/11 1,133,564,954 7/1/18 1,119,120,540 1/1/26 974,429,205 8/1/33 562,297,121 2/1/11 1,133,491,988 8/1/18 1,119,037,488 2/1/26 974,389,211 9/1/33 562,330,991 3/1/11 1,133,445,911 9/1/18 1,118,980,754 3/1/26 974,364,714 10/1/33 562,370,507 4/1/11 1,133,413,490 10/1/18 1,118,938,267 4/1/26 974,357,398 11/1/33 562,426,958 5/1/11 1,133,399,988 11/1/18 1,118,911,505 5/1/26 974,371,599 12/1/33 562,815,300 6/1/11 1,133,410,803 12/1/18 1,118,911,186 6/1/26 974,393,639 1/1/34 471,694,767 7/1/11 1,133,320,824 1/1/19 1,113,093,286 7/1/26 974,336,877 2/1/34 471,713,702 8/1/11 1,133,245,741 2/1/19 1,113,009,946 8/1/26 974,293,840 3/1/34 471,742,105 9/1/11 1,133,198,405 3/1/19 1,112,951,996 9/1/26 974,271,126 4/1/34 471,779,976

H-2


Value 10/1/11 1,133,167,787 4/1/19 1,112,911,735 10/1/26 974,259,085 5/1/34 471,822,580 11/1/11 1,133,155,451 5/1/19 1,112,884,216 11/1/26 974,268,394 6/1/34 471,879,385 12/1/11 1,133,159,140 6/1/19 1,112,884,799 12/1/26 974,302,134 7/1/34 471,888,853 1/1/12 1,133,067,986 7/1/19 1,112,784,231 1/1/27 936,609,101 8/1/34 471,912,522 2/1/12 1,132,997,516 8/1/19 1,112,705,083 2/1/27 936,576,707 9/1/34 471,940,925 3/1/12 1,132,943,362 9/1/19 1,112,639,071 3/1/27 936,563,573 10/1/34 471,974,061 4/1/12 1,132,910,705 10/1/19 1,112,597,379 4/1/27 936,566,077 11/1/34 472,021,399 5/1/12 1,132,896,761 11/1/19 1,112,574,941 5/1/27 936,580,727 12/1/34 472,357,041 6/1/12 1,132,905,156 12/1/19 1,112,573,340 6/1/27 936,617,447 1/1/35 370,969,481 7/1/12 1,132,814,370 1/1/20 1,103,890,723 7/1/27 936,569,528 2/1/35 370,988,080 8/1/12 1,132,736,401 2/1/20 1,103,808,799 8/1/27 936,535,666 3/1/35 371,010,399 9/1/12 1,132,686,527 3/1/20 1,103,753,615 9/1/27 936,520,552 4/1/35 371,040,158

10/1/12 1,132,652,341 4/1/20 1,103,711,621 10/1/27 936,524,697 5/1/35 371,077,357 11/1/12 1,132,637,621 5/1/20 1,103,693,336 11/1/27 936,539,720 6/1/35 371,121,995 12/1/12 1,132,638,947 6/1/20 1,103,693,737 12/1/27 936,580,458 7/1/35 371,129,435 1/1/13 1,132,546,649 7/1/20 1,103,594,739 1/1/28 892,343,194 8/1/35 371,148,034 2/1/13 1,132,473,248 8/1/20 1,103,516,492 2/1/28 892,326,699 9/1/35 371,174,073 3/1/13 1,132,422,300 9/1/20 1,103,453,046 3/1/28 892,322,492 10/1/35 371,203,832 4/1/13 1,132,385,859 10/1/20 1,103,415,042 4/1/28 892,335,708 11/1/35 371,241,030 5/1/13 1,132,369,609 11/1/20 1,103,395,376 5/1/28 892,358,986 12/1/35 371,496,576 6/1/13 1,132,375,062 12/1/20 1,103,394,609 6/1/28 892,407,484 1/1/36 259,319,370 7/1/13 1,132,280,978 1/1/21 1,091,644,266 7/1/28 892,371,010 2/1/36 259,332,360 8/1/13 1,132,201,154 2/1/21 1,091,570,446 8/1/28 892,348,978 3/1/36 259,347,948 9/1/13 1,132,147,993 3/1/21 1,091,511,113 9/1/28 892,343,749 4/1/36 259,371,330

