EL PASO ELECTRIC CO /TX/ (Form: 10-Q, Received: 05/06/2009 16:50:02)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2009

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

For the transition period from to

Commission file number 0-296

El Paso Electric Company

(Exact name of registrant as specified in its charter)


Texas		74-0607870
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Stanton Tower, 100 North Stanton, El Paso, Texas		79901
(Address of principal executive offices)		(Zip Code)

(915) 543-5711

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

As of April 30, 2009, there were 44,928,025 shares of the Company’s no par value common stock outstanding.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

INDEX TO FORM 10-Q


		Page No.
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

Consolidated Balance Sheets – March 31, 2009 and December 31, 2008		1

Consolidated Statements of Operations - Three Months and Twelve Months Ended March 31, 2009 and 2008		3

Consolidated Statements of Comprehensive Operations – Three Months and Twelve Months Ended March 31, 2009 and 2008		4

Consolidated Statements of Cash Flows – Three Months Ended March 31, 2009 and 2008		5

Notes to Consolidated Financial Statements		6

Report of Independent Registered Public Accounting Firm		27

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46

Item 4.	Controls and Procedures	46

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	47

Item 1A.	Risk Factors	47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 6.	Exhibits	47

(i)

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS


	March 31, 2009			December 31, 2008
	(Unaudited)
ASSETS (In thousands)
Utility plant:
Electric plant in service	$	2,243,278		$	2,223,066
Less accumulated depreciation and amortization		(934,335	)		(919,053	)

Net plant in service		1,308,943			1,304,013
Construction work in progress		232,620			205,748
Nuclear fuel; includes fuel in process of $54,511 and $51,352, respectively		129,534			115,749
Less accumulated amortization		(35,409	)		(29,904	)

Net nuclear fuel		94,125			85,845

Net utility plant		1,635,688			1,595,606


Current assets:
Cash and cash equivalents		101,962			91,642
Accounts receivable, principally trade, net of allowance for doubtful accounts of $1,740 and $3,123, respectively		78,839			96,507
Accumulated deferred income taxes		8,316			—
Inventories, at cost		38,155			40,153
Undercollection of fuel revenues		12,178			41,034
Prepayments and other		14,798			16,292

Total current assets		254,248			285,628


Deferred charges and other assets:
Decommissioning trust funds		108,863			111,306
Undercollection of fuel revenues, non current		—			5,823
Regulatory assets		50,361			48,616
Investments in debt securities		2,212			2,264
Other		20,156			19,840

Total deferred charges and other assets		181,592			187,849


Total assets	$	2,071,528		$	2,069,083

See accompanying notes to consolidated financial statements.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (Continued)


	March 31, 2009			December 31, 2008
	(Unaudited)
CAPITALIZATION AND LIABILITIES (In thousands except for share data)
Capitalization:
Common stock, stated value $1 per share, 100,000,000 shares authorized, 64,605,848 and 64,604,852 shares issued, and 166,762 and 127,800 restricted shares, respectively	$	64,773		$	64,733
Capital in excess of stated value		296,038			295,346
Retained earnings		652,931			643,322
Accumulated other comprehensive loss, net of tax		(31,840	)		(29,364	)

		981,902			974,037
Treasury stock, 19,848,900 shares, at cost		(279,808	)		(279,808	)

Common stock equity		702,094			694,229
Long-term debt, net of current portion		739,663			739,652
Financing obligations, net of current portion		71,728			70,066

Total capitalization		1,513,485			1,503,947


Current liabilities:
Current portion of long-term debt and financing obligations		30,943			23,587
Accounts payable, principally trade		34,714			61,550
Accumulated deferred income taxes		—			4,209
Taxes accrued		30,521			23,798
Interest accrued		10,656			7,519
Other		24,057			24,146

Total current liabilities		130,891			144,809


Deferred credits and other liabilities:
Accumulated deferred income taxes		184,608			175,816
Accrued postretirement benefit liability		86,456			85,797
Asset retirement obligation		79,866			78,037
Accrued pension liability		37,982			39,101
Regulatory liabilities		14,128			14,469
Other		24,112			27,107

Total deferred credits and other liabilities		427,152			420,327


Commitments and contingencies

Total capitalization and liabilities	$	2,071,528		$	2,069,083

See accompanying notes to consolidated financial statements.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands except for share data)


	Three Months Ended March 31,						Twelve Months Ended March 31,
	2009			2008			2009			2008
Operating revenues	$	190,436		$	240,240		$	989,126		$	929,250

Energy expenses:
Fuel		42,293			60,931			271,178			264,256
Purchased and interchanged power		29,398			55,358			184,523			155,532

		71,691			116,289			455,701			419,788

Operating revenues net of energy expenses		118,745			123,951			533,425			509,462

Other operating expenses:
Other operations		49,304			46,834			202,878			199,094
Maintenance		13,371			17,496			62,985			62,843
Depreciation and amortization		17,679			18,617			74,633			70,963
Taxes other than income taxes		12,517			11,778			50,545			48,924

		92,871			94,725			391,041			381,824

Operating income		25,874			29,226			142,384			127,638

Other income (deductions):
Allowance for equity funds used during construction		2,589			1,806			9,062			6,455
Investment and interest income, net		(486	)		629			2,683			8,217
Miscellaneous non-operating income		212			206			2,483			1,455
Miscellaneous non-operating deductions		(1,315	)		(1,977	)		(2,957	)		(4,815	)

		1,000			664			11,271			11,312

Interest charges (credits):
Interest on long-term debt and financing obligations		13,924			10,105			51,424			38,003
Other interest		170			212			1,166			861
Capitalized interest		(250	)		(1,295	)		(2,575	)		(3,879	)
Allowance for borrowed funds used during construction		(1,682	)		(862	)		(4,793	)		(3,268	)

		12,162			8,160			45,222			31,717


Income before income taxes		14,712			21,730			108,433			107,233
Income tax expense		5,103			7,242			35,691			33,111


Net income	$	9,609		$	14,488		$	72,742		$	74,122


Basic earnings per share	$	0.21		$	0.32		$	1.62		$	1.63


Diluted earnings per share	$	0.21		$	0.32		$	1.62		$	1.62


Weighted average number of shares outstanding		44,904,302			45,074,127			44,844,732			45,446,359


Weighted average number of shares and dilutive potential shares outstanding		44,937,780			45,304,237			44,947,918			45,722,138

See accompanying notes to consolidated financial statements.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS

(Unaudited)

(In thousands)


	Three Months Ended March 31,						Twelve Months Ended March 31,
	2009			2008			2009			2008
Net income	$	9,609		$	14,488		$	72,742		$	74,122
Other comprehensive income (loss):
Unrecognized pension and postretirement benefit costs:
Net gain (loss) arising during period		—			—			(30,587	)		40,625
Reclassification adjustments included in net income for amortization of:
Prior service benefit		(700	)		(700	)		(2,754	)		(2,766	)
Net loss		400			25			223			2,650
Net unrealized gains (losses) on marketable securities:
Net holding gains (losses) arising during period		(5,391	)		(6,814	)		(28,356	)		7
Reclassification adjustments for net (gains) losses included in net income		2,473			194			5,155			(1,330	)
Net losses on cash flow hedges:
Reclassification adjustment for interest expense included in net income		77			73			301			283

Total other comprehensive income (loss) before income taxes		(3,141	)		(7,222	)		(56,018	)		39,469

Income tax benefit (expense) related to items of other comprehensive income (loss):
Unrecognized pension and postretirement benefit costs		109			244			11,787			(17,783	)
Net unrealized gains (losses) on marketable securities		584			1,324			4,641			265
Losses on cash flow hedges		(28	)		(27	)		(109	)		(105	)

Total income tax benefit (expense)		665			1,541			16,319			(17,623	)


Other comprehensive income (loss), net of tax		(2,476	)		(5,681	)		(39,699	)		21,846

Comprehensive income	$	7,133		$	8,807		$	33,043		$	95,968

See accompanying notes to consolidated financial statements.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Three Months Ended March 31,
	2009			2008
Cash flows from operating activities:
Net income	$	9,609		$	14,488
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of electric plant in service		17,679			18,617
Amortization of nuclear fuel		5,921			5,274
Allowance for equity funds used during construction		(2,589	)		(1,806	)
Deferred income taxes, net		(4,222	)		4,281
Other amortization and accretion		3,860			3,534
Unrealized loss on investments in debt securities		52			529
Other operating activities		1,473			882
Change in:
Accounts receivable		17,668			(2,226	)
Inventories		2,168			(500	)
Net overcollection (undercollection) of fuel revenues		34,679			(2,035	)
Prepayments and other		(1,511	)		(1,422	)
Accounts payable		(24,257	)		(4,737	)
Taxes accrued		8,835			522
Interest accrued		3,137			5,721
Other current liabilities		(89	)		3,661
Deferred charges and credits		(4,788	)		(2,267	)

Net cash provided by operating activities		67,625			42,516

Cash flows from investing activities:
Cash additions to utility property, plant and equipment		(47,262	)		(43,966	)
Cash additions to nuclear fuel		(13,631	)		(15,048	)
Proceeds from sale of assets		—			5
Capitalized interest:
Utility property, plant and equipment		(4,271	)		(2,668	)
Nuclear fuel		(250	)		(1,295	)
Allowance for equity funds used during construction		2,589			1,806
Decommissioning trust funds:
Purchases, including funding of $2.0 and $1.8 million, respectively		(14,198	)		(12,416	)
Sales and maturities		12,416			9,277
Proceeds from sale of investments in debt securities		—			16,000
Other investing activities		(436	)		(3,025	)

Net cash used for investing activities		(65,043	)		(51,330	)

Cash flows from financing activities:
Proceeds from exercise of stock options		—			238
Repurchases of common stock		—			(9,892	)
Financing obligations:
Proceeds		164,485			29,016
Payments		(155,466	)		(3,434	)
Excess tax benefits from long-term incentive plans		—			214
Other financing activities		(1,281	)		(579	)

Net cash provided by financing activities		7,738			15,563

Net increase in cash and cash equivalents		10,320			6,749
Cash and cash equivalents at beginning of period		91,642			4,976

Cash and cash equivalents at end of period	$	101,962		$	11,725

See accompanying notes to consolidated financial statements.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A. Principles of Preparation

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Annual Report of El Paso Electric Company on Form 10-K for the year ended December 31, 2008 (the “2008 Form 10-K”). Capitalized terms used in this report and not defined herein have the meaning ascribed for such terms in the 2008 Form 10-K. In the opinion of the Company’s management, the accompanying consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company at March 31, 2009 and December 31, 2008; the results of its operations and comprehensive operations for the three and twelve months ended March 31, 2009 and 2008; and its cash flows for the three months ended March 31, 2009 and 2008. The results of operations and comprehensive operations and the cash flows for the three months ended March 31, 2009 are not necessarily indicative of the results to be expected for the full calendar year.

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

Investment in Debt Securities. The Company invested excess cash in auction rate securities with contract maturity dates that extended beyond three months. These securities have interest rates that reset frequently, and historically had provided a liquid market to sell the securities to meet cash requirements. These securities were and still are classified as trading securities by the Company. The auction rate securities had successful auctions through January 2008. However, beginning February 13, 2008, auctions for $4.0 million of these investments have not been successful, resulting in the inability to liquidate these investments. These investments continue to pay interest and are reported at fair value in deferred charges and other assets. See Note K.

Investments . The Company’s marketable securities, included in decommissioning trust funds in the balance sheets, are reported at fair value and consist of cash, equity securities and municipal, federal and corporate bonds in trust funds established for decommissioning of its interest in Palo Verde. Such marketable securities are classified as “available-for-sale” securities and, as such, unrealized gains and losses are included in accumulated other comprehensive income as a separate component of common stock equity. However, if declines in fair value of marketable securities below original cost basis are determined to be other than temporary, then the declines are reported as losses in the consolidated statement of operations and a new cost basis is established for the affected securities at fair value. Gains and losses are determined using the cost of the security based on the specific identification basis. See Note K.

Revenues . Accounts receivable include accrued unbilled revenues of $15.3 million and $18.6 million at March 31, 2009 and December 31, 2008, respectively. The Company presents sales net of sales taxes in its consolidated statements of operations.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Stock-Based Compensation . The Company has a stock-based long-term incentive plan. SFAS No. 123 (revised) “Accounting for Stock-Based Compensation,” requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with some limited exceptions). Such costs are recognized over the period during which an employee is required to provide service in exchange for the award (the “requisite service period”) which typically is the vesting period. Compensation cost is not recognized for anticipated forfeitures prior to vesting of equity instruments. See Note E.

New Accounting Standards. Effective January 1, 2009, the Company adopted the FASB Staff Position EITF 03-6-1 “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities,” (“FSP EITF 03-6-1”) which requires a public entity to include share-based compensation awards that qualify as participating securities in both basic and dilutive earnings per share. A share-based compensation award is considered a participating security if it receives non-forfeitable dividends or may participate in undistributed earnings with common stock. The Company awards unvested restricted stock which qualifies as participating securities, and has reflected the effects of FSP EITF 03-6-1 to its basic and diluted earnings per share for all periods presented. See Note E.

Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements.” The statement defines fair value, outlines a framework for measuring fair value, and details the required disclosures about fair value measurements. On April 9, 2009, the FASB issued FASB Staff Position 157-4 (“FSP 157-4”). FSP 157-4 provides additional guidance for estimating fair value in accordance with SFAS No. 157, when the volume and level of activity for the asset or liability have significantly decreased. FSP 157-4 is effective for interim and annual periods ending after June 15, 2009 and shall be applied prospectively. FSP 157-4 is not expected to have a significant impact on the Company’s consolidated financial statements. See Note K of Notes to Consolidated Financial Statements.

On April 9, 2009, the FASB issued FASB Staff Position 107-1 and Accounting Principles Board Opinion 28-1 (“FSP 107-1 and APB 28-1”). FSP 107-1 and APB 28-1 amend SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” and APB Opinion No. 28, “Interim Financial Reporting.” FSP 107-1 and APB 28-1 require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. FSP 107-1 and APB 28-1 are effective for interim reporting periods ending after June 15, 2009. FSP 107-1 and APB 28-1 will not impact amounts reported in the Company’s consolidated financial statements but will result in additional footnote disclosure.

On April 9, 2009, the FASB issued FASB Staff Position 115-2 and 124-2 (“FSP 115-2 and FSP 124-2”). FSP 115-2 and FSP 124-2 amend the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. FSP 115-2 and FSP 124-2 are effective for interim and annual reporting periods ending after June 15, 2009. FSP 115-2 and FSP 124-2 are not expected to have a significant impact on amounts reported in the Company’s consolidated financial statements.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In December 2008, the FASB issued FASB Staff Position 132(R)-1 (“FSP 132(R)-1”), which amends FASB No. 132(R), “Employers’ Disclosures about Pension and Other Postretirement Benefits,” to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. FSP 132(R)-1 requires additional disclosure on investment policies and strategies, categories and fair value measurements of plan assets, and significant concentrations of risk. FSP 132(R)-1 is effective for fiscal years ending after December 15, 2009. FSP 132(R)-1 will not have a significant impact on the amounts recognized in the Company’s consolidated financial statements.

Supplemental Cash Flow Disclosures (in thousands)


	Three Months Ended March 31,
	2009			2008
Cash paid for:
Interest on long-term debt and financing obligations	$	10,531		$	3,798
Other interest		5			41
Income taxes refund		(2,063	)		(575	)
Non-cash financing activities:
Grants of restricted shares of common stock		490			444

B. Regulation

General

The rates and services of the Company are regulated by incorporated municipalities in Texas, the Public Utility Commission of Texas (the “PUCT”), the NMPRC, and the FERC. The PUCT and the NMPRC have jurisdiction to review municipal orders, ordinances, and utility agreements regarding rates and services within their respective states and over certain other activities of the Company. The FERC has jurisdiction over the Company’s wholesale transactions. The decisions of the PUCT, NMPRC and the FERC are subject to judicial review.

Texas Regulatory Matters

Texas Freeze Period. The Company has entered into agreements (“Texas Rate Agreements”) with El Paso, PUCT Staff and other parties in Texas that provide for most retail base rates to remain at their current level through June 30, 2010. During the rate freeze period, if the Company’s return on equity falls below the bottom of a defined range, the Company has the right to initiate a rate case and seek an adjustment to base rates. If the Company’s return on equity exceeds the top of the range, the Company will refund an amount equal to 50% of the Texas jurisdictional pretax return in excess of the ceiling. The range is based upon a risk premium analysis used in rate proceedings to establish a utility’s

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

return on equity and as of March 2009 the range would be approximately 9.6% to 13.6%. The Company’s return on equity fell within the then prevailing range during the latest reporting period. Also pursuant to the Texas Rate Agreements, the Company agreed to share with its Texas customers 25% of off-system sales margins and wheeling revenues increasing to 90% of off-system sales margins after June 30, 2010 through June 30, 2015.

Fuel and Purchased Power Costs. Although the Company’s base rates are frozen pursuant to the Texas Rate Agreements, the Company’s actual fuel costs, including purchased power energy costs, are recoverable from its customers. The PUCT has adopted a rule establishing the recovery of fuel costs (“Texas Fuel Rule”) that allows the Company to seek adjustments to its fixed fuel factor three times per year in February, June and October. The Texas Fuel Rule provides for the fixed fuel factor to be based upon projected fuel and purchased power costs and projected kilowatt-hour sales for a twelve-month period. The Texas Fuel Rule also allows for the Company to request a formula to determine its fuel factor. Once a formula is approved, the Company could seek to revise its fixed fuel factor based upon the approved formula at least four months after its last revision except in the month of December. The Texas Fuel Rule requires the Company to request to refund fuel costs in any month when the over-recovery balance exceeds a threshold material amount and it expects to continue to be materially over-recovered. The Texas Fuel Rule also permits the Company to seek to surcharge fuel under-recoveries in any month the balance exceeds a threshold material amount and it expects to continue to be materially under-recovered. Fuel over and under recoveries are considered material when they exceed 4% of the previous twelve months fuel costs. All such fuel revenue and expense activities are subject to periodic final review by the PUCT in fuel reconciliation proceedings.

On January 8, 2008, the Company filed a request with the PUCT in PUC Docket No. 35204 to surcharge approximately $30.1 million, including interest, of under-recovered fuel and purchased power costs to be collected over a twelve-month period. The fuel under-recoveries were incurred during the period December 2005 through November 2007. On April 11, 2008, the PUCT issued a final order approving the fuel surcharge to be collected over a twelve-month period beginning in May 2008.

On July 8, 2008, the Company filed a petition in PUC Docket No. 35856 with the PUCT to increase its fixed fuel factors and to surcharge $39.5 million of under-recovered fuel and purchased power costs including interest, beginning in 2008. The surcharge was based upon actual under-recoveries for the period December 2007 through May 2008 and expected under-recoveries for June and July 2008. On September 25, 2008, the PUCT issued a final order approving an increase in the Company’s Texas jurisdictional fixed fuel factors of $38.8 million or 21.5% annually beginning with customer bills rendered in October 2008. In addition, the PUCT approved the recovery of $39.5 million in fuel under-recoveries over an 18-month period beginning in October 2008.

On April 1, 2009, the Company filed with the PUCT to terminate the interim fuel surcharge authorized in Docket No. 35856. This request was assigned Docket No. 36864. The Company’s request was a result of the over-recovery of fuel costs under the Company’s current fixed fuel factor which largely offset the remaining balance of the fuel surcharge. The fuel over-recoveries were the result of the significant drop in natural gas prices since the current fixed fuel factor went into effect in October

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2008. On April 23, 2009, the Company received approval from the PUCT to terminate the fuel surcharge effective for customer bills rendered in May 2009.

New Mexico Regulatory Matters

2007 New Mexico Stipulation. In July 2007, the NMPRC issued a final order approving a stipulation (“2007 New Mexico Stipulation”) addressing all issues in the 2006 rate filing in Case No. 06-00258-UT. The 2007 New Mexico Stipulation provided for a $5.8 million non-fuel base rate increase, established the amount of fuel and purchased power included in base rates at $0.04288 per kWh, and modified the Company’s Fuel and Purchased Power Cost Adjustment Clause (the “FPPCAC”). Any difference between actual fuel and purchased power costs and the amount included in base rates is recovered or refunded through the FPPCAC. Rates will continue in effect until changed by the NMPRC following the Company’s next rate case. The 2007 New Mexico Stipulation requires the Company to file its next general rate case no later than May 29, 2009 using as a base period the twelve months ending December 31, 2008. Under NMPRC statutes, new rates would become effective no later than July 2010 unless otherwise extended.

The 2007 New Mexico Stipulation provides for recovery through the FPPCAC of the cost of capacity and energy provided to New Mexico retail customers from the deregulated Palo Verde Unit 3. The amount to be recovered is based upon the monthly contract cost of capacity and energy for power purchased under the existing Southwestern Public Service Company (“SPS”) purchased power contract. In February and March 2009, the volumes delivered to the Company over the transmission tie used to import SPS power were materially lower than normal due to operational constraints. This reduction in volume resulted in contract formula prices for Palo Verde Unit 3 power that were significantly higher than what were foreseen by the 2007 New Mexico Stipulation. The Company addressed this price spike due to operational constraints by proposing to adjust the proxy price in February 2009 to $54.27 per MWh (January 2009 monthly calculated price) and in March 2009 to $64.38 per MWh (12 months ending January 2009 average price) which is approximately 28% and 55% of the price calculated utilizing the formula from the 2007 New Mexico Stipulation. Because the operational constraints limiting the SPS purchases are expected to continue during 2009, the Company on April 24, 2009 requested approval of an unopposed variance to the calculation of the Palo Verde Unit 3 proxy price to be the lower of the monthly cost of capacity and energy under the SPS purchased power contract or the average cost of capacity and energy under the SPS purchased power contract for the twelve months ended January 2009 of $64.38 per MWh. The variance is based on language in the 2007 New Mexico Stipulation governing repricing should the SPS contract be modified or terminated.

The 2007 New Mexico Stipulation also requires 25% of jurisdictional off-system sales margins to be credited to customers through the FPPCAC until July 2010 when 90% of jurisdictional off-system sales margins will be credited to customers. Under NMPRC rules, the Company must file to continue its FPPCAC by July 2009, at which time any party may propose to change the price charged to New Mexico customers for the capacity and energy from Palo Verde Unit 3.

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FPPCAC Rulemaking and Workshops. The NMPRC has docketed workshops (Case No. 07-00389-UT) to review consistency and potential changes to the FPPCAC rule in New Mexico with Comments filed by parties and Workshops scheduled to be held in May 2009 for discussion and consideration of any changes to the existing FPPCAC Rule that could be proposed in a new Rulemaking proceeding.

Pollution Control Bond Refunding. On March 20, 2008, the Company filed an application with the NMPRC requesting authority for long-term securities transactions necessary to refund and reissue certain Pollution Control Refunding Revenue Bonds (the “PCBs”). On April 22, 2008, the NMPRC issued a final order granting the Company the authority to enter into the securities transactions necessary to refund and reissue the Company’s Series B and Series C PCBs. On March 26, 2009, the Company completed a refunding transaction related to an aggregate principal amount of $100.6 million in pollution control indebtedness. See Note F.

Notice of Investigation of Rates. On August 3, 2007, the Company received a “Notice of Investigation of Rates of El Paso Electric Company” from the NMPRC in Case No. 07-00317-UT. On August 21, 2007, the NMPRC requested the Company to file a response to the issues, including the reasonableness of fuel and purchased power costs. On September 7, 2007, the Company filed its response and requested that the NMPRC suspend its investigation and close the docket. No further action has been taken by the Commission. The Company is unable at this time to predict the ultimate outcome of this docket.

New Mexico Investigation into Executive Compensation . In December 2007, the NMPRC initiated an investigation into executive compensation of investor-owned gas and electric public utilities. In its order initiating the investigation, the NMPRC required each utility to provide information on compensation of executive officers and directors for the period 1977-2006. The Company has provided the requested information. No further action has been taken by the NMPRC.

Federal Regulatory Matters

Transmission Dispute with Tucson Electric Power Company (“TEP”). In January 2006, the Company filed a complaint with the FERC to interpret the terms of a Power Exchange and Transmission Agreement (the “Transmission Agreement”) entered into with TEP in 1982. TEP filed a complaint with the FERC one day later raising virtually identical issues. TEP claimed that, under the Transmission Agreement, it was entitled to up to 400 MW of firm transmission rights on the Company’s transmission system that would enable it to transmit power from a new generating station (the Luna Energy Facility (“LEF”) located near Deming, New Mexico) to Springerville or Greenlee in Arizona. The Company asserted that TEP’s rights under the Transmission Agreement do not include transmission rights necessary to transmit such power as contemplated by TEP and that TEP must acquire any such rights in the open market from the Company at applicable tariff rates or from other transmission providers. On April 24, 2006, the FERC ruled in the Company’s favor, finding that TEP does not have the transmission rights under the Transmission Agreement to transmit power from the LEF to Arizona. The ruling was based on written evidence presented and without an evidentiary hearing. TEP’s request for a rehearing

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of the FERC’s decision was granted in part and denied in part in an order issued October 4, 2006, and hearings on the disputed issues were held before an administrative law judge. In his initial decision dated September 6, 2007, the administrative law judge found that the Transmission Agreement allows TEP to transmit power from the LEF to Arizona but limits that transmission to 200 MW on any segment of the circuit and to non-firm service on the segment from Luna to Greenlee. The Company and TEP filed exceptions to the initial decision.

On November 13, 2008, the FERC issued an order on the initial decision finding that the transmission rights given to TEP in the Transmission Agreement are firm and are not restricted for transmission of power from Springerville as the receipt point to Greenlee as the delivery point. Therefore, pursuant to the order, TEP can use its transmission rights granted under the Transmission Agreement to transmit power from the LEF to either Springerville or Greenlee so long as it transmits no more than 200 MW over all segments at any one time. The FERC also ordered that the Company refund to TEP all sums with interest that TEP had paid it for transmission under the applicable transmission service agreements since February 2006 for service relating to the LEF. On December 3, 2008 the Company refunded $9.7 million to TEP. The Company had established a reserve for rate refund of approximately $7.2 million as of September 30, 2008, resulting in a pre-tax charge to earnings of approximately $2.5 million in 2008. The Company also paid TEP interest on the refunded balance of approximately $0.9 million which was also charged to earnings in 2008. If the order is not reversed, the Company will lose the opportunity to receive compensation from TEP for such transmission service in the future. The Company filed a request for rehearing on December 15, 2008 of the FERC’s decision, seeking reversal of the order on the merits and a return of any refunds made in the interim, as well as compensation for all service that the Company may provide to TEP from the LEF over the Company’s transmission system on a going forward basis. The FERC suspended the period for ruling on the motion for rehearing on January 14, 2009. If the FERC denies the Company’s request for rehearing or again finds against the Company on rehearing, the Company will have the right to seek judicial review of the order. The Company cannot predict the outcome of such potential future proceedings.

Pollution Control Bond Refunding. On April 4, 2008, the Company filed an application with the FERC requesting authority for long-term securities transactions necessary to refund and reissue certain PCBs. The FERC issued an order on May 1, 2008 granting authority for the securities transactions. On March 26, 2009, the Company completed a refunding transaction related to an aggregate principal amount of $100.6 million in pollution control indebtedness. See Note F.

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C. Regulatory Assets and Liabilities

The Company’s operations are regulated by the PUCT, the NMPRC and the FERC. The provisions of SFAS No. 71 are applied to its regulated operations. Regulatory assets represent probable future recovery of previously incurred costs, which will be collected from customers through the ratemaking process. Regulatory liabilities represent probable future reductions in revenues associated with amounts that are to be credited to customers through the ratemaking process. Regulatory assets and liabilities reflected in the Company’s consolidated balance sheets are presented below (in thousands):


	Amortization Period Ends	March 31, 2009		December 31, 2008
Regulatory assets
New Mexico procurement plan costs	(a)	$	495	$	464
New Mexico loss on reacquired debt (b)	May 2030		5,532		5,585
New Mexico renewable energy credits	(a)		2,404		2,278
New Mexico 2006 rate case costs (b)	June 2010		265		294
New Mexico 2009 rate case costs	(a)		24		—
New Mexico Palo Verde deferred depreciation (b)	(c)		2,023		1,713
New Mexico energy efficiency	(d)		239		231
New Mexico transition costs (b)	June 2010		431		575
Unrecovered issuance costs due to reissuance of PCBs	April 2040		635		—
Texas energy efficiency	(a)		1,406		986
Regulatory assets pursuant to SFAS No. 109 (e)	(c)		25,138		24,326
Final coal reclamation (e)	July 2016		9,607		9,682
Nuclear fuel postload daily financing charge	(d)		2,162		2,482


Total regulatory assets		$	50,361	$	48,616


Regulatory liabilities

Regulatory liabilities pursuant to SFAS No. 109 (e)	(c)	$	8,588	$	8,839
Accumulated deferred investment tax credit (f)	(c)		5,540		5,630


Total regulatory liabilities		$	14,128	$	14,469

(a)	Amortization period is anticipated to be established in next general rate case.

(b)	This item is included in rate base which earns a return on investment.

(c)	The amortization period for this asset is based upon the life of the associated assets.

(d)	This asset will be recovered through a recovery factor after expenses are incurred.

(e)	No specific return on investment is required since related assets and liabilities, including accumulated deferred income taxes and reclamation liability, offset.

(f)	This item is excluded from rate base.

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D. Palo Verde

NRC. The NRC regulates the operation of all commercial nuclear power reactors in the United States, including Palo Verde. The NRC periodically conducts inspections of nuclear facilities and monitors performance indicators to enable the agency to arrive at objective conclusions about a licensee’s safety performance. Based on this assessment information and using a cornerstone evaluation system, the NRC determines the appropriate level of agency response and oversight, including supplemental inspections and pertinent regulatory actions as necessary. The NRC had placed Palo Verde Unit 3 in the “multiple/repetitive degraded cornerstone” column of the NRC’s action matrix which resulted in an enhanced NRC inspection regimen. This enhanced inspection regimen and resulting corrective actions resulted in increased operating costs at the plant. On March 24, 2009, the NRC announced that it is removing Palo Verde Unit 3 from the “multiple/repetitive degraded cornerstone” column of the NRC’s action matrix and returning all three units of the plant to routine inspection and oversight. This notification follows the NRC’s completion of its inspections of the corrective actions taken by Palo Verde to address performance deficiencies. The NRC has closed the confirmatory action letter that outlined the performance deficiencies and associated corrective actions.

E. Common Stock

Long-Term Incentive Plan

On May 2, 2007, the Company’s shareholders approved a stock-based long-term incentive plan (the “2007 Plan”) and authorized the issuance of up to one million shares of common stock for the benefit of directors and employees. Under the plan, common stock may be issued through the award or grant of non-statutory stock options, incentive stock options, stock appreciation rights, restricted stock, bonus stock, performance stock, cash-based awards and other stock-based awards. The Company may issue new shares, purchase shares on the open market, or issue shares from shares the Company has repurchased to meet the share requirements of these plans. As discussed in Note A, the Company accounts for its stock-based long-term incentive plan under SFAS No. 123 (revised).

Stock Options. Stock options have been granted at exercise prices equal to or greater than the market value of the underlying share at the date of grant. No options were exercised during the first quarter of 2009. The Company received $0.2 million in cash for the 25,000 stock options exercised in the three months ended March 31, 2008. All of the 465,888 options outstanding at March 31, 2009 have vested. Stock options have not been granted since 2003. For a full discussion of stock options, see Note F of Notes to Consolidated Financial Statements in the 2008 Form 10-K.

Restricted Stock. The Company has awarded restricted stock under its long-term incentive plans. Restrictions from resale generally lapse and awards vest over periods of one to three years. The market value of the unvested restricted stock at the date of grant is amortized to expense over the restriction period net of anticipated forfeitures. The Company awarded 39,958 shares of unvested restricted stock with a grant date fair value of $0.6 million to its directors and officers during the three months ended March 31, 2009. The Company awarded 25,096 shares of unvested restricted stock with a grant date fair value of $0.5 million during the three months ended March 31, 2008. During the three months

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ended March 31, 2009, 996 restricted shares vested and none were forfeited. As of March 31, 2009, there are 166,762 unvested shares of restricted stock with a grant date fair value of $1.4 million remaining to be expensed. For a full discussion of restricted stock, see Note F of Notes to Consolidated Financial Statements in the 2008 Form 10-K.

Performance Shares. The Company has granted performance share awards to certain officers under the Company’s existing long-term incentive plans, which provide for issuance of Company stock based on the achievement of certain performance criteria over a three-year period. The payout varies between 0% and 200% of performance share awards. Performance shares vesting on January 1, 2009 did not meet the minimum payout threshold and no shares were issued. During the three months ended March 31, 2009, the Company granted 124,450 performance shares to its officers with a grant date fair value of $1.5 million which will be expensed over the three-year vesting period. During the three months ended March 31, 2008, the Company granted 63,500 performance shares with a grant date fair value of $1.1 million which is expensed over the three-year vesting period. As of March 31, 2009, there are 227,200 outstanding performance shares with a grant date fair value of $1.8 million remaining to be expensed. For a full discussion of performance shares, see Note F of Notes to Consolidated Financial Statements in the 2008 Form 10-K.

The Company recorded total compensation expense for all stock-based incentive plans of approximately $0.7 million and $2.5 million for the three and twelve month periods ended March 31, 2009. For the three and twelve month periods ended March 31, 2008, the Company recorded total compensation expense of $0.4 million and $1.8 million for all stock-based incentive plans which included the cumulative adjustment for Mr. Redd’s forfeiture discussed below.

Separation Agreement with Ershel Redd

On February 12, 2008, the Company entered into an employment separation agreement with Ershel Redd, the Company’s former chief executive officer. In satisfaction of any and all obligations resulting from Mr. Redd’s service to the Company, he received a $1.65 million lump sum payment, in addition to two years of Company-paid medical benefits. All of Mr. Redd’s unvested restricted shares and performance shares awarded were forfeited in accordance with the Company’s long-term incentive plan which resulted in a net cumulative adjustment of $0.2 million recorded as a reduction of compensation costs in the first quarter of 2008.

Common Stock Repurchase Program

In November 2007, the Board authorized the repurchase of up to 2 million shares of the Company’s outstanding common stock (the “2007 Plan”). No shares remain available under previous plans. No shares were repurchased during the first quarter of 2009. As of March 31, 2009, the Company had 1,521,366 shares authorized for repurchase under the 2007 Plan. Since the inception of the stock repurchase program in 1999, the Company has repurchased a total of approximately 19.8 million shares of its common stock at an aggregate cost of $279.3 million, including commissions. The Company may in the future make purchases of its common stock pursuant to the 2007 Plan in open market transactions at prevailing prices and may engage in private transactions where appropriate. The

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repurchased shares will be available for issuance under employee benefit and stock incentive plans, or may be retired.

Basic and Diluted Earnings Per Share

Effective January 1, 2009, the Company adopted the FSP EITF 03-6-1 which requires a public entity to include share-based compensation awards that qualify as participating securities in both basic and dilutive earnings per share. A share-based compensation award is considered a participating security if it receives non-forfeitable dividends or may participate in undistributed earnings with common stock. The Company awards unvested restricted stock which qualifies as participating securities. The basic and dilutive earnings per share for the three months ended March 31, 2008 were unchanged after adopting FSP EITF 03-6-1, however, for the twelve months ended March 31, 2008 basic earnings per share decreased by $0.01 and dilutive earnings per share was unchanged. The basic and diluted earnings per share including the effects of adopting FSP EITF 03-6-1 are presented below:


	Three Months Ended March 31,				Twelve Months Ended March 31,
	2009		2008		2009		2008
Weighted average number of common and common equivalent shares outstanding:
Basic number of common shares outstanding		44,756,793		44,960,950		44,726,922		45,322,302
Basic number of participating restricted stock		147,509		113,177		117,810		124,057

Total basic common shares and participating restricted stock outstanding		44,904,302		45,074,127		44,844,732		45,446,359

Dilutive effect of unvested performance awards		–		50,561		3,180		63,757
Dilutive effect of stock options		33,478		179,549		100,006		212,022

Diluted number of common and common equivalent shares outstanding		44,937,780		45,304,237		44,947,918		45,722,138


Basic net income per common share	$	0.21	$	0.32	$	1.62	$	1.63
Diluted net income per common share and common equivalent shares outstanding	$	0.21	$	0.32	$	1.62	$	1.62

Performance shares of 227,200 and 121,810 were excluded from the computation of diluted earnings per share for the three and twelve months ended March 31, 2009, respectively, as no payouts would be required based upon current performance. These amounts assume a 100% performance level payout. Performance shares of 106,894 and 37,572 were excluded from the computation of diluted earnings per share for the three and twelve months ended March 31, 2008, respectively. No options were excluded from the computation of diluted earnings per share because the exercise price was lower than the average market price in 2009 and 2008.

F. Long-Term Debt

Pollution Control Bonds (“PCBs”)

On March 26, 2009, the Company completed a refunding transaction whereby the 2005 Series B $63.5 million and 2005 Series C $37.1 million bonds were refunded and replaced by 2009 Series A bonds in the aggregate principal amount of $63.5 million (the “2009 Series A Bonds”) and 2009

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Series B Bonds in the aggregate principal amount of $37.1 million (the “2009 Series B Bonds”). The 2009 Series A Bonds and the 2009 Series B Bonds were issued as unsecured obligations and both have a fixed interest rate of 7.25%. The 2009 Series A Bonds will mature on February 1, 2040. The 2009 Series B Bonds will mature on April 1, 2040. The 2005 Series B $63.5 million and the 2005 Series C $37.1 million bonds, which were to mature in 2040, had variable interest rates that were repriced weekly. The Company experienced increased yields and resulting interest expense for the auction rate PCBs as a consequence of the turbulent condition of the financial markets.

G. Income Taxes

The Company files income tax returns in the U.S. federal jurisdiction and in the states of Texas, New Mexico and Arizona. The Company is no longer subject to tax examination by the taxing authorities in the federal jurisdiction for years prior to 2005 and in the state jurisdictions for years prior to 1998. The Company’s federal tax returns are currently under audit for 2005 and 2006. A deficiency notice relating to the Company’s 1998 through 2003 income tax returns in Arizona contests a pollution control credit and the payroll apportionment factor. The Company is contesting these adjustments.

For the three months ended March 31, 2009 and 2008, the Company’s consolidated effective tax rate from continuing operations was 34.69% and 33.33%, respectively, and for the twelve months ended March 31, 2009 and 2008 the Company’s consolidated effective tax rate from continuing operations was 32.92% and 30.88%, respectively. The Company’s effective tax rates differ from the federal statutory tax rate of 35% primarily due to state income taxes, the allowance for equity funds used during construction, and permanent tax differences.

FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”) prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. A reconciliation of the March 31, 2009 and March 31, 2008 amount of unrecognized tax benefits is as follows (in millions):


	2009		2008
Balance at January 1	$	0.5	$	8.5
Reductions for tax positions of prior years		—		(0.3	)

Balance at March 31	$	0.5	$	8.2

The amount of unrecognized tax benefits at March 31, 2008 includes $7.9 million of tax positions for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, the disallowance of the shorter deductibility period for these issues does not change the amount of tax expense other than associated interest and penalties. However, the timing of cash payments to the federal taxing authority would be affected.

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The Company recorded in income tax expense an addition to its unrecognized tax position of $0.1 million and $0.2 million for the twelve months ended March 31, 2009 and 2008, respectively, which was associated with state income taxes.

The Company recognizes in tax expense interest and penalties related to tax benefits that have not been recognized. During the three and twelve month periods ended March 31, 2009, the Company recognized approximately $0.1 million in interest. The Company had approximately $0.5 million for the payment of interest and penalties accrued at March 31, 2009.

H. Commitments, Contingencies and Uncertainties

For a full discussion of commitments and contingencies, see Note J of Notes to Consolidated Financial Statements in the 2008 Form l0-K. In addition, see Note B above and Notes B and D of Notes to Consolidated Financial Statements in the 2008 Form 10-K regarding matters related to wholesale power sales contracts and transmission contracts subject to regulation and Palo Verde, including decommissioning, spent fuel storage, disposal of low-level radioactive waste, reactor vessel heads and liability and insurance matters. See Note G for a discussion of tax contingencies and uncertainties.

Power Purchase and Sale Contracts

The Company entered into a contract on April 18, 2007 (as amended on August 29, 2008, and March 31, 2009) to sell up to 100 MW of firm energy and 50 MW of contingent energy to Imperial Irrigation District (“IID”), which began May 1, 2007 and continues through April 30, 2009. The contract also provides for the Company to sell up to 100 MW of firm energy and 40 MW of contingent energy beginning May 1, 2009 through April 30, 2010. To ensure that power is available to meet the IID contract demand, the Company entered into a contract effective May 1, 2007 (as amended and restated on September 3, 2008 and March 30, 2009) to purchase up to 100 MW of firm energy from Credit Suisse Energy, LLC. This contract provides for up to 100 MW of firm energy to be delivered at Palo Verde through April 30, 2010 and 50 MW of energy delivered at Four Corners in the months of July through September in 2007 and May through September for the years 2008 through 2010.

In addition to the contracts disclosed in the Company’s 2008 Form 10-K, the Company has entered into several agreements with various counterparties for forward firm purchases of electricity:


Type of Contract	Quantity	Term
Purchase Off-Peak Energy	50 MW	April through October 2009
Purchase Off-Peak Energy	25 MW	November 2009 through April 2010

Power Purchase Contracts. To supplement its own generation and operating reserves, the Company engages in firm and non-firm power purchase arrangements which may vary in duration and amount based on evaluation of the Company’s resource needs and the economics of the transactions. In 2004, the Company entered into a 20-year contract, beginning in 2006, for the purchase of up to 133 MW of capacity and associated energy from SPS. The Company received notice from SPS in late 2006 that SPS had been subject to adverse regulatory action by the PUCT regarding transactions under the contract and that SPS wished to exercise its right to terminate the contract early. As a result, on

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January 29, 2008, the Company and SPS entered into an amendment to the contract and the contract will terminate on September 30, 2009.

Environmental Matters

The Company is subject to regulation with respect to air, soil and water quality, solid waste disposal and other environmental matters by federal, state, tribal and local authorities. Those authorities govern current facility operations and have continuing jurisdiction over facility modifications. Failure to comply with these environmental regulatory requirements can result in actions by regulatory agencies or other authorities that might seek to impose on the Company administrative, civil and/or criminal penalties. In addition, unauthorized releases of pollutants or contaminants into the environment can result in costly cleanup obligations that are subject to enforcement by regulatory agencies. These laws and regulations are subject to change and, as a result of those changes, the Company may face additional capital and operating costs to comply.

Another way in which environmental matters may impact the Company’s operations and business is the implementation of the U.S. Environmental Protection Agency’s (“EPA”) Clean Air Interstate Rule (“CAIR”) which, as applied to the Company, may result in a requirement that it substantially reduce emissions of nitrogen oxides from its power plants in Texas and/or purchase allowances representing other parties’ emissions reductions starting in 2009. These requirements become more stringent in 2015, and are anticipated to require even further emissions reductions or additional allowance purchases. On July 11, 2008, the U.S. Court of Appeals for the District of Columbia vacated CAIR in its entirety. On December 23, 2008 the DC Circuit Panel granted rehearing and remanded CAIR without vacating the original statute. As a result, the Company must comply with CAIR as written until the EPA rewrites the CAIR as required by the court’s earlier opinion.