10/1/13 1,132,110,663 4/1/21 1,091,478,983 10/1/28 892,356,890 5/1/36 259,397,310 11/1/13 1,132,092,913 5/1/21 1,091,459,153 11/1/28 892,385,666 6/1/36 259,428,486 12/1/13 1,132,098,967 6/1/21 1,091,461,548 12/1/28 892,436,209 7/1/36 259,436,280 1/1/14 1,132,001,695 7/1/21 1,091,364,924 1/1/29 841,304,484 8/1/36 259,449,270 2/1/14 1,131,925,538 8/1/21 1,091,289,061 2/1/29 841,295,666 9/1/36 259,467,456 3/1/14 1,131,872,513 9/1/21 1,091,234,221 3/1/29 841,307,179 10/1/36 259,490,838 4/1/14 1,131,831,839 10/1/21 1,091,192,098 4/1/29 841,329,958 11/1/36 259,516,818 5/1/14 1,131,814,789 11/1/21 1,091,179,037 5/1/29 841,369,648 12/1/36 259,667,813 6/1/14 1,131,816,501 12/1/21 1,091,179,840 6/1/29 841,424,024 1/1/37 136,148,264 7/1/14 1,131,719,851 1/1/22 1,075,985,746 7/1/29 841,401,017 2/1/37 136,155,078 8/1/14 1,131,641,758 2/1/22 1,075,914,143 8/1/29 841,390,445 3/1/37 136,164,617 9/1/14 1,131,585,530 3/1/22 1,075,863,363 9/1/29 841,400,788 4/1/37 136,176,882

10/1/14 1,131,545,415 4/1/22 1,075,834,107 10/1/29 841,423,567 5/1/37 136,190,510 11/1/14 1,131,526,547 5/1/22 1,075,817,382 11/1/29 841,464,427 6/1/37 136,208,225 12/1/14 1,131,527,898 6/1/22 1,075,820,923 12/1/29 841,520,557 7/1/37 136,206,863 1/1/15 1,131,434,421 7/1/22 1,075,728,774 1/1/30 783,051,202 8/1/37 136,210,951 2/1/15 1,131,355,932 8/1/22 1,075,661,191 2/1/30 783,072,589 9/1/37 136,219,127 3/1/15 1,131,291,994 9/1/22 1,075,608,270 3/1/30 783,107,492 10/1/37 136,232,755 4/1/15 1,131,255,669 10/1/22 1,075,571,531 4/1/30 783,154,717 11/1/37 136,250,471

5/1/30 783,221,104 12/1/37 136,275,000

I-1

APPENDIX I

SCHEDULE OF TERMINATION PAYMENTS1


Value 10/25/07 1,134,989,432 5/1/15 1,131,235,163 11/1/22 1,075,561,749 6/1/30 783,295,361

12/1/07 1,135,009,200 6/1/15 1,131,233,782 12/1/22 1,075,564,054 7/1/30 783,301,006 1/1/08 1,134,922,743 7/1/15 1,131,133,840 1/1/23 1,056,688,809 8/1/30 783,322,393 2/1/08 1,134,855,997 8/1/15 1,131,052,626 2/1/23 1,056,628,406 9/1/30 783,359,522 3/1/08 1,134,810,502 9/1/15 1,130,995,746 3/1/23 1,056,581,040 10/1/30 783,404,522 4/1/08 1,134,785,550 10/1/15 1,130,957,424 4/1/23 1,056,555,237 11/1/30 783,470,908 5/1/08 1,134,779,024 11/1/15 1,130,933,736 5/1/23 1,056,543,796 12/1/30 783,622,135 6/1/08 1,134,795,393 12/1/15 1,130,933,605 6/1/23 1,056,551,115 1/1/31 717,482,780 7/1/08 1,134,707,158 1/1/16 1,126,849,772 7/1/23 1,056,467,875 2/1/31 717,508,489 8/1/08 1,134,639,982 2/1/16 1,126,769,939 8/1/23 1,056,401,084 3/1/31 717,541,408 9/1/08 1,134,595,386 3/1/16 1,126,710,426 9/1/23 1,056,359,235 4/1/31 717,584,665

10/1/08 1,134,569,418 4/1/16 1,126,667,723 10/1/23 1,056,325,258 5/1/31 717,646,421 11/1/08 1,134,565,217 5/1/16 1,126,652,225 11/1/23 1,056,318,553 6/1/31 717,716,951 12/1/08 1,134,576,657 6/1/16 1,126,652,672 12/1/23 1,056,330,800 7/1/31 717,728,241 1/1/09 1,134,487,104 7/1/16 1,126,549,614 1/1/24 1,033,416,150 8/1/31 717,748,305 2/1/09 1,134,424,841 8/1/16 1,126,469,618 2/1/24 1,033,360,010 9/1/31 717,782,788 3/1/09 1,134,377,996 9/1/16 1,126,409,007 3/1/24 1,033,320,364 10/1/31 717,830,126 4/1/09 1,134,351,155 10/1/16 1,126,370,338 4/1/24 1,033,298,203 11/1/31 717,893,446 5/1/09 1,134,340,298 11/1/16 1,126,347,796 5/1/24 1,033,296,988 12/1/31 718,006,928 6/1/09 1,134,350,290 12/1/16 1,126,352,463 6/1/24 1,033,307,847 1/1/32 643,963,219 7/1/09 1,134,266,042 1/1/17 1,124,150,889 7/1/24 1,033,231,532 2/1/32 643,981,802 8/1/09 1,134,195,896 2/1/17 1,124,068,601 8/1/24 1,033,175,542 3/1/32 644,018,967 9/1/09 1,134,154,510 3/1/17 1,124,009,323 9/1/24 1,033,131,997 4/1/32 644,063,426