The Company takes its environmental compliance seriously and is monitoring these issues so that the Company is best able to effectively adapt to any changes. While the Company strives to prepare for and implement actions necessary to comply with changing environmental regulations, substantial expenditures may be required for the Company to comply with such regulations in the future and, in some instances, those expenditures may be material. The Company believes it is impossible at present to meaningfully quantify the costs of these potential impacts.

The Company analyzes the costs of its obligations arising from environmental matters on an ongoing basis and believes it has made adequate provision in its financial statements to meet such obligations. As a result of this analysis, the Company has a provision for environmental remediation obligations of approximately $1.7 million as of March 31, 2009, related to compliance with federal and state environmental standards. However, unforeseen expenses associated with environmental compliance or remediation may occur and could have a material adverse effect on the future operations and financial condition of the Company.

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The Company incurred the following expenditures during the three and twelve months ended March 31, 2009 and 2008 to comply with federal environmental statutes (in thousands):


	Three Months Ended March 31,				Twelve Months Ended March 31,
	2009		2008		2009		2008
Clean Air Act (1)	$	350	$	124	$	810	$	1,674
Clean Water Act (2)		59		503		799		1,404

(1)	Includes a $0.3 million reserve related to excess emissions at the Rio Grande generating station discussed below for the three and twelve months ended March 31, 2009.

(2)

Includes a $0.2 million reserve for remediation costs for the Gila River Boundary Site discussed below for the twelve months ended March 31, 2009. For the twelve months ended March 31, 2008 a $0.5 million adjustment was recorded reducing the estimated costs of remediation at the Rio Grande and Copper generating stations.

Along with many other companies, the Company received from the Texas Commission on Environmental Quality (“TCEQ”) a request for information in 2003 in connection with environmental conditions at a facility in San Angelo, Texas that was operated by the San Angelo Electric Service Company (“SESCO”). In November 2005, TCEQ proposed the SESCO site for listing on the registry of Texas state superfund sites and mailed notice to more than five hundred entities, including the Company, indicating that TCEQ considers each of them to be a “potentially responsible party” at the SESCO site. The Company received from the SESCO working group of potentially responsible parties a settlement offer in May 2006 for remediation and other expenses expected to be incurred in connection with the SESCO site. The Company’s position is that any liability it may have related to the SESCO site was discharged in the Company’s bankruptcy. At this time, the Company has not agreed to a settlement or to otherwise participate in the cleanup of the SESCO site and is unable to predict the outcome of this matter. While the Company has no reason at present to believe that it will incur material liabilities in connection with the SESCO site, it has accrued $0.3 million for potential costs related to this matter.

The EPA has investigated control releases or potential releases of hazardous substances, pollutants or contaminants at the Gila River Boundary Site, on the Gila River Indian Community (“GRIC”) reservation in Arizona and designated it as a Superfund Site. The Company currently owns 16.29% of the site and will share in the cost of cleanup of this site. Negotiations with the EPA are ongoing and the Company has accrued $0.2 million for potential costs related to this matter.

On September 30, 2008, the State of New Mexico, acting on behalf of the New Mexico Environment Department (“NMED”), filed a complaint in New Mexico district court alleging that, on approximately 650 occasions between May 2000 and September 2005, the Company’s Rio Grande Generating Station, located in Dona Ana County, New Mexico, emitted sulfur dioxide, nitrogen oxides or carbon monoxide in excess of its permitted emission rates, and failed to properly report these allegedly excess emissions. These allegations were previously made by the NMED in a previously disclosed compliance order, which the NMED withdrew on September 30, 2008. On October 27, 2008,

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the State of New Mexico amended its complaint to allege approximately 300 additional exceedances of permitted nitrogen dioxide and carbon monoxide emission rates and associated reporting failures between October 2005 and July 2007. The amended complaint seeks civil penalties in the amount of $15,000 per day for each alleged violation. The Company’s motion to dismiss was denied, and the Company is preparing a response to the allegations. In addition, the Company is currently in settlement discussions with NMED. While the Company cannot predict the outcome of this suit, it has accrued $0.3 million for potential costs related to this matter.

On April 4, 2007, the Company submitted its application for a New Source Review Air Quality Permit/Prevention of Significant Deterioration (“PSD”) permit to the TCEQ for Newman Unit 5. The Company received approval of its PSD application on May 22, 2008. Additional environmental permits other than the PSD are not required to begin construction of Newman Unit 5 because it will be constructed at an existing plant site, and other permits are currently in place which will encompass the operation of Newman Unit 5.

In May 2007, the EPA finalized a new federal implementation plan which addresses emissions at the Four Corners Station in northwestern New Mexico of which the Company owns a 7% interest in Units 4 and 5. APS, the Four Corners operating agent, has filed suit against the EPA relating to this new federal implementation plan in order to resolve issues involving operating flexibility for emission opacity standards. The Company cannot predict the outcome of the suit filed against the EPA or whether compliance with the new requirements could have an adverse effect on its capital and operating costs.

In December 2008, the Company was notified by El Paso that a property purchased from the Company in May 2005, (Santa Fe Facility), has revealed past contamination consistent with the Company’s past practices conducted at this site. The Company cooperated with El Paso to address and undertake partial disposal of certain subsurface contaminated materials. On April 7, 2009, El Paso was notified by the TCEQ that the remediation of the site met pre-spill conditions, and no further action was required. The Company’s remediation expenses were less than the reserve previously established by the Company.

Except as described herein, the Company is not aware of any other active investigation of its compliance with environmental requirements by the EPA, the TCEQ or the NMED which is expected to result in any material liability. Furthermore, except as described herein, the Company is not aware of any unresolved, potentially material liability it would face pursuant to the Comprehensive Environmental Response, Comprehensive Liability Act of 1980, also known as the Superfund law.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

I. Litigation

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

See Note B for discussion of the effects of government legislation and regulation on the Company.

J. Employee Benefits

Retirement Plans

The net periodic benefit cost recognized for the three and twelve months ended March 31, 2009 and 2008 is made up of the components listed below as determined using the projected unit credit actuarial cost method (in thousands):


	Three Months Ended March 31,						Twelve Months Ended March 31,
	2009			2008			2009			2008
Components of net periodic benefit cost:
Service cost	$	1,400		$	1,325		$	5,150		$	5,584
Interest cost		3,275			3,175			12,700			12,284
Expected return on plan assets		(3,875	)		(3,575	)		(14,533	)		(12,975	)
Amortization of:
Net loss		400			300			1,273			2,958
Prior service cost		25			25			115			111

Net periodic benefit cost	$	1,225		$	1,250		$	4,705		$	7,962

During the three months ended March 31, 2009, the Company contributed $2.3 million of its projected $6.3 million 2009 annual contribution to its retirement plans.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Other Postretirement Benefits

The net periodic benefit cost recognized for the three and twelve months ended March 31, 2009 and 2008 is made up of the components listed below (in thousands):


	Three Months Ended March 31,						Twelve Months Ended March 31,
	2009			2008			2009			2008
Components of net periodic benefit cost:
Service cost	$	925		$	800		$	3,285		$	3,463
Interest cost		1,650			1,575			6,274			5,970
Expected return on plan assets		(375	)		(450	)		(1,778	)		(1,722	)
Amortization of:
Prior service benefit		(725	)		(725	)		(2,869	)		(2,877	)
Net gain		—			(275	)		(1,050	)		(307	)

Net periodic benefit cost	$	1,475		$	925		$	3,862		$	4,527

During the three months ended March 31, 2009, the Company contributed $1.1 million of its projected $3.4 million 2009 annual contribution to its postretirement plan.

K. Financial Instruments and Investments

Fair Value Measurements. SFAS No. 157 “Fair Value Measurements” (“SFAS No. 157”) requires the Company to provide expanded quantitative disclosures for financial assets and liabilities recorded on the balance sheet at fair value. Financial assets carried at fair value include the Company’s decommissioning trust investments and investments in debt securities. The Company has no liabilities that are measured at fair value on a recurring basis. This standard establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:

•

Level 1 – Observable inputs that reflect quoted market prices for identical assets and liabilities in active markets. Financial assets utilizing Level 1 inputs include the nuclear decommissioning trust investments in active exchange-traded equity securities and U.S. treasury securities that are in a highly liquid and transparent market.

•

Level 2 – Inputs other than quoted market prices included in Level 1 that are observable for the asset or liability either directly or indirectly. Financial assets utilizing Level 2 inputs include the nuclear decommissioning trust investments in other fixed income securities. The fair value of these financial instruments is based on evaluated prices that reflect observable market information, such as actual trade information of similar securities, adjusted for observable differences.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

•

Level 3 – Unobservable inputs using data that is not corroborated by market data and primarily based on internal Company analysis using models and various other analyses. Financial assets utilizing Level 3 inputs include the Company’s investments in debt securities.

As of March 31, 2009, the Company had $4.0 million invested in debt securities which consisted of two $2.0 million investments in auction rate securities maturing in 2042 and 2044. The Company classifies them as trading securities. These auction rate securities are collateralized with student loans which are re-insured by the Department of Education as part of the Federal Family Education Loan Program (“FFELP”) and have credit ratings of “A” by Standard & Poors, “A2” by Moody’s, and “A” and “AAA” by Fitch. The principal on the securities can be realized at maturity, sold in a successful auction, or sold in the secondary market. Interest rates on the auction rate securities are reset every 28 days. At March 31, 2009 upon a failed auction, the maximum interest rates would be based upon the average 91 day T-bill plus 1.5% and one month LIBOR plus 2.5% with rate limitations based upon interest rates on the underlying student loans. At March 31, 2009, the maximum interest rates were 2.057% to 3.045%.

The auction process historically provided a liquid market to sell the securities to meet cash requirements. These auction rate securities had successful auctions through January 2008. However, since February 2008, auctions for these securities have not been successful, resulting in the inability to liquidate these investments. The Company’s valuation as of March 31, 2009 is based upon the average of a discounted cash flow model valuation and a market comparables method.

The discounted cash flow model valuation is based on expected cash flows using the maximum expected interest rates discounted by an expected yield reflecting illiquidity and credit risk. In order to more accurately forecast cash flows, treasury and LIBOR yields curves were created using swap rates, data provided on the U.S. Department of the Treasury website and the British Banker’s Association website. After thorough analysis, future cash flows were projected based on interest rate models over a term, which was based on an estimate of the weighted average life of the student loan portfolio within the issuing trusts. The applied discount yield was based on the applicable forward LIBOR rate and a yield spread of 650 basis points based on the securities’ (i) credit risk, (ii) illiquidity, (iii) subordinated status, (iv) interest rate limitations, and (v) FFELP guarantees.

The market comparables method is based upon sales and purchases of auction rate securities in secondary market transactions. The secondary market discounts of 43.3% to 45.3% are based on discounts indicated in secondary market transactions involving comparable Student Loan Auction Rate Securities. The average of the values provided by the discounted cash flow calculation and the market comparables method are used to arrive at the concluded value of the securities.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The securities in the Company’s decommissioning trust funds are classified as available for sale under SFAS No. 115 and are valued using prices and other relevant information generated by market transactions involving identical or comparable securities. SFAS No. 157 identifies this valuation technique as the “market approach” with observable inputs. The Company analyzes available for sale securities to determine if losses are other than temporary. For the three and twelve months ended March 31, 2009, $2.5 million and $9.5 million of gross impairments deemed to be other than temporary were recognized in the consolidated statement of operations. For both the three and twelve months ended March 31, 2008, $0.8 million of gross impairments were deemed to be other than temporary and recognized in the consolidated statement of operations.

The fair value of the Company’s decommissioning trust funds and investments in debt securities, at March 31, 2009, and the level within the three levels of the fair value hierarchy defined by SFAS No. 157 are presented in the table below (in thousands):


Description of Securities	Fair Value as of March 31, 2009		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Trading Securities:
Investments in Debt Securities	$	2,212	$	—	$	—	$	2,212


Available for Sale Securities:
Decommissioning Trust Funds:
U.S. Government Bonds		5,549		5,549		—		—
Federal Agency Mortgage Backed Securities		13,740		—		13,740		—
Municipal Bonds		31,082		—		31,082		—
Corporate Asset Backed Obligations		4,725		—		4,725		—

Total Debt Securities		55,096		5,549		49,547		—


Common Stock		44,206		44,206		—		—
Mutual Funds		6,923		6,923		—		—

Total Equity Securities		51,129		51,129		—		—


Cash and Cash Equivalents		2,638		2,638		—		—

Total Decommissioning Trust Funds	$	108,863	$	59,316	$	49,547	$	—

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The decline in the fair value of the investments in debt securities resulted in a charge to income of $0.1 million and $1.3 million for the three and twelve months ended March 31, 2009, respectively. For the three and twelve months ended March 31, 2008, the decline in the fair value of the investments in debt securities resulted in a charge to income of $0.5 million for both periods. These amounts are reflected in the Company’s consolidated statement of operations as a reduction to investment and interest income. Below is a reconciliation of the beginning and ending balances of the investments in debt securities (in thousands):


	March 31, 2009			March 31, 2008
Balance at January 1	$	2,264		$	—
Transfers into Level 3 (1)		—			4,000
Unrealized gain (loss) in fair value recognized in income		(52	)		(529	)

Balance at March 31	$	2,212		$	3,471

(1) Amounts presented as being transferred in are based on the fair value at the beginning of the period.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

El Paso Electric Company:

We have reviewed the consolidated balance sheet of El Paso Electric Company and subsidiary as of March 31, 2009, the related consolidated statements of operations and comprehensive operations for the three-month and twelve-month periods ended March 31, 2009 and 2008, and the related consolidated statements of cash flows for the three-month periods ended March 31, 2009 and 2008. These consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

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

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of El Paso Electric Company and subsidiary as of December 31, 2008, and the related consolidated statements of operations, comprehensive operations, changes in common stock equity, and cash flows for the year then ended (not presented herein); and in our report dated February 25, 2009, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2008, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ KPMG LLP

Houston, Texas

May 5, 2009

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information contained in this Item 2 updates, and should be read in conjunction with, the information set forth in Part II, Item 7 of our 2008 Form 10-K.

FORWARD-LOOKING STATEMENTS

Certain matters discussed in this Quarterly Report on Form 10-Q other than statements of historical information are “forward-looking statements.” The Private Securities Litigation Reform Act of 1995 has established that these statements qualify for safe harbors from liability. Forward-looking statements may include words like we “believe”, “anticipate”, “target”, “expect”, “pro forma”, “estimate”, “intend” and words of similar meaning. Forward-looking statements describe our future plans, objectives, expectations or goals. Such statements address future events and conditions concerning and include, but are not limited to such things as:

•

capital expenditures,

•

earnings,

•

liquidity and capital resources,

•

litigation,

•

accounting matters,

•

possible corporate restructurings, acquisitions and dispositions,

•

compliance with debt and other restrictive covenants,

•

interest rates and dividends,

•

environmental matters,

•

nuclear operations, and

•

the overall economy of our service area.

These forward-looking statements involve known and unknown risks that may cause our actual results in future periods to differ materially from those expressed in any forward-looking statement. Factors that would cause or contribute to such differences include, but are not limited to, such things as:

•

our rates in Texas following the five-year moratorium on rate increases which ends June 30, 2010,

•

our rates in New Mexico including the impact of the 2007 New Mexico Stipulation which requires a rate case to be filed by May 29, 2009,

•

any changes in our New Mexico fuel and purchased power adjustment clause after the 2009 continuation filing,

•

loss of margins on off-system sales due to changes in wholesale power prices or availability of competitive generation resources,

•

ability of our operating partners to maintain plant operations and manage operation and maintenance costs at the Palo Verde and Four Corners Plants,

•

reductions in output at generation plants operated by the Company,

•

unscheduled outages including outages at Palo Verde,

•

the size of our construction program and our ability to complete construction on budget and on a timely basis,

•

electric utility deregulation or re-regulation,

•

regulated and competitive markets,

•

ongoing municipal, state and federal activities,

•

economic and capital market conditions,

•

changes in accounting requirements and other accounting matters,

•

changing weather trends,

•

rates, cost recoveries and other regulatory matters including the ability to recover fuel costs on a timely basis,

•

changes in environmental regulations,

•

political, legislative, judicial and regulatory developments,

•

the impact of lawsuits filed against us,

•

the impact of changes in interest rates,

•

changes in, and the assumptions used for, pension and other post-retirement and post-employment benefit liability calculations, as well as actual and assumed investment returns on pension plan assets,

•

the impact of changing cost escalation and other assumptions on our nuclear decommissioning liability for Palo Verde,

•

Texas, New Mexico and electric industry utility service reliability standards,

•

homeland security considerations,

•

coal, uranium, natural gas, oil and wholesale electricity prices and availability, and

•

other circumstances affecting anticipated operations, sales and costs.

These lists are not all-inclusive because it is not possible to predict all factors. A discussion of some of these factors is included in this document under the headings “Risk Factors” and in the 2008 Form 10-K under the headings “Management’s Discussion and Analysis” “-Summary of Critical Accounting Policies and Estimates” and “-Liquidity and Capital Resources.” This report should be read in its entirety. No one section of this report deals with all aspects of the subject matter. Any forward-looking statement speaks only as of the date such statement was made, and we are not obligated to update any forward-looking statement to reflect events or circumstances after the date on which such statement was made except as required by applicable laws or regulations.

Summary of Critical Accounting Policies and Estimates

The preparation of our financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes for the periods presented and actual results could differ in future periods from those estimates. Critical accounting policies and estimates are both important to the portrayal of our financial condition and results of operations and require complex, subjective judgments and are more fully described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2008 Form 10-K.

Summary

The following is an overview of our results of operations for the three and twelve month periods ended March 31, 2009 and 2008. Income for the three and twelve month periods ended March 31, 2009 and 2008 is shown below:


	Three Months Ended March 31,				Twelve Months Ended March 31,
	2009		2008		2009		2008
Net income (in thousands)	$	9,609	$	14,488	$	72,742	$	74,122
Basic earnings per share		0.21		0.32		1.62		1.63

The following table and accompanying explanations show the primary factors affecting the after-tax change in income between the 2009 and 2008 periods presented (in thousands):


	Three Months Ended			Twelve Months Ended
March 31, 2008 net income	$	14,488		$	74,122
Change in (net of tax):
Deregulated Palo Verde Unit 3 proxy market pricing (a)		844			10,966
Decreased (increased) operations and maintenance at coal and gas-fired generating plants (b)		752			(1,219	)
Increased transmission wheeling revenue (c)		648			2,497
Decreased (increased) depreciation and amortization (d)		590			(2,313	)
Increased AFUDC and capitalized interest (e)		642			2,748
Decreased pension and benefits expense (f)		341			3,407
Decreased (increased) Palo Verde operations and maintenance expense (g)		255			(4,707	)
Decreased off-system sales margins retained (h)		(3,918	)		(1,575	)
Increased interest on long-term debt (i)		(2,406	)		(8,456	)
Impairments of equity securities in nuclear decommissioning trusts (k)		(1,414	)		(7,035	)
Increased (decreased) retail non-fuel base revenues (j)		(1,117	)		1,282
Other		(96	)		3,025

March 31, 2009 net income	$	9,609		$	72,742

(a)

Deregulated Palo Verde Unit 3 proxy market pricing reflects increased sales of the deregulated portion of Palo Verde Unit 3 to retail customers as the unit did not operate in the fourth quarter of 2007 and the first three weeks of January 2008 due to its refueling and replacement of steam generators and higher proxy market prices for deregulated Palo Verde Unit 3 power sold to retail customers.

(b)

Operation and maintenance costs decreased at our fossil-fueled generating plants for the three months ended March 31, 2009 compared to the same period last year due to planned major maintenance at the Newman Unit 3, Four Corners Unit 5, and Copper generating units performed in 2008 partially offset by planned maintenance at the Rio Grande Unit 8 and Newman Unit 4 generating units performed in 2009. Operation and maintenance costs increased at our fossil-fueled generating plants for the twelve months ended March 31, 2009 compared to the same period last year due to the planned major maintenance performed at Four Corners Unit 5 and Newman Unit 3 in 2008. In 2007 no major maintenance was performed at our fossil-fueled generating units.

(c)	Increased revenues for transmission wheeling for both periods in 2009 are largely due to wheeling power in Arizona. For the twelve months ended March 31, 2009 transmission wheeling revenues also increased due to wheeling power in southern New Mexico.

(d)	Depreciation and amortization decreased for the three months ended March 31, 2009 compared to the same period last year due to completing the amortization of certain fair value adjustments in December in 2008.

(e)

AFUDC (allowance for funds used during construction) increased for both periods in 2009 due to increased construction work in progress subject to AFUDC. Capitalized interest decreased for the three months ended March 31, 2009 compared to the same period last year due to lower capitalized interest on our nuclear fuel inventory due to lower interest rates charged on our revolving credit facility. Capitalized interest increased for the twelve month period due to increased nuclear fuel balances subject to capitalized interest.

(f)

Pension and benefits decreased for the three months ended March 31, 2009 compared to the same period last year primarily due to executive severance costs in 2008 partially offset by increased pension, OPEB, and medical costs in 2009. For the twelve month period, pension and benefits decreased due to an increase in the discount rate for the associated pension and OPEB liabilities in 2008 compared to 2007.

(g)

Palo Verde non-fuel operations and maintenance expenses decreased for the three months ended March 31, 2009 compared to the same period last year due to the timing of expenses incurred for Spring refueling outages. Palo Verde non-fuel operations and maintenance expenses increased for the twelve months ended March 31, 2009 compared to the same period last year due to increased operating costs at all three units.

(h)

Off-system sales margins retained decreased for the three months ended March 31, 2009 compared to the same period last year as a result of reduced margins per MWh due to lower market prices for power and a 4.9% decrease in MWh sales. Off-system sales margins retained decreased for the twelve months ended March 31, 2009 as a result of reduced margins per MWh due to lower market prices for power partially offset by a 30.8% increase in MWh sales.

(i)

Interest expense on long-term debt increased for both periods in 2009 due to the issuance of $150 million of 7.5% Senior Notes in June 2008 and to a smaller extent higher interest rates on auction rate pollution control bonds. The auction rate pollution control bonds were refunded and reissued at a fixed interest rate of 7.25% on March 26, 2009.

(j)

Non-fuel retail base revenues decreased for the three months ending March 31, 2009 compared to the same period last year due to a $0.9 million, pre-tax, decrease in revenues from our residential customers and a $0.9 million, pre-tax, decrease from our large commercial and industrial customers. Non-fuel retail base revenues increased for the twelve months ending March 31, 2009 due to a $4.6 million, pre-tax, increase in revenues from small commercial and industrial customers partially offset by a $3.0 million, pre-tax, decrease in revenues from the large commercial and industrial customers. Non-fuel retail base revenues exclude fuel recovered through New Mexico base rates.

(k)	Increase in impairments of equity investments in our Palo Verde decommissioning trust funds for the three and twelve months ended March 31, 2009 compared to the same periods last year.

Historical Results of Operations

The following discussion includes detailed descriptions of factors affecting individual line items in the results of operations. The amounts presented below are presented on a pre-tax basis.

Operating revenues

We realize revenue from the sale of electricity to retail customers at regulated rates and the sale of energy in the wholesale power market generally at market based prices. Sales for resale (which are wholesale sales within our service territory) accounted for less than 1% of revenues. Off-system sales are wholesale sales into markets outside our service territory. Off-system sales are primarily made in off-peak periods when we have competitive generation capacity available after meeting our regulated service obligations. Under the terms of our rate agreements in Texas and New Mexico, we share 25% of our off-system sales margins with our customers in Texas and New Mexico (effective July 1, 2005 and July 1, 2007, respectively). We are also sharing 25% of our off-system sales margins with our sales for resale customer under the terms of a contract which was effective April 1, 2008. In July 2010, off-system sales margins shared with customers increases to 90%.

Revenues from the sale of electricity include fuel costs that are recovered from our customers through fuel adjustment mechanisms. A significant portion of fuel costs are also recovered through base rates in New Mexico. We record deferred fuel revenues for the difference between actual fuel costs and recoverable fuel revenues until such amounts are collected from or refunded to customers. “Non-fuel base revenues” refers to our revenues from the sale of electricity excluding such fuel costs.

Retail non-fuel base revenue percentages by customer class are presented below:


	Three Months Ended March 31,				Twelve Months Ended March 31,
	2009		2008		2009		2008
Residential	39	%	40	%	39	%	40	%
Commercial and industrial, small	37		36		37		36
Commercial and industrial, large	8		8		8		8
Sales to public authorities	16		16		16		16

Total retail non-fuel base revenues	100	%	100	%	100	%	100	%

No retail customer accounted for more than 2% of our base revenues during such periods. As shown in the table above, residential and small commercial customers comprise more than 75% of our revenues. While this customer base is more stable, it is also more sensitive to changes in weather conditions. As a result, our business is seasonal, with higher kWh sales and revenues during the summer cooling season.

Weather significantly impacts our residential, small commercial and industrial customers, and to a lesser extent, our sales to public authorities. For the quarter ended March 31, 2009, retail non-fuel base revenues were negatively impacted by warmer than normal winter weather in 2009. Heating and cooling degree days can be used to evaluate the effect of weather on energy use. For each degree the average outdoor temperature varies from a standard of 65 degrees Fahrenheit a degree day is recorded. The table below shows heating and cooling degree days compared to a 10-year average.


	Three Months Ended March 31,		10-Year Average	Twelve Months Ended March 31,		10-Year Average*
	2009	2008	10-Year Average	2009	2008	10-Year Average*
Heating degree days	1,030	1,191	1,199	2,006	2,189	2,293
Cooling degree days	37	24	17	2,266	2,503	2,501

*	Calendar year basis.

Customer growth is a primary driver of the growth of retail sales. The average number of retail customers grew 1.6% and 1.8%, respectively, for the three and twelve months ended March 31, 2009 when compared to the same periods last year. See the tables presented on pages 36 and 37 which provide detail on the average number of retail customers and the related revenues and kWh sales.

Retail non-fuel base revenues. Retail non-fuel base revenues decreased by $1.8 million or 1.7% for the three months ended March 31, 2009 when compared to the same period last year reflecting a weather-related decline in sales to residential customers and a recession-related decline in sales to large commercial and industrial customers. Non-fuel base revenues from residential customers decreased $0.9 million or 2.2%. KWh sales for residential customers declined 3.1% relative to 2008 primarily as a result of milder winter weather in 2009 partially offset by increased kWh sales resulting from a 1.7% increase in the average number of customers served. Heating degree days in 2009 were 14% below the same period in 2008 and the 10-year average. The non-fuel base revenues from large commercial and industrial customers decreased $0.9 million or 10%. KWh sales to large commercial and industrial customers in the first quarter of 2009 decreased approximately 18% compared to the same quarter in 2008 due to the decrease in kWh sales to a number of large industrial customers and the loss of several of these customers reflecting the impact of the recession on our service territory. Non-fuel base revenues from public authorities decreased less than $0.1 million or 0.3%.

Retail non-fuel base revenues for the twelve months ended March 31, 2009 increased by $2.0 million, or 0.4%, compared to the same period in 2008. Non-fuel base revenues for small commercial and industrial customers increased $4.6 million, or 2.7% reflecting a 3.1% increase in the average number of customers served. Non-fuel base rate revenues for public authority customers increased $0.7 million, or 1.0% primarily as a result of increased sales to military bases and colleges and universities. Non-fuel base revenues from large commercial and industrial customers decreased $3.0 million or 7.7% due to the decrease in kWh sales to several large industrial customers and the loss of several of these customers reflecting the impact of the recession in our service territory. Residential non-fuel base revenues decreased $0.4 million, or 0.2% reflecting the warmer than normal winter weather in the first quarter of 2009 and the cooler than normal summer weather in 2008 offset in part by a 1.7% increase in the average number of customers served. During the twelve months ended March 31, 2009, cooling degree days were 9.5% lower and heating degree days were 8.4% lower than in the twelve months ended March 31, 2008. As a result, retail kWh sales from residential customers and small commercial and industrial customers were negatively impacted.

Fuel revenues. Fuel revenues consist of: (i) revenues collected from customers under fuel recovery mechanisms approved by the state commissions and FERC, (ii) deferred fuel revenues which are comprised of the difference between fuel costs and fuel revenues collected from customers and (iii) fuel costs recovered in base rates in New Mexico. In New Mexico and with our sales for resale customer, the fuel adjustment clause allows us to recover under-recoveries or refund over-recoveries of current fuel costs above the amount recovered in base rates with a two-month lag. In Texas, fuel costs are recovered through a fixed fuel factor that may be adjusted up to three times per year. In addition, if we materially over-recover fuel costs, we must seek to refund the over-recovery, and if we materially under-recover fuel costs, we may seek a surcharge to recover those costs.

Natural gas prices have decreased significantly since August 2008 resulting in decreases in fuel costs including purchased power costs. In Texas our current fixed fuel factor, implemented in October 2008, is resulting in the over collection of fuel costs. In the first quarter of 2009, we over-collected our fuel costs by $23.4 million. During the same period last year we incurred an under-collection of fuel costs of $2.0 million. We also collected $12.3 million in fuel surcharges, including interest, in 2009 with no comparable amount collected in 2008. In the twelve-month period ended March 31, 2009 we under-collected fuel costs by $17.4 million compared to an under-collection of $27.4 million for the same time period in 2008. We collected $38.3 million in fuel surcharges, including interest, in the twelve months ended March 31, 2009 compared to $13.9 million in the same time period last year. We have seen a significant decline in our deferred fuel under-recovery balances due to the fuel cost over-recoveries since October 2008 and as a result of the two fuel surcharges we implemented in May and October 2008. At March 31, 2009, we had a fuel under-recovery balance of $12.2 million, including $10.5 million in Texas and $1.7 million in New Mexico. At March 31, 2008, we had a fuel under-recovery balance of $29.7 million, including $28.8 million in Texas and $0.9 million in New Mexico. At current gas prices, we expect to continue to over-recover fuel costs until the Texas fixed fuel factor is revised. As a result, on April 23, 2009, we received approval from the PUCT to terminate our remaining fuel surcharge effective May 2009 as the remaining balance of fuel under-recoveries is expected to be recovered through current period fuel over-recoveries assuming current natural gas prices levels.

Off-system sales. Off-system sales are primarily made in off-peak periods when we have competitive generation capacity available after meeting our regulated service obligations. Typically, we realize a significant portion of our off-system sales margins in the first quarter of each calendar year when our native load is lower than at other times of the year allowing for the sale in the wholesale market of relatively larger amounts of off-system energy generated from lower cost generating resources. Palo Verde’s availability is an important factor in realizing these off-system sales margins. The table below shows the MWhs, sales revenue, fuel costs, total margins, and retained margins made on off-system sales for the three and twelve month periods (in thousands except for MWhs).


	Three Months Ended March 31,				Twelve Months Ended March 31,
	2009		2008		2009		2008
MWh sales		1,058,403		1,112,686		3,452,487		2,638,969
Sales revenues	$	38,617	$	73,517	$	197,600	$	162,875
Fuel cost	$	31,895	$	58,534	$	176,382	$	138,652
Total margin	$	6,722	$	14,983	$	21,218	$	24,223
Retained margin	$	5,043	$	11,263	$	15,917	$	18,417

Off-system sales decreased $34.9 million for the three months ended March 31, 2009 when compared to the same period last year as a result of lower average market prices for power and a 4.9% decrease in MWh sales. Off-system sales increased $34.7 million for the twelve months ended March 31, 2009 compared to the same period last year as a result of a 30.8% increase in off-system MWh sales partially offset by lower average market prices for power. Customers receive 25% of the off-system sales margins pursuant to the rate agreements in each jurisdiction. Prior to July 1, 2007, we retained 100% of off-system sales margins in New Mexico and prior to April 1, 2008, we retained 100% of off-system sales margins allocated to our sales for resale customer.

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


Quarter Ended March 31:	2009			2008		Increase (Decrease)
Quarter Ended March 31:	2009			2008		Amount			Percent
kWh sales:
Retail:
Residential		489,629			505,448		(15,819	)	(3.1	)%
Commercial and industrial, small		473,287			478,259		(4,972	)	(1.0	)
Commercial and industrial, large		222,997			273,406		(50,409	)	(18.4	)
Sales to public authorities		315,049			314,474		575		0.2

Total retail sales		1,500,962			1,571,587		(70,625	)	(4.5	)

Wholesale:
Sales for resale		10,394			9,879		515		5.2
Off-system sales		1,058,403			1,112,686		(54,283	)	(4.9	)

Total wholesale sales		1,068,797			1,122,565		(53,768	)	(4.8	)

Total kWh sales		2,569,759			2,694,152		(124,393	)	(4.6	)

Operating revenues:
Non-fuel base revenues:
Retail:
Residential	$	40,191		$	41,110	$	(919	)	(2.2	)%
Commercial and industrial, small		37,664			37,604		60		0.2
Commercial and industrial, large		7,806			8,669		(863	)	(10.0	)
Sales to public authorities		16,377			16,428		(51	)	(0.3	)

Total retail non-fuel base revenues		102,038			103,811		(1,773	)	(1.7	)

Wholesale:
Sales for resale		307			394		(87	)	(22.1	)

Total non-fuel base revenues		102,345			104,205		(1,860	)	(1.8	)

Fuel revenues:
Recovered from customers during the period		50,461			38,614		11,847		30.7	(1)
Under (over) collection of fuel		(23,356	)		2,035		(25,391	)	—
New Mexico fuel in base rates		15,360			16,094		(734	)	(4.6	)

Total fuel revenues		42,465			56,743		(14,278	)	(25.2	)
Off-system sales		38,617			73,517		(34,900	)	(47.5	)
Other		7,009			5,775		1,234		21.4	(2)

Total operating revenues	$	190,436		$	240,240	$	(49,804	)	(20.7	)


Average number of retail customers:
Residential		323,781			318,358		5,423		1.7	%
Commercial and industrial, small		35,785			35,390		395		1.1
Commercial and industrial, large		48			53		(5	)	(9.4	)
Sales to public authorities		4,938			4,864		74		1.5

Total		364,552			358,665		5,887		1.6

(1)	Excludes $12.3 million for 2009 of prior periods deferred fuel revenues recovered through Texas fuel surcharges.

(2)	Represents revenues with no related kWh sales.


Twelve Months Ended March 31:	2009		2008		Increase (Decrease)
Twelve Months Ended March 31:	2009		2008		Amount			Percent
kWh sales:
Retail:
Residential		2,212,019		2,228,437		(16,418	)	(0.7	)%
Commercial and industrial, small		2,250,613		2,235,291		15,322		0.7
Commercial and industrial, large		1,051,868		1,194,022		(142,154	)	(11.9	)
Sales to public authorities		1,449,229		1,405,000		44,229		3.1

Total retail sales		6,963,729		7,062,750		(99,021	)	(1.4	)

Wholesale:
Sales for resale		50,663		48,767		1,896		3.9
Off-system sales		3,452,487		2,638,969		813,518		30.8

Total wholesale sales		3,503,150		2,687,736		815,414		30.3

Total kWh sales		10,466,879		9,750,486		716,393		7.3


Operating revenues:
Non-fuel base revenues:
Retail:
Residential	$	183,881	$	184,234	$	(353	)	(0.2	)%
Commercial and industrial, small		174,653		170,053		4,600		2.7
Commercial and industrial, large		35,455		38,413		(2,958	)	(7.7	)
Sales to public authorities		74,376		73,630		746		1.0

Total retail non-fuel base revenues		468,365		466,330		2,035		0.4

Wholesale:
Sales for resale		1,559		1,938		(379	)	(19.6	)

Total non-fuel base revenues		469,924		468,268		1,656		0.4

Fuel revenues:
Recovered from customers during the period		210,139		189,660		20,479		10.8	(1)
Under (over) collection of fuel		17,361		27,422		(10,061	)	(36.7	)
New Mexico fuel in base rates		67,897		60,600		7,297		12.0

Total fuel revenues		295,397		277,682		17,715		6.4
Off-system sales		197,600		162,875		34,725		21.3
Other		26,205		20,425		5,780		28.3	(2)

Total operating revenues	$	989,126	$	929,250	$	59,876		6.4


Average number of retail customers:
Residential		321,679		316,346		5,333		1.7	%
Commercial and industrial, small		35,865		34,770		1,095		3.1
Commercial and industrial, large		51		55		(4	)	(7.3	)
Sales to public authorities		4,911		4,846		65		1.3

Total		362,506		356,017		6,489		1.8

(1)	Excludes $38.3 million and $13.9 million of deferred fuel revenues recovered through Texas fuel surcharges, respectively.

(2)	Represents revenues with no related kWh sales.

Energy expenses

Our sources of energy include electricity generated from our nuclear, natural gas and coal generating plants and purchased power. Palo Verde represents approximately 42% of our available net generating capacity and approximately 68% and 59% of our Company generated energy for the three and twelve months ended March 31, 2009, respectively. Recent decreases in the price of natural gas which also influences the price of purchased power has had a significant impact on our cost of energy in the three month period ended March 31, 2009.

Our energy expenses decreased $44.6 million or 38% for the three months ended March 31, 2009 when compared to 2008 primarily due to (i) decreased costs of purchased power of $26.0 million due to a 37% decrease in market prices for power and a 16% decrease in the MWhs purchased, and (ii) decreased natural gas costs of $20.4 million due to a 20% decrease in the average price of natural gas and a 25% decrease in MWhs generated with natural gas. Total MWh energy requirements in the three months ended March 31, 2009 declined 4.9% reflecting the decline in retail sales and off-system sales compared to the three months ended March 31, 2008. The table below details the sources and costs of energy for the three months ended March 31, 2009 and 2008.


Fuel Type	Three Months Ended March 31,
	2009					2008
	Cost		MWh	Cost per MWh		Cost		MWh	Cost per MWh
	(in thousands)					(in thousands)
Natural gas	$	30,716	431,524	$	71.18	$	51,112	573,076	$	89.19
Coal		4,026	199,390		20.19		2,902	151,983		19.09
Nuclear		7,551	1,353,084		5.58		6,917	1,261,528		5.48

Total		42,293	1,983,998		21.32		60,931	1,986,587		30.67
Purchased power		29,398	712,174		41.28		55,358	848,383		65.25

Total energy	$	71,691	2,696,172		26.59	$	116,289	2,834,970		41.02

Our energy expenses increased $33.2 million or 8% for the twelve months ended March 31, 2009 when compared to 2008 reflecting a 6.5% increase in MWh energy requirements. The increase in energy expenses included (i) an increase in purchased power costs of $29.0 million primarily due to an 18% increase in the MWhs purchased; (ii) an increase in coal costs of $3.6 million due to an 18% increase in the average price of coal and an 11.9% increase in coal generation, and (iii) an increase in nuclear fuel costs of $2.8 million primarily due to an 11% increase in nuclear generation. The energy expense increases were partially offset by a decrease in natural gas costs of $2.1 million due to a 12% decrease in natural gas generation partially offset by an increase in the average price of natural gas. The table below details the sources and costs of energy for the twelve month periods ended March 31, 2009 and 2008.


Fuel Type	Twelve Months Ended March 31,
	2009					2008
	Cost		MWh	Cost per MWh		Cost			MWh	Cost per MWh
	(in thousands)					(in thousands)
Natural gas	$	229,971	2,538,132	$	90.61	$	232,100	(a)	2,885,699	$	80.43
Coal		14,644	768,358		19.06		11,062		686,608		16.11
Nuclear		26,563	4,714,396		5.63		23,806		4,243,287		5.61

Total		271,178	8,020,886		33.81		266,968		7,815,594		34.16
Purchased power		184,523	3,016,187		61.18		155,532		2,550,107		60.99

Total energy	$	455,701	11,037,073		41.29	$	422,500		10,365,701		40.76

(a)	Excludes a refund of $2.7 million of gas transmission reservation costs recorded in the fourth quarter of 2007.

Other operations expense

Other operations expense increased $2.5 million, or 5.3%, for the three months ended March 31, 2009 compared to the same period last year due to (i) increased Palo Verde operations expense of $1.3 million, (ii) increased operations expense at our fossil-fueled generating plants of $0.8 million, and (iii) increased transmission operations expense of $0.7 million.

Other operations expense increased $3.8 million, or 1.9%, for the twelve months ended March 31, 2009 compared to the same period last year primarily due to (i) increased Palo Verde operations expense of $7.6 million, (ii) increased distribution operations expense of $1.8 million, and (iii) increased operations expense at our fossil-fueled generating plants of $1.6 million. These increases were partially offset by (i) decreased administrative and general expenses of $5.8 million primarily due to lower pension and other post-retirement benefits expenses reflecting an increase in the discount rate for the associated liabilities in 2008 and (ii) decreased customer accounts operations expense of $1.0 million primarily due to decreased payroll costs.

Maintenance expense

Maintenance expense decreased $4.1 million, or 23.6%, for the three months ended March 31, 2009 compared to the same period last year primarily due to (i) decreased maintenance expense at our fossil-fueled generating plants of $2.0 million as a result of the timing of planned maintenance, (ii) decreased Palo Verde maintenance expense of $1.7 million due to the timing of maintenance expenses associated with the spring refueling outages in 2009 compared to 2008, and (iii) decreased distribution maintenance expense of $0.5 million. Maintenance expense was relatively unchanged for the twelve months ended March 31, 2009 compared to the same period last year.

Depreciation and amortization expense

Depreciation and amortization expense decreased $0.9 million, or 5.0%, for the three months ended March 31, 2009 compared to the same period last year primarily due to completing the amortization of certain fair value adjustments in December 2008. Depreciation and amortization expense increased $3.7 million, or 5.2%, for the twelve months ended March 31, 2009 compared to the same period last year due to increases in depreciable plant balances.

Taxes other than income taxes

Taxes other than income taxes increased $0.7 million, or 6.3%, for the three months ended March 31, 2009 compared to the same period last year primarily due to higher revenue related taxes in Texas resulting from a higher fixed fuel factor and the collection of fuel surcharges. Taxes other than income taxes increased $1.6 million, or 3.3%, for the twelve months ended March 31, 2009 compared to the same period last year primarily due to revenue related taxes in Texas and increased property taxes in Texas.

Other income (deductions)

Other income (deductions) increased $0.3 million, or 50.6% for the three months ended March 31, 2009 compared to the same period last year due to increased allowance for equity funds used during construction (“AEFUDC”) of $0.8 million due to higher balances of construction work in progress in 2009 and (ii) a $1.0 million increase in interest income included in fuel surcharges in Texas. These increases were partially offset by a $2.3 million decrease in income from our decommissioning trust funds including $1.8 million of impairments in equity investments when compared to the same period last year.

Other income (deductions) remained relatively level for the twelve months ended March 31, 2009 compared to the same period last year and included a $6.2 million decrease in income from our decommissioning trust funds including $8.8 million of impairments in equity investments when compared to the same period last year. This decrease was partially offset by increased AEFUDC of $2.6 million due to higher balances of construction work in progress in 2009 and (ii) a $3.3 million increase in interest income included in the surcharge recovery of under-collection of deferred fuel.

Interest charges (credits)

Interest charges (credits) increased $4.0 million, or 49%, for the three months ended March 31, 2009 compared to the same period last year primarily due to (i) a $2.8 million increase in interest related to the issuance of our 7.50% Senior Notes in June 2008, (ii) a $1.7 million increase in interest on our auction rate pollution control bonds and (iii) reduced capitalized interest on our nuclear fuel inventory due to lower interest rates charged on our revolving credit facility. The interest rates bid in the weekly auctions of our pollution control bonds increased substantially in 2008. These auction rate pollution control bonds were refunded and reissued at a fixed interest rate of 7.25% on March 26, 2009. The increase in interest charges (credits) was partially offset by a $0.8 million increase in allowance for funds used during construction (“AFUDC”) as a result of increased construction work in progress subject to AFUDC.

Interest charges (credits) for the twelve month period ended March 31, 2009 increased $13.5 million, or 42.6%, compared to the same period last year primarily due to (i) a $9.3 million increase in interest related to the issuance of our 7.50% Senior Notes in June 2008; (ii) a $5.4 million increase in interest related to our auction rate pollution control bonds discussed above and (iii) reduced capitalized interest on our nuclear fuel inventory due to lower interest rates charged on our revolving credit facility. The increase in interest charges (credits) was partially offset by a $1.5 million increase in AFUDC as a result of increased construction work in progress subject to AFUDC.

Income tax expense

Income tax expense decreased by $2.1 million, or 29.5%, in the first quarter of 2009 compared to the first quarter of 2008 primarily as a result of decreased pre-tax income. Income tax expense increased by $2.6 million, or 7.8%, in the twelve months ended March 31, 2009 compared to the twelve months ended March 31, 2008 due to increased pre-tax income and a reduction in permanent tax differences associated with other post-retirement benefits in the 2008 period.

New accounting standards

Effective January 1, 2009, we adopted the FASB Staff Position EITF 03-6-1 “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities,” (“FSP EITF 03-6-1”) which requires a public entity to include share-based compensation awards that qualify as participating securities in both basic and dilutive earnings per share. A share-based compensation award is considered a participating security if it receives non-forfeitable dividends or may participate in undistributed earnings with common stock. We award unvested restricted stock which qualifies as participating securities, and have reflected the effects of FSP EITF 03-6-1 on our basic and diluted earnings per share for all periods presented.

Effective January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements.” The statement defines fair value, outlines a framework for measuring fair value, and details the required disclosures about fair value measurements. On April 9, 2009, the FASB issued FASB Staff Position 157-4 (“FSP 157-4”). FSP 157-4 provides additional guidance for estimating fair value in accordance with SFAS No. 157, when the volume and level of activity for the asset or liability have significantly decreased. FSP 157-4 is effective for interim and annual periods ending after June 15, 2009 and shall be applied prospectively. FSP 157-4 is not expected to have a significant impact on our consolidated financial statements. See Note K of Notes to Consolidated Financial Statements.

On April 9, 2009, the FASB issued FASB Staff Position 107-1 and Accounting Principles Board Opinion 28-1 (“FSP 107-1 and APB 28-1”). FSP 107-1 and APB 28-1 amend SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” and APB Opinion No. 28, “Interim Financial Reporting.” FSP 107-1 and APB 28-1 require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. FSP 107-1 and APB 28-1 are effective for interim reporting periods ending after June 15, 2009. FSP 107-1 and APB 28-1 will not impact amounts reported in our consolidated financial statements but will result in additional footnote disclosure.

Inflation. For the last several years, inflation has been relatively low and, therefore, has had minimal impact on our results of operations and financial condition.

Liquidity and Capital Resources

We continue to maintain a strong capital structure in order to provide us with an opportunity to access the capital markets at a reasonable cost. At March 31, 2009, our capital structure, including common stock, long-term debt, the current portion of long-term debt and financing obligations, consisted of 45.5% common stock equity and 54.5% debt. In June 2008, we issued $150 million of 7.5% Senior Notes to meet current and future cash requirements. The net proceeds from the 7.5% Senior Notes were used to pay down working capital borrowings under our credit facility and the remaining proceeds are expected to fund our construction program through most of 2009. We believe that we will have adequate liquidity through our current cash balances, cash from operations, and our credit facility to meet all of our anticipated cash requirements through 2009. At March 31, 2009, we had a balance of $102.0 million in cash and cash equivalents. Substantially all of our cash and cash equivalents are currently held in federally insured accounts.

Our principal liquidity requirements in the near-term are expected to consist of capital expenditures to expand and support electric service obligations, expenditures for nuclear fuel inventory, interest payments on our indebtedness and operating expenses including fuel costs, non-fuel operation and maintenance costs and taxes. In addition, we may repurchase common stock in the future.

Capital Requirements. During the three months ended March 31, 2009, our cash requirements primarily consisted of capital expenditures and operations and maintenance costs. Projected utility construction expenditures will consist primarily of expanding and updating our transmission and distribution systems, adding new generation, and making capital improvements and replacements at Palo Verde and other generating facilities. We are constructing Newman Unit 5, a 288 MW gas-fired combined cycle combustion turbine generating unit, which is scheduled to be completed in two phases at an estimated cost of approximately $245 million. The first phase of Newman Unit 5 is expected to be completed by June 2009 and the second phase is currently expected to be completed before the summer of 2011. As of March 31, 2009, we had expended $98 million on Newman Unit 5. See Part I, Item 1, “Business –Construction Program” in our 2008 Form 10-K. Capital expenditures were $47.3 million in the three months ended March 31, 2009 compared to $44.0 million in the three months ended March 31, 2008.

Capital requirements have also been impacted by the requirement to fund fuel costs prior to their recovery through fuel recovery mechanisms in Texas and New Mexico and to a small extent our sales for resale customer. We recover actual fuel costs from customers through fuel adjustment mechanisms in Texas, New Mexico, and from our sales for resale customer. We record deferred fuel revenues for the under-recovery or over-recovery of fuel costs until they can be recovered from or refunded to customers. In Texas, fuel costs are recovered through a fixed fuel factor which may be adjusted three times a year. In the three months ending March 31, 2009 we over recovered our current fuel costs by $23.4 million due to a decline in natural gas prices since the current Texas fixed fuel factor was implemented in October 2008. We also collected $12.3 million of deferred fuel revenues, including interest, in the first quarter of 2009 through two fuel surcharges implemented in May and October 2008. At March 31, 2009, we had a fuel under-recovery balance of $12.2 million including $10.5 million in Texas and $1.7 million in New Mexico.

At current gas prices, we expect to continue to over-recover fuel costs in Texas until the fixed fuel factor is revised. Our first fuel surcharge will be completed in April 2009, and the PUCT issued an order on April 23, 2009, terminating our second fuel surcharge effective in May 2009. We requested the

termination of the second fuel surcharge as our current fixed fuel factor is expected to result in the recovery of our outstanding fuel under-recovery balances based on current natural gas prices.

Our capital requirements for nuclear fuel are financed through a trust that borrows under our $200 million credit facility to acquire and process the nuclear fuel. Borrowings under the credit facility for nuclear fuel were $102.7 million as of March 31, 2009 and $95.6 million as of March 31, 2008. Up to $120 million of the credit facility may be used to finance nuclear fuel. Amounts not drawn for nuclear fuel are available for general corporate purposes.

The Company does not pay dividends on common stock. Since 1999, we have repurchased approximately 19.8 million shares of common stock at an aggregate cost of $279.3 million, including commissions. No shares were repurchased during the first quarter of 2009. As of March 31, 2009, 1,521,366 shares remain available for repurchase under the currently authorized program. We may make purchases of our stock in the future pursuant to our stock repurchase plan at open market prices and may engage in private transactions, where appropriate. The repurchased shares will be available for issuance under employee benefit and stock incentive plans, or may be retired.

Our cash requirements for federal and state income taxes are impacted by changes in net income as well as when revenues are reflected in taxable income and expenses are deducted from taxable income. Since deferred fuel revenues are not taxable until collected from customers, the collection of fuel under-recoveries will increase income taxes otherwise payable in 2009.

We continually evaluate our funding requirements related to our retirement plans, other postretirement benefit plans, and decommissioning trust funds. We contributed $2.3 million of the projected $6.3 million 2009 annual contribution to our retirement plans during the three months ended March 31, 2009. In the three months ended March 31, 2009, we contributed $1.1 million of the projected $3.4 million 2009 annual contribution to our other postretirement benefit plan, and $2.0 million of the projected $7.9 million 2009 annual contribution to our decommissioning trust funds. We are in compliance with the funding requirements of the federal government for our benefit plans and decommissioning trust. We will continue to review our funds for these plans in order to meet our future obligations.

Capital Resources. Cash flow from operations funded our capital requirements during the first three months of 2009. Cash generated from operations increased $25.1 million in the three months ended March 31, 2009 compared to the same period in 2008 primarily due to the collection of deferred fuel revenues in 2009 net of related tax impacts. We expect that a significant portion of our construction expenditures will continue to be financed with internal sources of funds, including the collection of the remaining balance of deferred fuel revenues.

We issued $150 million of 7.5% Senior Notes in June 2008 to meet our current and future cash requirements. The net proceeds of $148.7 million from the 7.50% Senior Notes were used to repay $44.0 million of working capital borrowings under our credit facility. The remaining proceeds are expected to help fund our construction program through most of 2009. We believe we will have adequate liquidity through our current cash balances, cash from operations, and our credit facility to meet all of our anticipated cash requirements through 2009. Our Senior Notes are rated “Baa2” by Moody’s and “BBB” by Standard & Poors. We continue to maintain a $200 million credit facility to provide funds for the purchase of nuclear fuel and to provide liquidity to meet our capital requirements before they can be financed with long-term capital sources. At March 31, 2009, we had an outstanding balance of $102.7 million on our credit facility, all of which pertained to our purchases of nuclear fuel.

Pollution Control Bonds Interest Rates. On March 26, 2009, we completed a refunding transaction whereby the 2005 Series B $63.5 million and 2005 Series C $37.1 million bonds were refunded and replaced by 2009 Series A Bonds in the aggregate principal amount of $63.5 million (the “2009 Series A Bonds”) and 2009 Series B Bonds in the aggregate principal amount of $37.1 million (the “2009 Series B Bonds”) which were issued as unsecured obligations and both have a fixed interest rate of 7.25%. The 2009 Series A Bonds will mature on February 1, 2040. The 2009 Series B Bonds will mature on April 1, 2040.

Off-Balance Sheet Arrangements

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

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk due to changes in interest rates, equity prices and commodity prices. See our 2008 Form 10-K, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” for a complete discussion of the market risks we face and our market risk sensitive assets and liabilities. As of March 31, 2009, there have been no material changes in the market risks we faced or the fair values of assets and liabilities disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our 2008 Form 10-K.

Item 4.

Controls and Procedures

Evaluation of disclosure controls and procedures . Under the supervision and with the participation of our management, including our chief executive officer and our principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities and Exchange Act of 1934. These controls and procedures are designed to ensure that material information relating to the company and its subsidiaries is communicated to the chief executive officer and the principal financial officer by others within those entities. Based on that evaluation, our chief executive officer and our principal financial officer concluded that, as of March 31, 2009, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to the chief executive officer and the principal financial officer, and recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting in connection with the evaluation required by paragraph (d) of the Securities Exchange Act of 1934 Rules 13a-15 or 15d-15, that occurred during the quarter ended March 31, 2009, that materially affected, or that were reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

We hereby incorporate by reference the information set forth in Part I of this report under Notes B and I of Notes to Consolidated Financial Statements.

Item 1A.

Risk Factors

Our 2008 Form 10-K includes a detailed discussion of our risk factors.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(c) Issuer Purchases of Equity Securities.

In November 2007, our Board of Directors authorized a new stock repurchase program permitting the repurchase of up to 2.0 million additional shares of its outstanding common stock. Approximately 1.5 million shares remain authorized to be repurchased under the program. No shares were repurchased during the first quarter of 2009.

Item 6.

Exhibits

See Index to Exhibits incorporated herein by reference.

SIGNATURES

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


		EL PASO ELECTRIC COMPANY

By:		/s/ DAVID G. CARPENTER
		David G. Carpenter
		Vice President-Regulatory Services and Controller (Duly Authorized Officer and Principal Financial Officer)

Dated: May 6, 2009

EL PASO ELECTRIC COMPANY

INDEX TO EXHIBITS


Exhibit Number		Exhibit
4.01		Indenture of Trust between Maricopa County, Arizona Pollution Control Corporation and Union Bank, N.A. as Trustee dated as of March 1, 2009 relating to $63,500,000 Maricopa County, Arizona Pollution Control Corporation Pollution Control Refunding Revenue Bonds 2009 Series A (El Paso Electric Company Palo Verde Project).

4.02		Loan Agreement dated March 1, 2009 between Maricopa County, Arizona Pollution Control Corporation and El Paso Electric Company relating to the Pollution Control Bonds referred to in Exhibit 4.01.

4.03		Indenture of Trust between Maricopa County, Arizona Pollution Control Corporation and Union Bank, N.A., as Trustee dated as of March 1, 2009 relating to $37,100,000 Maricopa County, Arizona Pollution Control Corporation Pollution Control Refunding Revenue Bonds 2009 Series B (El Paso Electric Company Palo Verde Project).

4.04		Loan Agreement dated March 1, 2009 between Maricopa County, Arizona Pollution Control Corporation and El Paso Electric Company relating to the Pollution Control Bonds referred to in Exhibit 4.03.

4.05		Bond Purchase Agreement dated March 19, 2009, among El Paso Electric Company, J.P. Morgan Securities, Inc., BNY Mellon Capital Markets, LLC, Maricopa County, Arizona Pollution Control Corporation, relating to the Pollution Control Bonds referred to in Exhibit 4.01 and 4.03.

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

††10.02		Amended Confirmation of Power Purchase Transaction, dated March 30, 2009, between the Company and Credit Suisse Energy LLC. Amendment to Exhibit 10.44-01 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

††10.03		Amended Confirmation of Power Sales Transaction, dated March 31, 2009, between the Company and Imperial Irrigation District. Amendment to Exhibit 10.45 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

10.04		El Paso Electric Company Excess Benefit Plan, dated as of December 31, 2008.

15		Letter re Unaudited Interim Financial Information

EL PASO ELECTRIC COMPANY

INDEX TO EXHIBITS


Exhibit Number		Exhibit
31.01		Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.01		Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

†	In lieu of non-employee director cash compensation, four agreements, dated as of January 1, 2009 and April 1, 2009, substantially identical in all material respects to this Exhibit, have been entered into with Kenneth R. Heitz and Patricia Z. Holland-Branch, directors of the Company.

††

Confidential treatment has been requested for the redacted portions of these Exhibits. The copies filed omit the information subject to the confidentiality request. Omissions are designated as “****”. A complete version of these Exhibits has been filed separately with the Securities and Exchange Commission.

Exhibit 4.01

EXECUTION COPY

INDENTURE OF TRUST

between

MARICOPA COUNTY, ARIZONA POLLUTION CONTROL CORPORATION

and

UNION BANK, N.A.,

as Trustee

Dated as of March 1, 2009

Relating to

$63,500,000

Maricopa County, Arizona Pollution Control Corporation

Pollution Control Refunding Revenue Bonds

2009 Series A

(El Paso Electric Company Palo Verde Project)

TABLE OF CONTENTS


		Page

ARTICLE I DEFINITIONS

Section 1.01	Definitions	3
Section 1.02	Number and Gender	19
Section 1.03	Articles, Sections, Etc	19
Section 1.04	Content of Certificates and Opinions	19
Section 1.05	Findings	19

ARTICLE II THE BONDS

Section 2.01	Authorization and Terms of Bonds	20
Section 2.02	Execution of Bonds	33
Section 2.03	Transfer and Exchange of Bonds	34
Section 2.04	Bond Register	35
Section 2.05	Bonds Mutilated Lost Destroyed or Stolen	35
Section 2.06	Disposition of Cancelled Bonds	36
Section 2.07	CUSIP Number	36
Section 2.08	Other Obligations	36
Section 2.09	Temporary Bonds	36

ARTICLE III ISSUANCE OF BONDS

Section 3.01	Authentication and Delivery of Bonds	36
Section 3.02	Application of Proceeds of Bonds	37
Section 3.03	Payment of Principal and Interest	37

ARTICLE IIIA ARS PROVISIONS

Section 3A.01	Amendments with Conversion to Applicable ARS Rate	37
Section 3A.02	Payments with Respect to ARS	38
Section 3A.03	Calculation of All-Hold Rate	40
Section 3A.04	Notification of Rates, Amounts and Payment Dates	40
Section 3A.05	Adjustments with Respect to ARS Provisions	41
Section 3A.06	Maximum Bond Interest Rate, Non-Payment Rate	41
Section 3A.07	Auction Agent	42
Section 3A.08	Broker-Dealers	43
Section 3A.09	Provisions Relating to Auctions	43
Section 3A.10	Agreement of Holders	43
Section 3A.11	Changes in Auction Period or Auction Date	43
Section 3A.12	Conversion of Bonds to Applicable ARS Rate	45
Section 3A.13	Conversion to from ARS to Other Interest Rate Modes	45


ARTICLE IV REDEMPTION AND PURCHASE OF BONDS

Section 4.01	Redemption of Bonds	46
Section 4.02	Selection of Bonds to be Redeemed	49
Section 4.03	Notice for Redemption	49
Section 4.04	Partial Redemption of Bonds	50
Section 4.05	Effect of Redemption	51
Section 4.06	Payment of Redemption Price	51
Section 4.07	Bank Purchase Option	52
Section 4.08	Purchase of Bonds	54
Section 4.09	Delivery of Tendered Bonds	57
Section 4.10	Bonds Deemed Purchased	57
Section 4.11	Payment Procedure Pursuant to Bond Insurance Policy	57
Section 4.12	Purchase in Lieu of Redemption	59

ARTICLE V THE BOND FUND

Section 5.01	Creation of Bond Fund	59
Section 5.02	Deposits into Bond Fund	59
Section 5.03	Use of Moneys in Bond Fund	59
Section 5.04	Credit Facility	60
Section 5.05	Custody of Bond Fund; Withdrawal of Moneys	62
Section 5.06	Bonds Not Presented for Payment	62
Section 5.07	Moneys Held in Trust	62
Section 5.08	Payment to the Bank and to the Borrower	63

ARTICLE VI PURCHASE FUND

Section 6.01	Tender Agent	63
Section 6.02	Notice of Bonds Delivered for Purchase; Purchase of Bonds	64

ARTICLE VII INVESTMENTS

Section 7.01	Investments	66

ARTICLE VIII GENERAL COVENANTS

Section 8.01	Limited Obligation; Payment of Principal and Interest	66
Section 8.02	Performance of Agreements; Authority	67
Section 8.03	Maintenance of Corporate Existence; Compliance with Laws	67
Section 8.04	Enforcement of Borrower’s Obligations under the Agreement	67
Section 8.05	Further Assurances	67
Section 8.06	No Disposition or Encumbrance of Issuer’s Interests	67
Section 8.07	Trustee’s Access to Books Relating to Facilities	68
Section 8.08	Filing of Financing Statements	68
Section 8.09	Tax Covenant	68
Section 8.10	Notices by Trustee	68
Section 8.11	No Transfer of Credit Facility	69

ARTICLE IX DEFEASANCE


Section 9.01	Defeasance	69
Section 9.02	Survival of Certain Provisions	70

ARTICLE X DEFAULTS AND REMEDIES

Section 10.01	Events of Default	70
Section 10.02	Remedies	73
Section 10.03	Restoration to Former Position	73
Section 10.04	Bond Insurer’s Right to Direct Proceedings	74
Section 10.05	Limitation on Owners’ Right to Institute Proceedings	74
Section 10.06	No Impairment of Right to Enforce Payment	74
Section 10.07	Proceeding by Trustee Without Possession of Bonds	74
Section 10.08	No Remedy Exclusive	74
Section 10.09	No Waiver of Remedies	75
Section 10.10	Application of Moneys	75
Section 10.11	Severability of Remedies	76
Section 10.12	Waivers of Events of Default	77
Section 10.13	No Obligation of Issuer to Act	77

ARTICLE XI TRUSTEE, PAYING AGENT, REGISTRAR

Section 11.01	Acceptance of Trusts	77
Section 11.02	Trustee Not Responsible for Recitals, Maintenance, Insurance, etc	78
Section 11.03	Limitations on Liability	78
Section 11.04	Compensation, Expenses and Advances	79
Section 11.05	Notice of Events of Default	79
Section 11.06	Action by Trustee	80
Section 11.07	Good Faith Reliance	80
Section 11.08	Dealings in Bonds and with the Issuer and the Borrower	80
Section 11.09	Several Capacities	81
Section 11.10	Construction of Indenture	81
Section 11.11	Resignation of Trustee	81
Section 11.12	Removal of Trustee	81
Section 11.13	Appointment of Successor Trustee	81
Section 11.14	Qualifications of Successor Trustee	82
Section 11.15	Judicial Appointment of Successor Trustee	82
Section 11.16	Acceptance of Trusts by Successor Trustee	82
Section 11.17	Successor by Merger or Consolidation	82
Section 11.18	Standard of Care	83
Section 11.19	Notice of Event of Default	83
Section 11.20	Intervention in Litigation	83
Section 11.21	Paying Agent	83
Section 11.22	Qualifications of Paying Agent; Resignation; Removal	84
Section 11.23	Registrar	84
Section 11.24	Qualifications of Registrar; Resignation; Removal	85

iii


Section 11.25	Appointment of Co-Trustee	85
Section 11.26	Notices to Rating Agencies	86

ARTICLE XII EXECUTION OF INSTRUMENTS BY OWNERS AND PROOF OF OWNERSHIP OF BONDS

Section 12.01	Execution of Instruments Proof of Ownership	86

ARTICLE XIII MODIFICATION OF INDENTURE DOCUMENTS

Section 13.01	Limitations	87
Section 13.02	Modification without Consent of Owners	87
Section 13.03	Modification with Consent of Owners	88
Section 13.04	Effect of Supplemental Indenture	89
Section 13.05	Consent of the Borrower, the Bank and the Bond Insurer	89
Section 13.06	Amendment of Agreement without Consent of Owners	89
Section 13.07	Amendment of Agreement with Consent of Owners	90
Section 13.08	Issuance of Bonds Under Other Indentures: Recognition of Prior Pledges	90

ARTICLE XIV REMARKETING AGENT; TENDER AGENT; PURCHASE AND REMARKETING OF BONDS

Section 14.01	Remarketing Agent and Tender Agent	91
Section 14.02	Qualifications of Remarketing Agent and Tender Agent; Resignation; Removal	91
Section 14.03	Remarketing of Bonds; Notice of Interest Rates	92
Section 14.04	Delivery of Bonds	92
Section 14.05	Drawings on Credit Facility	94
Section 14.06	Delivery of Proceeds of Sale	94

ARTICLE XV MISCELLANEOUS

Section 15.01	Indenture to Bind and Inure to Benefit of Successors to Issuer	94
Section 15.02	Parties in Interest	94
Section 15.03	Severability	95
Section 15.04	No Personal Liability of Issuer Under Indenture	95
Section 15.05	Bonds Owned by the Issuer or the Borrower	95
Section 15.06	Governing Law	95
Section 15.07	Notices	95
Section 15.08	Non-Business Days	96
Section 15.09	Opinions	97
Section 15.10	Headlines; Table of Contents	97
Section 15.11	Execution in Several Counterparts	97
Section 15.12	Bond Insurer as Third-Party Beneficiary	97
Section 15.13	Additional Covenants of the Issuer to Bond Insurer	97
Section 15.14	Bank and Bond Insurer	97
Section 15.15	Statutory Notice	97


Exhibit A – Form of Bond		A-1
Exhibit B – Auction Procedures		B-1

THIS INDENTURE OF TRUST is made and entered into as of March 1, 2009, by and between MARICOPA COUNTY, ARIZONA POLLUTION CONTROL CORPORATION, an Arizona nonprofit corporation designated as a political subdivision under the laws of the State of Arizona incorporated for and with the approval of the County of Maricopa, Arizona, pursuant to the provisions of the Constitution of the State of Arizona and Title 9, Chapter 12, Arizona Revised Statutes, enacted by Chapter 69, Section 2, Laws of Arizona of 1972, renumbered as Title 35, Chapter 6, Arizona Revised Statutes, by Chapter 281, Section 2, Laws of Arizona of 1986, and all acts supplemental thereto or, amendatory thereof (hereinafter, together with any successor to its functions, called the “Issuer”), and Union Bank, N.A., a national banking association authorized to exercise corporate trust powers, with a principal corporate trust office in Los Angeles, California (hereinafter, together with any successor in such capacity, called the “Trustee”).

W I T N E S S E T H:

WHEREAS, Title 35, Chapter 6, Arizona Revised Statutes (formerly Title 9, Chapter 12, Arizona Revised Statutes, enacted by Chapter 69, Section 2, Laws of Arizona of 1972), as amended (hereinafter called the “Act”), empowers any pollution control corporation organized pursuant to Article 1 of the Act to issue revenue bonds in accordance with Article 2 of the Act and to make secured or unsecured loans for the purpose of financing or refinancing the acquisition, construction, improvement or equipping of pollution control facilities, to charge and collect interest on such loans and pledge the proceeds of loan agreements as security for the payment of the principal of and interest on bonds, or designated issues of bonds, issued by the corporation and any agreements made in connection therewith, whenever the board of directors finds such loans to be in furtherance of the purposes of the corporation; and

WHEREAS, Chapter 69, Section 1, Laws of Arizona of 1972, declares it to be the purpose of the Act to authorize the incorporation in the several municipalities and counties of the State of Arizona of corporations which shall constitute political subdivisions of the State, to finance the acquisition and installation of, or the construction and leasing of, properties, machinery and equipment intended to prevent or limit air, water and other forms of pollution for the purpose of protecting the health and welfare of the citizens of the State of Arizona, and to facilitate compliance with existing or future air, water and other quality standards designed to improve the environment, and declares that such corporations shall serve a public purpose and perform an essential governmental function; and

WHEREAS, in response to an application by four qualified electors of the County of Maricopa, Arizona (the “County”), a political subdivision of the State of Arizona, the Board of Supervisors of said County on December 5, 1983, adopted a resolution by which it determined that it was wise, expedient, advisable and in the public interest that said application be approved, approved said application, and authorized said four electors to proceed with the incorporation of the Issuer as a pollution control corporation for said County, all in accordance with Section 35¬802 of the Act to issue bonds and to carry out the other functions and fulfill the purposes of the Issuer; and

WHEREAS, the Issuer was thereupon organized and incorporated in accordance with the provisions of the Act, and, on December 5, 1983, the Articles of Incorporation of the Issuer were

filed with the Arizona Corporation Commission, in accordance with Section 35-809 of the Act; and

WHEREAS, the Issuer has heretofore issued and sold its $63,500,000 aggregate principal amount of Pollution Control Refunding Revenue Bonds, 2005 Series B (El Paso Electric Company Palo Verde Project) (the “Prior Bonds”), the proceeds of which were used to refinance a portion of the costs of acquisition, construction, improvement or equipping of the Project; and

WHEREAS, the Board of Directors of the Issuer on March 17, 2009 determined to sell additional revenue bonds of the Issuer to provide the moneys necessary to redeem and refund the outstanding principal amount of the Prior Bonds; and

WHEREAS, appropriate certifications have been received stating that the portion of the Generating Station which constitutes the pollution control facilities, as described in Exhibit A to the Agreement (defined below) (the “Generating Station”), as designed, are in furtherance of the purpose of abating or controlling atmospheric or water pollutants or contaminants resulting from the generation of electricity at the Generating Station; and

WHEREAS, the Issuer and the Borrower have executed and delivered that certain Loan Agreement, dated as of March 1, 2009 (hereinafter called the “Agreement”), setting forth the undertaking by the Issuer to issue and sell its revenue bonds under the Act (hereinafter called the “Bonds”), and to lend the proceeds of the Bonds to the Borrower to provide a portion of the moneys necessary to redeem and refund the outstanding principal amount of Prior Bonds; and

WHEREAS, in the Agreement the Borrower releases the Issuer and agrees that the Issuer shall not be liable for, and will indemnify and hold the Issuer and the Trustee harmless from, certain matters; and

WHEREAS, certain findings and determinations relating to the Agreement and the Generating Station and the Project have heretofore been made and are set forth in this Indenture; and

WHEREAS, the execution and delivery of the Agreement and this Indenture and the issuance of the Bonds have been in all respects duly and validly authorized, and duly adopted and approved by resolutions of the Board of Directors of the Issuer, and the Project, the plan of financing for the Project and the issuance of the Bonds have been duly approved by the Board of Supervisors of the County, as required by the Act and otherwise; and

WHEREAS, all other things necessary to make the Bonds, when issued, executed and delivered by the Issuer and authenticated by the Trustee pursuant to this Indenture, the valid, legal and binding limited obligations of the Issuer, and to constitute this Indenture a valid pledge and assignment of all right, title and interest of the Issuer in the Agreement (except as to certain payments to the Issuer under provisions for indemnification of, and reimbursement of expenses of, the Issuer), and of certain income and revenues derived from the Agreement, for the payment of the principal of and interest on the Bonds authenticated and delivered under this Indenture, and the creation, execution and issuance of the Bonds, subject to the terms hereof, have in all respects been duly authorized;

NOW, THEREFORE, the Issuer, in consideration of the covenants herein contained and of the purchase and acceptance of the Bonds by the holders thereof, in order to secure the payment of all Bonds at any time Outstanding under this Indenture, according to their tenor and effect, and the performance and observance of all the covenants and conditions in the Bonds and herein contained, and to declare the terms and conditions upon and subject to which the Bonds are issued and secured, does grant a security interest in and pledge to the Trustee (as hereinafter defined), and to its successors and assigns forever, the Trust Estate (as hereinafter defined) for the equal and proportionate benefit, security and protection of all holders and owners of the Bonds issued under and secured by this Indenture without privilege, priority or distinction as to the lien or otherwise of any of the Bonds over any other of the Bonds, all upon the terms stated in this Indenture.

ARTICLE I

DEFINITIONS

Section 1.01 Definitions . The terms defined in this Article I shall, for all purposes of this Indenture and of any supplemental indenture hereto have the meanings herein specified, unless the context clearly requires otherwise. Capitalized terms used herein, defined in the Agreement and not otherwise defined herein, shall have the meaning specified in the Agreement.

“Act” shall mean Title 35, Chapter 6, Arizona Revised Statutes (formerly Title 9, Chapter 12, Arizona Revised Statutes, enacted by Chapter 69, Section 2, Laws of Arizona of 1972), and all acts supplemental thereto or amendatory thereof.

“Agreement” shall mean the Loan Agreement, of even date herewith, between the Issuer and the Borrower and relating to the loan of the proceeds of the Bonds, as originally executed or as it may from time to time be supplemented or amended.

“All-Hold Rate” shall mean, on any date of determination, the interest rate per annum equal to 65% of the Index on such date; provided, that in no event shall the All-Hold Rate be more than the Maximum Lawful Rate.

“Alternate Credit Support” shall mean any letter of credit, credit facility, insurance policy, guarantee or other credit support agreement or security mechanism provided by the Borrower in accordance with Section 6.08 of the Agreement and any extension thereof.

“Applicable ARS Rate” shall mean, with respect to ARS, the rate per annum at which interest accrues on the Bonds for any Auction Period.

“ARS” or “Auction Rate Securities” shall mean, on any date, the Bonds when bearing interest as auction rate securities as provided in Article IIIA of this Indenture and the Auction Procedures applicable thereto.

“ARS Beneficial Owner” shall mean the Person who is the beneficial owner of ARS according to the records of (i) DTC or its participants or a successor Securities Depository while such ARS are in book-entry form, or (ii) the Trustee while such ARS are not in book-entry form.

“ARS Defaulted Interest” shall mean interest on any ARS which is payable but is not punctually paid or duly provided for on any ARS Interest Payment Date.

“ARS Interest Payment Date” shall mean, when used with respect to ARS in an Auction Period other than a Special Auction Period, the Business Day immediately following each Auction Period, and, when used with respect to a Special Auction Period of seven days or more but fewer than 183 days, the Business Day immediately following such Special Auction Period, and, when used with respect to a Special Auction Period of 183 days or more, each February 1 and August 1 and on the Business Day immediately following such Special Auction Period.

“ARS Interest Period” shall mean the period commencing on and including an ARS Interest Payment Date and ending on but excluding the next succeeding ARS Interest Payment Date; provided, that the first ARS Interest Period within each ARS Interest Rate Period shall commence on and include the Issue Date or the Conversion Date, as the case may be.

“ARS Interest Rate Period” shall mean each period during which the Bonds are ARS.

“ARS Maximum Rate” shall mean 15% per annum; provided that in no event shall the ARS Maximum Rate be more than the Maximum Lawful Rate.

“ARS Payment Default” shall mean (a) (i) a default by the Issuer in the due and punctual payment of any installment of interest on ARS, or (ii) a default by the Issuer in the due and punctual payment of any principal of ARS at stated maturity or pursuant to a mandatory redemption and (b) a payment default by the Bond Insurer under the Bond Insurance Policy.

“ARS Rating Agency” shall mean Moody’s or S&P, or if any of Moody’s or S&P discontinues its securities rating service, then such other nationally recognized securities rating agency as may be specified by the Broker-Dealer with the consent of the Borrower.

“Auction” shall mean the implementation of the Auction Procedures on an Auction Date.

“Auction Agent” shall mean the Auction Agent unless and until a Substitute Auction Agent Agreement becomes effective, after which “Auction Agent” shall include both the initial Auction Agent (if it is continuing to act in such capacity under this Indenture) and each such Substitute Auction Agent so acting.

“Auction Agent Agreement” shall mean, on any date, each Auction Agent Agreement and each Substitute Auction Agent Agreement, in each case as from time to time in effect.

“Auction Agent Fee” shall have the meaning provided in each Auction Agent Agreement.

“Auction Date” shall mean, with respect to ARS, the Business Day next preceding the first day of each Auction Period, other than

(i) each Auction Period commencing after the ownership of such ARS is no longer maintained in book-entry form by a Securities Depository;

(ii) each Auction Period commencing after the occurrence and during the continuance of an ARS Payment Default; or

(iii) any Auction Period commencing less than two Business Days after the cure or waiver of an ARS Payment Default.

The Auction Date determined as provided in this definition may be adjusted as provided in Section 3A.11(b).

“Auction Period” shall mean (i) with respect to ARS in a seven-day mode, any of (A) a period, generally of seven days, beginning on and including a Monday (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on a Sunday) and ending on and including the Sunday thereafter (unless such Sunday is not followed by a Business Day, in which case ending on and including the next succeeding day which is followed by a Business Day), (B) a period, generally of seven days, beginning on and including a Tuesday (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on a Monday) and ending on and including the Monday thereafter (unless such Monday is not followed by a Business Day, in which case ending on and including the next succeeding day which is followed by a Business Day), (C) a period, generally of seven days, beginning on and including a Wednesday (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on a Tuesday) and ending on and including the Tuesday thereafter (unless such Tuesday is not followed by a Business Day, in which case ending on and including the next succeeding day which is followed by a Business Day), (D) a period, generally of seven days, beginning on and including a Thursday (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on a Wednesday) and ending on and including the Wednesday thereafter (unless such Wednesday is not followed by a Business Day, in which case ending on and including the next succeeding day which is followed by a Business Day) or (E) a period, generally of seven days, beginning on and including a Friday (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on a Thursday) and ending on and including the Thursday thereafter (unless such Thursday is not followed by a Business Day, in which case ending on and including the next succeeding day which is followed by a Business Day); (ii) with respect to ARS in a 28-day mode, any of (A) a period, generally of 28 days, beginning on and including a Monday (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on a Sunday) and ending on and including the fourth Sunday thereafter (unless such Sunday is not followed by a Business Day, in which case ending on and including the next succeeding day which is followed by a Business Day), (B) a period, generally of 28 days, beginning on and including a Tuesday (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on a Monday) and ending on and including the fourth Monday thereafter (unless such Monday is not followed by a Business Day, in which case ending on and including the next succeeding day followed by a Business Day), (C) a period, generally of 28 days, beginning on and including a Wednesday (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on a Tuesday) and ending on and including the fourth Tuesday thereafter (unless such Tuesday is not followed by a Business Day, in which case ending on and including the next succeeding day followed by a Business Day), (D) a period, generally of 28 days, beginning on and including a Thursday (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on a Wednesday) and ending on and including

the fourth Wednesday thereafter (unless such Wednesday is not followed by a Business Day, in which case ending on and including the next succeeding day followed by a Business Day), or (E) a period, generally of 28 days, beginning on and including a Friday (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on a Thursday) and ending on and including the fourth Thursday thereafter (unless such Thursday is not followed by a Business Day, in which case ending on and including the next succeeding day which is followed by a Business Day); (iii) with respect to ARS in a 35-day mode, any of (A) a period, generally of 35 days, beginning on and including a Monday (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on a Sunday) and ending on and including the fifth Sunday thereafter (unless such Sunday is not followed by a Business Day, in which case ending on and including the next succeeding day which is followed by a Business Day), (B) a period, generally of 35 days, beginning on and including a Tuesday (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on a Monday) and ending on and including the fifth Monday thereafter (unless such Monday is not followed by a Business Day, in which case ending on and including the next succeeding day followed by a Business Day), (C) a period, generally of 35 days, beginning on and including a Wednesday (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on a Tuesday) and ending on and including the fifth Tuesday thereafter (unless such Tuesday is not followed by a Business Day, in which case ending on and including the next succeeding day followed by a Business Day), (D) a period, generally of 35 days, beginning on and including a Thursday (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on a Wednesday) and ending on and including the fifth Wednesday thereafter (unless such Wednesday is not followed by a Business Day, in which case ending on and including the next succeeding day followed by a Business Day), or (E) a period, generally of 35 days, beginning on and including a Friday (or the day following the last day of the prior Auction Period if the prior Auction Period does not end on a Thursday) and ending on and including the fifth Thursday thereafter (unless such Thursday is not followed by a Business Day, in which case ending on and including the next succeeding day which is followed by a Business Day) and (iv) a Special Auction Period; provided, however, that the initial Auction Period with respect to the Bonds shall begin on and include the Issue Date, and that in the event of a Conversion of the Bonds from another Interest Rate Period to an ARS Interest Rate Period the initial Auction Period following such Conversion shall begin on and include the Conversion Date.

“Auction Procedures” shall mean the provisions set forth in Exhibit B to this Indenture.

“Auction Rate” shall mean, with respect to the interest rate on ARS, the rate of interest per annum that results from implementation of the Auction Procedures, and determined as described in Section 1.03 of the Auction Procedures; provided, however, that the Auction Rate shall not exceed the ARS Maximum Rate. While Auction Procedures are suspended, the Auction Rate will be determined as otherwise described herein.

“Authorized Borrower Representative” shall mean each person at the time designated to act on behalf of the Borrower by written certificate furnished to the Issuer and the Trustee containing the specimen signature of such person and signed on behalf of the Issuer.

“Authorized Denominations” shall mean (a) with respect to any Long-Term Interest Rate Period, $5,000 and any integral multiple thereof; (b) with respect to any Daily Interest Rate Period, Weekly Interest Rate Period or Short-Term Interest Rate Period, $100,000 and any integral multiple of $5,000 in excess of $100,000; and (c) with respect to ARS, $25,000 and any integral multiple thereof while the ARS are in any Auction Period.

“Available ARS” shall have the meaning provided in Section 1.03(b) of the Auction Procedures.

“Available Moneys” shall mean (i) with respect to any date occurring during the term of a Credit Facility, (a) proceeds of a drawing under a Credit Facility which have been directly deposited in the Bond Fund or the Purchase Fund, as applicable, (b) moneys deposited in the Bond Fund or the Purchase Fund by or on behalf of the Borrower and which have been on deposit with the Trustee or the Tender Agent, as applicable, for at least one hundred and twenty-four (124) days prior to and during which no petition by or against the Issuer or the Borrower or any affiliate of the Borrower, under any Bankruptcy Act shall have been filed or any bankruptcy or similar proceeding shall have been commenced, unless such petition or proceeding shall have been dismissed and such dismissal shall be final and not subject to appeal, (c) any other money (including the proceeds of the sale of refunding obligations of the Issuer) the application of which would not, in the written opinion of Bond Counsel or other nationally recognized counsel experienced in bankruptcy matters and acceptable to the Issuer, the Rating Agencies, if any, and the Trustee and delivered to the Trustee and the Tender Agent, constitute a voidable preference in the case of a filing for protection under the Bankruptcy Act of the Issuer or the Borrower or any affiliate of the Borrower, and (d) the proceeds from the investment of moneys described above, and (ii) with respect to any date not occurring during the term of a Credit Facility, any moneys furnished to the Trustee or the Tender Agent, as applicable, and the proceeds from the investment thereof.

“Bank” shall mean the issuer of a Letter of Credit, if any, with respect to the Bonds, and, any subsequently issued Credit Facility, the issuer of such other Credit Facility so long as such other Credit Facility shall be in effect, in its capacity as such issuer, its successors in such capacity and their assigns.

“Bankruptcy Act” shall mean the United States Bankruptcy Code, any successor act thereto or amendment thereof or any other applicable federal or state bankruptcy, insolvency, reorganization, liquidation, dissolution or similar law, now or hereafter in effect.

“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 Bond (including any Person holding a Bond through nominees, depositories or other intermediaries), or (b) is treated as the owner of any Bond for federal income tax purposes.

“Bid” shall have the meaning provided in Section 1.01(a) of the Auction Procedures.

“Bond” or “Bonds” shall mean the bonds issued in accordance with this Indenture as referenced in Section 2.01(a).

“Bond Counsel” shall mean Katten Muchin Rosenman LLP, New York, New York or any firm of nationally recognized bond counsel which is experienced in the financing of pollution control facilities and acceptable to the Issuer, the Remarketing Agent, the Trustee and the Borrower.

“Bond Fund” shall mean the fund created by Section 5.01 hereof.

“Bond Insurance Policy” shall mean a municipal bond new issue insurance policy issued by a Bond Insurer that guarantees payment of principal of and interest on the Bonds.

“Bond Insurer” shall mean the issuer of a Bond Insurance Policy, if any, with respect to the Bonds, and, any subsequently issued Bond Insurance Policy, the issuer of such other Bond Insurance Policy so long as such other Bond Insurance Policy shall be in effect, in its capacity as such issuer, its successors in such capacity and their assigns.

“Bond Interest Term” or “BIT” shall mean, with respect to each Bond bearing interest at a BIT Rate, the period established in accordance with the terms of Section 2.01(c)(v) hereof.

“Bond Interest Term Rate” or “BIT Rate” shall mean the interest rate on any Bond established in accordance with Section 2.01(c)(v) hereof.

“Book-Entry Bonds” shall mean any Bonds which are then held in book-entry form as provided in Section 2.01(e) hereof.

“Borrower” shall mean (i) El Paso Electric Company, a corporation organized under the laws of the State of Texas and its successors and assigns, and (ii) any surviving, resulting or transferee corporation as provided in Section 6.02 of the Agreement.