10/1/09 1,134,120,321 4/1/17 1,123,970,382 10/1/24 1,033,108,561 5/1/32 644,119,998 11/1/09 1,134,115,691 5/1/17 1,123,952,162 11/1/24 1,033,106,589 6/1/32 644,183,864 12/1/09 1,134,123,083 6/1/17 1,123,947,817 12/1/24 1,033,124,171 7/1/32 644,191,859 1/1/10 1,134,038,644 7/1/17 1,123,850,142 1/1/25 1,006,067,180 8/1/32 644,214,439 2/1/10 1,133,968,320 8/1/17 1,123,767,782 2/1/25 1,006,016,960 9/1/32 644,245,136 3/1/10 1,133,922,573 9/1/17 1,123,706,009 3/1/25 1,005,989,878 10/1/32 644,290,418 4/1/10 1,133,888,900 10/1/17 1,123,664,600 4/1/25 1,005,973,208 11/1/32 644,349,462 5/1/10 1,133,881,218 11/1/17 1,123,638,689 5/1/25 1,005,976,214 12/1/32 644,423,091 6/1/10 1,133,894,767 12/1/17 1,123,640,795 6/1/25 1,005,999,625 1/1/33 562,054,382 7/1/10 1,133,801,341 1/1/18 1,119,428,951 7/1/25 1,005,930,622 2/1/33 562,076,962 8/1/10 1,133,735,416 2/1/18 1,119,347,425 8/1/25 1,005,875,217 3/1/33 562,105,187 9/1/10 1,133,685,858 3/1/18 1,119,284,674 9/1/25 1,005,843,096 4/1/33 562,150,348

10/1/10 1,133,655,004 4/1/18 1,119,245,971 10/1/25 1,005,828,067 5/1/33 562,201,154 11/1/10 1,133,647,170 5/1/18 1,119,225,885 11/1/25 1,005,830,882 6/1/33 562,263,250 12/1/10 1,133,654,578 6/1/18 1,119,220,187 12/1/25 1,005,853,634 7/1/33 562,274,540 1/1/11 1,133,564,954 7/1/18 1,119,120,540 1/1/26 974,429,205 8/1/33 562,297,121 2/1/11 1,133,491,988 8/1/18 1,119,037,488 2/1/26 974,389,211 9/1/33 562,330,991 3/1/11 1,133,445,911 9/1/18 1,118,980,754 3/1/26 974,364,714 10/1/33 562,370,507 4/1/11 1,133,413,490 10/1/18 1,118,938,267 4/1/26 974,357,398 11/1/33 562,426,958 5/1/11 1,133,399,988 11/1/18 1,118,911,505 5/1/26 974,371,599 12/1/33 562,815,300

1 The termination amount will include the amortized value of the Senior Lien Bonds plus accrued and unpaid interest to the early redemption date

I-2


Value 6/1/11 1,133,410,803 12/1/18 1,118,911,186 6/1/26 974,393,639 1/1/34 471,694,767 7/1/11 1,133,320,824 1/1/19 1,113,093,286 7/1/26 974,336,877 2/1/34 471,713,702 8/1/11 1,133,245,741 2/1/19 1,113,009,946 8/1/26 974,293,840 3/1/34 471,742,105 9/1/11 1,133,198,405 3/1/19 1,112,951,996 9/1/26 974,271,126 4/1/34 471,779,976

10/1/11 1,133,167,787 4/1/19 1,112,911,735 10/1/26 974,259,085 5/1/34 471,822,580 11/1/11 1,133,155,451 5/1/19 1,112,884,216 11/1/26 974,268,394 6/1/34 471,879,385 12/1/11 1,133,159,140 6/1/19 1,112,884,799 12/1/26 974,302,134 7/1/34 471,888,853 1/1/12 1,133,067,986 7/1/19 1,112,784,231 1/1/27 936,609,101 8/1/34 471,912,522 2/1/12 1,132,997,516 8/1/19 1,112,705,083 2/1/27 936,576,707 9/1/34 471,940,925 3/1/12 1,132,943,362 9/1/19 1,112,639,071 3/1/27 936,563,573 10/1/34 471,974,061 4/1/12 1,132,910,705 10/1/19 1,112,597,379 4/1/27 936,566,077 11/1/34 472,021,399 5/1/12 1,132,896,761 11/1/19 1,112,574,941 5/1/27 936,580,727 12/1/34 472,357,041 6/1/12 1,132,905,156 12/1/19 1,112,573,340 6/1/27 936,617,447 1/1/35 370,969,481 7/1/12 1,132,814,370 1/1/20 1,103,890,723 7/1/27 936,569,528 2/1/35 370,988,080 8/1/12 1,132,736,401 2/1/20 1,103,808,799 8/1/27 936,535,666 3/1/35 371,010,399 9/1/12 1,132,686,527 3/1/20 1,103,753,615 9/1/27 936,520,552 4/1/35 371,040,158