“Broker-Dealer” shall mean J.P. Morgan Securities Inc. or any other broker or dealer (each as defined in the Securities Exchange Act), commercial bank or other entity permitted by law to perform the functions required of a Broker-Dealer set forth in the Auction Procedures which (i) is a participant in or member of the Securities Depository as determined by the rules or bylaws of the Securities Depository (or an affiliate of such a participant or member), (ii) has been appointed as such by the Borrower pursuant to Section 3A.08 of this Indenture, and (iii) has entered into a Broker-Dealer Agreement that is in effect on the date of reference. When used herein at a time when more than one Broker-Dealer is acting under this Indenture, the term “the Broker-Dealer” shall mean, as the context dictates, either all such Broker-Dealers collectively, or only each Broker-Dealer acting with respect to the ARS.

“Broker-Dealer Agreement” means each agreement among the Auction Agent, Borrower and a Broker-Dealer pursuant to which the Broker-Dealer agrees to participate in Auctions as set forth in the Auction Procedures, as from time to time amended or supplemented.

“Business Day” shall mean any day other than a Saturday, Sunday or other day on which the New York Stock Exchange, Inc. or banks are authorized or required to close in New York, New York, or in the cities in which the Principal Offices of the Trustee, the Auction Agent, the Registrar, the Paying Agent, the Tender Agent, if any, and the Remarketing Agent, if any, are

located, and in the city or cities in which drawings under a Credit Facility are required to be made.

“Code” shall mean the Internal Revenue Code of 1986, as amended from time to time. Each reference herein to a section of the Code shall be deemed to include the United States Treasury Regulations adopted under the Code, as the same may be in effect from time to time, unless the context clearly requires otherwise.

“Conversion” shall mean a conversion of the Bonds from one Interest Rate Period to another Interest Rate Period (including the establishment of a new interest period within the Long-Term Interest Rate Period) as provided in Sections 2.01(c)(ii)(B), (iii)(B), (iv)(B), (v)(B) or 3A.12 of this Indenture.

“Conversion Date” shall mean the effective date of a Conversion of the Bonds.

“Credit Facility” shall mean, collectively, the Letter of Credit, if any, and any extensions thereof, and, upon the issuance and delivery of any Alternate Credit Support in accordance with Section 6.08 of the Agreement, “Credit Facility” shall mean such Alternate Credit Support.

“County” shall mean the County of Maricopa, Arizona.

“Daily Interest Rate” shall mean the variable interest rate on any Bond established in accordance with Section 2.01(c)(ii) hereof.

“Daily Interest Rate Period” shall mean each period during which a Daily Interest Rate is in effect.

“Default” shall mean any Event of Default or any event or condition which, with the passage of time, or giving of notice or both, would constitute an Event of Default.

“Determination of Taxability” means a determination that, due to the untruth or inaccuracy of any representation or warranty made by the Borrower in the Agreement or the breach of any covenant or warranty of the Borrower contained in the Agreement, interest on the Bonds, or any of them, is determined not to be Tax-Exempt by a final administrative determination of the Internal Revenue Service or a final judicial decision of a court of competent jurisdiction in a proceeding of which the Borrower received notice and in which the Borrower was afforded an opportunity to participate to the full extent permitted by law. A determination or decision will not be considered final for purposes of the preceding sentence unless (A) the Issuer or the holder or Owners of the Bonds involved in the proceeding in which the issue is raised (i) shall have given the Borrower and the Trustee prompt written notice of the commencement thereof, and (ii) shall have offered the Borrower the opportunity to control the proceeding; provided the Borrower agrees to pay all expenses in connection therewith and to indemnify such holder or holders against all liability for such expenses (except that any such holder may engage separate counsel, and the Borrower shall not be liable for the fees or expenses of such counsel); and (B) such proceeding shall not be subject to a further right of appeal or shall not have been timely appealed.

“DTC” shall mean The Depository Trust Company, New York, New York.

“Electronic” notice shall mean notice by any form of electronic transmission capable of producing a written record and shall constitute written notice as required herein.

“Event of Default” shall mean any of the events listed in Section 10.01.

“Existing Owner” shall mean, with respect to any Auction, a Person who is the Beneficial Owner of ARS at the close of business on the Business Day immediately preceding such Auction; provided, however, that for purposes of conducting an Auction, the Auction Agent may consider a Broker-Dealer acting on behalf of its customer as an Existing Owner.

“Facilities” or “Project” shall mean the pollution control, solid waste disposal and sewage disposal facilities at the Plant, which are described in Exhibit A to the Agreement, as from time to time revised, changed, amended or modified, and related improvements and any substitutions therefor.

“Favorable Opinion of Bond Counsel” shall mean, with respect to any action relating to the Bonds, the occurrence of which requires such an opinion, a written legal opinion of Bond Counsel addressed to the Issuer, the Bank, the Trustee, the Borrower, the Remarketing Agent or the Broker-Dealers, as applicable, to the effect that the action proposed to be taken (i) is authorized or permitted by the laws of the State of Arizona and federal law and this Indenture, and all conditions precedent, if any, have been satisfied, and (ii) will not adversely affect any exclusion from gross income for federal income tax purposes of interest on the Bonds.

“Fitch” shall mean Fitch Ratings, a corporation organized and existing under the laws of the State of Delaware, its successors and assigns, and, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, shall be deemed to refer to any other nationally recognized securities rating agency designated by the Borrower by notice to the Issuer and the Trustee.

“Government Obligations” shall mean direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed as to full and timely payment by, the United States of America and which are not subject to prepayment or redemption prior to maturity.

“Hold Order” shall have the meaning provided in Section 1.01(a) of the Auction Procedures.

“Indenture” shall mean this Indenture of Trust, as originally executed or as it may from time to time be supplemented, modified or amended by any supplemental indenture entered into pursuant to the provisions hereof.

“Index” shall mean, on any Auction Date with respect to the Bonds in any Auction Period of 35 days or less, the One Month LIBOR Rate on such date and, with respect to ARS in any Auction Period of more than 35 days, the yield on United States Treasury securities on the date the Auction Period began which has a maturity which most closely matches the last day of the Auction Period. If such rate is unavailable, the Index for the Bonds means an index or rate agreed to by all Broker-Dealers. If for any reason on any Auction Date the Index shall not be

determined as provided above, the Index shall mean the Index for the Auction Period ending on such Auction Date.

“Initial Long-Term Interest Rate” shall mean the Interest Rate for the Bonds on the date of issuance and delivery of the Bonds as specified in Section 2.01(b) hereof.

“Initial Long-Term Interest Rate Period” shall mean the period commencing March 26, 2009 and ending on the Maturity Date.

“Insurance Agreement” shall mean an Insurance Agreement between the Bond Insurer and the Borrower, as amended or supplemented from time to time.

“Interest Accrual Date” shall mean (i) with respect to any Daily Interest Rate Period, the first day thereof and, thereafter, the first day of each calendar month during that Daily Interest Rate Period, (ii) with respect to any Weekly Interest Rate Period, the first day thereof and, thereafter, the first day of each calendar month during that Weekly Interest Rate Period, (iii) with respect to any Long-Term Interest Rate Period, the first day thereof and, thereafter, each Interest Payment Date in respect thereof, other than the last such Interest Payment Date, (iv) with respect to each Bond Interest Term within a Short-Term Interest Rate Period, the first day thereof, and (v) with respect to each ARS Interest Rate Period, the first day thereof.

“Interest Payment Date” shall mean (i) with respect to any Daily Interest Rate Period or Weekly Interest Rate Period, the first Business Day of each calendar month, (ii) with respect to any Long-Term Interest Rate Period, each February 1 and August 1, commencing August 1, 2009 and occurring during such Long-Term Interest Rate Period and the Business Day next succeeding the last day thereof, (iii) with respect to any Short-Term Interest Rate Period, the Business Day next succeeding the last day of thereof, (iv) with respect to ARS, each ARS Interest Payment Date, and (v) in all events, the redemption date or the Maturity Date.

“Interest Rate Period” shall mean any Daily Interest Rate Period, Weekly Interest Rate Period, Short-Term Interest Rate Period, Long- Term Interest Rate Period or ARS Interest Rate Period.

“Investment Securities” shall mean any of the following obligations or securities (only to the extent investment therein would not violate the laws of the State of Arizona) on which the Borrower (or any affiliate) is not the obligor, maturing at such time or times as to enable disbursements to be made from the Bond Fund in accordance with the terms hereof, or which shall be marketable prior to the maturities thereof

(i) direct obligations of, or obligations the principal and interest of which are guaranteed as to the full and timely payment by, the United States of America, which obligations, in either case, are not subject to redemption or prepayment at less than par by anyone other than the holder;

(ii) obligations issued or guaranteed by an instrumentality of the United States of America pursuant to authority granted by the Congress of the United States of America, including obligations of the Federal National Mortgage Association,

Federal Intermediate Credit Banks, Banks for Cooperatives, Federal Land Banks or Federal Home Loan Banks;

(iii) commercial paper rated at the time of investment in the highest short-term grade by the Rating Agencies;

(iv) bankers’ acceptances drawn on and accepted by commercial banks (including the Trustee, the Paying Agent, and the Bank) having at least $10,000,000 in capital stock, surplus and undivided profits the unsecured, uninsured obligations of which are rated not less than “Prime - 1” or “Aa2” by Moody’s and “A-1” or “A+” by S&P;

(v) certificates of deposit, deposit accounts and savings accounts fully insured by the Federal Deposit Insurance Corporation;

(vi) repurchase agreements with solvent banking or other financial institutions (including the Trustee, the Paying Agent, and the Bank) rated at the time of investment not less than the then current rating of the Bonds by each of the Rating Agencies;

(vii) obligations of a state, a territory, Puerto Rico, or a possession of the United States of America, or any political subdivision of the foregoing, or of the District of Columbia and which are rated at the time of investment not less than the then current rating of the Bonds by each of the Rating Agencies;

(viii) 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 “AAAm-G”, “AAAm” or “Aam”, and by Moody’s of “Aaa” or “Aa”, including funds for which the Trustee (or any affiliate of the Trustee) provides investment advice or other services;

(ix) custodial agreements providing for the investment of moneys through a custodian, reverse purchase agreements, option agreements and agreements to lend securities; and

(x) any other obligations and securities not prohibited by law and which are rated at least “Aaa” or “Aa” by Moody’s and “AAA” or “AA” by S&P.

“Issue Date” shall mean March 26, 2009, the date of issuance and delivery of the Bonds to the Underwriters against payment therefor.

“Issuer” shall mean Maricopa County, Arizona Pollution Control Corporation, an Arizona nonprofit corporation designated as a political subdivision existing under the laws of the State of Arizona, incorporated for and with the approval of the County, pursuant to the provisions of the Constitution of the State of Arizona and the Act, and its successors and assigns.

“Letter of Credit” shall mean the irrevocable direct pay letter of credit, if any, issued by the Bank and delivered to the Trustee in accordance with Section 6.08 of the Agreement and any extension thereof.

“Long-Term Interest Rate” shall mean with respect to each Bond, a fixed, non-variable interest rate on such Bond established in accordance with Section 2.01(c)(iv) hereof.

“Long-Term Interest Rate Period” shall mean each period during which a Long-Term Interest Rate is in effect.

“Maturity Date” shall mean February 1, 2040.

“Maximum Bond Interest Rate” shall mean (a) with respect to Bonds other than ARS the lesser of 12% per annum and the Maximum Lawful Rate, and (b) with respect to ARS, the lesser of 15% per annum and the Maximum Lawful Rate, in each case calculated in the same manner as interest is calculated for the particular interest rate on the Bonds.

“Maximum Lawful Rate” shall mean the maximum rate of interest on the relevant obligation permitted by applicable law.

“Moody’s” shall mean Moody’s Investors Service, Inc., a corporation organized and existing under the laws of the State of Delaware, its successors and their assigns, and, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, “Moody’s” shall be deemed to refer to any other nationally recognized securities rating agency designated by the Borrower, with the approval of the Remarketing Agent, the Bank and the Bond Insurer, by notice to the Trustee, the Tender Agent and the Issuer.

“Nominee” shall have the meaning specified in Section 2.01(e) hereof.

“Non-Payment Rate” shall mean, on any date of determination, 15% per annum; provided, that in no event shall the Non-Payment Rate be more than the Maximum Lawful Rate.

“Notice of ARS Payment Default” shall mean a notice substantially in the form of Exhibit A to the Auction Agent Agreement.

“Notice of Cure of ARS Payment Default” shall mean a notice substantially in the form of Exhibit B to the Auction Agent Agreement.

“Official Statement” shall mean the Official Statement relating to the Bonds, including all appendices thereto.

“One Month LIBOR Rate” shall mean, as of any date of determination, the offered rate (rounded up to the next highest 0.001%) for deposits in U.S. dollars for a one-month period which appears on the Telerate Page 3750 at approximately 11:00 a.m., London time, on such date, or if such date is not a date on which dealings in U.S. dollars are transacted in the London interbank market, then on the next preceding day on which such dealings were transacted in such market.

“Order” shall have the meaning provided in Section 1.01(a) of the Auction Procedures.

“Outstanding” when used in reference to the Bonds, shall mean, as at any particular date, the aggregate of all Bonds authenticated and delivered in accordance with this Indenture except:

(iv) those cancelled at or prior to such date or delivered to or held by the Trustee at or prior to such date for cancellation;

(v) those deemed to be paid in accordance with Article IX hereof;

(vi) those in lieu of or in exchange, replacement or substitution for which other Bonds shall have been authenticated and delivered in accordance with this Indenture, unless proof satisfactory to the Trustee and the Borrower is presented that such Bond is held by a bona fide holder in due course; and

(vii) Bonds deemed purchased pursuant to Section 4.10 hereof.

“Owner” shall mean the person or entity in whose name any Bond is registered upon the registration books maintained pursuant to Section 2.04 hereof.

“Participant” shall mean, with respect to DTC or another Securities Depository, a member of or participant in DTC or such other Securities Depository, respectively.

“Paying Agent” shall mean the initial and any successor paying agent or agents appointed in or in accordance with Section 11.21 hereof. “Principal Office” of the Paying Agent shall mean the Principal Office of the Trustee (if the Trustee is the Paying Agent) or such other office of the Paying Agent designated in writing to the Issuer, the Trustee, the Auction Agent, the Broker-Dealers, the Bank, the Tender Agent and the Remarketing Agent, as applicable.

“Payment Date” shall mean each Interest Payment Date or any other date on which any principal of, premium, if any, or interest on any Bond is due and payable for any reason, including without limitation upon any redemption of Bonds pursuant to Section 4.01.

“Person” shall mean a corporation, association, partnership, limited liability company, joint venture, trust, organization, business, individual or government or any governmental agency or political subdivision thereof.

“Plant” shall mean Units 1, 2 and 3 of the Palo Verde Nuclear Generating Station, a nuclear power generating plant located in Maricopa County, Arizona, at which the Project is located.

“Potential Owner” shall mean, with respect to any Auction, any Person, including any Existing Owner, who may be interested in acquiring a beneficial interest in ARS subject to such Auction in addition to the ARS, if any, currently owned by such Person.

“Prior Bonds” shall have the meaning set forth in the 5th Whereas clause of this Indenture.

“Purchase Fund” shall mean the fund created by Section 6.01 hereof.

“Rating Agencies” shall mean S&P and Moody’s.

“Receipts and Revenues” shall mean (a) the Repayment Installments including all moneys drawn by the Trustee under a Credit Facility in satisfaction of the Borrower’s obligations to make Repayment Installments (b) all other moneys received by the Trustee (for the account of the Issuer) pursuant to the Agreement, (c) all moneys and investments in the Bond Fund and (d) all income and profit from the investment of the foregoing moneys. The term “Receipts and Revenues” does not include any moneys or investments in the Purchase Fund or amounts required to be paid to the Issuer pursuant to Sections 5.04, 5.07, 8.03 and 8.05 of the Agreement.

“Record Date” shall mean (a) with respect to any Interest Payment Date in respect of any Daily Interest Rate Period, the last Business Day of each calendar month or, in the case of the last Interest Payment Date in respect of a Daily Interest Rate Period, the Business Day immediately preceding such Interest Payment Date, (b) with respect to any Interest Payment Date in respect of any Weekly Interest Rate Period or any Bond Interest Term within a Short-Term Interest Rate Period, the Business Day immediately preceding such Interest Payment Date, (c) with respect to any Interest Payment Date in respect of any Long-Term Interest Rate Period, the fifteenth day of the month immediately preceding such Interest Payment Date or, in the event that an Interest Payment Date shall occur within 16 days after the first day of a Long-Term Interest Rate Period, such first day, and (d) with respect to ARS, the second Business Day next preceding each ARS Interest Payment Date.

“Registrar” shall mean the registrar or registrars appointed in or in accordance with Section 11.23 hereof. “Principal Office” of the Registrar shall mean the Principal Office of the Trustee (if the Trustee is the Registrar) or such other office of the Registrar designated in writing to the Issuer, the Trustee, the Tender Agent and the Remarketing Agent.

“Reimbursement Agreement” shall mean the Reimbursement Agreement, between the Borrower and the Bank issued in connection with the Letter of Credit and delivered to the Trustee in connection with Section 6.08 of the Agreement and any extension thereof.

“Remarketing Agent” shall mean J.P. Morgan Securities Inc. and any successor remarketing agent appointed in accordance with Section 14.01 hereof. “Principal Office” of the Remarketing Agent shall mean J.P. Morgan Securities Inc., 383 Madison Avenue, 23rd Floor, New York, NY 10179 Attention: Tax-Exempt Capital Markets, or such other office thereof designated in writing to the Issuer, the Trustee, the Bank and the Tender Agent.

“Remarketing Agreement” shall mean a Remarketing Agreement, that may be executed and delivered, between the Borrower and the Remarketing Agent, relating to the Bonds other than ARS, as supplemented or amended in accordance with the provisions thereof.

“Repayment Installment” shall mean any amount that the Borrower is required to pay to the Trustee pursuant to Section 5.02(a) of the Agreement as a repayment of the loan made by the Issuer under the Agreement.

“Representation Letter” shall have the meaning set forth in Section 2.01(e) hereof.

“S&P” shall mean Standard & Poor’s Ratings Group, a division of The McGraw-Hill Companies, Inc., a corporation organized and existing under the laws of the State of New York, its successors and their assigns, and, if such corporation shall be dissolved or liquidated or shall

no longer perform the functions of a securities rating agency, “S&P” shall be deemed to refer to any other nationally recognized securities rating agency designated by the Borrower, with the approval of the Remarketing Agent and the Bank and the Bond Insurer, by notice to the Trustee, the Tender Agent and the Issuer.

“Securities Act” shall mean the Securities Act of 1933, as amended, and any successor thereto.

“Securities Depository” shall mean DTC or, if applicable, any successor securities depository appointed pursuant to this Indenture.

“Securities Exchange Act” shall mean the Securities and Exchange Act of 1934, as amended, and any successor thereto.

“Sell Order” shall have the meaning provided in Section 1.01(a) of the Auction Procedures.

“Short-Term Interest Rate Period” shall mean, with respect to each Bond bearing interest at a BIT Rate, the period established in accordance with Section 2.01(c)(v) hereof.

“SIFMA” means Securities Industry and Financial Markets Association or any person acting in cooperation with or under the sponsorship of SIFMA and acceptable to the Remarketing Agent and effective from such date.

“SIFMA Index” shall mean on any date, a rate determined on the basis of the seven-day high grade market index of tax-exempt variable rate demand obligations, as produced by Municipal Market Data (“MMD”) and published or made available by SIFMA.

“Special Auction Period” shall mean, with respect to ARS, (a) any period of less than 183 days which is not another Auction Period and which is divisible by seven and which begins on an Interest Payment Date and ends (i) in the case of ARS with Auctions generally conducted on Fridays, on a Sunday unless such Sunday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day, (ii) in the case of ARS with Auctions generally conducted on Mondays, on a Monday unless such Monday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day, (iii) in the case of ARS with Auctions generally conducted on Tuesdays, on a Tuesday unless such Tuesday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day, (iv) in the case of ARS with Auctions generally conducted on Wednesdays, on a Wednesday unless such Wednesday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day, and (v) in the case of ARS with Auctions generally conducted on Thursdays, on a Thursday unless such Thursday is not followed by a Business Day, in which case on the next succeeding day which is followed by a Business Day, or (b) any period which is 183 days or longer which begins on an Interest Payment Date and ends not later than the day prior to the final scheduled maturity date of ARS.

“Special Record Date” shall mean, (a) with respect to any Bond other than ARS, the date established by the Trustee in connection with the payment of overdue interest on that Bond pursuant to Section 2.01(b) hereof and (b) with respect to ARS, a special date fixed to determine

the names and addresses of holders of ARS for purposes of paying interest on a special interest payment date for the payment of defaulted interest, all as further provided in Section 3A.02(f)(ii) hereof.

“State” shall mean the State of Arizona.

“Submission Processing Deadline” shall mean the earlier of (i) 40 minutes after the Submission Deadline, and (ii) the time when the Auction Agent begins to disseminate the results of the Auction to the Broker-Dealers.

“Submission Processing Representation” shall mean the written representation in the form attached to the Broker-Dealer Agreement as Exhibit D to be used in the event that Broker-Dealers submit an Order after the Submission Deadline and prior to the Submission Processing Deadline and the Order was (i) received by the Broker-Dealer from Existing Owners or Potential Owners prior to the Submission Deadline, or (ii) initiated internally by the Broker-Dealer for its own account prior to the Submission Deadline. Each Order submitted to the Auction Agent after the Submission Deadline and prior to the Submission Processing Deadline shall constitute a representation by the Broker-Dealer that such Order was (i) received from an Existing Owner or Potential Owner prior to the Submission Deadline, or (ii) initiated internally by the Broker-Dealer for its own account prior to the Submission Deadline (the “Submission Processing Representation”).

“Submitted Hold Order” shall have the meaning provided in Section 1.03(b) of the Auction Procedures.

“Substitute Auction Agent” shall mean the Person with whom the Trustee at the direction of the Borrower enters into a Substitute Auction Agent Agreement.

“Substitute Auction Agent Agreement” shall mean an auction agent agreement containing terms substantially similar to the terms of the Auction Agent Agreement whereby a Person having the qualifications required by Section 3A.07 of this Indenture agrees with the Trustee at the direction of the Borrower to perform the duties of the Auction Agent herein with respect to the Bonds.

“Sufficient Clearing Bids” shall have the meaning provided in Section 1.03(b) of the Auction Procedures.

“Supplemental Indenture” shall mean any supplemental indenture hereafter duly authorized and entered into between the Issuer and the Trustee in accordance with the provisions of this Indenture.

“Tax Certificate” shall mean the Tax Compliance Certificate dated March 26, 2009, executed by the Issuer in connection with the issuance of the Bonds.

“Tax-Exempt” shall mean, with respect to interest on any obligations of a state or local government, including the Bonds, that such interest is excluded from the gross income of the holders thereof (other than any holder who is a “substantial user” of facilities financed with such obligations or a “related person” within the meaning of Section 147(a) of the Code) for federal

income tax purposes, whether or not such interest is includable as an item of tax preference or otherwise includable directly or indirectly for purposes of calculating other tax liabilities, including any alternative minimum tax or environmental tax under the Code.

“Tender Agent” shall initially mean the Trustee, and any such other party as shall be designated by the Issuer as a Tender Agent and appointed in accordance with Section 14.01 hereof. “Principal Office” of the Tender Agent shall initially mean the Principal Office of the Trustee, or such other office thereof designated in writing to the Issuer, the Trustee and the Remarketing Agent.

“Tender Agreement” shall mean the Tender Agreement, if any, that may be executed and delivered, between the Borrower and the Tender Agent, relating to the Bonds other than ARS, as supplemented or amended in accordance with the provisions thereof.

“Trustee” shall mean Union Bank, N.A., as trustee under this Indenture, and its successor or successors hereunder. “Principal Office” of the Trustee shall mean a principal office of the Trustee at which at any particular time its corporate trust business shall be administered in California, which office at the date of the execution of this Indenture, is 120 South San Pedro Street, 4th Floor, Los Angeles, California 90012, Corporate Trust Department; except that with respect to the presentation of Bonds for payment or for registration of transfer, exchange or tender, such term shall mean the office or agency of the Trustee at Union Bank, N.A., Corporate Trust Department, 120 South San Pedro Street, 4th Floor, Los Angeles, California 90012, Attention: Bond Redemption.

“Trust Estate” shall mean at any particular time all right, title and interest of the Issuer in and to the Agreement (except its rights under Sections 5.04, 5.07 and 8.05 thereof and any rights of the Issuer to receive notices, certificates, requests, requisitions, directions and other communications thereunder), including without limitation the Receipts and Revenues, all moneys and obligations which at such time are deposited or are required to be deposited with, or are held or are required to be held by or on behalf of, the Trustee or any Paying Agent in trust under any of the provisions of this Indenture and all other rights, titles and interests which at such time are subject to the lien of this Indenture, except for moneys or obligations deposited with or paid to the Trustee or any Paying Agent for the redemption or payment of Bonds which are deemed to have been paid in accordance with Article IX hereof and funds held pursuant to Section 5.06 hereof.

“Trust Indenture Act” shall mean the Trust Indenture Act of 1939, as amended, and any successor thereto.

“Underwriters” means J.P. Morgan Securities Inc. and BNY Mellon Capital Markets, LLC.

“Weekly Interest Rate” shall mean a variable interest rate on the Bonds established in accordance with Section 2.01(c)(iii) hereof.

“Weekly Interest Rate Period” shall mean each period during which a Weekly Interest Rate is in effect.

“Winning Bid Rate” shall have the meaning provided in Section 1.03(b) of the Auction Procedures.

Section 1.02 Number and Gender . The singular form of any word used herein, including the terms defined in Section 1.01, shall include the plural, and vice versa. The use herein of a word of any gender shall include all genders.

Section 1.03 Articles, Sections, Etc . All references herein to “Articles,” “Sections” and other subdivisions are to the corresponding Articles, Sections or subdivisions of this Indenture as originally executed; and the words “herein,” “hereof,” “hereunder” and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or subdivision hereof. The headings or titles of the several Articles and Sections hereof, and any table of contents appended to copies hereof, shall be solely for convenience of reference and shall not affect the meaning, construction or effect of this Indenture.

Section 1.04 Content of Certificates and Opinions . Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture or the Agreement (except for the certificate of cancelled Bonds provided for in Sections 2.05, 2.06 and 4.05 hereof) shall include (a) a statement that the person or persons making or giving such certificate or opinion have read such covenant or condition and the definitions herein relating thereto; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of the signers, they have made or caused to be made such examination or investigation as is necessary to enable them to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of the signers, such condition or covenant has been complied with.

Any such certificate or opinion made or given by an officer of the Issuer or the Borrower may be based, insofar as it relates to legal matters, upon a certificate or opinion of or representations by counsel, unless such officer knows that the certificate or opinion or representations with respect to the matters upon which his or her certificate or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should have known that the same were erroneous. Any such certificate or opinion made or given by counsel may be based, insofar as it relates to factual matters (with respect to which information is in the possession of the Issuer or the Borrower), upon the certificate or opinion of or representations by an officer of the Issuer or the Borrower, as applicable, unless such counsel knows that the certificate or opinion or representations with respect to the matters upon which his or her opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should have known that the same were erroneous.

Section 1.05 Findings . It is hereby found and determined by the Issuer that:

(a) The Borrower is a corporation which is conducting operations in the County and is qualified under the Act to borrow the proceeds of the sale of the Bonds from the Issuer to redeem and repay the outstanding principal amount of the Prior Bonds for purposes of the Act;

(b) The Project promotes the purposes of the Act by preventing or limiting air, water and other forms of pollution for the purpose of protecting the health and welfare of the citizens of the State of Arizona, and facilitates compliance by the Borrower with existing and possible future air, water and other quality standards designed to improve the environment in the State of Arizona;

(d) It is advisable that the Bonds be subject to redemption as provided in this Indenture;

(e) The manner in which the Bonds are sold is most advantageous and it is necessary and advantageous that the expenses, premiums and commissions, if any, in connection with the issuance of the Bonds be paid by the Borrower; and

(f) It is advisable that this Indenture contain the provisions set forth herein.

ARTICLE II

THE BONDS

Section 2.01 Authorization and Terms of Bonds .

(a) Authorization . Bonds designated as “Maricopa County, Arizona Pollution Control Corporation Pollution Control Refunding Revenue Bonds, 2009 Series A (El Paso Electric Company Palo Verde Project)” may be issued under this Indenture. The aggregate principal amount of Bonds which may be issued and Outstanding under this Indenture shall not exceed Sixty-three Million Five Hundred Thousand Dollars ($63,500,000). No Bonds may be issued hereunder except in accordance with this Article.

(b) General Terms . The Bonds shall be issued as fully registered Bonds, without coupons, in Authorized Denominations and shall be dated as of the Issue Date. The Bonds shall mature, subject to prior redemption as provided in Article IV, upon the terms and conditions hereinafter set forth, on the Maturity Date. The Bonds shall initially bear interest at the Long Term Interest Rate for a Long-Term Interest Rate Period commencing on March 26, 2009 and ending on the Maturity Date (the “Initial Long-Term Interest Rate Period”). The Initial Long-Term Interest Rate shall be 7.25% per annum.

The Bonds shall be numbered from R-1 consecutively upwards in order of authentication. Each Bond shall bear interest from the last date to which interest has been paid in full or, if no interest has been paid in full or duly provided on such Bond, from the Issue Date. All Bonds shall mature on the Maturity Date and shall bear interest at the rates determined from time to time in accordance with the provisions of this Indenture. Payment of the interest on any Bond shall be made to the person appearing on the bond registration books of the Registrar as the registered holder thereof as of the close of business on the Record Date, such interest to be paid by the Paying Agent to such registered holder (i) in the event such Bond is a Book-Entry Bond, in immediately available funds on the Interest Payment Date in accordance with the

Representation Letter, and (ii) in the event such Bond is not a Book-Entry Bond (A) in immediately available funds (by wire transfer or by deposit to the account of the holder of at least $1,000,000 of Bonds if such account is maintained with the Paying Agent), according to the written instructions given by such holder to the Registrar prior to the Record Date, or (B) in all other cases, by check mailed by first class mail to the holder at such holder’s address as it appears as of the Record Date on the registration books of the Registrar; except, in each case, that, if and to the extent that there shall be a default in the payment of the interest due on such Interest Payment Date, such defaulted interest shall be paid to the holders in whose name any such Bonds are registered as of a Special Record Date to be fixed by the Trustee, notice of which shall be given to such holders not less than ten (10) days prior thereto. Both the principal of and premium, if any, on the Bonds shall be payable upon surrender thereof in lawful money of the United States of America at the Principal Office of the Paying Agent. Notwithstanding the foregoing, interest on any Bond bearing a Bond Interest Term Rate (except any such Bond which is a Book-Entry Bond) shall be paid only upon presentation to the Tender Agent of the Bond on which such payment is due. The Bonds shall be dated as of the Issue Date. The Bonds shall be substantially in the form attached hereto as Exhibit A.

If and to the extent, however, that the Issuer fails to make payment or provision for payment of interest on any Bond on any Interest Payment Date, that interest shall cease to be payable to the Owner of that Bond on the applicable Record Date. When moneys become available for payment of the interest, (a) the Trustee shall, pursuant to Section 10.10 hereof, establish a Special Record Date for the payment of that interest which shall be not more than 15 nor fewer than 10 days prior to the date of the proposed payment, and (b) the Trustee shall give notice by first-class mail of the proposed payment and of the Special Record Date to each owner not fewer than 10 days prior to the Special Record Date and, thereafter, the interest shall be payable to the owners of the Bonds as of the Special Record Date at the close of business on the Special Record Date.

(c) Interest Rates and Rate Periods . The Bonds shall bear interest until final payment of the principal or redemption price thereof shall have been made in accordance with the provisions hereof, whether at the Maturity Date, upon redemption or otherwise: During Daily Interest Rate Periods, interest on the Bonds shall be computed on the basis of a 365- or 366-day year for the number of days actually elapsed during Daily Interest Rate Periods. During Short-Term Interest Rate Periods or Weekly Interest Rate Periods, interest on the Bonds shall be computed on the basis of a 365- or 366-day year for the number of days actually elapsed based on the calendar year in which the Short-Term Interest Rate Period or Weekly Interest Rate Period commences. During any Long-Term Interest Rate Period, interest on the Bonds shall be computed upon the basis of a 360-day year, consisting of twelve 30-day months.

(i) Rate Periods . The Bonds shall initially bear interest as set forth in Section 2.01(b), and shall remain in such Interest Rate Period until adjusted to a different Interest Rate Period as provided herein. After any such adjustment, the term of the Bonds shall be divided into consecutive Interest Rate Periods during which the Bonds may bear interest at the Daily Interest Rate, Weekly Interest Rate, Bond Interest Term Rate, Long-Term Interest Rate or Applicable ARS Rate. Any Daily Interest Rate Period, Weekly Interest Rate Period or Short-Term Interest Rate Period established with respect to the Bonds shall continue in effect unless and until adjusted to a different Interest Rate

Period as provided herein. Notwithstanding any other provision herein, the Bonds are not subject to an adjustment to a different Interest Rate Period from the Initial Long-Term Interest Rate Period until after such Bonds have been purchased in lieu of redemption pursuant to Section 4.12 hereof.

(ii) Daily Interest Rate .

(A) Determination of Daily Interest Rate . During each Daily Interest Rate Period, the Bonds shall bear interest at the Daily Interest Rate, determined by the Remarketing Agent on or before each Business Day for such Business Day. The Daily Interest Rate shall be the rate of interest per annum determined by the Remarketing Agent to be the lowest interest rate which would enable the Remarketing Agent to sell the Bonds for delivery on the effective date of such interest rate at a price (without regard to accrued interest) equal to 100% of the principal amount thereof. The Remarketing Agent shall provide the Trustee and the Borrower with telephonic or Electronic notice of the Daily Interest Rate determined by 10:30 a.m. (New York City time) on the date of determination. If the Remarketing Agent shall not have determined a Daily Interest Rate for any day by 10:30 a.m. (New York City time) on such day, the Daily Interest Rate shall be the same as the Daily Interest Rate for the immediately preceding day. In no event shall the Daily Interest Rate be greater than the Maximum Bond Interest Rate.

(B) Adjustment to a Daily Interest Rate Period . At any time, the Borrower, by written notice to the Issuer, the Trustee, the Bank, the Tender Agent and the Remarketing Agent may elect that the Bonds shall bear interest at a Daily Interest Rate. Such notice (1) shall specify the effective date of such adjustment to a Daily Interest Rate, which shall be (a) a Business Day not earlier than thirty-five (35) days after delivery of such notice (or such shorter period as shall be acceptable to the Trustee); (b) in the case of an adjustment from a Long-Term Interest Rate Period, a day on which the Bonds would be permitted to be redeemed at the option of the Borrower pursuant to Section 4.01(a)(ii)(C) hereof; and (c) in the case of an adjustment from a Weekly Interest Rate Period or a Short-Term Interest Rate Period, an Interest Payment Date on which interest is payable for the Weekly Interest Rate Period or Bond Interest Term from which the adjustment is to be made; provided, however, that if prior to the Borrower’s making such election, any Bonds shall have been called for redemption and such redemption shall not have theretofore been effected, the effective date of such Daily Interest Rate Period shall not precede such redemption date; and (2) if the adjustment is from a Long-Term Interest Rate Period, shall be accompanied by a Favorable Opinion of Bond Counsel addressed to the Trustee to the effect that such adjustment (a) is authorized or permitted by the Indenture and the Act, and (b) will not adversely affect the Tax-Exempt status of the interest on the Bonds.

(C) Notice of Adjustment to a Daily Interest Rate Period . The Trustee shall give notice by first class mail of an adjustment to a Daily Interest Rate Period to the Owners of the Bonds not less than 15 days (30 days if the then

current Interest Rate Period is a Long-Term Interest Rate Period) prior to the effective date of such Daily Interest Rate Period. Such notice shall state (1) that the interest rate on the Bonds will be adjusted to a Daily Interest Rate (subject to the Borrower’s ability to rescind its election as described in Section 2.01(c)(viii) hereof), (2) the effective date of the Daily Interest Rate Period, (3) that the Bonds are subject to mandatory tender for purchase on such effective date (except in the case of adjustment between Daily Interest Rate Periods and Weekly Interest Rate Periods), (4) the procedures for such mandatory tender, and (5) the purchase price of the Bonds on such effective date (expressed as a percentage of the principal amount thereof).

(iii) Weekly Interest Rate .

(A) Determination of Weekly Interest Rate . During each Weekly Interest Rate Period, the Bonds shall bear interest at the Weekly Interest Rate, which shall be determined by the Remarketing Agent no later than the first day of such Weekly Interest Rate Period and thereafter no later than 10:00 a.m. (New York City time) on Wednesday of each week during such Weekly Interest Rate Period, unless any such Wednesday shall not be a Business Day, in which event the Weekly Interest Rate shall be determined by the Remarketing Agent no later than the Business Day immediately preceding such Wednesday. The Weekly Interest Rate shall be the rate of interest per annum determined by the Remarketing Agent to be the lowest interest rate which would enable the Remarketing Agent to sell the Bonds for delivery on the effective date of such interest rate at a price (without regard to accrued interest) equal to 100% of the principal amount thereof. If for any reason, a Weekly Interest Rate is not so established for any period by the time specified above by the Remarketing Agent, the Weekly Interest Rate shall be the same as the Weekly Interest Rate in effect for the immediately preceding week. In no event shall any Weekly Interest Rate exceed the Maximum Bond Interest Rate. The first Weekly Interest Rate determined for each Weekly Interest Rate Period shall apply to the period commencing on the first day of such Weekly Interest Rate Period and ending on the next succeeding Tuesday. Thereafter, each Weekly Interest Rate shall apply to the period commencing on each Wednesday and ending on the next succeeding Tuesday, unless such Weekly Interest Rate Period shall end on a day other than Tuesday, in which event the last Weekly Interest Rate for such Weekly Interest Rate Period shall apply to the period commencing on the Wednesday preceding the last day of such Weekly Interest Rate Period and ending on such last day. The Remarketing Agent shall provide the Trustee and the Borrower with written, telephonic or Electronic notice of each Weekly Interest Rate, as determined, by 12:00 noon (New York City time) on the effective date of such Weekly Interest Rate.

(B) Adjustment to Weekly Interest Rate . At any time, the Borrower, by written direction to the Issuer, the Trustee, the Bank, the Tender Agent and the Remarketing Agent may elect that the Bonds shall bear interest at a Weekly Interest Rate. Such direction (1) shall specify the effective date of such

adjustment to a Weekly Interest Rate, which shall be (a) a Business Day not earlier than thirty-five (35) days after delivery of such notice (or such shorter period as shall be acceptable to the Trustee); (b) in the case of an adjustment from a Long-Term Interest Rate Period, a day on which the Bonds would otherwise be permitted to be redeemed at the option of the Borrower pursuant to Section 4.01(a)(ii)(C) hereof; and (c) in the case of an adjustment from a Daily Interest Rate Period or Short-Term Interest Rate Period, an Interest Payment Date on which interest is payable for the Daily Interest Rate Period or Bond Interest Term from which the adjustment is to be made; provided, however, that if prior to the Borrower’s making such election, any Bonds shall have been called for redemption and such redemption shall not have theretofore been effected, the effective date of such Weekly Interest Rate Period shall not precede such redemption date; and (2) if the adjustment is from a Long-Term Interest Rate Period, shall be accompanied by a Favorable Opinion of Bond Counsel addressed to the Trustee to the effect that such adjustment (a) is authorized or permitted by the Indenture and the Act, and (b) will not adversely affect the Tax-Exempt status of interest on the Bonds.

(C) Notice of Adjustment to a Weekly Interest Rate Period . The Trustee shall give notice by first class mail of an adjustment to a Weekly Interest Rate Period to the Owners of the Bonds not less than fifteen (15) days (thirty (30) days if the then current Interest Rate Period is a Long-Term Interest Rate Period) prior to the effective date of such Weekly Interest Rate Period. Such notice shall state (1) that the Interest Rate on the Bonds will be adjusted to a Weekly Interest Rate (subject to the Borrower’s ability to rescind its election as provided in Section 2.01(c)(viii) hereof), (2) the effective date of the Weekly Interest Rate Period, (3) that the Bonds are subject to mandatory tender for purchase on such effective date (except in the case of adjustments between Daily Interest Rate Periods and Weekly Interest Rate Periods), (4) the procedures for such mandatory tender, and (5) the purchase price of such Bonds on such effective date (expressed as a percentage of the principal amount thereof).

(iv) Long-Term Interest Rate .

(A) Determination of Long-Term Interest Rate . During each Long-Term Interest Rate Period, the Bonds shall bear interest at the Long-Term Interest Rate, which shall be determined by the Remarketing Agent on a Business Day selected by the Remarketing Agent, but not more than forty (40) days prior to and not later than the effective date of such Long-Term Interest Rate Period. The Long-Term Interest Rate shall be the rate of interest per annum determined by the Remarketing Agent on such date, and communicated by the close of business on such date to the Trustee, the Paying Agent and the Borrower, by written, telephonic or Electronic notice, as being the lowest interest rate which would enable the Remarketing Agent to sell the Bonds for delivery on the effective date of such Long-Term Interest Rate Period at a price (without regard to accrued interest) equal to 100% of the principal amount thereof, provided, however, that if, for any reason, a Long-Term Interest Rate for any Long-Term Interest Rate

Period shall not be determined or effective or if an adjustment from a Long-Term Interest Rate Period to another Interest Rate Period shall not be effective, the Interest Rate Period for the Bonds shall automatically convert to a Daily Interest Rate Period; provided, further, however, that in the event the Borrower elected to have the right to terminate the mandatory tender for purchase required by Section 4.08(b)(i)(A) hereof pursuant to the fourth paragraph of this Section 2.01(c)(iv)(B), the Borrower may exercise such right in accordance with the fourth paragraph of this Section 2.01(c)(iv)(B); provided, further, however, that if the Favorable Opinion of Bond Counsel required by Section 2.01(c)(ii)(B) in connection with an adjustment to a Daily Interest Rate Period from a Long-Term Interest Rate Period cannot be obtained, then the Interest Rate Period for the Bonds shall automatically convert to a Long-Term Interest Rate Period of one year and one day. If a Daily Interest Rate for the first day of such Daily Interest Rate Period is not determined as provided in Section 2.01(c)(ii) hereof, the Daily Interest Rate for the first day of such Daily Interest Rate Period shall be equal to the SIFMA Index. In no event shall any Long-Term Interest Rate be greater than the Maximum Bond Interest Rate.

(B) Adjustment to or Continuation of a Long-Term Interest Rate Period . At any time, the Borrower, by written notice to the Issuer, the Bank, the Trustee, the Tender Agent and the Remarketing Agent may elect that the Bonds shall bear, or continue to bear, interest at a Long-Term Interest Rate, and if it shall so elect, shall determine the duration of the Long-Term Interest Rate Period during which the Bonds shall bear interest at such Long-Term Interest Rate. Each Long-Term Interest Rate Period shall have a duration such that the last day of such Long-Term Interest Rate Period is (1) a day which both immediately precedes a Business Day and is at least one year after the effective date of such Long-Term Interest Rate Period, or (2) if earlier, the day immediately preceding the Maturity Date. At the time the Borrower so elects an adjustment to or continuation of a Long-Term Interest Rate Period, the Borrower may specify two or more consecutive Long-Term Interest Rate Periods and, if the Borrower so specifies, shall specify the duration of each such Long-Term Interest Rate Period as provided in this paragraph. Such notice shall specify the effective date of each Long-Term Interest Rate Period, which shall be (a) a Business Day not earlier than thirty-five (35) days after delivery of such notice (or such shorter period as shall be acceptable to the Trustee); (b) in the case of an adjustment from or continuation of a Long-Term Interest Rate Period, a day on which the Bonds would be permitted to be redeemed by the Borrower pursuant to Section 4.01(a)(ii)(C) hereof, and (c) in the case of an adjustment from a Daily, Weekly or Short-Term Interest Rate Period, an Interest Payment Date on which interest is payable for the Daily or Weekly Interest Rate Period or Bond Interest Term from which the adjustment is to be made; provided, however, that if prior to the Borrower’s making such election, any Bonds shall have been called for redemption and such redemption shall not have theretofore been effected, the effective date of such Long-Term Interest Rate Period shall not precede such redemption date. In addition, such notice (i) shall specify the last day of such Long-Term Interest Rate Period, and (ii) if the adjustment is from a Daily,

Weekly or Short-Term Interest Rate Period, shall be accompanied by a Favorable Opinion of Bond Counsel addressed to the Trustee to the effect that such adjustment (a) is authorized or permitted by the Indenture and the Act, and (b) will not adversely affect the Tax-Exempt status of interest on the Bonds.

If, by the thirty-fifth day prior to the last day of any Long-Term Interest Rate Period, the Trustee shall not have received notice of the Borrower’s election that, during the next succeeding Interest Rate Period, the Bonds shall bear interest at a Daily Interest Rate, a Weekly Interest Rate, a Long-Term Interest Rate or a Bond Interest Term Rate accompanied by appropriate opinions of Bond Counsel, if required by Section 2.01(c)(ii)(B), (iii)(B), (iv)(B) or (v)(B) hereof, the next succeeding Interest Rate Period for the Bonds shall be a Daily Interest Rate Period; provided, however, that if the Favorable Opinion of Bond Counsel required by Section 2.01(c)(ii)(B) hereof in connection with an adjustment to a Daily Interest Rate Period from a Long-Term Interest Rate Period cannot be obtained, then the Interest Rate Period for the Bonds shall automatically convert to a Long-Term Interest Rate Period of one year and one day. If a Daily Interest Rate for the first day of such Daily Interest Rate Period is not determined as provided in Section 2.01(c)(ii) hereof, the Daily Interest Rate for the first day of such Daily Interest Rate Period shall be equal to the SIFMA Index.

At the same time that the Borrower elects to have the Bonds bear interest at a Long-Term Interest Rate or continue to bear interest at a Long-Term Interest Rate, the Borrower may also specify to the Trustee optional redemption prices and periods different from (including that there be no such optional redemption) those set out in Section 4.01(a)(ii)(C) during the Long-Term Interest Rate Period(s) with respect to which such election is made; provided, however, that such notice shall be accompanied by a Favorable Opinion of Bond Counsel addressed to the Trustee to the effect that such changes (i) are authorized or permitted by the Act and this Indenture, and (ii) will not adversely affect the Tax-Exempt status of interest on the Bonds.

At the same time that the Borrower elects to have the Bonds bear interest at a Long-Term Interest Rate or continue to bear interest at a Long-Term Interest Rate, the Borrower may elect to have the right to terminate the mandatory tender for purchase required by Section 4.08(b)(i)(A) (“Mandatory Tender”) in accordance with this paragraph. The Borrower may terminate the Mandatory Tender by providing, no later than 2 p.m. on the last day of the Long-Term Interest Rate Period, to the Trustee written notice rescinding the Mandatory Tender. If the Borrower terminates the Mandatory Tender, the Borrower shall have no obligation to redeem or purchase the Bonds prior to maturity except as otherwise provided herein and the Bonds shall bear interest from the expiration of the Long-Term Interest Rate Period at a rate per annum, in no event greater than the Maximum Bond Interest Rate, as determined at the same time the Borrower elected to have the Bonds bear interest at a Long-Term Interest Rate or continue to bear interest at a Long-Term Interest Rate. Following such rescission, at the option of the Borrower, the Bonds are subject to tender for purchase at 100% of

the principal amount of the Bonds on any Business Day, if the Borrower provides written notice to the Trustee no later than noon on such Business Day.

(C) Notice of Adjustment to or Continuation of a Long-Term Interest Rate Period . The Trustee shall give notice by first class mail of an adjustment to or continuation of a Long-Term Interest Rate Period to the Owners of the Bonds not less than fifteen (15) days (thirty (30) days if the then current Interest Rate Period is a Long-Term Interest Rate Period) prior to the effective date of such Long-Term Interest Rate Period. Such notice shall state (1) that the interest rate on the Bonds will be adjusted to, or continue to be, a Long-Term Interest Rate (subject to the Borrower’s ability to rescind its election as provided in Section 2.01(c)(viii) hereof), (2) the effective date of such Long-Term Interest Rate Period, (3) that the Bonds shall be subject to mandatory tender for purchase on such effective date, (4) the procedures for such mandatory tender, and (5) the purchase price of the Bonds on such effective date (expressed as a percentage of the principal amount thereof).

(v) Bond Interest Term Rate .

(A) Determination of Bond Interest Terms and Bond Interest Term Rates . During each Short-Term Interest Rate Period, each Bond shall bear interest during each Bond Interest Term for such Bond at the Bond Interest Term Rate for such Bond. Each Bond Interest Term for any Bond shall be a period of at least one day but not more than the lesser of (x) 270 days or (y) the number of days of interest coverage on the Bonds provided for in any Credit Facility then in effect minus five (5) days. When a Credit Facility, if any, other than any initial Letter of Credit is in effect with respect to the Bonds or no Credit Facility is in effect with respect to the Bonds, each Bond Interest Term for any Bond shall be a period of at least one day but not more than 270 days. Each Bond Interest Term for any Bond shall be a period determined by the Remarketing Agent to be, in its judgment, the period which, taking into account prevailing market conditions and all other Bond Interest Terms and Bond Interest Term Rates for all Bonds then Outstanding, is likely to result in the lowest overall net interest expense on all such Bonds; provided, however, that any such Bond purchased on behalf of the Borrower and remaining unsold in the hands of the Remarketing Agent as of 1:00 p.m. (New York City time) on the effective date of the Bond Interest Term for such Bond shall have a Bond Interest Term of one day or, if such Bond Interest Term would not end on a day immediately preceding a Business Day, a Bond Interest Term of more than one day ending on the day immediately preceding the next Business Day; provided, further, however, that (1) each Bond Interest Term shall end on a day which immediately precedes a Business Day and no Bond Interest Term shall extend beyond the day immediately preceding the Maturity Date or, if a Credit Facility, if any, is then in effect with respect to the Bonds, the fifth day immediately preceding the scheduled expiration date of such Credit Facility, and (2) if for any reason the Remarketing Agent fails or is unable to determine a Bond Interest Term on any Bond, the Bond Interest Term for such Bond shall be one day, unless such Bond Interest Term would end on a day which

does not precede a Business Day, in which case such Bond Interest Term shall end on the day immediately preceding the next succeeding Business Day.

The Bond Interest Term Rate for each Bond Interest Term for each Bond shall be the rate of interest per annum determined by the Remarketing Agent no later than 1:00 p.m. (New York City time) on the first day of such Bond Interest Term to be the lowest interest rate which would enable the Remarketing Agent to sell such Bonds on the effective date of such interest rate at a price (without regard to accrued interest) equal to 100% of the principal amount thereof. The Remarketing Agent shall provide the Trustee and the Borrower with telephonic or Electronic notice of each Bond Interest Term Rate and Bond Interest Term by 1:00 p.m. (New York City time) on the date of determination. If a Bond Interest Term Rate for a Bond Interest Term of one day is not determined or effective by 1:00 p.m. (New York City time) on such day, the Bond Interest Term Rate for such Bond Interest Term of one day shall be equal to the SIFMA Index. In no event shall any Bond Interest Term Rate exceed the Maximum Bond Interest Rate.

Notwithstanding the foregoing, in the event that notice of redemption with respect to any Bond in a Short-Term Interest Rate Period shall have been given to the holder of such Bond by the Trustee pursuant to Section 4.03 hereof, no subsequent Bond Interest Terms or Bond Interest Term Rates shall be determined with respect to such Bond.

(B) Adjustment to or Continuation of Bond Interest Term Rates . At any time, the Borrower, by written direction to the Issuer, the Trustee, the Bank, if any, the Tender Agent and the Remarketing Agent may elect that the Bonds shall bear interest at Bond Interest Term Rates. Such direction (1) shall specify the effective date of the Short-Term Interest Rate Period during which the Bonds shall bear interest at Bond Interest Term Rates, which shall be (a) a Business Day not earlier than thirty-five (35) days after delivery of such notice (or such shorter period as shall be acceptable to the Trustee), (b) in the case of an adjustment from a Long-Term Interest Rate Period, a day on which the Bonds would be permitted to be redeemed at the option of the Borrower pursuant to Section 4.01(a)(ii)(C) hereof, and (c) in the case of an adjustment from a Daily or Weekly Interest Rate Period, an Interest Payment Date on which interest is payable for the Daily or Weekly Interest Rate Period from which the adjustment is to be made; provided, however, that if prior to the Borrower’s making such election any Bonds shall have been called for redemption and such redemption shall not have theretofore been effected, the effective date of such Short-Term Interest Rate Period shall not precede such redemption date; and (2) shall be accompanied by a Favorable Opinion of Bond Counsel addressed to the Trustee to the effect that such adjustment (a) is authorized or permitted by the Indenture and the Act and (b) will not adversely affect the Tax-Exempt status of interest on the Bonds.

(C) Notice of Adjustment to a Bond Interest Term . The Trustee shall give notice by first class mail of an adjustment to a Short-Term Interest Rate Period to the Owners of the Bonds not less than fifteen (15) days (thirty (30) days if the then current Interest Rate Period is a Long-Term Interest Rate Period) prior to the effective date of such Short-Term Interest Rate Period. Such notice shall state (1) that the interest rate on the Bonds will be adjusted to Bond Interest Term Rates (subject to the Borrower’s ability to rescind its election as provided in Section 2.01(c)(viii) hereof), (2) the effective date of the Short-Term Interest Rate Period, (3) that the Bonds are subject to mandatory tender for purchase on the effective date of such Short-Term Interest Rate Period, (4) the procedures for such mandatory tender, and (5) the purchase price of the Bonds on such effective date (expressed as a percentage of the principal amount thereof).

(D) Adjustment from a Short-Term Interest Rate Period . At any time during a Short-Term Interest Rate Period, the Borrower may elect that the Bonds shall no longer bear interest at Bond Interest Term Rates and shall instead bear interest as otherwise permitted under this Indenture. The Borrower shall give written notice to the Issuer, the Trustee, the Paying Agent and the Remarketing Agent, if any, of such election and shall specify the Interest Rate Period to follow with respect to such Bonds upon cessation of the Short-Term Interest Rate Period and instruct the Remarketing Agent to (1) determine Bond Interest Terms of such duration that, as soon as possible, all Bond Interest Terms shall end on the same date, not earlier than twenty-four (24) days (or such shorter period acceptable to the Trustee) following the delivery by the Borrower of such written notice, and upon the establishment of such Bond Interest Term the day next succeeding the last day of all such Bond Interest Terms shall be the effective date of the Interest Rate Period elected by the Borrower; or (2) determine Bond Interest Terms that will best promote an orderly transition to the next succeeding Interest Rate Period to apply to the Bonds, beginning not earlier than twenty-four (24) days (or such shorter period acceptable to the Trustee) following the delivery by the Borrower of such written notice. If the alternative in clause (2) above is selected (and if the Trustee requests, a Favorable Opinion of Bond Counsel is received), the day next succeeding the last day of the Bond Interest Term for each Bond shall be with respect to such Bond the effective date of the Interest Rate Period elected by the Borrower. The Remarketing Agent, promptly upon the determination thereof, shall give written notice of such last day and such effective dates to the Borrower, the Trustee and the Tender Agent. During any transitional period from a Short-Term Interest Rate Period to the next succeeding Interest Rate Period in accordance with clause (2) above, the provisions of this Indenture shall be deemed to apply to the Bonds as follows: the Bonds continuing to bear interest at Bond Interest Term Rates shall have applicable to them the provisions hereunder theretofore applicable to such Bonds as if all Bonds were continuing to bear interest at Bond Interest Term Rates and the Bonds bearing interest in the Interest Rate Period to which the transition is being made will have applicable to them the provisions hereunder as if all Bonds were bearing interest in such Interest Rate Period.

(vi) Applicable ARS Rate . The Borrower may elect that the Bonds shall bear interest at the Applicable ARS Rate pursuant to Article IIIA hereof. In the event that the Borrower makes such an election, the provisions of this Article II shall be subject to the provisions of Article IIIA hereof. and the Auction Procedures set forth in Exhibit B to this Indenture.

(vii) Terms of Credit Facility, If Any . If a Credit Facility in the form of a letter of credit is to be held by the Trustee after the effective date of any adjustment from one Interest Rate Period to another Interest Rate Period, such Credit Facility, if any, shall be in an amount sufficient to provide payment of (x) the principal amount of the Outstanding Bonds plus (y) the amount of interest (computed on the basis of a 365-day year in the case of an adjustment to a Daily Interest Rate Period, Weekly Interest Rate Period or Short-Term Interest Rate Period, and on the basis of a 360-day year consisting of twelve 30-day months in the case of an adjustment to a Long-Term Interest Rate Period) which will accrue on the Outstanding Bonds for a period equal to the maximum number of days between Interest Payment Dates during the new Interest Rate Period plus five (5) days. In the case of an adjustment to a Long-Term Interest Rate Period, a Credit Facility, if any, to be in effect after the effective date of such adjustment shall (i) extend for a period ending on a date no earlier than five (5) days after the first date on which the Bonds may be called for redemption pursuant to Section 4.01(a)(ii)(C), and (ii) cover the premium, if any, which would be included in the purchase price upon mandatory purchase of the Bonds pursuant to Section 4.08(b) hereof if the term of such Credit Facility was not extended beyond the expiration date set forth therein.

(viii) Determination Conclusive . The determination of any Bond Interest Term Rate, Daily Interest Rate, Weekly Interest Rate and Long-Term Interest Rate and each Bond Interest Term and the calculation of interest payable on the Bonds by the Remarketing Agent shall be conclusive and binding upon such Remarketing Agent, the Trustee, the Tender Agent, the Issuer, the Borrower, the Bank and the Owners of the Bonds.

(ix) Rescission of Election . Notwithstanding anything herein to the contrary, the Borrower may rescind any election by it to adjust to or continue an Interest Rate Period pursuant to Sections 2.01(c)(ii)(B), (iii)(B), (iv)(B), (v)(B) or 3A.12 hereof prior to the effective date of such adjustment or continuation by giving written notice thereof to the Issuer, the Trustee, the Tender Agent, the Auction Agent, the Broker-Dealers and the Remarketing Agent, if any, prior to such effective date. If the Trustee receives notice of such rescission prior to the time the Trustee has given notice to the Owners of the Bonds pursuant to Section 2.01(c)(ii)(C), (iii)(C), (iv)(C), (v)(C) or 3A.12 as applicable, then the notice of adjustment or continuation previously delivered by the Borrower shall be of no force and effect. If the Trustee receives notice from the Borrower of rescission of an adjustment to or continuation of an Interest Rate Period after the Trustee has given notice to the Owners of the Bonds pursuant to Section 2.01(c)(ii)(C), (iii)(C), (iv)(C), (v)(C) or 3A.12, as applicable, then the Interest Rate Period for the Bonds shall automatically adjust to a Daily Interest Rate Period on the date originally scheduled for such adjustment or continuation; provided, however, that in the event the Borrower elected to have the right to terminate the Mandatory Tender pursuant

to the fourth paragraph of Section 2.01(c)(iv)(B), the Borrower may exercise such right in accordance with the fourth paragraph of Section 2.01(c)(iv)(B); provided, however, that if the Bonds are then in a Long-Term Interest Rate Period and the Favorable Opinion of Bond Counsel required by Section 2.01(c)(ii)(B) in connection with an adjustment to a Daily Interest Rate Period from a Long-Term Interest Rate Period cannot be obtained, then the Interest Rate Period for the Bonds shall automatically convert to a Long-Term Interest Rate Period of one year and one day. If a Daily Interest Rate for the first day of such Daily Interest Rate Period is not determined as provided in Section 2.01(c)(ii) hereof, the Daily Interest Rate for the first day of such Daily Interest Rate Period shall be equal to the SIFMA Index.

(d) Form of Bonds . The Bonds may be engraved, printed, lithographed or typewritten, shall be in Authorized Denominations and may contain such references to any of the provisions of this Indenture as may be appropriate. The form of the Bonds, the certificate of authentication to be executed on all the Bonds by the Trustee and the forms for registration of transfer shall be in substantially the forms thereof set forth in Exhibit A hereto, with necessary or appropriate variations, omissions and insertions as permitted or required by this Indenture. The Bonds and the certificate of authentication to be executed thereon shall be in substantially the form attached hereto as Exhibit A, with such appropriate variations, omissions and insertions as are permitted or required by this Indenture. Pursuant to recommendations promulgated by the Committee on Uniform Security Identification Procedures, “CUSIP” numbers may be printed on the Bonds. The Bonds may bear such endorsement or legend relating thereto as may be required to conform to usage or law with respect thereto. If appropriate, the Bonds may be printed with a portion of the text printed on the reverse side thereof and with a legend printed on the front referring to such text to the following effect: “Reference is hereby made to the further provisions of this Bond set forth on the back hereof and such further provisions are hereby incorporated by reference as if set forth here in full.” Upon adjustment to a Long-Term Interest Rate Period, the form of Bond may include a summary of the rescission of the Mandatory Tender pursuant to paragraph four of Section 2.01(c)(iv)(B), a summary of the mandatory and optional redemption provisions to apply to the Bonds during such Long-Term Interest Rate Period, or a statement to the effect that the Bonds will not be optionally redeemed during such Long-Term Interest Rate Period, provided that the Registrar shall not authenticate such a revised Bond form prior to receiving a Favorable Opinion of Bond Counsel that such Bond form conforms to the terms of the Act and of this Indenture and that authentication thereof will not adversely affect the Tax-Exempt status of the Bonds, and a summary.

(e) Book-Entry System . Bonds shall be issued in the form of a single certificated fully registered Bond, registered in the name of Cede & Co., as nominee of the Depository Trust Company (such entity and its successors and assigns are referred to herein as “DTC”), or such other name as may be requested by an authorized representative of DTC, or any successor nominee (the “Nominee”). Except as provided in paragraph (C) below, all of the Outstanding Bonds shall be so registered in the registration books kept by the Registrar, and the provisions of this Section 2.01(e) shall apply thereto.

(i) The Issuer, the Borrower, the Remarketing Agent, the Tender Agent, the Trustee, the Registrar, the Paying Agent and any Co-Registrar and Co-Paying Agent shall have no responsibility or obligation to any DTC participant or to any person

on behalf of which a DTC participant holds an interest in the Bonds, except as otherwise expressly provided herein. Without limiting the immediately preceding sentence, the Issuer, the Borrower, the Trustee, the Registrar, the Paying Agent, the Tender Agent, the Remarketing Agent and any Co-Registrar and Co-Paying Agent shall have no responsibility or obligation with respect to (i) the accuracy of the records of DTC, the Nominee, any DTC participant or indirect participant with respect to any ownership interest in the Bonds, (ii) the delivery to any DTC participant or any other person, other than an Owner as shown in the registration books kept by the Registrar, of any notice with respect to the Bonds, including any notice of redemption (except that the Trustee and Tender Agent, if any, shall have the obligation to deliver notices of optional and mandatory tender to the Remarketing Agent, if any, as provided herein) or (iii) the payment to any DTC participant or any other person, other than an Owner, as shown in the registration books kept by the Registrar, of any amount with respect to principal or purchase price of, premium, if any, or interest on the Bonds. The Paying Agent shall pay all principal, premium, if any, and interest on the Bonds only to or upon the order of the respective Owners, as shown in the registration books kept by the Registrar, or their respective attorneys duly authorized in writing, and all such payments shall be valid and effective to fully satisfy and discharge the Issuer’s obligations with respect to payment of principal of, premium, if any, and interest on the Bonds to the extent of the sum or sums so paid. The Issuer, the Borrower, the Trustee, the Registrar, the Paying Agent, the Tender Agent, the Remarketing Agent and any Co-Registrar and Co-Paying Agent may treat and consider the person in whose name each Bond is registered in the registration books kept by the Registrar as the holder and absolute owner of such Bond for the purpose of payment of principal, purchase price, premium and interest with respect to such Bond, for the purpose of giving notices of redemption and other matters with respect to such Bond, for the purpose of registering transfers with respect to such Bond, and for all other purposes whatsoever; provided, however, notwithstanding the foregoing provisions, the Tender Agent, if any, shall accept any notice of optional tender pursuant to Section 4.08(a) from any Owner of any Book-Entry Bond, but shall make payment of the purchase price thereof only to the registered owner of such Bond in the manner provided in the Representation Letter (as defined below); and provided further, that no person other than an Owner, as shown in the registration books kept by the Registrar, shall receive a certificated Bond evidencing the obligation of the Issuer to make payments of principal, premium, if any, and interest pursuant to this Indenture.

(ii) The Issuer, the Paying Agent, the Registrar, the Tender Agent and/or the Trustee shall, if not previously on file, execute and deliver to DTC a letter of representation in customary form with respect to the Bonds (the “Representation Letter”), but such Representation Letter shall not in any way limit the provisions of the foregoing paragraph (i) or in any other way impose upon the Issuer any obligation whatsoever with respect to persons having interests in the Bonds other than the Owners, as shown on the registration books kept by the Registrar. The Trustee, the Tender Agent and the Paying Agent shall take all actions necessary for representations of the Issuer in the Representation Letter with respect to the Trustee, the Tender Agent and the Paying Agent to be complied with at all times.

(iii) The Issuer, with the consent of the Borrower, may, and upon request of the Borrower shall, terminate the services of DTC with respect to the Bonds. DTC may determine to discontinue providing its services with respect to the Bonds at any time by giving written notice and all relevant information on the Beneficial Owners of the Bonds to the Issuer, the Borrower, the Tender Agent, if any, and the Trustee and discharging its responsibilities with respect thereto under applicable law. Upon the discontinuance or termination of the services of DTC with respect to the Bonds, unless a substitute securities depository is appointed by the Issuer (with the consent, or at the request, of the Borrower) to undertake the functions of DTC hereunder, the Issuer, at the expense of the Borrower, is obligated to deliver Bond certificates to the Owners of such Bonds, as described in this Indenture, and such Bonds shall no longer be restricted to being registered in the registration books kept by the Registrar in the name of the Nominee, but may be registered in whatever name or names Owners transferring or exchanging such Bonds shall designate, in accordance with the provisions of this Indenture.

(iv) In connection with any notice or other communication to be provided to Owners pursuant to this Indenture by the Issuer, the Borrower the Remarketing Agent, the Tender Agent, the Trustee, the Registrar, the Paying Agent, and any Co-Registrar and Co-Paying Agent with respect to any consent or other action to be taken by the Owners of the Bonds, the Issuer, the Borrower the Remarketing Agent, the Tender Agent, the Trustee, the Registrar, the Paying Agent, any Co-Registrar and Co-Paying Agent, as the case may be, the Trustee shall establish a record date for such consent or other action and give DTC notice of such record date not less than 15 calendar days in advance of such record date to the extent possible.

(v) So long as any Bond is registered in the name of the Nominee, all payments with respect to principal, purchase price, premium, if any, and interest on such Bond and all notices with respect to such Bond shall be made and given, respectively, in the manner provided in the Representation Letter. Owners shall have no lien or security interest in any rebate or refund paid by DTC to the Tender Agent, if any, or the Paying Agent which arises from the payment by the Tender Agent, if any, or Paying Agent of principal of or purchase price, premium, if any, or interest on the Bonds in immediately available funds to DTC.

Section 2.02 Execution of Bonds . The Bonds shall be executed on behalf of the Issuer by its President, a Vice President, Secretary, Treasurer, Assistant Secretary or Assistant Treasurer and such execution shall be attested by its President, a Vice-President, Secretary, Treasurer, Assistant Secretary or Assistant Treasurer; provided that the officer so attesting such execution shall not be the same officer that executed such Bond. The signatures of the President, a Vice President, Secretary, Treasurer, Assistant Secretary or Assistant Treasurer of the Issuer may be facsimile signatures.

The Bonds and the interest thereon shall not be general obligations or an indebtedness of the Issuer but shall be limited obligations of the Issuer, which is obliged to pay the principal and premium, if any, and interest on the Bonds only out of the Receipts and Revenues of the Issuer from the Agreement and other moneys pledged therefor under this Indenture. The Bonds shall

never constitute an indebtedness of the State of Arizona, or the County, or the Issuer within the meaning of any Arizona Constitutional provision or statutory limitation and shall never constitute or give rise to a pecuniary liability of the State of Arizona, or the County, or the Issuer or a charge against the general credit or taxing powers of the State of Arizona, or the County, or the general credit of the Issuer and such fact shall be plainly stated on each Bond. The Issuer has no taxing power.

The Bonds shall then be delivered to the Trustee for authentication by the Trustee. In case any officer who shall have signed any of the Bonds shall cease to be such officer before the Bonds so signed or attested shall have been authenticated or delivered by the Trustee or issued by the Issuer, such Bonds may nevertheless be authenticated, delivered and issued and, upon such authentication, delivery and issuance, shall be as binding upon the Issuer as though those who signed and attested the same had continued to be such officers of the Issuer. Also, any Bond may be signed on behalf of the Issuer by such persons as on the actual date of the execution of such Bond shall be the proper officers although on the nominal date of such Bond any such person shall not have been such officer.

Only such of the Bonds as shall bear thereon a certificate of authentication in the form recited in Exhibit A hereto, manually executed by the Trustee, shall be valid or obligatory for any purpose or entitled to the benefits of this Indenture, and such certificate of the Trustee shall be conclusive evidence that the Bonds so authenticated have been duly authenticated and delivered hereunder and are entitled to the benefits of this Indenture. The Trustee’s certificate of authentication on any Bond shall be deemed to have been executed by it if manually signed by an authorized signatory on behalf of the Trustee but it shall not be necessary that the same person sign the certificate of authentication on all of the Bonds issued hereunder.

Upon authentication of any Bond, the Trustee, Registrar or the Tender Agent, if any, as the case may be, shall set forth on such Bond (1) the date of such authentication, and (2) in the case of a Bond bearing interest at a Bond Interest Term Rate which is not a Book-Entry Bond, such Bond Interest Term Rate, the day next succeeding the last day of the applicable Short-Term Interest Rate Period, the number of days comprising such Short-Term Interest Rate Period and the amount of interest to accrue during such Short-Term Interest Rate Period.

So long as Union Bank, N.A. is serving as Trustee hereunder, it shall also serve as Registrar hereunder.

Section 2.03 Transfer and Exchange of Bonds . Registration of any Bond may, in accordance with the terms of this Indenture, be transferred, upon the books of the Registrar required to be kept pursuant to the provisions of Section 2.04, by the person in whose name it is registered, in person or by his duly authorized attorney, upon surrender of such Bond for cancellation, accompanied by a written instrument of transfer in a form approved by the Registrar, duly executed. Whenever any Bond shall be surrendered for registration of transfer, the Issuer shall execute and the Trustee shall authenticate and deliver a new Bond or Bonds of the same tenor in Authorized Denominations. No registration of transfer of Bonds upon the books of the Registrar required to be kept pursuant to the provisions of Section 2.04 hereof shall be required to be made during the period after any Record Date and prior to the related Interest Payment Date or during the period of fifteen (15) days immediately preceding the date on which

the Trustee mails any notice of redemption, nor shall any registration of transfer of Bonds called for redemption be required.

Bonds may be exchanged at the Principal Office of the Trustee for a like aggregate principal amount of Bonds of the same tenor of Authorized Denominations. The Trustee shall require the payment by the Owner requesting such exchange of any tax or other governmental charge required to be paid with respect to such exchange, and there shall be no other charge to any owners for any such exchange. Except with respect to Bonds remarketed after being purchased pursuant to Sections 4.07 and 4.08 hereof, no exchange of Bonds shall be required to be made during the period after any Record Date and prior to the related Interest Payment Date or during the period of fifteen (15) days immediately preceding the date on which the Trustee gives notice of redemption, nor shall any exchange of Bonds called for redemption be required. If a Bond is presented for transfer or exchange after notice of redemption of such Bond has been given as provided in Section 4.03 hereof, the Registrar shall deliver a copy of such notice of redemption to the new owner of such Bond.

Section 2.04 Bond Register . The Registrar will keep or cause to be kept at its Principal Office sufficient books for the registration and the registration of transfer of the Bonds, which shall at all times, during regular business hours, be open to inspection by the Issuer, the Trustee, the Bond Insurer and the Borrower; and, upon presentation for such purpose, the Registrar shall, under such reasonable regulations as it may prescribe, register the transfer or cause to be registered the transfer, on said books, of Bonds as hereinbefore provided.

Section 2.05 Bonds Mutilated Lost Destroyed or Stolen . If any Bond shall become mutilated, the Issuer, upon the request and at the expense of the holder of said Bond, shall execute, and the Trustee shall thereupon authenticate and deliver a new Bond of like tenor in exchange and substitution for the Bond so mutilated, but only upon surrender to the Registrar of the Bond so mutilated. Every mutilated Bond so surrendered to the Registrar shall be treated by the Trustee in accordance with its document retention policies (provided that the Trustee shall not be required to destroy such Bonds) and, upon the written request of the Issuer, a certificate evidencing such disposition shall be delivered to the Issuer, with a copy to the Borrower. If any Bond issued hereunder shall be lost, destroyed or stolen, evidence of such loss, destruction or theft may be submitted to the Issuer, the Borrower and the Registrar, and if such evidence be satisfactory to them and indemnity satisfactory to them shall be given by or on behalf of the holder of such lost, destroyed or stolen Bond, the Issuer, at the expense of the holder, shall execute, and the Trustee shall thereupon authenticate and deliver, a new Bond of like tenor in lieu of and in substitution for the Bond so lost, destroyed or stolen (or if any such Bond shall have matured or shall be about to mature, instead of issuing a substitute Bond the Trustee shall, at the direction of the Issuer, pay the same without surrender thereof). The Issuer may require payment of a reasonable fee for each new Bond issued under this Section and payment of the expenses which may be incurred by the Issuer and the Trustee. Any Bond issued under the provisions of this Section in lieu of any Bond mutilated or alleged to be lost, destroyed or stolen shall constitute an original additional contractual obligation on the part of the Issuer whether or not the Bond mutilated or so alleged to be lost, destroyed or stolen shall be at any time enforceable by anyone, and shall be equally and proportionately entitled to the benefits of this Indenture with all other Bonds secured by this Indenture.

All Bonds shall be held and owned upon the express condition that, to the extent permitted by law, the foregoing provisions are exclusive with respect to the replacement or payment of lost, destroyed or improperly cancelled Bonds, notwithstanding any law or statute now existing or hereafter enacted.

Section 2.06 Disposition of Cancelled Bonds . When paid in full, all Bonds shall be delivered to the Trustee, who shall forthwith cancel such Bonds and deliver upon request a certificate evidencing such cancellation to the Issuer and the Borrower. The Trustee shall treat such cancelled Bonds in accordance with its document retention policies, provided that the Trustee shall not be required to destroy such Bonds.

Section 2.07 CUSIP Number . As provided in Section 2.01(d) of this Indenture, the Issuer in issuing the Bonds may use “CUSIP” number (if then generally in use), and, if so, the Trustee shall use “CUSIP” number in notices of redemption as a convenience to holders of Bonds; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Bonds or as contained in any notice of a redemption and that reliance may be placed only on the other identification number printed on the Bonds, and any such redemption shall not be affected by any defect in or omission of such CUSIP number. The Issuer shall promptly notify the Trustee of any changes in the CUSIP number.

Section 2.08 Other Obligations . The Issuer expressly reserves the right to issue, to the extent permitted by law, obligations under another ordinance(s) and/or indenture(s) to provide additional funds or, at the request of the Borrower, to refund all or any principal amount of the Bonds.

Section 2.09 Temporary Bonds . Pending the preparation of definitive Bonds, the Issuer may execute and the Trustee shall authenticate and deliver temporary Bonds. Temporary Bonds shall be issuable as fully registered Bonds, of any Authorized Denomination, and substantially in the form of the definitive Bonds but with such omissions, insertions and variations as may be appropriate for temporary Bonds, all as may be determined by the Issuer. Temporary Bonds may contain such reference to any provisions of this Indenture as may be appropriate. Every temporary Bond shall be executed by the Issuer and be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with like effect, as the definitive Bonds. As promptly as practicable, the Issuer shall execute and shall furnish definitive Bonds and thereupon temporary Bonds may be surrendered in exchange therefor without charge at the Principal Office of the Trustee, and the Trustee shall authenticate and deliver in exchange for such temporary Bonds a like aggregate principal amount of the definitive Bonds of Authorized Denominations. Until so exchanged the temporary Bonds shall be entitled to the same benefits under this Indenture as definitive Bonds.

ARTICLE III

ISSUANCE OF BONDS

Section 3.01 Authentication and Delivery of Bonds . Forthwith upon the execution and delivery of this Indenture, the Issuer shall execute and deliver to the Trustee and the Trustee shall

authenticate the Bonds and deliver the Bonds to the initial purchasers thereof as directed hereinafter in this Section 3.01. Without any further action on the part of the Issuer, the Trustee shall authenticate the Bonds in an aggregate principal amount of Sixty-Three Million Five Hundred Thousand Dollars ($63,500,000). Prior to the delivery on original issuance by the Trustee of any authenticated Bonds there shall be or have been delivered to the Trustee:

(i) An original duly executed counterpart of this Indenture.

(ii) An original duly executed counterpart of the Agreement.

(iii) A written order of the Issuer to the Trustee to authenticate and deliver the Bonds to the purchaser or purchasers therein identified upon payment to the Trustee, but for the account of the Issuer, of a sum specified in such request and authorization plus any accrued interest on such Bonds to the date of delivery.

(iv) A written statement on behalf of the Borrower, executed by an Authorized Borrower Representative, (i) approving the issuance and delivery of the Bonds and (ii) consenting to each and every provision of this Indenture.

Section 3.02 Application of Proceeds of Bonds . The proceeds received by the Issuer from the sale of the Bonds in the amount of $63,500,000 shall be deposited with the Trustee, and the Trustee shall transfer such proceeds to Union Bank, N.A., as trustee for the Prior Bonds, to be applied to the redemption of the Prior Bonds.

Section 3.03 Payment of Principal and Interest . For the payment of interest on the Bonds, the Issuer shall cause to be deposited in the Bond Fund established under Section 5.01 hereof, on or prior to each Interest Payment Date, solely out of the Receipts and Revenues, an amount sufficient to pay the interest to become due on such Interest Payment Date. The obligation of the Issuer to cause any such deposit to be made hereunder shall be reduced by the amount of moneys in the Bond Fund available on such Interest Payment Date for the payment of interest on the Bonds.

For the payment of the principal of the Bonds on the Maturity Date or upon earlier redemption, the Issuer shall cause to be deposited in the Bond Fund, on or prior to the Maturity Date or redemption date of the Bonds, solely out of the Receipts and Revenues, an amount sufficient to pay the principal of the Bonds then due. The obligation of the Issuer to cause any such deposit to be made hereunder shall be reduced by the amount of moneys in the Bond Fund available on the Maturity Date or redemption date for the payment of the principal of the Bonds.

ARTICLE IIIA

ARS PROVISIONS

Section 3A.01 Amendments with Conversion to Applicable ARS Rate .

Notwithstanding any other provision in this Indenture, at the time of conversion of the Bonds to Auction Rate Securities mode pursuant to Section 3A.12 hereof, the Borrower shall have the right direct the Issuer to amend without further consent any provisions in this Indenture

relating to the Bonds in Auction Rate Securities mode in accordance with the then current market practice with respect to similar securities and provisions.

Section 3A.02 Payments with Respect to ARS .

(a) Interest with respect to ARS shall accrue from and including, as applicable, the Issue Date, the Conversion Date or the most recent ARS Interest Payment Date to which interest has been paid or duly provided for.

(b) The Trustee shall determine the aggregate amount of interest payable in accordance with subsection (e) below with respect to ARS on each ARS Interest Payment Date. Interest due on any ARS Interest Payment Date with respect to each $25,000 in principal amount of ARS shall equal (i) the Applicable ARS Rate multiplied by (ii) the principal amount of $25,000 multiplied by (iii) if the number of days in the Auction Period is less than 183, the number of days in the applicable ARS Interest Period, and, if the number of days in the Auction Period is 183 or greater, the number of days in the applicable ARS Interest Period assuming twelve 30-day months, divided by (iv) 360, and rounding the resultant figure to the nearest cent (a half cent being rounded upward). The Trustee shall notify the Securities Depository of its calculations, as provided in Section 3A.04(b) of this Indenture.

(c) Interest on the ARS shall be computed on the basis of a 360-day year for the actual number of days elapsed, except in the case of a Special Auction Period of 183 days or more in which case it will be computed on the basis of twelve 30-day months. The Applicable ARS Rate for each ARS Interest Period after the first ARS Interest Period shall be the Auction Rate; provided that

(i) Reserved .

(ii) in the event the Auction Agent fails to calculate or, for any reason, fails to timely provide the Auction Rate for any Auction Period (except as contemplated otherwise herein pursuant to (x), (y) and (z) below), the new Auction Period shall be the same as the preceding Auction Period if the preceding Auction Period was a period of 35 days or less and the new Auction Period shall be a seven-day Auction Period if the preceding Auction Period was a period of greater than 35 days and the Auction Rate for the new Auction Period shall be the same as the Auction Rate for the preceding Auction Period. The ARS shall continue in such Auction Period until changed pursuant to Section 3 A.10(a) hereof.

Notwithstanding the foregoing:

(x) if the ownership of the ARS is no longer maintained in book-entry form by a Securities Depository, the Applicable ARS Rate for any Auction Period commencing after the delivery of certificates representing the ARS shall equal the ARS Maximum Rate;

(y) if an ARS Payment Default shall have occurred with respect to the ARS, the Applicable ARS Rate for the Auction Period commencing on or immediately after such ARS Payment Default and for each Auction Period thereafter, to and including the

Auction Period, if any, during which, or commencing less than two Business Days after, such ARS Payment Default is cured in accordance with this Indenture, shall equal the Non-Payment Rate on the first day of each such Auction Period, provided that if an” Auction occurred on the Business Day immediately preceding any such Auction Period, the Applicable ARS Rate for such Auction Period shall be the Non-Payment Rate; or

(z) for any Auction Period during which there is no duly appointed Auction Agent, or during which there is no duly appointed Broker-Dealer, no Auction will be held and, if the preceding Auction Period was 35 days or less, the new Auction Period shall be the same as the preceding Auction Period and, if the preceding Auction Period was more than 35 days, the new Auction Period shall be a seven-day Auction Period and the Auction Rate in each case shall be the ARS Maximum Rate. The ARS shall continue in such Auction Period until changed pursuant to Section 3A.11(a) hereof.

(d) Medium of Payment .

(i) The principal of and interest on the ARS shall be payable in any currency of the United States of America which on the respective dates for payment thereof is legal tender for the payment of public and private debts. The principal of and interest on the ARS (other than at maturity) shall be payable by check mailed on the date due to the registered owner thereof on the Record Date at the address of such registered owner as it appears on the registration books maintained by the Trustee.

(ii) Interest payable on any ARS Interest Payment Date to a registered owner of ARS in the aggregate principal amount of $1,000,000 or more may, upon written request by such registered owner received by the Trustee prior to the Record Date preceding such ARS Interest Payment Date, be paid by wire transfer on the date due to a designated account in the United States. Such written request shall remain in effect until rescinded in writing by such registered owner. The principal of each ARS at maturity will be paid upon presentation and surrender thereof at the Principal Office of the Trustee.

(iii) Unless otherwise requested by the Securities Depository, payments of the principal of ARS, at maturity or upon redemption, and payments of interest on ARS made by wire transfer, shall be made by the Trustee in immediately available funds, provided, however, that such method of payment may be modified by written agreement among the Trustee, the Securities Depository and the Auction Agent.

(e) Computation of Interest Distributable on ARS . The amount of interest distributable to ARS Beneficial Owners, in respect of each $25,000 in principal amount thereof for any ARS Interest Period or part thereof, shall be calculated by the Trustee by applying the Applicable ARS Rate with respect to the ARS, for such ARS Interest Period or part thereof, to the principal amount of $25,000, multiplying such product by the actual number of days in such ARS Interest Period or part thereof if the number of days in the Auction Period is less than 183 and multiplying the product by the number of days in such ARS Interest Period assuming twelve 30-day months if the number of days in the Auction Period is 183 days or more in each case

divided by 360 and rounding the resultant figure to the nearest cent (half a cent being rounded upward).

(f) ARS Defaulted Interest .

(i) The Trustee shall determine not later than 2:00 p.m., New York City time, on each ARS Interest Payment Date, whether an ARS Payment Default has occurred. If an ARS Payment Default has occurred, the Trustee shall, not later than 2:30 p.m. New York City time on such Business Day, send a Notice of ARS Payment Default to the Auction Agent and each Broker-Dealer by telecopy or similar means and, if such ARS Payment Default is cured, the Trustee shall immediately send a Notice of Cure of ARS Payment Default to the Auction Agent and each Broker-Dealer by telecopy or similar means.

(ii) ARS Defaulted Interest shall forthwith cease to be payable to the ARS Beneficial Owner on the relevant Record Date by virtue of having been such ARS Beneficial Owner and such ARS Defaulted Interest shall be payable to the Person in whose name the ARS are registered at the close of business on a Special Record Date fixed therefor by the Trustee, which shall not be more than 15 days and not less than ten days prior to the date of the proposed payment of ARS Defaulted Interest. The Trustee shall promptly notify the Issuer and the Borrower of the Special Record Date and, at the Borrower’s expense, mail to each ARS Beneficial Owner of which it has knowledge pursuant to Section 11.01, not less than ten days before the Special Record Date, notice of the Special Record Date and the date of the proposed payment of such ARS Defaulted Interest.

Section 3A.03 Calculation of All-Hold Rate . The Auction Agent shall calculate the All-Hold Rate on each Auction Date. If the ownership of the ARS is no longer maintained in book-entry form by the Securities Depository, the Auction Agent shall announce the ARS Maximum Rate on the Business Day immediately preceding each ARS Interest Payment Date after the delivery of certificates representing the ARS. If an ARS Payment Default shall have occurred, the Trustee shall announce the Non-Payment Rate on the first day of (i) each Auction Period commencing on or after the date of the occurrence and during the continuance of such ARS Payment Default, and (ii) any Auction Period commencing less than two Business Days after the cure of any ARS Payment Default. The determination by the Auction Agent of the All-Hold Rate shall (in the absence of manifest error) be final and binding upon all ARS Beneficial Owners and all other parties. The Auction Agent shall promptly advise the Trustee of the All-Hold Rate.