10/1/12 1,132,652,341 4/1/20 1,103,711,621 10/1/27 936,524,697 5/1/35 371,077,357 11/1/12 1,132,637,621 5/1/20 1,103,693,336 11/1/27 936,539,720 6/1/35 371,121,995 12/1/12 1,132,638,947 6/1/20 1,103,693,737 12/1/27 936,580,458 7/1/35 371,129,435 1/1/13 1,132,546,649 7/1/20 1,103,594,739 1/1/28 892,343,194 8/1/35 371,148,034 2/1/13 1,132,473,248 8/1/20 1,103,516,492 2/1/28 892,326,699 9/1/35 371,174,073 3/1/13 1,132,422,300 9/1/20 1,103,453,046 3/1/28 892,322,492 10/1/35 371,203,832 4/1/13 1,132,385,859 10/1/20 1,103,415,042 4/1/28 892,335,708 11/1/35 371,241,030 5/1/13 1,132,369,609 11/1/20 1,103,395,376 5/1/28 892,358,986 12/1/35 371,496,576 6/1/13 1,132,375,062 12/1/20 1,103,394,609 6/1/28 892,407,484 1/1/36 259,319,370 7/1/13 1,132,280,978 1/1/21 1,091,644,266 7/1/28 892,371,010 2/1/36 259,332,360 8/1/13 1,132,201,154 2/1/21 1,091,570,446 8/1/28 892,348,978 3/1/36 259,347,948 9/1/13 1,132,147,993 3/1/21 1,091,511,113 9/1/28 892,343,749 4/1/36 259,371,330

10/1/13 1,132,110,663 4/1/21 1,091,478,983 10/1/28 892,356,890 5/1/36 259,397,310 11/1/13 1,132,092,913 5/1/21 1,091,459,153 11/1/28 892,385,666 6/1/36 259,428,486 12/1/13 1,132,098,967 6/1/21 1,091,461,548 12/1/28 892,436,209 7/1/36 259,436,280 1/1/14 1,132,001,695 7/1/21 1,091,364,924 1/1/29 841,304,484 8/1/36 259,449,270 2/1/14 1,131,925,538 8/1/21 1,091,289,061 2/1/29 841,295,666 9/1/36 259,467,456 3/1/14 1,131,872,513 9/1/21 1,091,234,221 3/1/29 841,307,179 10/1/36 259,490,838 4/1/14 1,131,831,839 10/1/21 1,091,192,098 4/1/29 841,329,958 11/1/36 259,516,818 5/1/14 1,131,814,789 11/1/21 1,091,179,037 5/1/29 841,369,648 12/1/36 259,667,813 6/1/14 1,131,816,501 12/1/21 1,091,179,840 6/1/29 841,424,024 1/1/37 136,148,264 7/1/14 1,131,719,851 1/1/22 1,075,985,746 7/1/29 841,401,017 2/1/37 136,155,078 8/1/14 1,131,641,758 2/1/22 1,075,914,143 8/1/29 841,390,445 3/1/37 136,164,617 9/1/14 1,131,585,530 3/1/22 1,075,863,363 9/1/29 841,400,788 4/1/37 136,176,882

10/1/14 1,131,545,415 4/1/22 1,075,834,107 10/1/29 841,423,567 5/1/37 136,190,510 11/1/14 1,131,526,547 5/1/22 1,075,817,382 11/1/29 841,464,427 6/1/37 136,208,225 12/1/14 1,131,527,898 6/1/22 1,075,820,923 12/1/29 841,520,557 7/1/37 136,206,863 1/1/15 1,131,434,421 7/1/22 1,075,728,774 1/1/30 783,051,202 8/1/37 136,210,951 2/1/15 1,131,355,932 8/1/22 1,075,661,191 2/1/30 783,072,589 9/1/37 136,219,127 3/1/15 1,131,291,994 9/1/22 1,075,608,270 3/1/30 783,107,492 10/1/37 136,232,755 4/1/15 1,131,255,669 10/1/22 1,075,571,531 4/1/30 783,154,717 11/1/37 136,250,471

5/1/30 783,221,104 12/1/37 136,275,000