Section 3A.04 Notification of Rates, Amounts and Payment Dates .

(a) So long as the ownership of the ARS is maintained in book-entry form by the Securities Depository, the Trustee shall advise the Securities Depository (i) of each Record Date for the ARS at least two Business Days prior thereto and (ii) of each succeeding Interest Payment Date on each Interest Payment Date.

(b) On the Issue Date, or as soon as practicable thereafter, and on the Business Day preceding each ARS Interest Payment Date with respect to the ARS, the Trustee shall advise the Securities Depository, so long as the ownership of the ARS is maintained in book-entry form by the Securities Depository, of the amount of interest distributable in respect of each $25,000 in principal amount of ARS for any ARS Interest Period or part thereof, calculated in accordance with Section 3A.02(e) of this Indenture.

If any day scheduled to be an ARS Interest Payment Date shall be changed after the Trustee shall have given notice, the Trustee shall, not later than 9:15 a.m., New York City time, on the Business Day next preceding the earlier of the new ARS Interest Payment Date or the old ARS Interest Payment Date, by such means as the Trustee deems practicable, give notice of such change to the Auction Agent, so long as no ARS Payment Default has occurred and is continuing and the ownership of the ARS is maintained in book-entry form by the Securities Depository.

Section 3A.05 Adjustments with Respect to ARS Provisions . Notwithstanding any other provision of this Indenture relating to ARS, including without limitation the mandatory tender provisions and the definitions of terms used in this Article IIIA (including without limitation the definitions of Applicable ARS Rate, All-Hold Rate, ARS Maximum Rate and Non-Payment Rate), the ARS provisions may be amended by the Issuer at the written request of the Borrower, (i) upon obtaining an opinion of Counsel that the same does not materially adversely affect the rights of the ARS Beneficial Owners or (ii) by obtaining the consent of a majority of the ARS Beneficial Owners and, in each case, delivering a Favorable Opinion of Bond Counsel. In the case of clause (ii) above, the Trustee shall mail notice of such amendment to the ARS Beneficial Owners of which it has knowledge pursuant to Section 11.01, and if, on the first Auction Date occurring at least 20 days after the date on which the Trustee mailed such notice, Sufficient Clearing Bids have been received or all of the ARS are subject to Submitted Hold Orders, the proposed amendment shall be deemed to have been consented to by the ARS Beneficial Owners. Written notice of each such amendment shall be delivered by the Issuer to the Trustee, the Borrower, the Auction Agent, and each Broker-Dealer.

Section 3A.06 Maximum Bond Interest Rate, Non-Payment Rate . If the Auction Rate on the Bonds shall be the Maximum Bond Interest Rate, the ARS Maximum Rate, or Non-Payment Rate for a period (A) in excess of thirty (30) days, the Borrower agrees to take all steps necessary to ensure that the Auction Rate does not exceed the interest rate payable on similar securities (taking into account the interest period and enhanced/insured rating of the Bonds), or (B) in excess of sixty (60) days, the Borrower agrees to convert, or cause to be converted, all Bonds to a Long-Term Interest Rate Period extending through the maturity of the Bonds or, with the approval of the Bond Insurer, to a variable interest rate mode, in each case at the lowest interest rate that will permit the Remarketing Agent to sell all the Bonds on the conversion date at a price equal to 100% of the principal amount thereof plus accrued interest thereon. If an Event of Default shall have occurred and be continuing under the Indenture or the Borrower fails to cause a conversion of the Bonds to another interest rate mode as required by the foregoing sentence, the Bond Insurer may, in its discretion, direct the conversion of the Bonds to a fixed rate or any other interest rate mode.

Section 3A.07 Auction Agent .

(c) The Trustee is hereby directed to enter into an Auction Agent Agreement with an Auction Agent as directed by the Borrower. Any Substitute Auction Agent shall be (i) subject to the written approval of each Broker-Dealer, (ii) a bank or trust company duly organized under the laws of the United States of America or any state or territory thereof and having a combined capital stock, surplus and undivided profits of at least $15,000,000, or (iii) a member of the National Association of Securities Dealers, Inc., having a capitalization of at least $15,000,000, and, in either case, authorized by law to perform all the duties imposed upon it hereunder and under the Auction Agent Agreement and a member of or a participant in, the Securities Depository. The Auction Agent may at any time resign and be discharged of the duties and obligations created by this Indenture by giving at least 45 days’ notice to the Trustee, the Broker-Dealer, the Issuer, the Borrower, and the Bond Insurer. The Auction Agent may be removed at any time by the Trustee, upon the written direction of (i) the Borrower, with the consent of the Bond Insurer, (ii) the Bond Insurer, or (iii) the ARS Beneficial Owners of 66 ² / 3 % of the aggregate principal amount of the ARS then Outstanding, with the consent of the Bond Insurer, by an instrument signed by the Trustee and filed with the Auction Agent, the Bond Insurer, the Issuer and the Borrower upon at least 30 days’ notice. Neither the resignation nor the removal of the Auction Agent pursuant to the preceding two sentences shall be effective until and unless a Substitute Auction Agent has been appointed and has accepted such appointment; provided, however, that if a Substitute Auction Agent has not been so appointed within 45 days of the notice of resignation of the Auction Agent, the Auction Agent may petition a court of competent jurisdiction to appoint a Substitute Auction Agent. Notwithstanding the foregoing, the Auction Agent may terminate the Auction Agent Agreement if, within 30 days after notifying the Trustee, the Issuer, the Borrower, and the Bond Insurer in writing that it has not received payment of any Auction Agent Fee due it in accordance with the terms of the Auction Agent Agreement, the Auction Agent does not receive such payment.

(d) If the Auction Agent shall resign or be removed or be dissolved, or if the property or affairs of the Auction Agent shall be taken under the control of any state or federal court or administrative body because of bankruptcy or insolvency, or for any other reason, the Trustee, at the direction of the Borrower, shall use its best efforts to appoint a Substitute Auction Agent.

(e) In the absence of willful misconduct, grossly negligent failure to act or gross negligence on its part, the Auction Agent shall not be liable for any action taken, suffered or omitted or any error of judgment made by it in the performance of its duties under the Auction Agent Agreement and shall not be liable for any error of judgment made in good faith unless the Auction Agent shall have been grossly negligent in ascertaining (or failing to ascertain) the pertinent facts necessary to make such judgment. The Trustee shall not be liable for any action, omission or error in judgment by the Auction Agent. In no event shall the Auction Agent be responsible or liable for special, indirect or consequential loss or damage of any kind whatsoever (including, but not limited to, loss of profit), even if the Auction Agent has been advised of the likelihood of such loss or damage and regardless of the form of action.

(f) The Auction Agent shall not be responsible or liable for any failure or delay in the performance of its obligations under this Indenture arising out of or caused, directly

or indirectly, by circumstances beyond its reasonable control, including without limitation, acts of God; earthquakes; fires; floods; wars; civil or military disturbances; sabotage; acts of terrorism; epidemics; riots; interruptions, loss or malfunctions of utilities; computer (software or hardware) or communications services; accidents; labor disputes; acts of civil or military authority or governmental actions; it being understood that the Auction Agent shall use reasonable efforts which are consistent with accepted practices in the banking industry to resume performance as soon as practicable under the circumstances.

Section 3A.08 Broker-Dealers .

(g) The Auction Agent shall enter into a Broker-Dealer Agreement with J.P. Morgan Securities Inc., as the initial Broker-Dealer. The Borrower may, from time to time, approve one or more additional Persons to serve as Broker-Dealers under Broker-Dealer Agreements and shall be responsible for providing such Broker-Dealer Agreements to the Trustee and the Auction Agent. No such party shall constitute a Broker-Dealer until a fully executed Broker-Dealer Agreement is delivered to the Trustee and the Auction Agent.

(h) Any Broker-Dealer may be removed at any time, at the written request of the Borrower, with the written consent of the Issuer.

Section 3A.09 Provisions Relating to Auctions . None of the Borrower, the Issuer, the Trustee or the Auction Agent shall be responsible for any failure of a Broker-Dealer to submit an Order to the Auction Agent on behalf of any Existing Owner or Potential Owner, nor shall any of the Borrower, the Issuer, the Trustee or the Auction Agent be responsible for failure by any Securities Depository to effect any transfer or to provide the Auction Agent with current information regarding registration of transfers. None of the Borrower, the Issuer, the Trustee, the Broker-Dealers or the Auction Agent shall have any liability in the event that there are not Sufficient Clearing Bids from time to time pursuant to the Auction Procedures.

Section 3A.10 Agreement of Holders . By purchasing ARS, whether in an Auction or otherwise, each prospective purchaser of ARS and its Broker-Dealer will be deemed to have agreed to the provisions for the replacement of the Auction Agent and each Broker-Dealer as provided in this Indenture, and relevant agreements among the Issuer, the Borrower, the Trustee, the Auction Agent, and the Broker-Dealer, as appropriate.

Section 3A.11 Changes in Auction Period or Auction Date .

(i) Changes in Auction Period .

(i) The Auction Period for the ARS Interest Rate Period commencing on the issue Date initially shall be a seven-day period commencing generally on a Tuesday. The Auction Period for the Bonds with respect to each subsequent ARS Interest Rate Period, if any, initially shall be either a seven-day period, a 28-day period, a 35-day period or a Special Auction Period, commencing generally on a Monday, generally on a Tuesday, generally on a Wednesday, generally on a Thursday or generally on a Friday, in each case as announced by the Borrower in its notice of the proposed Conversion to such subsequent ARS Interest Rate Period as provided in Section 3A.12.

(ii) During any Auction Period, the Borrower may from time to time and on any ARS Interest Payment Date immediately following an Auction Period, change the length of the Auction Period between seven-days, 28-days, 35-days and a Special Auction Period in order to accommodate economic and financial factors that may affect or be relevant to the length of the Auction Period and the interest rate borne by the Bonds. The Borrower shall initiate the change in the length of the Auction Period by giving written notice to the Trustee, the Issuer, the Auction Agent, the Broker-Dealer and the Securities Depository that the Auction Period shall change if the conditions described herein are satisfied and the proposed effective date of the change, at least three Business Days prior to the Auction Date for such Auction Period.

(iii) Any such changed Auction Period shall be for a period of seven days, 28 days, 35 days or for a Special Auction Period and shall apply for all of the Bonds.

(iv) The change in length of the Auction Period for the Bonds shall take effect only if Sufficient Clearing Bids exist at the Auction on the Auction Date for the first such Auction Period. For purposes of the Auction for such first Auction Period only, each Existing Owner shall be deemed to have submitted Sell Orders with respect to all of its ARS except to the extent such Existing Owner submits an Order with respect to such ARS. If the condition referred to in the first sentence of this clause (iv) is not met, the Auction Rate for the next Auction Period shall be the ARS Maximum Rate, and the Auction Period shall be a seven-day Auction Period.

(j) Changes in Auction Date . During any Auction Period, the Auction Agent, with the written consent of the Borrower may specify an earlier Auction Date (but in no event more than five Business Days earlier) than the Auction Date that would otherwise be determined in accordance with the definition of “Auction Date” in order to conform with then current market practice with respect to similar securities or to accommodate economic and financial factors that may affect or be relevant to the day of the week constituting an Auction Date and the interest rate borne on the ARS. The Auction- Agent shall provide notice of its determination to specify an earlier Auction Date for an Auction Period by means of a written notice delivered at least 45 days prior to the proposed changed Auction Date to the Trustee, the Paying Agent, the Borrower, the Issuer, the Broker-Dealers and the Securities Depository, which will, in turn, notify the holders. In the event the Auction Agent specifies an earlier Auction Date, the days of the week on which a Special Auction Period begins and ends and the Interest Payment Date relating to a Special Auction Period shall be adjusted accordingly.

(k) Conditions Precedent . No change in the length or the day of commencement of the Auction Period for the Bonds (as provided in subsection (a) or (b), as applicable) shall be allowed unless Sufficient Clearing Bids exist at the Auction immediately preceding the proposed change and, in the sole discretion of the Broker-Dealer, at the Auction before the date on which the notice of the proposed change was given.

Section 3A.12 Conversion of Bonds to Applicable ARS Rate .

(l) Conversion to Applicable ARS Rate . Subject to Section 2.01 hereof, the Borrower on behalf of the Issuer may, from time to time, by written direction to the Issuer, the Trustee, the Tender Agent (if any), the Bank (if any), the Remarketing Agent (if any), the Auction Agent (if any) and each Broker-Dealer (if any), elect that the Bonds shall bear interest at the Applicable ARS Rate. The direction of the Borrower shall specify (A) the proposed effective date of the Conversion to the Applicable ARS Rate, which shall be (1) in each case, a Business Day not earlier than the 30 ^th day following the second Business Day after receipt by the Trustee of such direction, (2) in the case of a Conversion from a Long-Term Interest Rate Period, the day immediately following the last day of the then-current Long-Term Interest Rate Period or a day on which the Bonds would otherwise be subject to optional redemption pursuant to Section 4.01(a) hereof if such Conversion did not occur, and (3) in the case of a Conversion from a Short-Term Interest Rate Period, the day immediately following the last day of the Short-Term Interest Rate Period, (B) the Tender Date for the Bonds to be purchased, which shall be the proposed effective date of the adjustment to the Applicable ARS Rate and (C) the initial Auction Period. In addition, the direction of the Borrower shall be accompanied by a form of notice to be mailed to the holders of the Bonds by the Trustee as provided in Section 3A.12(b) hereof. During each ARS Interest Rate Period for the Bonds commencing on the Conversion Date and ending on the day immediately preceding the Conversion Date to the next succeeding Interest Rate Period, the interest rate borne by the Bonds shall be the Applicable ARS Rate.

(m) Notice of Conversion to Applicable ARS Rate . The Trustee shall give notice by first-class mail of an adjustment to an ARS Interest Rate Period to the holders of the Bonds not less than 30 days prior to the proposed effective date of such ARS Interest Rate Period. Such notice shall state (A) that the interest rate shall be adjusted to the Applicable ARS Rate unless the Borrower rescinds its election to adjust the interest rate to the Applicable ARS Rate as provided in Section 2.01(c)(viii); (B) the proposed effective date of the ARS Interest Rate Period; (C) that the Bonds are subject to mandatory tender for purchase on the proposed effective date and setting forth the Tender Price and the place of delivery for purchase of the Bonds; and (D) the information set forth in Section 4.08(b).

Section 3A.13 Conversion to from ARS to Other Interest Rate Modes .

The Borrower may elect to convert the Bonds to other interest rate modes effective as of an ARS Interest Payment Date. Upon such conversion, the Bonds may accrue interest based on a Daily Interest Rate Period, Weekly Interest Rate Period, Short-Term Interest Rate Period or Long-Term Interest Rate Period. In order to effect such conversion, the Borrower shall provide a written direction to the Issuer, the Trustee, the Auction Agent and the Broker-Dealer of its election to convert the Bonds to another interest rate mode. The Trustee shall provide notice of such conversion to the holders of the Bonds not less than 30 days prior to the proposed effective date of such conversion. Pursuant to Section 4.08(a)(iii) hereof, the Bonds will be subject to mandatory tender for purchase on the first day of each Interest Rate Period, subject to the terms of the Indenture. The tender price shall be equal to the principal amount thereof tendered for purchase, without premium, plus accrued interest from the immediately preceding Interest Accrual Date to the date of such tender.

ARTICLE IV

REDEMPTION AND PURCHASE OF BONDS

Section 4.01 Redemption of Bonds The Bonds shall be subject to redemption if and to the extent the Borrower is entitled or required to make and makes a prepayment pursuant to Article IX of the Agreement. The Trustee shall not give notice of any optional redemption under Section 4.01(a) hereof unless the Borrower has so directed in accordance with Section 9.02 of the Agreement. In the event of a failure by the Borrower to give a notice of mandatory prepayment under Section 9.03 of the Agreement, such notice may be given by the Issuer, the Trustee or any holder or holders of ten percent (10%) or more in aggregate principal amount of the Outstanding Bonds.

The Bonds shall be redeemed upon the following terms:

(a) Redemption Upon Optional Prepayment .

(i) Extraordinary Events . During any Long-Term Interest Rate Period, the Bonds shall be redeemed prior to the Maturity Date in whole or in part, and if in part by lot, at any time at a redemption price equal to the principal amount thereof plus accrued interest to the redemption date, upon receipt by the Trustee of a written notice of the Borrower and signed by an Authorized Borrower Representative stating that any of the following events has occurred (which determination shall be in the sole discretion of the Borrower) and that the Borrower therefore intends to exercise its option to prepay all payments due under the Agreement, including Repayment Installments, in whole or in part pursuant to Section 9.01 of the Agreement and thereby effect the redemption of Bonds in whole or in part to the extent of such prepayments:

(A) All or part of the Project or the Plant shall have been damaged or destroyed to such an extent that, in the opinion of the Borrower, (i) the Project or the Plant or such affected portion could not reasonably be restored within a period of four (4) months to the condition thereof immediately preceding such damage or destruction, and the Borrower or the operator of the Project or the Plant will be prevented, or is likely to be prevented for a period of four (4) consecutive months or more, from carrying on all or substantially all of its normal operation of the Project or the Plant, or (ii) the cost of restoration of the Project or the Plant or such affected portion will be substantially in excess of the net proceeds of insurance thereon.

(B) Title to, or the temporary use of, all or a part of the Project or the Plant shall have been taken under the exercise of the power of eminent domain.

(C) Changes in economic availability of raw materials, operating supplies or facilities necessary to operate all or a part of the Project or the Plant, or technological or other changes which make the continued operation of the Project or the Plant or such affected portion uneconomical, in the opinion-

of the Borrower, shall have occurred and shall have resulted in a cessation of all or substantially all of the Borrower’s normal operations of either the Project or the Plant.

(D) Unreasonable burdens or excessive liabilities shall have been imposed upon the Issuer or the Borrower in respect of all or a part of the Project or the Plant including, without limitation, federal, state or other ad valorem, property, income or other taxes not being imposed on the date of the Agreement, as well as any statute or regulation enacted or promulgated after the date of the Agreement that prevents the Borrower from deducting interest in respect of the Agreement for federal income tax purposes.

(ii) Borrower Option . Subject to Section 4.12 hereof, the Bonds shall be subject to redemption prior to the Maturity Date by the exercise by the Borrower of any of its options to prepay all or part of the unpaid balance of the Repayment Installments and cause the Bonds to be redeemed, in whole, or in part by lot, prior to the Maturity Date, as follows:

(A) During any Short-Term Interest Rate Period, each Bond shall be subject to such redemption on the day next succeeding the last day of each Bond Interest Term for such Bond at a redemption price equal to 100% of the principal amount thereof.

(B) During any Daily Interest Rate Period or Weekly Interest Rate Period, the Bonds shall be subject to such redemption on any Interest Payment Date at a redemption price equal to 100% of the principal amount thereof.

(C) During any Long-Term Interest Rate Period in excess of three (3) years that is in effect after the Initial Long-Term Interest Rate Period, the Bonds shall be subject to redemption after year three, in whole or in part, on any Business Day at 100% of the principal amount thereof unless different redemption terms shall be specified by the Borrower pursuant to Section 2.01(c)(iv)(B). The Bonds shall be subject to optional redemption, in whole or in part on any Business Day on or after February 1, 2019 at a redemption price equal to the principal amount being redeemed together with the accrued interest on such principal amount to the date fixed for redemption.

(iii) Change of Use . During any Long-Term Interest Rate Period, the Bonds shall be subject to redemption prior to the Maturity Date upon prepayment of the Repayment Installments attributable to the Bonds at the option of the Borrower in whole or in part by lot on any Interest Payment Date, at a redemption price equal to 100% of the principal amount thereof, if the Borrower delivers to the Trustee a written or Electronic notice to the effect that either:

(A) the Borrower has determined that some or all of the interest payable under the Agreement for any sixty (60) days (which need not be

consecutive) within any consecutive twenty-four (24) month period is not or will not be deductible, in whole or in part, for federal income tax purposes by reason of Section 150(b) of the Code (or would not be deductible unless some or all of the Bonds are redeemed) due to a change in use of the Project or any portion thereof, and the Borrower will not claim deductions for such interest on its federal income tax returns; or

(B) the Borrower after reasonable effort has been unable to obtain an opinion of Bond Counsel that it is more likely than not that Section 150 of the Code will not prevent interest payable under the Agreement for any sixty (60) days (which need not be consecutive) within any consecutive twenty-four (24) month period from being deductible, in whole or in part, for federal income tax purposes.

In either such case, the Borrower shall only cause the Trustee to redeem Bonds pursuant to this Section 4.01(a)(iv) on or after the Interest Payment Date immediately preceding the date on which, due to a change in use in the Project or any portion thereof, the period of potential interest expense disallowance described above commences, and the Borrower may only cause the Trustee to redeem such principal amount of Bonds as the Borrower determines is necessary to assure that the Borrower retains its right to all such deductions otherwise allowable or, if a partial redemption will not enable the Borrower to retain the right to deduct such interest, the Borrower may cause the Trustee to redeem all the Outstanding Bonds.

(iv) ARS Interest Rate Period . The ARS shall be subject to redemption prior to the Maturity Date by the Issuer, at the written direction of the Borrower, on the ARS Interest Payment Date immediately following an Auction Period, in whole or in part in an Authorized Denomination, at a redemption price equal to the principal amount thereof to be redeemed, plus accrued but unpaid interest to the redemption date, without premium.

Notwithstanding any term or provision of Section 4.01(a) of this Indenture to the contrary, the Bonds shall not be subject to optional redemption unless (i) the Bank, if any, shall consent thereto in writing and deliver such consent to the Borrower and the Trustee, (ii) in connection with such redemption, the proceeds of a refunding shall be sufficient to pay, and shall be used to pay, the redemption price of the Bonds so redeemed, or (iii) sufficient Available Moneys (other than proceeds of any drawing under the Letter of Credit) shall have been deposited by the Borrower with the Trustee for the payment of all amounts due in respect of all Bonds called for redemption pursuant to Section 4.01(a) of this Indenture. This paragraph shall be inapplicable if at the time of such optional redemption there is no Letter of Credit or other Credit Facility with respect to the Bonds.

(b) Redemption Upon Mandatory Prepayment . The Bonds shall be subject to redemption prior to the Maturity Date from amounts which are required to be prepaid by the Borrower under Section 9.03 of the Agreement, as set forth below.

(i) The Bonds shall be redeemed in whole on any date at a redemption price equal to the principal amount thereof plus interest accrued, if any, to the redemption date, within 180 days after the occurrence of a Determination of Taxability; provided, however, that if, in the opinion of Bond Counsel delivered to the Trustee, the redemption of a specified portion of such Bonds Outstanding would have the result that interest payable on such Bonds remaining Outstanding after such redemption would remain Tax-Exempt, then such specified portion of the Bonds shall be redeemed in part by lot (in Authorized Denominations), in such amount as Bond Counsel in such opinion shall have determined is necessary to accomplish that result.

(ii) The Bonds shall be redeemed in whole at a redemption price equal to the principal amount thereof plus accrued interest to the redemption date in the event that as a result of any changes in the Constitution of the United States of America or the Constitution of the State of Arizona or as a result of any legislative, judicial or administrative action, the Agreement shall have become void or unenforceable or impossible to perform in accordance with the intention and purposes of the parties thereto, or shall have been declared unlawful.

(c) Extraordinary Mandatory Redemption . The Bonds shall be subject to extraordinary mandatory redemption prior to the stated maturity, in whole but not in part, on any date at a redemption price equal to the principal amount thereof plus interest accrued to the redemption date prior to any merger, consolidation, reorganization or conversion of the Borrower, or any sale or other disposition of all or substantially all of the Borrower’s assets if the successor to such merger, consolidation or disposition 1) is not a public utility (including a holding company) regulated by the applicable state regulatory body or the Federal Energy Regulatory Commission, and 2) does not agree to assume the obligations of the Borrower under the Agreement.

Section 4.02 Selection of Bonds to be Redeemed . If less than all the Bonds shall be called for redemption, the Trustee shall select the Bonds or any given portion thereof to be redeemed, from Outstanding Bonds or any given portion thereof not previously called for redemption, by lot. For the purpose of any such selection the Trustee shall assign a separate number for each minimum Authorized Denomination of each Bond of a denomination of more than such minimum; provided that following any such selection, both the portion of such Bond to be redeemed and the portion remaining shall be in Authorized Denominations. The Trustee shall promptly notify the Issuer and the Borrower in writing of the numbers of the Bonds or portions thereof so selected for redemption. Notwithstanding the foregoing, if less than all of the Bonds are to be redeemed at any time while the Bonds are Book-Entry Bonds, selection of the Bonds to be redeemed shall be made in accordance with customary practices of DTC or the applicable successor depository, as the case may be.

Section 4.03 Notice for Redemption . The Trustee shall give notice, Electronically or by first class mail, in the name of the Issuer, of the redemption of the Bonds, not less than thirty (30) nor more than sixty (60) days prior to the redemption date for Bonds bearing interest fixed to the Maturity Date or at Daily, Weekly or Long-Term Interest Rates, and at any time not more than sixty (60) days prior to the redemption date for Bonds bearing interest at Bond Interest Term Rates. Each notice of redemption shall (i) specify the Bonds to be redeemed, the

redemption date, the redemption price, the place where amounts due upon such redemption will be payable (which shall be the Principal Office of the Paying Agent) and the source of the funds to be used for such redemption, the principal amount, the CUSIP numbers (if any) of the Bonds to be redeemed and, if less than all, the distinctive certificate numbers of the Bonds to be redeemed and, in the case of Bonds to be redeemed in part only, the respective portions of the principal amount thereof to be redeemed. Each such notice shall also state that the interest on the Bonds designated for redemption shall cease to accrue from and after such redemption date and that on said date there will become due and payable on each of said Bonds the principal amount thereof to be redeemed, interest accrued thereon, if any, to the redemption date and the premium, if any, thereon (such premium to be specified) and shall require that such Bonds be then surrendered at the address or addresses of the Paying Agent specified in the redemption notice; provided however, the failure to duly give such notice, or any defect therein, shall not affect the validity of any proceedings for the redemption of Bonds with respect to which no such failure or defect occurred. In the event that any Bond selected for redemption shall be tendered for purchase pursuant to Section 4.08 hereof, the Tender Agent shall note on each Bond delivered to an Owner pursuant to Section 14.04 hereof upon the purchase of such tendered Bond that such Bond has been called for redemption and the date of such redemption. Upon presentation and surrender of Bonds so called for redemption at the place or places of payment, such Bonds shall be redeemed and cancelled. Notice of any redemption hereunder shall also be given to the Tender Agent and the Bank. The cost of the mailing of any such notice of redemption shall be paid by the Borrower.

With respect to any notice of optional redemption of Bonds pursuant to Section 4.01(a), unless upon the giving of such notice such Bonds shall be deemed to have been paid within the meaning of Article IX hereof, such notice shall state that such redemption shall be conditional upon the receipt by the Trustee on or prior to the date fixed for such redemption of Available Moneys sufficient to pay the principal of, premium, if any, and interest on, such Bonds to be redeemed, and that if such Available Moneys shall not have been so received said notice shall be of no force and effect and the Issuer shall not be required to redeem such Bonds. In the event that such notice of redemption contains such a condition and such Available Moneys are not so received, the redemption shall not be made and the Trustee shall within a reasonable time thereafter give notice, to the persons and in the manner in which the notice of redemption was given, that such Available Moneys were not so received.

Any notice for the redemption of any Bond mailed as provided herein shall be conclusively deemed to have been duly given whether or not such notice is received. Failure to mail the notices required by this paragraph to any holder of a Bond, or any defect in any notice so mailed, shall not affect the validity of the proceedings for redemption of any Bonds nor impose any liability on the Trustee.

Section 4.04 Partial Redemption of Bonds . Upon surrender of any Bond redeemed in part only, the Registrar shall exchange the Bond redeemed for a new Bond of like tenor and in an Authorized Denomination without charge to the holder in the principal amount of the portion of the Bond not redeemed. In the event of any partial redemption of a Bond which is registered in the name of the Nominee, DTC may elect to make a notation on the Bond certificate which reflects the date and amount of the reduction in principal amount of said Bond in lieu of surrendering the Bond certificate to the Registrar for exchange. The Issuer, the Trustee and the

Registrar shall be fully released and discharged from all liability upon, and to the extent of, payment of the redemption price for any partial redemption and upon the taking of all other actions required hereunder in connection with such redemption.

If any Auction Bonds are to be redeemed and those Bonds are held by a Securities Depository, the Borrower shall include in the notice of the call for redemption delivered to the Securities Depository (i) a date placed under an item entitled “Publication Date for Securities Depository Purposes” and such date shall be three Business Days after the Auction Date immediately preceding such redemption date, and (ii) an instruction to Securities Depository to (x) determine on such Publication Date after the Auction held on the immediately preceding Auction Date has settled, the Participants whose Securities Depository positions will be redeemed and the principal amount of such Auction Bonds to be redeemed from each such position (the “Securities Depository Redemption Information”), and (y) notify the Auction Agent immediately after such determination of the positions of the Participants in such Auction Bonds immediately prior to such Auction settlement, the position of the Participants in such Auction Bonds immediately following such auction settlement, and the Securities Depository’ Redemption Information.

Section 4.05 Effect of Redemption . Notice of redemption having been duly given as aforesaid, and moneys for payment of the redemption price being held by the Trustee, the Bonds so called for redemption shall, on the redemption date designated in such notice, become due and payable at the redemption price specified in such notice, interest on the Bonds so called for redemption shall cease to accrue, said Bonds shall cease to be entitled to any lien, benefit or security under this Indenture, and the holders of said Bonds shall have no rights in respect thereof except to receive payment of the redemption price thereof (including interest, if any, accrued to the redemption date), without interest accrued on any funds held after the redemption date to pay such redemption price.

All Bonds fully redeemed pursuant to the provisions of this Article IV shall upon surrender thereof be cancelled by the Trustee, who shall deliver a certificate evidencing such cancellation to the Issuer and the Borrower. The Trustee shall treat such cancelled Bonds in accordance with its document retention policies, provided that the Trustee shall not be required to destroy such Bonds.

Section 4.06 Payment of Redemption Price .

(i) For the redemption of any of the Bonds, the Issuer shall cause to be deposited in the Bond Fund, on or prior to the date fixed for redemption, solely out of the Receipts and Revenues, an amount sufficient to pay the principal of and interest and any premium to become due on the date fixed for such redemption on the Bonds; provided that so long as a Credit Facility is in effect with respect to the Bonds and such Credit Facility does not cover some or all of the optional or mandatory redemption price, any amount payable as the optional or mandatory redemption price upon redemption of Bonds and not covered by such Credit Facility shall be on deposit in the Bond Fund and constitute Available Moneys prior to the Trustee giving any notice of redemption hereunder. The Bond Insurance Policy shall not cover payments for the redemption of any of the Bonds, other than payments of the redemption price and accrued interest due

on the redemption date upon the mandatory redemption resulting from the occurrence of the Determination of Taxability pursuant to Section 4.01(b) hereof and payments of the redemption price and accrued interest due on the redemption date upon the extraordinary mandatory redemption pursuant to Section 4.01(c) hereof.

(ii) Moneys for payment of the principal of and interest and any premium to the date fixed for redemption on Bonds called for redemption and not presented for payment on the date fixed for redemption shall be set aside by the Trustee in trust for the Owners of such Bonds and shall be held uninvested. Interest on such Bonds shall cease to accrue on the date fixed for redemption.

Section 4.07 Bank Purchase Option .

(i) Notwithstanding any term or provision of this Indenture to the contrary, if a Credit Facility is in effect and (i) if an Event of Default shall occur and the Bonds are accelerated or (ii) if any Bonds shall be subject to redemption pursuant to Section 4.01 of this Indenture, or (iii) if the Remarketing Agent shall be unable to remarket Bonds as provided in Article XIV of this Indenture, then in any of such cases the Bank may from time to time in its discretion (in the manner provided in this Section 4.07) purchase all of the Bonds or the portion thereof that is subject to redemption, acceleration or which the Remarketing Agent has been unable to remarket, on the terms provided herein.

(ii) The Bank shall notify the Trustee in writing of its exercise of its purchase option pursuant hereto at or before the time by which payment of any drawing of a Credit Facility is required in respect of the relevant acceleration, redemption or failure to remarket Bonds which gives rise to such purchase option. Such notice may be given after presentation by the Trustee of any document or draft under such Credit Facility with respect to such acceleration, redemption or failure to remarket, in which case purchase of the relevant Bonds by the Bank shall take precedence over such drawing; provided, that if the Bank has not exercised its purchase option and paid the purchase price of the Bonds being purchased by the time by which payment is due under such Credit Facility in respect of such drawing, the Bank shall pay such drawing pursuant to such Credit Facility. If the Trustee shall have presented drafts or documents under such Credit Facility, the Bank’s notice of exercise of its purchase option may accompany payment of the purchase price of Bonds being acquired. The purchase price of Bonds purchased by the Bank pursuant hereto shall be paid to the Trustee at such account as it shall specify and shall be distributed by the Trustee to the former owners from which such Bonds shall have been purchased; provided, that in the case of any Bonds purchased upon a failed remarketing pursuant to paragraph (vi) of this Section 4.07, the purchase price shall be paid to the Remarketing Agent for distribution to the former Owners of such Bonds which tendered them to the Tender Agent.

(iii) No purchase of any Bonds by the Bank in accordance herewith shall cause such Bonds to be extinguished or deemed paid, and upon payment of the purchase price of Bonds by the Bank, the Trustee shall authenticate and deliver to the Bank (or its nominee) as Owner a Bond or Bonds in an aggregate principal amount equal

to the aggregate principal amount of Bonds so purchased (which shall be deemed to be in an “Authorized Denomination” for all purposes of this Indenture), and such Bonds so delivered shall be Outstanding Bonds that are entitled to the benefits of this Indenture equally and proportionately with all other Bonds; provided that the Trustee shall not make any drawing on a Credit Facility in respect of Bonds known by the Trustee to be held by the Bank (or its nominee) except as provided in paragraph (viii) of this Section 4.07. Bonds purchased by the Bank which are not delivered to the Trustee by the date upon which such Bonds were to have been purchased nonetheless will be deemed to have been purchased by the Bank, and the former Owner or Owners of such Bonds shall have no claim thereon, under this Indenture or otherwise, for any amount other than the purchase price thereof. Interest accruing after the purchase date of such Bonds shall no longer be payable to the former Owners thereof. If the Bonds are then Book-Entry Bonds, the Trustee shall act in accordance with the procedures and requirements of DTC then in effect and, if provided by such procedures and requirements, promptly obtain a CUSIP number for the Bonds purchased by the Bank so that such Bonds can be separately identified by such CUSIP number from all other Bonds.

(iv) Bonds called for and subject to redemption pursuant to Section 4.01 of this Indenture may, at the option of the Bank, be purchased by the Bank pursuant to this Section 4.07, on the date upon which such Bonds were to have been redeemed at a purchase price equal to the amount that would have been payable on such Bonds if such Bonds had been so redeemed, except as provided in paragraph (vii) of this Section 4.07; provided, that no Bond called for redemption shall be subject to purchase by the Bank pursuant to this Section 4.07 if (i) in connection with such redemption, the proceeds of a refunding shall be sufficient to pay, and shall be used to pay, the redemption price of the Bonds so redeemed, or (ii) sufficient Available Moneys (other than proceeds of any drawing under a Credit Facility) shall have been deposited by the Borrower with the Trustee for the payment of all amounts due in respect of all Bonds called for redemption pursuant to Section 4.01 of this Indenture. The Bank shall pay the purchase price for Bonds purchased by the Bank on such redemption date.

(v) If an Event of Default occurs and the Bonds are accelerated, the Bank may purchase all Bonds, pursuant to this Section 4.07, for a purchase price equal to the principal amount of such Bonds plus interest accrued thereon to the date of purchase, except as otherwise provided in paragraph (vii) of this Section 4.07.

(vi) In the event that the Remarketing Agent shall be unable to remarket any Bonds as provided in Article XIV hereof, the Bank may, at its option, purchase all such unremarketed Bonds pursuant to this Section 4.07, at a purchase price equal to 100% of the principal amount thereof plus accrued interest, if any, on the date on which such Bonds would otherwise be purchased by the Remarketing Agent pursuant to Section 6.02(b), except as otherwise provided in paragraph (vii) of this Section 4.07.

(vii) Upon a purchase of Bonds by the Bank pursuant to this Section 4.07, the Bank may, in its discretion, purchase all Bonds, if any, then held by the Trustee which have been purchased by or on behalf of the Borrower with moneys drawn under a Credit Facility as to which drawing the Borrower has not reimbursed the Bank in

accordance with the Reimbursement Agreement without the payment of any cash purchase price therefor, but the Borrower’s reimbursement obligations under the Reimbursement Agreement shall be reduced by an amount equal to the principal amount of such Bonds so deemed purchased. The Bank may exercise its option pursuant to the preceding sentence by a notice to the Trustee given with or included in the relevant notice to the Trustee under paragraph (ii) of this Section 4.07, together with a notice which shall confirm that a Credit Facility has been reinstated in an equal amount.

(viii) Notwithstanding any term or provision of this Indenture to the contrary, the Trustee shall not without the prior written consent of the Bank make any drawing under a Credit Facility with respect to the principal amount of any Bonds known by the Trustee to be held by the Bank or its nominee; provided, that the Trustee shall make drawings of interest under a Credit Facility with respect to the Bonds held by the Bank or its nominee, as provided in this Indenture.

(ix) The purchase price of any Bonds to be purchased by the Bank in accordance with this Section 4.07 shall be paid by the Bank with its general funds and not directly or indirectly from funds or collateral on deposit with or pledged to the Bank for the account of the Issuer or the Borrower or any affiliate thereof, and such payment by the Bank shall not be deemed to be a draw under a Credit Facility.

(x) Notwithstanding any term or provision of this Indenture or the Bonds to the contrary, if at any time all of the Outstanding Bonds are in aggregate held by the Bank or its nominee (whether pursuant to the provisions hereof or otherwise), the Bank shall not be entitled to exercise its rights under Section 4.08 of this Indenture or under the Bonds to require that the Bonds be purchased unless either (i) the Bank shall have given the Borrower, the Trustee and the Remarketing Agent at least 30 days prior written notice of its intention to exercise such rights, or (ii) the Remarketing Agent shall have received from the Borrower offering materials relating to the Bonds which are, in the opinion of the counsel to the Borrower and the counsel to the Issuer, correct and complete in all material respects.

Section 4.08 Purchase of Bonds .

(a) Holder’s Option to Tender for Purchase.

(i) During any Daily Interest Rate Period, any Bond or portion thereof in an Authorized Denomination shall be purchased on any Business Day at a purchase price equal to 100% of the principal amount thereof plus accrued interest from the Interest Accrual Date immediately prior to the date of purchase to the date of purchase (unless the date of purchase shall be an Interest Accrual Date, in which case at a purchase price equal to the principal amount thereof), payable in immediately available funds, upon (A) delivery to the Tender Agent at its Principal Office, by no later than 11:00 a.m. (New York City time) on such Business Day, of an irrevocable written, telephonic or Electronic notice which states the principal amount of such Bond to be tendered for purchase and the date of purchase, and (B) delivery of such Bond tendered for purchase to the Tender Agent at its Principal Office on the date of purchase in accordance with

Section 4.09 hereof. The Tender Agent shall keep a written record of the notice described in Clause (A).

(ii) During any Weekly Interest Rate Period, any Bond or portion thereof in an Authorized Denomination shall be purchased on any Business Day at a purchase price equal to 100% of the principal amount thereof plus accrued interest, if any, from the Interest Accrual Date immediately prior to the date of purchase to the date of purchase (unless the date of purchase shall be an Interest Accrual Date, in which case at a purchase price equal to the principal amount thereof), payable in immediately available funds, upon (A) delivery to the Tender Agent at its Principal Office by no later than 5:00 p.m. (New York City time), on such Business Day at least seven (7) days prior to the date of purchase of an irrevocable written, telephonic or Electronic notice, which states the principal amount of such Bond to be tendered for purchase and the date of purchase, and (B) delivery of such Bond tendered for purchase to the Tender Agent at its Principal Office on the date of purchase in accordance with Section 4.09 hereof. The Tender Agent shall keep a written record of the notice described in Clause (A).

(iii) If any Bond is to be purchased in part pursuant to (i) or (ii) above, the amount so purchased and the amount not so purchased must each be an Authorized Denomination.

(iv) Any instrument delivered to the Tender Agent in accordance with this Section 4.08 shall be irrevocable with respect to the purchase for which such instrument was delivered and shall be binding upon any subsequent Owner of the Bond to which it relates, including any Bond issued in exchange therefor or upon the registration of transfer thereof, and as of the date of such instrument, the Owner of the Bonds specified therein shall not have any right to optionally tender for purchase such Bonds prior to the date of purchase specified in such notice. The Tender Agent and the Trustee may conclusively assume that any person (other than a holder) providing notice of optional tender pursuant to (i) or (ii) above is the Owner of the Bond to which such notice relates, and neither the Tender Agent nor the Trustee shall assume any liability in accepting such notice from any person whom it reasonably believes to be an Owner of Bonds.

(b) Mandatory Tender for Purchase .

(i) The Bonds shall be subject to mandatory tender for purchase at a purchase price, except as provided in paragraph (ii) below, equal to 100% of the principal amount thereof, plus accrued interest to the date of purchase described below, upon the occurrence of any of the events stated below:

(A) as to any Bond, on the effective date of any change in an Interest Rate Period for such Bond, subject to Sections 2.01(b) and 2.01(c)(iv)(B), other than the effective date of any change from a Daily Interest Rate Period to a Weekly Interest Rate Period or from a Weekly Interest Rate Period to a Daily Interest Rate Period; or

(B) as to each Bond in a Short-Term Interest Rate Period, on the day next succeeding the last day of each Bond Interest Term with respect to such Bond; or

(C) as to all Bonds, on the effective date of any Credit Facility which may be provided with respect to the Bonds pursuant to Section 6.08 of the Agreement or of any substitute Credit Facility provided with respect to the Bonds pursuant to Section 6.08 of the Agreement, subject to Section 4.08(c) hereof.

(ii) In the event that on a date the Bonds are subject to optional redemption pursuant to Section 4.01(a)(ii), the Borrower elects to change the Interest Rate Period with respect to the Bonds during a Long-Term Interest Rate Period to a different Interest Rate Period or to provide, substitute or terminate a Credit Facility, if any, during a Long-Term Interest Rate Period and thereby causes a mandatory tender of such Bonds as provided in Section 4.08(b)(i)(A) or (C), as the case may be, the Bonds shall be purchased on the applicable mandatory tender date at a purchase price equal to the principal amount thereof plus an amount equal to any premium which would have been payable on such day had the Borrower directed redemption of the Bonds pursuant to Section 4.01(a)(ii) hereof.

(iii) The Trustee shall give notice Electronically or by first class mail of the provision of any Credit Facility with respect to the Bonds or the provision of any substitute Credit Facility with respect to the Bonds to the holders of the Bonds at their addresses shown on the registration books kept by the Registrar, not later than the fifteenth day (thirtieth day if the then current Interest Rate Period is a Long-Term Interest Rate Period) prior to the date on which the Bonds are subject to mandatory tender pursuant to Section 4.08(b)(i)(C), which notice shall (i) state the date of such provision or substitution; and (ii) state that such Bonds shall be subject to mandatory tender for purchase on the effective date of such provision or substitution in accordance with Section 4.08(b)(i)(C) hereof.

(c) Mandatory Tender for Purchase on Termination or Expiration of Credit Facility . In the event that any Credit Facility either is to terminate or is to expire in accordance with its terms (other than because a final drawing thereunder shall have been made in accordance with its terms), unless the term of the Credit Facility shall be extended or unless the Borrower shall provide the Trustee, no later than the 35th day preceding the mandatory purchase date set forth herein with a substitute Credit Facility and with written evidence from Moody’s, if the Bonds shall be rated at the time by Moody’s, and from S&P, if the Bonds shall be rated at the time by S&P, to the effect that such substitute Credit Facility will not, by itself, result in a reduction or withdrawal of the rating on the Bonds by Moody’s or S&P, as the case may be (and the Trustee shall have received written notice of such extension or such substitution and evidence thereof prior to giving the notice required in paragraph (b) above), the Bonds shall be subject to mandatory tender for purchase at a purchase price, payable in immediately available funds, of 100% of their principal amount, plus accrued interest, if any, to the mandatory purchase date, on the second Business Day prior to the date of such termination or expiration.

Section 4.09 Delivery of Tendered Bonds . With respect to any Book-Entry Bond, delivery of such Bond to the Tender Agent in connection with any optional or mandatory tender pursuant to Section 4.08 hereof shall be effected by the making of, or the irrevocable authorization to make, appropriate entries on the books of DTC or any DTC Participant to reflect the transfer of the beneficial ownership interest in such Bond to the account of the Tender Agent, or to the account of a DTC Participant acting on behalf of the Tender Agent. With respect to any Bond which is not a Book-Entry Bond, delivery of such Bond to the Tender Agent in connection with any optional or mandatory tender pursuant to Section 4.08 hereof shall be effected by physical delivery of such Bond to the Tender Agent at its Principal Office, by 1:00 p.m. (New York City time) on the purchase date, accompanied by a proper instrument of transfer thereof, in a form satisfactory to the Tender Agent, executed in blank by the holder thereof with the signature of such holder guaranteed in accordance with the guidelines set forth by one of the nationally recognized medallion signature programs.

Section 4.10 Bonds Deemed Purchased .

(a) If moneys sufficient to pay the purchase price of Bonds to be purchased pursuant to Section 4.08 shall be held by the Tender Agent on the date such Bonds are to be purchased, such Bonds shall be deemed to have been purchased for all purposes of this Indenture, irrespective of whether or not such Bonds shall have been delivered to the Tender Agent, and neither the former holder of such Bonds nor any other person shall have any claim thereon, under this Indenture or otherwise, for any amount other than the purchase price thereof.

(b) In the event of non-delivery of any Bond to be purchased pursuant to Section 4.08 hereof, the Tender Agent shall segregate and hold uninvested the moneys for the purchase price of such Bonds in trust, without liability for interest thereon, for the benefit of the former holders of such Bonds, who shall, except as provided in the following sentence, thereafter be restricted exclusively to such moneys for the satisfaction of any claim for the purchase price of such Bonds. Any moneys which the Tender Agent shall segregate and hold in trust for the payment of the purchase price of any Bond and remaining unclaimed for two (2) years after the date of purchase shall be paid, upon the Borrower’s written request, to the Borrower. After the payment of such unclaimed moneys to the Borrower, the former holder of such Bond shall look only to the Borrower for the payment thereof.

Section 4.11 Payment Procedure Pursuant to Bond Insurance Policy . As long as the Bond Insurance Policy shall be in full force and effect, the Issuer and the Trustee shall comply with the following provisions:

(a) If, on the third day next preceding any Interest Payment Date for the Bonds there is not on deposit with the Trustee sufficient moneys available to pay all principal of and interest on the Bonds due on such date, the Trustee shall immediately notify the Bond Insurer and U.S. Bank Trust National Association, New York, New York, or its successor as its Fiscal Agent (the “Fiscal Agent”), if any such Fiscal Agent shall have been appointed, of the amount of such deficiency. If, by said Interest Payment Date, the Issuer has not provided the amount of such deficiency, the Trustee shall simultaneously make available to the Bond Insurer and to the Fiscal Agent the Bond Register for the Bonds maintained by the Trustee. In addition:

(i) The Trustee shall provide the Bond Insurer with a list of the Owners entitled to receive principal or interest payments from the Bond Insurer under the terms of the Bond Insurance Policy and shall make arrangements for the Bond Insurer and its Fiscal Agent (1) to mail checks or drafts to Owners entitled to receive full or partial interest payments from the Bond Insurer, and (2) to pay principal of the Bonds surrendered to the Fiscal Agent by the Owners entitled to receive full or partial principal payments from the Bond Insurer; and

(ii) The Trustee shall, at the time it makes the Bond Register available to the Bond Insurer pursuant to subsection (a) above, notify Owners entitled to receive the payment of principal of or interest on the Bonds from the Bond Insurer (1) as to the fact of such entitlement, (2) that the Bond Insurer will remit to them all or part of the interest payments coming due subject to the terms of the Bond Insurance Policy, (3) that, except as provided in subsection (b) below, in the event that any Owner is entitled to receive full payment of principal from the Bond Insurer, such Owner must tender its Bond with the instrument of transfer in the form provided on the Bond executed in the name of the Bond Insurer, and (4) that, except as provided in subsection (b) below, in the event that such Owner is entitled to receive partial payment of principal from the Bond Insurer, such Owner must tender its Bond for payment first to the Trustee, which shall note on such Bond the portion of principal paid by the Trustee, and then, with an acceptable form of assignment executed in the name of the Bond Insurer, to the Fiscal Agent, which will then pay the unpaid portion of principal to the Owner subject to the terms of the Bond Insurance Policy.

(b) In the event that the Trustee has notice that any payment of principal of or interest on a Bond has been recovered from an Owner pursuant to the United States Bankruptcy Code by a trustee in bankruptcy in accordance with the final, nonappealable order of a court having competent jurisdiction, the Trustee shall, at the time it provides notice to the Bond Insurer, notify all Owners that in the event that any Owner’s payment is so recovered, such Owner shall be entitled to payment from the Bond Insurer to the extent of such recovery, and the Trustee shall furnish to the Bond Insurer its records evidencing the payments of principal of and interest on the Bonds which have been made by the Trustee and subsequently recovered from Owners, and the dates on which such payments were made.

(c) The Bond Insurer shall, to the extent it makes payment of principal of or interest on the Bonds, become subrogated to the rights of the recipients of such payments in accordance with the terms of the Bond Insurance Policy and, to evidence such subrogation, (1) in the case of subrogation as to claims for past due interest, the Trustee shall note the Bond Insurer’s rights as subrogee on the Bond Register upon receipt from the Bond Insurer of proof of the payment of interest thereon to the Owners of such Bonds, and (2) in the case of subrogation as to claims for past due principal, the Trustee shall note the Bond Insurer’s rights as subrogee on the Bond Register for the Bonds upon receipt of proof of the payment of principal thereof to the Owners of such Bonds. Notwithstanding anything in this Indenture or the Bonds to the contrary, the Trustee shall make payment of such past due interest and past due principal upon receipt thereof directly to the Bond Insurer to the extent that the Bond Insurer is a subrogee with respect thereto.

Section 4.12 Purchase in Lieu of Redemption . Notwithstanding any other provision in this Indenture, at any time that the Bonds are called for redemption under this Article IV, the Trustee, on behalf of the Borrower, may purchase such Bonds in lieu of redemption at a price equal to the amount payable upon the redemption of such Bonds. During the Initial Long-Term Interest Rate Period, any adjustment or proposed adjustment to a new Interest Rate Period on a day on which the Bonds would be permitted to be redeemed at the option of the Borrower pursuant to Section 4.01(a)(ii)(C) hereof shall be deemed to be accomplished pursuant to a purchase of such Bonds in lieu of a redemption pursuant to this Section.

ARTICLE V

THE BOND FUND

Section 5.01 Creation of Bond Fund . There is hereby created by the Issuer and ordered established with the Trustee a trust fund in the name of the Issuer to be designated “Maricopa County, Arizona Pollution Control Corporation Pollution Control Refunding Revenue Bonds, 2009 Series A (El Paso Electric Company Palo Verde Project) Bond Fund” (the “Bond Fund”). The Trustee shall establish one or more accounts within the Bond Fund for the purpose of segregating moneys drawn under a Credit Facility, if any, and Available Moneys therein, and may establish one or more accounts within the Bond Fund for other purposes.

Section 5.02 Deposits into Bond Fund .

There shall be deposited in the Bond Fund:

(i) The accrued interest and purchase premium, if any, paid by the initial purchasers of the Bonds;

(ii) All Repayment Installments and moneys drawn by the Trustee under a Credit Facility for the payment of principal of and interest and any premium on the Bonds, other than moneys paid by the Bank pursuant to Section 4.07 hereof or drawn under a Credit Facility pursuant to subsection (b) of Section 6.02 hereof or Section 4.07 hereof,

(iii) All other moneys received by the Trustee under and pursuant to any provision of the Agreement, other than Sections 5.04, 5.07 and 8.05 thereof, or from any other source when accompanied by directions by the Borrower that such moneys are to be paid into the Bond Fund; and

(iv) All moneys required to be deposited therein under any other provision of this Indenture.

Section 5.03 Use of Moneys in Bond Fund . Except as otherwise provided in Sections 5.05, 5.06, 5.07, 9.01, 10.10 and 11.04 hereof, moneys in the Bond Fund shall be used solely for the payment of the principal of and interest and any premium on the Bonds as the same shall become due and payable on an Interest Payment Date or at the Maturity Date, upon redemption or acceleration or otherwise. Funds for such payments of the principal of and interest and any

premium on the Bonds shall be derived from the following sources in the order of priority indicated:

(i) moneys paid into the Bond Fund pursuant to Section 5.02(i) hereof, which shall be applied to the payment of interest on the Bonds;

(ii) proceeds of the sale of refunding obligations and proceeds from the investment thereof, deposited into the Bond Fund which constitute Available Moneys;

(iii) moneys furnished by the Borrower to the Trustee pursuant to the Agreement which have been deposited into the Bond Fund and constitute Available Moneys (other than funds under a Credit Facility) and proceeds from the investment thereof,

(iv) moneys drawn by the Trustee under a Credit Facility for the payment of the principal of or interest or any premium on the Bonds and deposited into the Bond Fund;

(v) moneys furnished by the Borrower to the Trustee pursuant to the Agreement and any other moneys available therefor and proceeds from the investment thereof-,

(vi) In addition to amounts required to be paid into the Bond Fund, the Trustee shall (i) in the case of Bonds to be purchased by the Tender Agent on behalf of the Borrower pursuant to Article IV hereof, draw moneys under a Credit Facility in accordance with the terms thereof to the extent necessary to make timely payments of the purchase price of the Bonds pursuant to such Article IV, but only to the extent moneys are not available from the sources set forth in clauses (i) and (ii) of Section 6.02(b) hereof, and furnish said moneys to the Tender Agent and (ii) in connection with the purchase of Bonds by the Trustee on behalf of or for the account of the Bank pursuant to Section 4.07, draw moneys under such Credit Facility in accordance with the terms hereof and of such Credit Facility in amounts sufficient to pay the purchase price of the Bonds so purchased to the extent sufficient funds are not otherwise timely furnished by the Bank to the Trustee; provided, however, that the principal of, premium, if any, and interest on Bonds held by the Borrower, the Tender Agent or the Trustee on behalf of the Borrower (or any affiliate thereof), shall not be paid from moneys drawn under such Credit Facility.

Section 5.04 Credit Facility .

(a) No Credit Facility relating to the Bonds will be delivered as of-the date of issuance and delivery of the Bonds. During the Initial Long-Term Interest Rate Period, no Credit Facility relating to the Bonds shall be permitted to be delivered until such time as the Bonds are permitted to be optionally redeemed hereunder pursuant to Section 4.01(a)(ii)(C). A Credit Facility shall be required if the Bonds are converted to any Interest Rate Period other than a Long-Term Interest Rate Period and in such event, the Borrower shall be required to obtain prior written approval from the Bond Insurer for such Credit Facility and for a Bank providing such

Credit Facility stating that the terms of such Credit Facility shall be satisfactory to the Bond Insurer, which approval shall not be unreasonably withheld.

(b) A Credit Facility shall be the obligation of a Bank to pay to the Trustee, in accordance with the terms thereof, such amounts as shall be specified therein and available to be drawn thereunder for the timely payment of the principal of and interest and, if permitted by a Credit Facility, any premium on the Bonds (whether at the Maturity Date, or upon acceleration or redemption or otherwise), and portions of the purchase price of Bonds corresponding to principal and interest thereon, and, if permitted by a Credit Facility, portions of the purchase price corresponding to premium on the Bonds, required to be made pursuant to, and in accordance with the provisions of this Indenture. Such Credit Facility shall be reduced to the extent of any drawings thereunder and reinstated in accordance with the terms thereof.

(c) The Trustee shall draw moneys under a Credit Facility in accordance with the terms hereof and the terms of the Tender Agreement to the extent necessary to make timely payments of principal of and interest and any premium, if drawings thereunder shall be available to pay premium, on the Bonds required to be made from the Bond Fund or to enable the Tender Agent to pay the purchase price of Bonds purchased pursuant to Section 6.02(b) hereof, provided, however, that, anything herein to the contrary notwithstanding, in no event shall the Trustee draw moneys under such Credit Facility in order to make payments of principal of or interest or any premium on, or to enable the Tender Agent to pay the purchase price of, Bonds held of record by the Borrower (or any affiliate thereof) or held by the Tender Agent or the Trustee for the account of the Borrower or delivered to and held of record by, or held for the account of, the Bank pursuant to Section 14.04(c) hereof if such Credit Facility prohibits by its terms a drawing thereunder for such purpose; provided, further, however, that the Trustee may draw moneys under such Credit Facility in order to make payment of interest on Bonds held of record by the Borrower (or any affiliate thereof), the Bank or by the Tender Agent or the Trustee for the account of the Borrower or the Bank pursuant to Section 14.04(c) hereof if such Bond was not so held by or for the account of the Borrower or the Bank on the immediately preceding Record Date. Upon any reduction in the aggregate principal amount of Bonds Outstanding, the Trustee shall request the Bank to permanently reduce the amounts that may be drawn under the applicable Credit Facility to those amounts which are then required pursuant to Section 6.08 of the Agreement. For extensions of the term of a Credit Facility, the Trustee shall surrender the applicable Credit Facility to the Bank (if so directed by the Bank) in exchange for a Credit Facility of the Bank conforming in all material respects to the applicable Credit Facility except that the expiration date shall be extended. If at any time there shall cease to be any Bonds Outstanding hereunder, the Trustee shall promptly surrender the applicable Credit Facility to the Bank, in accordance with the terms of the applicable Credit Facility, for cancellation.

(d) If at any time there shall have been delivered to the Trustee, all as described in and in accordance with Section 6.08 the Agreement, (i) a notice of the Borrower, (ii) the required opinion of Bond Counsel, and (iii) a Credit Facility, if any, described in such notice, then the Trustee shall accept such Credit Facility, if any, and comply with the direction of the Borrower, if any, contained in such notice. If the delivery of such Credit Facility does not result in a mandatory tender for purchase of all Bonds pursuant to Section 4.08(b) hereof, the Trustee shall give notice by first-class mail of the delivery of such Credit Facility to the Owners of the Bonds not less than 20 days prior to the date of the expiration or termination of a Credit

Facility then in effect. Such notice shall state that the Borrower has caused to be provided the new Credit Facility, shall describe the new Credit Facility (including its effective date and scheduled expiration date) and shall state that the Borrower has delivered written evidence from Moody’s, if the Bonds are then rated by Moody’s and from S&P, if the Bonds are then rated by S&P, that none of Moody’s nor S&P will reduce or withdraw its rating then in effect with respect to the Bonds as a result of the proposed delivery of the new Credit Facility.

Section 5.05 Custody of Bond Fund; Withdrawal of Moneys . The Bond Fund shall be in the custody of the Trustee but in the name of the Issuer and the Issuer hereby irrevocably authorizes and directs the Trustee to withdraw from the Bond Fund and furnish to the Paying Agent funds sufficient to pay the principal of and interest and any premium on the Bonds as the same shall become due and payable, and to withdraw from the Bond Fund funds sufficient to pay any other amounts payable therefrom as the same shall become due and payable. If and to the extent that moneys remain in the Bond Fund after payment of such principal, interest and premium, if any, and are not required to be held therein pursuant to Section 5.06 hereof, such moneys shall be paid to the Bank, to the extent that there shall then be amounts due and payable to the Bank pursuant to the Reimbursement Agreement and the Bank has notified the Trustee thereof, and the Bond Insurer, to the extent that there shall then be amounts due and payable to the Bond Insurer pursuant to the Insurance Agreement and the Bond Insurer has notified the Trustee thereof; provided, however, that if no Bank or Bond Insurer exists, such moneys shall be paid to the Borrower.

Section 5.06 Bonds Not Presented for Payment . In the event any Bond shall not be presented for payment when the principal thereof (or any portion of such principal) becomes due, either at the Maturity Date or at the date fixed for redemption thereof or otherwise or in the event that any interest payment remains unclaimed, if moneys sufficient to pay such Bonds or portions thereof or such interest are held by the Paying Agent for the benefit of the Owners thereof, the Paying Agent shall segregate and hold such moneys uninvested without liability for interest thereon, for the benefit of Owners of such Bonds, who shall, except as provided in the following paragraph, thereafter be restricted exclusively to such fund or funds for the satisfaction of any claim of whatever nature on their part under this Indenture or relating to said Bonds.

Any moneys which the Paying Agent shall segregate and hold for the payment of the principal of or interest or any premium on any Bond and remaining unclaimed for two years after such principal, interest or any premium shall have become due and payable shall be paid to the extent legally permissible (i) if, at the time, there shall be amounts due and payable to the Bond Insurer or the Bank pursuant to the Reimbursement Agreement, or (ii) if no such amounts shall be due and payable, to the Borrower, with notice to the Trustee of such action. For purposes of this Indenture, the Paying Agent may conclusively assume that no such indebtedness, liability or obligation is owing to the Bond Insurer or the Bank unless the Bond Insurer or the Bank shall otherwise give written notice to the Paying Agent. After the payment of such unclaimed moneys to the Bond Insurer, the Bank or the Borrower, the Owner of such Bond shall look only to the Borrower for the payment thereof.

Section 5.07 Moneys Held in Trust . All moneys required to be deposited with or paid to the Trustee for deposit into the Bond Fund under any provision hereof and all moneys withdrawn from the Bond Fund and held by the Trustee or the Paying Agent shall be held by the

Trustee or the Paying Agent, as the case may be, in trust, and such moneys (other than moneys held pursuant to Section 5.06 hereof) shall, while so held, constitute part of the Trust Estate and be subject to the lien hereof for the benefit of the Owners.

Section 5.08 Payment to the Bank and to the Borrower . Any moneys remaining in the Bond Fund after the right, title and interest of the Trustee in and to the Trust Estate and all covenants, agreements and other obligations of the Issuer under this Indenture shall have ceased, terminated and become void and shall have been satisfied and discharged in accordance with Article IX hereof, shall be paid (a) if, at that time, there shall be amounts due and payable to the Bank pursuant to the Reimbursement Agreement, if any, and the Bank has notified the Trustee thereof, to the Bank, or (b) if, at that time, there shall be amounts due and payable to the Bond Insurer pursuant to the Insurance Agreement, to the Bond Insurer, or (c) no such amounts shall be so due and payable, to the Borrower.

ARTICLE VI

PURCHASE FUND

Section 6.01 Tender Agent . By acceptance of its appointment under Section 14.01(b) hereof, the Tender Agent agrees:

(a) to hold all Bonds delivered to it pursuant to Section 4.09 hereof, as agent and bailee of, and in escrow for the benefit of, the respective Owners which shall have so delivered such Bonds until moneys representing the purchase price of such Bonds shall have been delivered to or for the account of or to the order of such Owners;

(b) to establish and maintain, and there is hereby established with the Tender Agent, a separate segregated trust fund designated as the “Maricopa County, Arizona Pollution Control Corporation Pollution Control Refunding Revenue Bonds, 2009 Series A (El Paso Electric Company Palo Verde Project) Purchase Fund” (the “Purchase Fund”) until such time as it has been discharged from its duties as Tender Agent hereunder;

(c) to hold all moneys (without investment thereof) delivered to it hereunder in the Purchase Fund for the purchase of Bonds pursuant to Section 4.08 hereof, other than moneys delivered to it by the Borrower during the term of a Credit Facility, as agent and bailee of, and in escrow for the benefit of, the person or entity which shall have so delivered such moneys until the Bonds purchased with such moneys shall have been delivered to or for the account of such person or entity;

(d) to hold all moneys delivered to it by the Borrower for the purchase of Bonds pursuant to Section 4.08 hereof, as agent and bailee of, and in escrow for the benefit of, the Owners or former Owners who shall deliver Bonds to it for purchase until the Bonds purchased with such moneys shall have been delivered to or for the account of the Borrower; provided, however, that if the Bonds shall at any time become due and payable, the Tender Agent shall cause such moneys (other than moneys held pursuant to Section 6.03(d) hereof) to be deposited into the Bond Fund;

(e) to hold all Bonds registered in the name of the new Owners thereof which have been delivered to it by the Trustee for delivery to the Remarketing Agent in accordance with the Tender Agreement;

(f) to hold Bonds for the account of the Borrower as contemplated by Section 14.04(c) hereof, such Bonds to be released to or upon the order of the Borrower upon receipt by the Tender Agent from the Bank of a notice to the effect that the Trustee is entitled to draw under a Credit Facility to pay principal of the Bonds and to pay the purchase price of Bonds tendered under Section 4.08 hereof and not remarketed in an amount equal to the amount that could be drawn under a Credit Facility if the drawing made to purchase such Bonds were disregarded;

(g) to hold Bonds for the account of the Bank (or its nominee), or to deliver Bonds to the Bank, as contemplated by Section 14.04(c) hereof, and

(h) to keep such books and records with respect to the Bonds as shall be consistent with prudent industry practice and to make such books and records available for inspection by the Issuer, the Trustee, the Borrower and the Remarketing Agent at all reasonable times.

The Issuer shall cooperate with the Borrower and the Trustee to cause the necessary arrangements to be made and to be thereafter continued to enable the Tender Agent to perform its duties and obligations described above.

Section 6.02 Notice of Bonds Delivered for Purchase; Purchase of Bonds .

(a) The Tender Agent shall determine timely and proper delivery of Bonds pursuant to this Indenture and the proper endorsement of such Bonds. Such determination shall be binding on the Owners of such Bonds, the Issuer, the Borrower, the Remarketing Agent, the Trustee and the Bank absent manifest error. As promptly as practicable, the Tender Agent shall give telephonic or Electronic notice, promptly confirmed by a written notice, to the Bank, if any, the Bond Insurer, the Trustee, the Remarketing Agent, the Registrar and the Borrower specifying the principal amount of Bonds, if any, for which it has received notice of tender for purchase in accordance with Section 4.08(a)(i) or 4.08(a)(ii) hereof.

(b) Bonds required to be purchased in accordance with Section 4.08 hereof shall be purchased from the Owners thereof by the Tender Agent, on the date and at the purchase price at which such Bonds are required to be purchased if the Bank shall not have exercised its option to purchase such Bonds pursuant to Section 4.07 hereof. Funds for the payment of such purchase price by the Tender Agent from the Owners of Bonds shall be derived from the following sources in the order of priority indicated:

(i) moneys furnished to the Tender Agent for deposit into the Purchase Fund representing moneys provided by the Borrower pursuant to Section 10.02 of the Agreement, which constitute Available Moneys;

(ii) proceeds of the sale of such Bonds remarketed to any person, other than the Issuer, the Borrower or an affiliate thereof, pursuant to Section 14.03 hereof and

furnished to the Tender Agent by the Remarketing Agent for deposit into the Purchase Fund;

(iii) moneys furnished to the Tender Agent by the Trustee for deposit into the Purchase Fund representing the proceeds of a drawing under a Credit Facility; and

(iv) moneys furnished to the Tender Agent representing moneys provided by the Borrower (or any affiliate thereof) pursuant to Section 10.01 or 10.02 of the Agreement or otherwise available for such purpose.

Moneys described in clause (iii) may not be used to purchase Bonds held of record by the Borrower (or any affiliate thereof) or by the Tender Agent for the account of the Borrower.

The Tender Agent shall establish separate accounts or subaccounts within the Purchase Fund for each deposit made into the Purchase Fund so that (1) the Tender Agent may at all times ascertain the date of deposit of the funds in each account or subaccount, and (2) the amounts derived from the source described in clause (iii) may be segregated from other sources and such amounts shall not be commingled with any funds from the sources described in clause (iv).

(c) The Trustee shall authenticate a new Bond or Bonds in an aggregate principal amount equal to the principal amount of Bonds purchased in accordance with Section 6.02(b) hereof, whether or not the Bonds so purchased are presented by the Owners thereof, bearing a number or numbers not contemporaneously outstanding. Every Bond authenticated and delivered as provided in this Section 6.02(c) shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Bonds duly issued hereunder, except as provided in Section 5.04(c) hereof. The Tender Agent shall maintain a record of the Bonds purchased as provided in this Section 6.02, together with the names and addresses of the former Owners thereof.

(d) In the event any Bonds purchased as provided in this Section 6.02 shall not be presented to the Tender Agent, the Tender Agent shall segregate and hold the moneys for the purchase price of such Bonds in trust for the benefit of the former Owners of such Bonds, who shall, except as provided in the following sentence, thereafter be restricted exclusively to such moneys for the satisfaction of any claim for the purchase price of such Bonds. Any moneys which the Tender Agent shall segregate and hold in trust for the payment of the purchase price of any Bond and remaining unclaimed for two years after the date of purchase shall, to the extent legally permissible, upon the Borrower’s written request to the Tender Agent, be paid to the Bank, if the Borrower then owes funds under the Reimbursement Agreement, to the Bond Insurer, if the Borrower owes funds under the Insurance Agreement or otherwise to the Borrower. After the payment of such unclaimed moneys to the Borrower, the former Owner of such Bond shall look only to the Borrower for the payment thereof.

ARTICLE VII

INVESTMENTS

Section 7.01 Investments . The moneys in the Bond Fund (other than the moneys described in Sections 4.06(ii), 5.04(c) and 5.06 hereof, which may not be invested) shall, but only at the direction of the Borrower, be invested and reinvested in Investment Securities to the extent not prohibited by applicable law as determined by the Borrower. The income from, and any gain or loss from, any investment shall be credited or charged to the Bond Fund from which such investment was made. Investment Securities will be registered in the name of the Trustee or its nominee and held by or under the control of the Trustee. Subject to the further provisions of this Section 7.01, such investment shall be made, and such agreements entered into, by the Trustee as directed and designated by the Borrower in a certificate of an Authorized Borrower Representative. In the absence of any such direction, the Trustee shall invest all funds in the Investment Securities defined by clause (viii) of the definition thereof. As and when any amounts thus invested (including investments of Available Moneys) may be needed for disbursements from the Bond Fund, the Trustee shall cause a sufficient amount of such investments to be sold or otherwise converted into cash to the credit of such Bond Fund. As long as no Event of Default (as defined in Section 10.01 hereof) shall have occurred and be continuing, the Borrower shall have the right to designate the investments to be sold and to otherwise direct the Trustee in the sale or conversion to cash of the investments made with the moneys in the Bond Fund; provided that, the Trustee shall be entitled to conclusively assume the absence of any such Event of Default unless it has notice thereof within the meaning of Section 11.05 hereof. The Trustee shall have no responsibility under this Indenture with respect to the compliance by the Borrower or the Issuer with any covenant herein or in the Agreement regarding the yield on, or tax-exempt nature of investments made in accordance with this Section 7.01, other than to use its best efforts to comply with instructions from the Borrower or the Issuer regarding such investments and the Trustee shall bear no responsibility for losses incurred from such investments or the sale thereof. Moneys held by the Tender Agent in the Purchase Fund shall not be invested. The Trustee may acquire or sell any Investment Security through itself or an affiliate, as principal or agent.

ARTICLE VIII

GENERAL COVENANTS

Section 8.01 Limited Obligation; Payment of Principal and Interest . Each and every covenant herein made, including all covenants made in the various Sections of this Article VIII, is predicated upon the condition that any obligation for the payment of money incurred by the Issuer shall not be the general obligation of the Issuer within the meaning of the Constitution of Arizona, and shall never constitute an indebtedness of the Issuer within the meaning of any State of Arizona constitutional provision or statutory limitation, and shall never constitute or give rise to any pecuniary liability of the Issuer or a charge against its general credit or taxing powers, but shall be payable by the Issuer solely from the Receipts and Revenues from the Agreement, which are required to be set apart and transferred to the Bond Fund, and which, along with the balance of the Trust Estate, are hereby specifically pledged to the payment thereof in the manner and to

the extent specified in this Indenture, and nothing in the Bonds or in this Indenture shall be considered as pledging or obligating any other funds or assets of the Issuer.

The Issuer will in the manner provided herein and in the Bonds, according to the true intent and meaning thereof, promptly cause to be paid, solely from the sources stated herein, at the place and on the dates provided herein, the principal of and premium, if any, and interest on every Bond issued under this Indenture.

Section 8.02 Performance of Agreements; Authority . The Issuer will faithfully perform at all times any and all covenants, undertakings, stipulations and provisions contained in this Indenture, in any and every Bond executed, authenticated and delivered hereunder, and in all proceedings pertaining thereto. The Issuer represents that it has the authority under the Constitution and laws of the State of Arizona to issue the Bonds authorized hereby, to enter into the Agreement, and to pledge to the Trustee the Receipts and Revenues from the Agreement and to pledge and assign to the Trustee all or any part of the Issuer’s right, title and interest under the Agreement pledged and assigned hereunder, and that the Bonds in the hands of the Owners thereof are and will be valid and enforceable obligations of the Issuer according to the import thereof.

Section 8.03 Maintenance of Corporate Existence; Compliance with Laws . The Issuer will at all times maintain its corporate existence or assure the assumption of its obligations under this Indenture by any public body succeeding to its powers under the Act, and it will use its best efforts to maintain, preserve and renew all the rights and powers provided to it by the Act; and it will comply with all valid acts, rules, regulations, orders and directions of any legislative, executive, administrative or judicial body applicable to the Agreement.

Section 8.04 Enforcement of Borrower’s Obligations under the Agreement . So long as any of the Bonds are Outstanding, upon receipt of written notification from the Trustee, the Issuer will, in the manner provided herein and giving due recognition to the role of the Trustee hereunder, enforce the obligation of the Borrower to pay, or cause to be paid, all the payments and other costs and charges payable by the Borrower under the Agreement, provided, however, that the Issuer shall not be required to spend any of its own funds in any such enforcement. The Issuer will not enter into any agreement with the Borrower amending the Agreement without the prior written consent of the Trustee and compliance with Sections 13.06 and 13.07 hereof.

Section 8.05 Further Assurances . The Issuer will, upon the reasonable request of the Trustee, from time to time execute and deliver such further instruments and take such further action as may be reasonable and as may be required to carry out the purpose of this Indenture; provided, however, that no such instruments or actions shall give rise to any pecuniary liability of the Issuer or pledge the credit or taxing power of the State of Arizona, the Issuer or any other political subdivision of said State.

Section 8.06 No Disposition or Encumbrance of Issuer’s Interests . Except as permitted by this Indenture, the Issuer will not sell, lease, pledge, assign or otherwise dispose of or encumber its interest in the Receipts and Revenues from the Agreement or its rights and interest under the Agreement pledged and assigned hereunder and will promptly pay or cause to be

discharged or make adequate provision to satisfy and discharge any lien or charge on any part thereof not permitted by this Indenture.

Section 8.07 Trustee’s Access to Books Relating to Facilities . All books and documents in the possession of the Issuer relating to the Facilities and the moneys, revenues and receipts derived from the Facilities shall at all reasonable times be open to inspection by such accountants or other agencies as the Trustee may from time to time designate. The Trustee shall permit the Borrower or its designee reasonable access to records relating to the investment of the proceeds of the Bonds or any other records relating to the Bonds necessary to assure compliance with Section 148 of the Code.

Section 8.08 Filing of Financing Statements . Appropriate financing statements, naming the Trustee as secured party with respect to the Receipts and Revenues from the Agreement and the other moneys pledged by the Issuer under this Indenture for the payment of the principal of and premium, if any, and interest on the Bonds, and as pledgee and assignee of certain of the Issuer’s rights and interest under the Agreement, shall be duly filed and recorded in the appropriate state and county offices as required by the provisions of the Uniform Commercial Code or other similar law as adopted in the State of Arizona, the state in which lies the Principal Office of the Trustee and any other applicable jurisdiction, as from time to time amended. The Trustee will file and record, with such assistance as necessary from the Issuer and the Borrower, such necessary continuation statements from time to time as may be required pursuant to the provisions of said Uniform Commercial Code or other similar law to protect the interest of the Trustee.

Section 8.09 Tax Covenant . The Issuer covenants for the benefit of the purchasers of the Bonds that it will not take any action or fail to take any action reasonably within its control which would, under the Code, Regulations of the Department of the Treasury of the United States of America (including Temporary Regulations and Proposed Regulations) under the Code applicable to the Bonds, rulings and court decisions, cause the interest payable on the Bonds to be includable in the gross income of the holders thereof for Federal income tax purposes (other than a “substantial user” of the Facilities or a “related person” as those terms are used in Section 147(a) of the Code). Pursuant to such covenant, the Issuer obligates itself to comply throughout the term of the issue of the Bonds with the requirements of Section 148 of the Code and any regulations promulgated thereunder.

The Borrower by its execution of the Agreement has covenanted to restrict the investment of money in the funds created under this Indenture in such manner and to such extent, if any, as may be necessary, so that the Bonds will not constitute “arbitrage bonds” under Section 148 of the Code.

Section 8.10 Notices by Trustee . The Trustee shall give the same notices to the Issuer that it is required to give to the Borrower, and to the Borrower that it is required to give to the Issuer, pursuant to the terms of this Indenture and, additionally, shall give written or Electronic notice to the Issuer, the Borrower and the Remarketing Agent of any prior redemption pursuant to Section 4.01 hereof.

Section 8.11 No Transfer of Credit Facility . Except as provided in Section 5.04 hereof, the Trustee shall not sell, assign or transfer a Credit Facility except to a successor trustee under this Indenture and as contemplated by Section 11.16 hereof.

ARTICLE IX

DEFEASANCE

Section 9.01 Defeasance . If the Issuer shall pay or cause to be paid with Available Moneys to the Owner of any Outstanding Bond secured hereby the principal of and interest and any premium due and payable, and thereafter to become due and payable, on such Bond, or any portion of such Bond in an Authorized Denomination, such Bond or portion thereof shall cease to be entitled to any lien, benefit or security under this Indenture (except as set forth in Section 9.02 hereof). If the Issuer shall pay or cause to be paid with Available Moneys to the owners of all the Bonds the principal thereof and interest and any premium due and payable and thereafter to become due and payable thereon, and shall pay or cause to be paid all other sums payable hereunder by the Issuer, or payable under the Agreement by the Borrower, then the right, title and interest of the Trustee in and to the Trust Estate shall thereupon cease, terminate and become void. In such event, the Trustee shall assign, transfer and turn over the Trust Estate, including, without limitation, any surplus in the Bond Fund and any balance remaining in any other fund created under this Indenture, (i) if, at that time, there shall be amounts due and payable to the Bank pursuant to the Reimbursement Agreement and the Bank has notified the Trustee thereof, to the Bank, or (ii) if no such amounts shall be so due and payable, to the Borrower.

All Outstanding Bonds shall, prior to the Maturity Date or redemption date thereof, be deemed to have been paid within the meaning and with the effect expressed in this Article IX (except as set forth in Section 9.02 hereof) when

(a) in the event the Bonds are to be redeemed, the Trustee shall have given, or the Borrower shall have given to the Trustee in form satisfactory to the Trustee irrevocable instruction to give, on a date in accordance with the provisions of Article IV hereof, notice of redemption of the Bonds,

(b) there shall have been deposited with the Trustee either moneys in an amount which shall be sufficient, or fixed rate Government Obligations (i) which shall not contain provisions permitting the redemption or prepayment thereof at the option of the issuer thereof, (ii) which mature no later than the earlier of (A) the date fixed for the redemption of the Bonds and (B) the Maturity Date, and (iii) the principal of and the interest on which, when due, and without any regard to reinvestment thereof, will provide moneys which, together with the moneys, if any, deposited with or held by the Trustee, shall be sufficient, based on the written opinion of a firm of certified public accountants acceptable to the Trustee, delivered to the Trustee, to pay when due the principal of and interest and any premium due and to become due on the Bonds on and prior to the redemption date or Maturity Date, as the case may be; provided, however, that such moneys shall constitute Available Moneys and that such Government Obligations shall have been purchased with Available Moneys, and provided further, that if a forward supply contract is employed in connection with the redemption, such certified public accountant’s opinion shall expressly state that the adequacy of the Available Moneys and

Government Obligations to accomplish the redemption relies solely on the initial deposited investments and the maturing principal thereof and interest income thereon and does not assume performance under or compliance with the forward supply contract, and

(c) in the event the Bonds do not mature and are not to be redeemed within the next succeeding 60 days, the Borrower shall have given the Trustee, in form satisfactory to it, irrevocable instructions to give, as soon as practicable in the same manner as a notice of redemption is given pursuant to Section 4.03 hereof, a notice to the Owners that the deposit required by clause (b) above has been made with the Trustee and that the Bonds are deemed to have been paid in accordance with this Article IX and stating the Maturity Date or redemption date upon which moneys are to be available for the payment of the principal of and interest and any premium on the Bonds.

Neither the Government Obligations nor moneys deposited with the Trustee pursuant to this Article IX nor principal or interest payments on any such Government Obligations shall be withdrawn or used for any purpose other than, and shall be held in trust for, the payment of the principal of and interest and any premium on the Bonds; provided that any cash received from such principal or interest payments on such Government Obligations deposited with the Trustee, if not then needed for such purpose, shall be invested, to the extent practicable, at the direction of the Borrower, in Government Obligations of the type and tenor described in clause (b) of the immediately preceding paragraph, and interest earned from such reinvestment shall be paid as received by the Trustee (i) if, at that time, there shall be amounts due and payable to the Bank pursuant to the Reimbursement Agreement and the Bank has notified the Trustee thereof, to the Bank, (ii) if, at that time, there shall be amounts due and payable to the Bond Insurer pursuant to the Insurance Agreement, to the Bond Insurer, or (iii) if no such amounts shall be so due and payable, to the Borrower.

Section 9.02 Survival of Certain Provisions . Notwithstanding the foregoing, any provisions of this Indenture which relate to the payment of the principal of or any premium on Bonds at the Maturity Date or pursuant to redemption, as the case may be, interest payments and dates thereof, exchange, transfer and registration of Bonds, replacement of mutilated, destroyed, lost or stolen Bonds, the safekeeping and cancellation of Bonds, non-presentment of Bonds, the holding of moneys in trust and repayments to the Bank, the Bond Insurer or the Borrower from the Bond Fund or the Purchase Fund and the duties of the Trustee, the Registrar, the Remarketing Agent and the Paying Agent in connection with all of the foregoing, shall remain in effect and be binding upon the Issuer, the Trustee, the Remarketing Agent, the Tender Agent, the Registrar, the Paying Agent and Owners notwithstanding the release and discharge of this Indenture. The provisions of this Section shall survive the release, discharge and satisfaction of this Indenture; provided, however, that the provisions of Section 2.01 hereof, permitting adjustments in the Interest Rate Period with respect to the Bonds, shall not be in effect after the release and discharge of this Indenture.

ARTICLE X

DEFAULTS AND REMEDIES

Section 10.01 Events of Default .

(a) Each of the following events shall constitute and is referred to in this Indenture as an “Event of Default” (except that in making such determination no effect shall be given to payments made under the Bond Insurance Policy):

(i) a failure to pay the principal of or any premium on any of the Bonds when the same shall become due and payable at the Maturity Date or upon redemption;

(ii) a failure to pay an installment of interest on any of the Bonds after such interest has become due and payable;

(iii) a failure to pay an amount due pursuant to Section 4.08 hereof after such payment has become due and payable;

(iv) an “Event of Default” as such term is defined in Section 8.01 of the Agreement;

(v) prior to termination or expiration of a Credit Facility, receipt by the Trustee, prior to the date set forth in a Credit Facility for automatic reinstatement of interest following a drawing under a Credit Facility to pay accrued interest on the Bonds, of notice from the Bank in accordance with a Credit Facility that a Credit Facility will not be reinstated in respect of such interest;

(vi) prior to termination or expiration of a Credit Facility and payment in full of all amounts due under the Reimbursement Agreement, receipt by the Trustee of written notice from the Bank that an “Event of Default” under the Reimbursement Agreement has occurred and is continuing; or

(vii) a failure by the Issuer to observe and perform any covenant, condition, agreement or provision (other than as specified in clauses (i), (ii) and (iii) of paragraph (a) of this Section 10.01) contained in the Bonds or in this Indenture on the part of the Issuer to be observed or performed, which failure shall continue for a period of 60 days after written notice, specifying such failure and requesting that it be remedied, shall have been given to the Issuer and the Borrower by the Trustee, which may give such notice in its discretion and shall give such notice at the written request of the Owners of a majority in principal amount of the Bonds then Outstanding, unless the Trustee or the Owners of Bonds then Outstanding in principal amount not less than the principal amount of Bonds the Owners of which requested such notice, as the case may be, shall agree in writing to an extension of such period prior to its expiration; provided, however, that the Trustee, or the Trustee and the Owners of such principal amount of Bonds, as the case may be, shall be deemed to have agreed to an extension of such period if corrective action is initiated by the Issuer, or the Borrower on behalf of the Issuer, within such period and is being diligently pursued.

(b) If

(i)(A) a Credit Facility is then in effect and (B) an Event of Default described in clause (i), (ii) or (iii) of paragraph (a) of this Section 10.01 shall occur and

be continuing, the Trustee may, and at the written request of the owners of a majority in principal amount of Bonds then Outstanding, the Trustee shall, or

(ii)(A) a Credit Facility is then in effect and (B) an Event of Default described in clause (iv) of paragraph (a) of this Section 10.01 shall occur and be continuing, at the written request of the Bank, the Trustee shall, or

(iii)(A) a Credit Facility is then in effect and (B) an Event of Default described in clause (v) or (vi) of paragraph (a) of this Section 10.01 shall occur and be continuing, the Trustee shall, or

(iv)(A) a Credit Facility is not then in effect or if the Bank shall have wrongfully failed to honor a drawing under such Credit Facility then in effect and (B) an Event of Default described in clause (i), (ii), (iii), (iv), (v), or (vi) of paragraph (a) of this Section 10.01 shall occur and be continuing, the Trustee may, and at the written request of the Owners of a majority in principal amount of Bonds then Outstanding, the Trustee shall, subject to the Bank’s right to purchase the Bonds pursuant to Section 4.07 in the circumstances set forth therein, by written notice to the Issuer, the Bank, and the Borrower, declare the Bonds to be immediately due and payable, whereupon they shall, without further action, become and be immediately due and payable, anything in this Indenture or in the Bonds to the contrary notwithstanding, and the Trustee shall give notice thereof to the Tender Agent, the Remarketing Agent, the Bond Insurer and the Owners and shall immediately (and in no event later than five (5) days thereafter) draw under a Credit Facility to the extent provided in Section 5.04 hereof. If the principal of all of the Bonds shall have been declared due and payable while a Credit Facility shall be in effect, interest on such Bonds shall cease to accrue on the date of the drawing on a Credit Facility with respect to such declaration unless such drawing is pursuant to the Bank’s purchase of the Bonds in accordance with Section 4.07 hereof. The Trustee shall not be entitled to accelerate the principal of the Bonds upon the occurrence of an Event of Default described in clause (vii) of paragraph (a) of this Section 10.01.

(c) The provisions of paragraph (b)(iv), however, are subject, when no Credit Facility shall be in effect, to the condition that if, after the principal of the Bonds shall have been so declared to be due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, the Issuer shall cause to be deposited with the Trustee a sum sufficient to pay all matured installments of interest upon all Bonds, premium, if any, and the principal of any and all Bonds which shall have become due otherwise than by reason of such declaration (with interest upon such principal and, to the extent permissible by law, on overdue installments of interest, at the rate per annum borne by the Bonds on the date of such declaration) and such amounts as shall be sufficient to cover reasonable compensation and reimbursement of expenses payable to the Trustee, and all Events of Default hereunder other than nonpayment of the principal of Bonds which shall have become due by said declaration shall have been remedied or waived, then, in every such case, such Event of Default shall be deemed waived and such declaration and its consequences rescinded and annulled, and the Trustee shall promptly give written or Electronic notice of such waiver, rescission and annulment to the Issuer, the Borrower, the Remarketing Agent, and, if notice of the acceleration of the Bonds shall have been given to the Owners, shall give notice thereof to the Owners; but no

such waiver, rescission and annulment shall extend to or affect any subsequent Event of Default or impair any right or remedy consequent thereon.

(d) The provisions of paragraph (b) are, further, subject to the condition that (i) if an Event of Default described in clauses (v) or (vi) of paragraph (a) shall have occurred and the Trustee shall thereafter have received written notice from the Bank that the notice of the Bank which caused the occurrence of such Event of Default shall have been withdrawn and (ii) if any drawing under a Credit Facility shall have been made and a Credit Facility shall have been reinstated as to principal to an amount equal to the outstanding principal amount of the Bonds and as to interest to an amount which at least equals, depending on the type of Interest Rate Period then in effect, the coverage required by Section 2.01(c)(vi) hereof to permit such Interest Rate Period to go into effect, and the Trustee shall have received written notice from the Bank of such reinstatement, then such Event of Default shall be waived, and the consequences of such Event of Default rescinded and annulled and the Trustee shall promptly give written notice of such waiver, rescission and annulment to the Issuer, the Borrower, the Bank, the Tender Agent, the Bond Insurer, the Remarketing Agent, and, if notice of the acceleration of the Bonds shall have been given to the Owners, shall give notice thereof to the Owners; but no such waiver, rescission and annulment shall extend to or affect any subsequent Event of Default or impair any right or remedy consequent thereon. Notwithstanding anything to the contrary set forth herein, any acceleration of the Bonds or annulment thereof shall be subject to the prior written consent of the Bond Insurer (so long as it has not failed to comply with its payment obligations under the Bond Insurance Policy).

Section 10.02 Remedies . In addition to the rights conferred, or obligation imposed, upon the Trustee under Section 10.01 hereof to accelerate the principal of the Bonds upon the occurrence and continuance of any Event of Default, then and in every such case the Trustee in its discretion may, and upon the written request of the Bank, the Bond Insurer or the Owners of a majority in principal amount of the Bonds then Outstanding and receipt of indemnity to its satisfaction shall, in its own name and as the Trustee of an express trust:

(i) by mandamus, or other suit, action or proceeding at law or in equity, enforce all rights of the Owners of the Bonds, and require the Issuer, the Bank, the Bond Insurer and the Borrower to carry out any agreements with or for the benefit of the Owners and to perform their duties under the Act, the Agreement, a Credit Facility, the Bond Insurance Policy and this Indenture;

(ii) bring suit upon the Bonds or a Credit Facility or the Bond Insurance Policy; or

(iii) by action or suit in equity enjoin any acts or things which may be unlawful or in violation of the rights of the Owners of the Bonds.

Section 10.03 Restoration to Former Position . In the event that any proceeding taken by the Trustee to enforce any right under this Indenture shall have been discontinued or abandoned for any reason, or shall have been determined adversely to the Trustee, then and in every case the Issuer, the Trustee and the Owners of the Bonds shall be restored to their former positions and

rights hereunder, respectively, and all rights, remedies and powers of the Trustee shall continue as though no such proceeding had been taken.

Section 10.04 Bond Insurer’s Right to Direct Proceedings . Subject to the provisions of Section 4.07 hereof relating to the rights of the Bank and subject in the circumstances set forth as described therein, anything in this Indenture to the contrary notwithstanding, so long as it is not in default on its payment obligations under the Bond Insurance Policy, the Bond Insurer shall be treated as the “Owner” of the Bonds and shall have the right, by an instrument in writing executed and delivered to the Trustee, to direct the time, method and place of conducting all remedial proceedings available to the Trustee under this Indenture or exercising any trust or power conferred on the Trustee by this Indenture.

Section 10.05 Limitation on Owners’ Right to Institute Proceedings . No owner shall have any right to institute any suit, action or proceedings in equity or at law for the execution of any trust or power hereunder, or any other remedy hereunder or on said Bonds, unless (i) such Owner previously shall have given to the Trustee written notice of an Event of Default as hereinabove provided, (ii) the owners of a majority in principal amount of the Bonds then Outstanding shall have made written request of the Trustee so to do, after the right to institute said suit, action or proceeding shall have accrued, and shall have afforded the Trustee a reasonable opportunity to proceed to institute the same in either its or their name, (iii) there also shall have been offered to the Trustee security and indemnity satisfactory to it against the costs, expenses and liabilities to be incurred therein or thereby, and (iv) the Trustee shall not have complied with such request within a reasonable time after such notice, request and offer of indemnity; and such notification, request and offer of indemnity are hereby declared in every such case, at the option of the Trustee, to be conditions precedent to the institution of said suit, action or proceeding; it being understood and intended that no one or more of the Owners shall have any right in any manner whatever by his or their action to affect, disturb or prejudice the security of this Indenture, or to enforce any right hereunder or under the Bonds, except in the manner herein provided, and that all suits, actions and proceedings at law or in equity shall be instituted, had and maintained in the manner herein provided and for the equal benefit of all Owners.

Section 10.06 No Impairment of Right to Enforce Payment . Notwithstanding any other provision in this Indenture, the right of any Owner to receive payment of the principal of and interest and any premium on such Bond, on or after the respective due dates expressed therein or applicable redemption dates, or to institute suit for the enforcement of any such payment on or after such respective date, shall not be impaired or affected without the consent of such Owner.

Section 10.07 Proceeding by Trustee Without Possession of Bonds . All rights of action under this Indenture or under any of the Bonds secured hereby which are enforceable by the Trustee may be enforced by it without the possession of any of the Bonds or the production thereof at the trial or other proceedings relative thereto. Any such suit, action or proceeding instituted by the Trustee shall be brought in its name for the equal and ratable benefit of the Owners subject to the provisions of this Indenture.

Section 10.08 No Remedy Exclusive . No remedy herein conferred upon or reserved to the Trustee, the Bank, the Bond Insurer or to the Owners of the Bonds is intended to be exclusive

of any other remedy or remedies, and each and every such remedy shall be cumulative, and shall be in addition to every other remedy given hereunder or under the Agreement, or now or hereafter existing at law or in equity or by statute.

Section 10.09 No Waiver of Remedies . No delay or omission of the Trustee, the Bank, the Bond Insurer or of any Owner of a Bond to exercise any right or power accruing upon any default shall impair any such right or power accruing upon any default or shall be construed to be a waiver of any such default, or an acquiescence therein. Every power and remedy given by this Article X to the Trustee, the Bank, the Bond Insurer and to the Owners of the Bonds, respectively, may be exercised from time to time as often as may be deemed expedient.

Section 10.10 Application of Moneys . Any moneys received by the Trustee, by any receiver or by any Owner of a Bond pursuant to any right given or action taken under the provisions of this Article X (other than moneys received by the Trustee in consequence of the exercise by the Bank of its right to purchase the Bonds pursuant to Section 4.07) or under the provisions of the Agreement after payment of the costs and expenses of the proceedings resulting in the collection of such moneys, including any amounts due to the Trustee pursuant to Section 11.04 hereof and under the Agreement (except that proceeds of a drawing under a Credit Facility and any moneys held pursuant to Section 5.06 hereof may not be so used), shall be deposited in the Bond Fund and all moneys so deposited in the Bond Fund during the continuance of an Event of Default (other than moneys for the payment of Bonds which had matured or otherwise become payable prior to such Event of Default or for the payment of interest due prior to such Event of Default) shall be applied as follows:

(a) Unless the principal of all the Bonds shall have been declared due and payable, all such moneys shall be applied (i) first, to the payment to the persons entitled thereto of all installments of interest then due on the Bonds, with interest on overdue installments, if lawful, at the rate per annum borne by the Bonds on the date of occurrence of such Event of Default, in the order of maturity of the installments of such interest and, if the amount available shall not be sufficient to pay in full any particular installment of interest, then to the payment ratably, according to the amounts due on such installment, and (ii) second, to the payment to the persons entitled thereto of the unpaid principal of and any premium on any of the Bonds which shall have become due (other than Bonds called for redemption for the payment of which money is held pursuant to the provisions of this Indenture) with interest on such Bonds at their rate on the date of occurrence of such Event of Default from the respective dates upon which they became due and, if the amount available shall not be sufficient to pay in full Bonds due on any particular date, together with such interest, then to the payment ratably, according to the amount of principal and interest and any premium due on such date, in each case to the persons entitled thereto, without any discrimination or privilege; provided, however, that moneys derived from the exercise of rights by the Trustee under a Credit Facility shall not be applied to the payment of the principal of or premium or interest on Bonds held of record by the Borrower or any affiliate thereof or by the Tender Agent for the account of the Borrower.

(b) If the principal of all the Bonds shall have been declared due and payable and the Bank has not exercised its option to direct the Trustee to purchase all Bonds on behalf of the Bank pursuant to Section 4.07 hereof, all such moneys shall be applied to the payment of the principal and interest then due and unpaid upon the Bonds, with interest on overdue interest and

principal, as aforesaid, without preference or priority of principal over interest or of interest over principal, or of any installment of interest over any other installment of interest, or of any Bond over any other Bond, ratably, according to the amounts due respectively for principal and interest, to the persons entitled thereto without any discrimination or privilege; provided however, that moneys derived from the exercise of rights by the Trustee under a Credit Facility shall not be applied to the payment of the principal of or premium or interest on Bonds held of record by the Borrower or any affiliate thereof or by the Tender Agent for the account of the Borrower.

(c) If the principal of all the Bonds shall have been declared due and payable, and if such declaration shall thereafter have been rescinded and annulled under the provisions of this Article X, subject to the provisions of clause (b) of this Section 10.10 which shall be applicable in the event that the principal of all the Bonds shall later become due and payable, the moneys shall be applied in accordance with the provisions of clause (a) of this Section 10.10.

Whenever moneys are to be applied pursuant to the provisions of this Section 10.10, such moneys shall be applied at such times, and from time to time, as the Trustee shall determine, having due regard to the amount of such moneys available for application and the likelihood of additional moneys becoming available for such application in the future. Whenever the Trustee shall apply such funds, it shall fix the date (which, while a Credit Facility shall be in effect, shall be within five days of any declaration of acceleration and, if possible, an Interest Payment Date unless it shall deem another date more suitable) upon which such application is to be made and, upon such application, interest on the amounts of principal, premium and interest to be paid on such dates shall cease to accrue, except that if the principal of all of the Bonds shall have been declared due and payable when a Credit Facility shall be in effect, interest on such amounts shall cease to accrue on the date of the drawing on a Credit Facility with respect to such declaration unless such drawing is pursuant to the Bank’s purchase of the Bonds in accordance with Section 4.07 hereof. The Trustee shall give notice of the deposit with it of any such moneys and of the fixing of any such date to all Owners of Outstanding Bonds, consistent with the requirements of Section 2.01 hereof for the establishment of, and giving of notice with respect to, a Special Record Date for the payment of overdue interest. The Trustee shall not be required to make payment to any Owner of a Bond until such Bond shall be presented to the Trustee for appropriate endorsement or for cancellation if fully paid.

Notwithstanding anything in this Section 10.10 to the contrary, moneys received by the Trustee pursuant to draws on a Credit Facility, and moneys held by the Trustee pursuant to Section 4.10 for the payment of Bonds not presented for payment, shall be applied only to the payment of principal, redemption premium (if any) and interest due on the Bonds.

Section 10.11 Severability of Remedies . It is the purpose and intention of this Article X to provide rights and remedies to the Trustee, the Bank, the Bond Insurer and the Owners which may be lawfully granted under the provisions of the Act, but should any right or remedy granted herein be held to be unlawful, the Trustee, the Bank, the Bond Insurer and the Owners shall be entitled, as above set forth, to every other right and remedy provided in this Indenture and by law.

Section 10.12 Waivers of Events of Default . The Trustee in its discretion may waive any Event of Default hereunder (other than an Event of Default described in clauses (v) and (vi) of paragraph (a) of Section 10.01 and not waived in accordance with paragraph (d) of Section 10.01) and its consequences and shall in any event do so upon the written request of the Owners of a majority in principal amount of all Bonds then outstanding; provided, however, that there shall not be waived

(i) any Event of Default pertaining to the payment of the principal of any Bond at the Maturity Date or redemption date prior to the Maturity Date, or

(ii) any Event of Default pertaining to the payment when due of the interest on any Bond,

unless, prior to such waiver (A) all arrears of principal (due otherwise than by declaration) and interest, with interest (to the extent permitted by law) at the rate per annum borne by the Bonds in respect of which such Event of Default shall have occurred on overdue installments of principal (due otherwise than by declaration) and interest, shall have been paid or provided for, (B) all expenses of the Trustee in connection with such Event of Default shall have been paid or provided for to the satisfaction of the Trustee, and (C) if a Credit Facility is in effect with respect to the Bonds, the coverage under a Credit Facility shall have been reinstated as to principal to an amount equal to the outstanding principal amount of the Bonds and as to interest to an amount which at least equals, depending on the type of Interest Rate Period then in effect, the coverage required by Section 2.01(c)(vi) hereof to permit such Interest Rate Period to go into effect, and provided further that, in case of any such waiver, or in case any proceeding taken by the Trustee on account of any such Event of Default shall be discontinued or abandoned or determined adversely, then and in every such case the Issuer, the Borrower, the Trustee, the Bank, the Bond Insurer and the Owners of the Bonds shall be restored to their former positions and rights hereunder, respectively, but no such waiver shall extend to any subsequent or other Event of Default, or impair any right consequent thereon. The Trustee shall not have any discretion to waive any Event of Default hereunder and its consequences except in the manner and subject to the terms expressed above.

Section 10.13 No Obligation of Issuer to Act . Subject to Sections 8.04 and 8.05, the Issuer shall have no obligation to take any action or pursue any right or remedy of the Trustee or any Owner under this Indenture or otherwise, including, but not limited to, taking any action in a bankruptcy proceeding.

ARTICLE XI

TRUSTEE, PAYING AGENT, REGISTRAR

Section 11.01 Acceptance of Trusts . By executing the certificate of authentication endorsed upon the Bonds, the Trustee shall signify its acceptance and agree to execute the trusts hereby created but only upon the additional terms set forth in this Article XI, to all of which the Issuer agrees and the respective owners agree by their acceptance of delivery of any of the Bonds.

To the extent that it is necessary for the Trustee to determine whether any Person is a Beneficial Owner or an ARS Beneficial Owner, the Trustee shall make such determination based on a certification of such Person (on which the Trustee may conclusively rely) setting forth in satisfactory detail the principal balance and bond certificate owned and any intermediaries through which such bond certificate is held. The Trustee shall be entitled to rely conclusively on information it receives from DTC or other applicable Securities Depository, its direct participants and the indirect participating brokerage firms for such participants with respect to the identity of a Beneficial Owner or ARS Beneficial Owner. The Trustee shall not be deemed to have actual or constructive knowledge of the books and records of DTC or its participants.

Section 11.02 Trustee Not Responsible for Recitals, Maintenance, Insurance, etc . The recitals, findings and representations in this Indenture or in the Bonds contained, save only the Trustee’s authentication upon the Bonds, shall be taken and construed as made by and on the part of the Issuer, and not by the Trustee, and the Trustee does not assume, and shall not have, any responsibility or obligation for the correctness of any thereof. In addition, the Trustee shall not have any responsibility for monitoring the Borrower’s obligations under Sections 5.05 and 5.06 of the Agreement to maintain the Facilities or to maintain or cause to be maintained the insurance required thereunder.

Section 11.03 Limitations on Liability .

(a) The Trustee may execute any of the trusts or powers hereof and perform the duties required of it hereunder by or through attorneys, agents, receivers or employees, and shall be entitled to advice of counsel concerning all matters of trust and its duty hereunder and shall not be liable for any action taken or omitted to be taken in good faith on the basis of such advice, and the Trustee shall not be answerable for the default or misconduct of any such attorney, agent or employee selected by it with reasonable care. The Trustee shall not be answerable for the exercise of any discretion or power under this Indenture or for anything whatsoever in connection with the trust created hereby, except only for its own gross negligence or willful misconduct.

(b) The permissive rights of the Trustee to do things enumerated in this Indenture shall not be construed as a duty, and the Trustee shall not be liable for any action reasonably taken or omitted to be taken by it in good faith and reasonably believed by it to be within its discretion or power conferred upon it hereby.

(c) Whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder or under the Agreement, the Trustee may, in the absence of bad faith on its part, rely upon a Certificate of the Borrower.

(d) Prior to taking any action under the Agreement or this Indenture, the Trustee shall be entitled to a certificate of an Authorized Borrower Representative and/or an opinion of counsel with respect to the proposed action, which certificate and/or opinion shall confirm that all conditions precedent, if any, have been satisfied.

(e) The Trustee shall not be required to give any bond or surety with respect to the performance of its duties or the exercise of its powers under this Indenture. No provision of the Indenture shall require the Trustee to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers.

(f) The Trustee shall not be bound to ascertain or inquire as to performance or observance of any covenants, conditions or other agreements on the part of the Borrower or the Issuer under the Agreement or this Indenture, as the case may be, except as specifically provided for herein. The Trustee shall have no obligation to perform any of the duties of the Issuer or the Borrower under the Agreement or this Indenture.

Section 11.04 Compensation, Expenses and Advances . The Trustee, the Paying Agent, the Registrar and the Tender Agent under this Indenture shall be entitled to reasonable compensation for their services rendered hereunder including extraordinary services such as default administration (not limited by any provision of law in regard to the compensation of the trustee of an express trust) and to reimbursement for their actual out-of-pocket expenses (including counsel fees and expenses) reasonably incurred in connection therewith except as a result of their gross negligence or willful misconduct. If the Issuer shall fail to perform any of the covenants or agreements contained in this Indenture, other than the covenants or agreements in respect of the payment of the principal of, premium, if any, and interest on the Bonds, the Trustee may, in its uncontrolled discretion and without notice to the Owners of the Bonds, at any time and from time to time, make advances to effect performance of the same on behalf of the Issuer, but the Trustee shall be under no obligation to do so; but no such advance shall operate to relieve the Issuer from any default hereunder. In Section 5.04 of the Agreement, the Borrower has agreed that it will pay to the Trustee, the Paying Agent, the Registrar, the Remarketing Agent and the Tender Agent such compensation and reimbursement of expenses and advances, but the Borrower may, without creating a default hereunder, contest in good faith the reasonableness of any such services, expenses and advances. In Section 5.07 of the Agreement, the Borrower has agreed to indemnify the Trustee and the Registrar to the extent stated therein. If the Borrower shall have failed to make any payment to the Trustee under Sections 5.04 or 5.07 of the Agreement and such failure shall have resulted in an Event of Default under the Agreement, the Trustee shall have, in addition to any other rights hereunder, a claim, prior to the claim of the Owners of the Bonds, for the payment of its compensation and the reimbursement of its expenses and any advances made by it, as provided in this Section 11.04, upon the moneys and obligations in the Bond Fund, except for proceeds of drawings under a Credit Facility and except for moneys or obligations deposited with or paid to the Trustee for the purchase of Bonds by the Bank in accordance with Section 4.07 hereof or which are deemed to have been paid in accordance with Article IX hereof and funds held pursuant to Section 5.06 hereof.

Section 11.05 Notice of Events of Default . The Trustee shall not be required to take notice, or be deemed to have notice, of any default or Event of Default under this Indenture or the Agreement other than an Event of Default under clauses (i), (ii), (iii) (but only if the Trustee and the Tender Agent are the same entity), (v) or (vi) of paragraph (a) of Section 10.01 hereof, unless specifically notified in writing of such default or Event of Default by Owners of at least a majority in principal amount of the Bonds then Outstanding or by the Bank or the Bond Insurer. The Trustee may, however, at any time, in its discretion, require of the Issuer full information

and advice as to the performance of any of the covenants, conditions and agreements contained herein.

Section 11.06 Action by Trustee . The Trustee shall be under no obligation to take any action in respect of any default or Event of Default hereunder other than pursuant to Section 10.01(b) hereof, or toward the execution or enforcement of any of the trusts hereby created, or to institute, appear in or defend any suit or other proceeding in connection therewith, unless requested in writing to do so by Owners of at least a majority in principal amount of the Bonds then Outstanding or the Bank, and, if in its opinion such action may tend to involve it in expense or liability, unless furnished, from time to time as often as it may require, with security and indemnity satisfactory to it. The foregoing provisions are intended only for the protection of the Trustee, and shall not affect any discretion or power given by any provisions of this Indenture to the Trustee to take action in respect of any default or Event of Default without such notice or request from Owners or the Bank, or without such security or indemnity. Notwithstanding the foregoing, the Trustee shall submit draw requests under a Credit Facility as provided therein, make payments on the Bonds in accordance with this Indenture and give notice of acceleration in accordance with Section 10.01(b) hereof, without as a precondition to such action, demanding security and indemnity as hereinbefore provided.

Section 11.07 Good Faith Reliance . The Trustee shall be protected and shall incur no liability in acting or proceeding in good faith upon any resolution, notice, telegram, request, consent, waiver, certificate, statement, affidavit, voucher, bond, requisition or other paper or document, or upon telephonic instructions to the extent the giving of telephonic instructions is specifically authorized by this Indenture or the Agreement, in any case which the Trustee shall in good faith believe to be genuine and to have been passed, signed or given by the proper board, body or person or to have been prepared and furnished pursuant to any of the provisions of this Indenture or the Agreement, or upon the written opinion of any attorney, engineer, accountant or other expert believed by the Trustee to be qualified in relation to the subject matter, and the Trustee shall be under no duty to make any investigation or inquiry as to any statements contained or matters referred to in any such instrument, but may accept and rely upon the same as conclusive evidence of the truth and accuracy of such statements. Neither the Trustee, the Paying Agent, the Registrar nor the Tender Agent shall be bound to recognize any person as an Owner or to take any action at his request unless his Bond shall be deposited with such entity or satisfactory evidence of the ownership of such Bond shall be furnished to such entity.

Section 11.08 Dealings in Bonds and with the Issuer and the Borrower . The Trustee, the Paying Agent, the Registrar, the Bank, the Bond Insurer, the Tender Agent or the Remarketing Agent and each of their officers and directors, may in good faith buy, sell, own, hold and deal in any of the Bonds, and may join in any action which any Owner may be entitled to take with like effect as if it did not act in any capacity hereunder. The Trustee, the Paying Agent, the Registrar, the Bank, the Bond Insurer, the Tender Agent or the Remarketing Agent, in its individual capacity, either as principal or agent, may also engage in or be interested in any financial or other transaction with the Issuer or the Borrower, and may act as depositary, trustee or agent for any committee or body of Owners or other obligations of the Issuer as freely as if it did not act in any capacity hereunder.

Section 11.09 Several Capacities . Anything in this Indenture to the contrary notwithstanding, the same entity may serve hereunder as the Trustee, the Paying Agent, the Registrar, the Tender Agent and the Remarketing Agent and in any other combination of such capacities, to the extent permitted by law.

Section 11.10 Construction of Indenture . The Trustee may construe any of the provisions of this Indenture or the Agreement insofar as the same may appear to be ambiguous or inconsistent with any other provision hereof or thereof, and any construction of any such provisions hereof by the Trustee in good faith shall be binding upon the Owners, the Issuer and the Borrower.

Section 11.11 Resignation of Trustee . The Trustee may resign and be discharged of the trusts created by this Indenture by executing an instrument in writing resigning such trust and specifying the date when such resignation shall take effect, and the Trustee shall provide such notice to the Issuer, the Borrower, the Bank, if any, and the Bond Insurer and the Trustee shall give such notice of such resignation to all Owners. Such notice shall specify the date when such resignation shall take effect. Such resignation shall only take effect on the day a successor Trustee shall have been appointed as hereinafter provided and shall have accepted such appointment and agreed to assume all of the obligations as Trustee hereunder.

Section 11.12 Removal of Trustee . The Trustee may be removed by the Issuer at any time, at the written request of the Borrower (other than during the continuation of an Event of Default) or the Owners of not less than a majority in principal amount of the Bonds then Outstanding, by filing with the Trustee so removed, the Issuer, the Borrower, the Tender Agent, the Remarketing Agent, the Bank and the Bond Insurer an instrument or instruments in writing appointing a successor in accordance with Section 11.13 hereof. Promptly upon delivery of such instrument or instruments to the Trustee, the successor Trustee upon its acceptance of the trusts created hereby shall give notice thereof to all Owners.

Section 11.13 Appointment of Successor Trustee . If at any time the Trustee shall be removed, be dissolved or its property or affairs shall be taken under the control of any state or federal court or administrative body because of insolvency, bankruptcy or any other reason, a vacancy shall ipso facto be deemed to exist in the office of Trustee and a successor may be appointed, and in case at any time the Trustee shall resign, then a successor may be appointed, by giving written notice to the Issuer, the Borrower, the Tender Agent, the Remarketing Agent, the Bank and the Bond Insurer an instrument of appointment in writing, executed by Owners of not less than a majority in principal amount of Bonds then Outstanding with the consent of the Bank unless the Bank has wrongfully dishonored a draw on a Credit Facility and with the consent of the Bond Insurer so long as the Bond Insurer is not in default in its payment obligations under the Bond Insurance Policy. Copies of such instrument shall be promptly delivered by the Issuer to the predecessor Trustee and to the Trustee so appointed.

Until a successor Trustee shall be appointed by the Owners of the Bonds as herein authorized with the consent of the Bank unless the Bank has wrongfully dishonored a draw on a Credit Facility and with the consent of the Bond Insurer so long as the Bond Insurer is not in default in its payment obligations under the Bond Insurance Policy, the Issuer, by an instrument authorized by resolution of the Issuer, may, but shall have no obligation to, appoint a successor

Trustee acceptable to the Borrower, the Bank and the Bond Insurer. After any appointment by the Issuer, it shall cause notice of such appointment to be given to the Remarketing Agent and to all Owners of the Bonds. Any new Trustee so appointed by the Issuer shall immediately and without further act be superseded by a Trustee appointed by the Owners of the Bonds in the manner above provided. Notwithstanding anything herein to the contrary, no resignation or removal of the Trustee shall be effective until (i) a successor Trustee shall be appointed in accordance with the terms hereof and has accepted such appointment, and (ii) each then existing Letter of Credit or other Credit Facility shall have been transferred to such successor in accordance with the terms thereof.

Section 11.14 Qualifications of Successor Trustee . Every successor Trustee (a) shall be a bank or trust company (other than the Bank) duly organized under the laws of the United States or any state or territory thereof and authorized by law to perform all the duties imposed upon it by this Indenture, (b) shall have a combined capital stock, surplus and undivided profits of at least $50,000,000 if there can be located, with reasonable effort, such an institution willing and able to accept the trust on reasonable and customary terms and (c) shall have its obligations rated or be a wholly-owned subsidiary of an entity whose obligations are rated, so long as the Bonds shall be rated by Moody’s, at least Baa3/P-3 by Moody’s or otherwise qualified by Moody’s.

Section 11.15 Judicial Appointment of Successor Trustee . If at any time the Trustee shall resign and no appointment of a successor Trustee shall be made pursuant to the foregoing provisions of this Article XI prior to the date specified in the notice of resignation as the date when such resignation is to take effect, the retiring Trustee may forthwith apply to a court of competent jurisdiction for the appointment of a successor Trustee. If no appointment of a successor Trustee shall be made pursuant to the foregoing provisions of this Article XI within six months after a vacancy shall have occurred in the office of Trustee, any Owner of a Bond or the Bank or the Bond Insurer may apply to any court of competent jurisdiction to appoint a successor Trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor Trustee.

Section 11.16 Acceptance of Trusts by Successor Trustee . Any successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Issuer, the Borrower, the Bank, if any, the Bond Insurer and to its predecessor Trustee an instrument accepting such appointment hereunder, and thereupon such successor Trustee, without any further act, deed or conveyance, shall become duly vested with all the estates, property, rights, powers, trusts, duties and obligations of its predecessor in the trust hereunder, with like effect as if originally named Trustee herein. Upon request of such successor Trustee, such predecessor Trustee and the Issuer shall execute and deliver an instrument transferring to such successor Trustee all the estates, property, rights, powers and trusts hereunder of such predecessor Trustee and, subject to the provisions of Section 11.04 hereof and upon payment of its charges, such predecessor Trustee shall (i) pay over to the successor Trustee all moneys and other assets at the time held by it hereunder and (ii) transfer over to the successor Trustee its interest in any Credit Facility.

Section 11.17 Successor by Merger or Consolidation . Any corporation into which any Trustee hereunder may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which any Trustee hereunder shall be a party or any corporation to which all or substantially all of the corporate trust business of the

Trustee shall be sold or transferred, shall be the successor Trustee under this Indenture, without the execution or filing of any paper or any further act on the part of the parties hereto, anything in this Indenture to the contrary notwithstanding.

Section 11.18 Standard of Care . Notwithstanding any other provisions of this Article XI, the Trustee shall, during the existence of an Event of Default of which the Trustee is required to take notice or is deemed to have notice under Section 11.05 hereof, exercise such of the rights and powers vested in it by this Indenture and use the same degree of skill and care in their exercise as a prudent indenture trustee would use and exercise under the circumstances. Prior to the existence and after the curing or waiving of any such Event of Default, the duties of the Trustee hereunder shall be only such duties as are specifically set forth herein and no implied covenants shall be read into this Indenture or the Agreement against the Trustee.

Section 11.19 Notice of Event of Default . If an Event of Default occurs of which the Trustee is required by Section 11.05 hereof to take notice or has notice, or any other Event of Default occurs of which the Trustee has been specifically notified in accordance with Section 11.05 hereof, then (a) immediately upon the Trustee taking or having notice of any Event of Default under Section 10.1(a)(i),(ii) or (iii) or Section 10.01(b) upon any other Event of Default continuing for at least five Business Days after the Trustee is required to take, or has received, notice thereof, the Trustee shall give notice thereof to the Issuer, the Remarketing Agent, the Tender Agent, the Bank, the Bond Insurer and the Owners of the Bonds.

Section 11.20 Intervention in Litigation . In any judicial proceeding to which the Issuer is a party and which in the opinion of the Trustee and its counsel has a substantial bearing on the interests of the Owners of the Bonds, the Trustee may intervene on behalf of the Owners of the Bonds and shall, upon receipt of indemnity satisfactory to it, do so if requested in writing by Owners of at least a majority in principal amount of the Bonds then Outstanding if permitted by the court having jurisdiction in the premises.

Section 11.21 Paying Agent . The Issuer may at any time or from time to time by resolution, with the approval of the Trustee and the Borrower, appoint the Paying Agent for the Bonds, subject to the conditions set forth in Section 11.22 hereof. The Trustee is hereby appointed as the initial Paying Agent. Each Paying Agent (if not also the Trustee) shall designate to the Trustee, the Bank and the Bond Insurer its Principal Office and signify its acceptance of the duties and obligations imposed upon it hereunder by a written instrument of acceptance delivered to the Issuer, the Borrower and the Trustee under which such Paying Agent will agree, particularly:

(i) to hold all sums held by it for the payment of the principal of and interest and any premium on Bonds in trust for the benefit of the Owners until such sums shall be paid to the Owners or otherwise disposed of as herein provided; and

(ii) to keep such books and records as shall be consistent with prudent industry practice and to make such books and records available for inspection by the Issuer, the Trustee and the Borrower at all reasonable times.

The Issuer shall cooperate with the Trustee and the Borrower to cause the necessary arrangements to be made and to be thereafter continued whereby funds will be made available for the payment when due of the Bonds as presented at the Principal Office of the Paying Agent.

Section 11.22 Qualifications of Paying Agent; Resignation; Removal . The Paying Agent shall (i) be a bank, a trust company, national banking association or another corporation duly organized under the laws of the United States of America or any state or territory thereof, (ii) have its obligations rated or be a wholly-owned subsidiary of an entity whose obligations are rated, so long as the Bonds are rated by Moody’s, at least Baa3/P-3 by Moody’s or otherwise qualified by Moody’s, and (iii) be authorized by law to perform all the duties imposed upon it by this Indenture. The Paying Agent may at any time resign and be discharged of the duties and obligations created by this Indenture by giving at least 60 days’ notice to the Issuer, the Borrower and the Trustee (if no longer the Paying Agent). The Paying Agent shall be removed at any time, other than during the continuance of an Event of Default, at the direction of the Borrower, by an instrument, signed by the Issuer, filed with the Paying Agent and with the Trustee.

In the event of the resignation or removal of the Paying Agent, the Paying Agent shall pay over, assign and deliver any moneys held by it in such capacity to its successor or, if there be no successor, to the Trustee.

In the event that the Paying Agent shall resign, be removed or be dissolved, or if the property or affairs of the Paying Agent shall be taken under the control of any state or federal court or administrative body because of bankruptcy, insolvency or any other reason, and the Issuer shall not have appointed its successor as Paying Agent, the Trustee shall de facto be deemed to be the Paying Agent for all purposes of this Indenture until the appointment by the Issuer of the Paying Agent or successor Paying Agent, as the case may be.

Section 11.23 Registrar . The Trustee hereby is appointed as the initial Registrar. In the event of the resignation or removal of the Registrar, the Issuer shall, at the direction of the Borrower, appoint the Registrar for the Bonds, subject to the conditions set forth in Section 11.24 hereof. Each Registrar (if not also the Trustee) shall designate to the Trustee its Principal Office and signify its acceptance of the duties imposed upon it hereunder by a written instrument of acceptance delivered to the Issuer, the Borrower and the Trustee under which such Registrar will agree, particularly, to keep such books and records as shall be consistent with prudent industry practice and to make such books and records available for inspection by the Issuer, the Trustee and the Borrower at all reasonable times.

The Issuer shall cooperate with the efforts of the Trustee and the Borrower intended to cause the necessary arrangements to be made and to be thereafter continued whereby Bonds, executed by the Issuer and authenticated by the Trustee, shall be made available for exchange and registration of transfer at the Principal Office of the Registrar. The Issuer shall cooperate with the efforts of the Trustee, the Registrar and the Borrower to cause the necessary arrangements to be made and thereafter continued whereby the Paying Agent and the Remarketing Agent shall be furnished such records and other information, at such times, as shall be required to enable the Paying Agent and the Remarketing Agent to perform the duties and obligations imposed upon them hereunder.

Section 11.24 Qualifications of Registrar; Resignation; Removal . The Registrar shall be a corporation duly organized under the laws of the United States of America or any state or territory thereof, authorized by law to perform all the duties imposed upon it by this Indenture. The Registrar may at any time resign and be discharged of the duties and obligations created by this Indenture by giving at least 60 days’ notice to the Issuer, the Trustee and the Borrower. The Registrar may be removed at any time, at the direction of the Borrower (other than during the continuance of an Event of Default), by an instrument, signed by the Issuer, filed with the Registrar and the Trustee.

In the event of the resignation or removal of the Registrar, the Registrar shall deliver any Bonds held by it in such capacity to its successor or, if there be no successor, to the Trustee.

In the event that the Registrar shall resign, be removed or be dissolved, or if the property or affairs of the Registrar shall be taken under the control of any state or federal court or administrative body because of bankruptcy, insolvency or any other reason, and the Issuer shall not have appointed its successor as Registrar, the Trustee shall de facto be deemed to be the Registrar for all purposes of this Indenture until the appointment by the Issuer of the Registrar or successor Registrar, as the case may be.

Section 11.25 Appointment of Co-Trustee . It is the purpose of this Indenture that there shall be no violation of any law of any jurisdiction (including particularly the law of the State of Arizona) denying or restricting the right of banking corporations or associations to transact business as trustee in such jurisdiction. It is recognized that in case of litigation under this Indenture or the Agreement, and in particular in the case of the enforcement thereof on default, or in the case the Trustee deems that by reason of any present or future law of any jurisdiction it may not exercise any of the powers, rights or remedies herein granted to the Trustee or hold title to the properties, in trust, as herein granted, or take any action which may be desirable or necessary in connection therewith, it may be necessary that the Trustee appoint an additional individual or institution as a separate or co-trustee.

In the event that the Trustee shall appoint an additional individual or institution as a separate or co-trustee, each and every remedy, power, right, claim, demand, cause of action, immunity, estate, title, interest and lien expressed or intended by this Indenture to be exercised by or vested in or conveyed to the Trustee with respect thereto shall be exercisable by and vest in such separate or co-trustee, but only to the extent necessary to enable such separate or co-trustee to exercise such powers, rights and remedies, and every covenant and obligation necessary to the exercise thereof by such separate or co-trustee shall run to and be enforceable by either of them.

Should any reasonable instrument in writing from the Issuer be required by the separate or co-trustee so appointed by the Trustee for more fully and certainly vesting in and confirming to him or it such estates, property, rights, powers, trusts, duties and obligations, any and all such instruments in writing shall, on request, be executed, acknowledged and delivered by the Issuer. In case any separate or co-trustee or a successor to either shall die, become incapable of acting, resign or be removed, all the estates, properties, rights, powers, trusts, duties and obligations of such separate or co-trustee, so far as permitted by law, shall vest in and be exercised by the Trustee until the appointment of a successor to such separate or co-trustee or a new separate or

co-trustee. No trustee hereunder shall be liable by reason of any act or omission of any other trustee hereunder.

Section 11.26 Notices to Rating Agencies . The Trustee shall provide Moody’s, if the Bonds are then rated by Moody’s, or S&P, if the Bonds are then rated by S&P as appropriate, with prompt written notice at least 15 days prior to its execution and adoption of (i) the appointment of any successor Trustee, Paying Agent, Remarketing Agent or Tender Agent, (ii) any amendments to this Indenture or the Agreement, (iii) the payment (or provision for payment) in whole of the Bonds, (iv) the adjustment of any Bonds to a Short-Term or Long-Term Interest Rate Period, (v) the acquisition, extension, expiration or termination of a Credit Facility, or (vi) any amendment to the Reimbursement Agreement or a Credit Facility of which the Trustee has actual knowledge.

ARTICLE XII

EXECUTION OF INSTRUMENTS BY

OWNERS AND PROOF OF OWNERSHIP OF BONDS

Section 12.01 Execution of Instruments Proof of Ownership . Any request, direction, consent or other instrument in writing, whether or not required or permitted by this Indenture to be signed or executed by Owners of the Bonds, may be in any number of concurrent instruments of similar tenor and may be signed or executed by Owners of the Bonds in person or by agent appointed by an instrument in writing. Proof of the execution of any such instrument and of the ownership or former ownership of Bonds shall be sufficient for any purpose of this Indenture and shall be conclusive in favor of the Trustee with regard to any action taken by it under such instrument if made in the following manner:

(i) The fact and date of the execution by any person of any such instrument may be proved by the certificate of any officer in any jurisdiction who, by the laws thereof, has power to take acknowledgments within such jurisdiction, to the effect that the person signing such instrument acknowledged before him the execution thereof, or by an affidavit of a witness to such execution, or in any other manner reasonably acceptable to the Trustee.

(ii) The ownership or former ownership of Bonds shall be proved by the registration books kept under the provisions of Section 2.04 hereof and the records kept by the Trustee pursuant to Section 6.02(c) hereof.

(iii) While the Bonds are in book-entry only form, the beneficial ownership or former ownership of Bonds shall be proved by an instrument in writing signed by such Beneficial Owner and acceptable to the Trustee.

Nothing contained in this Article XII shall be construed as limiting the Trustee to such proof, it being intended that the Trustee may accept any other evidence of matters herein stated which it may deem to be sufficient. Any request or consent of any Owner of a Bond shall bind every future Owner of any Bond or Bonds issued in lieu thereof or upon registration of transfer

or in exchange thereof in respect of anything done by the Trustee or the Issuer in pursuance of such request or consent.

ARTICLE XIII

MODIFICATION OF INDENTURE DOCUMENTS

Section 13.01 Limitations . This Indenture and the Agreement shall not be modified or amended in any respect subsequent to the initial issuance of the Bonds, except as provided in and in accordance with and subject to the provisions of this Article XIII.

Section 13.02 Modification without Consent of Owners . The Issuer and the Trustee may, from time to time and at any time without the consent of or notice to the Owners of the Bonds but with the consent of the Bond Insurer subject to Section 13.05 hereof, enter into Supplemental Indentures as follows:

(i) to cure any formal defect, omission, inconsistency or ambiguity in this Indenture;

(ii) to grant to or confer upon the Trustee for the benefit of the Owners of the Bonds any additional rights, remedies, powers, authority or security which may lawfully be granted or conferred and which are not contrary to or inconsistent with this Indenture as theretofore in effect;

(iii) to add to the covenants and agreements of, and limitations and restrictions upon, the Issuer in this Indenture other covenants, agreements, limitations and restrictions to be observed by the Issuer which are not contrary to or inconsistent with this Indenture as theretofore in effect;

(iv) to confirm, as further assurance, any pledge or assignment under, and the subjection to any claim, lien, pledge or assignment created or to be created by this Indenture, of the Receipts and Revenues or of any other moneys, securities or funds;

(v) to authorize different Authorized Denominations of the Bonds and to make correlative amendments and modifications to this Indenture regarding exchangeability of Bonds of different Authorized Denominations, redemptions of portions of Bonds of particular Authorized Denominations and similar amendments and modifications of a technical nature;

(vi) to modify, alter, supplement or amend this Indenture in such manner as shall permit the qualification hereof under the Trust Indenture Act of 1939, as from time to time amended;

(vii) to increase or decrease the number of days specified in Section 2.01(c) hereof and to make corresponding changes to Section 4.03 hereof; provided that no decreases in any such number of days shall become effective except during a Daily Interest Rate Period or a Weekly Interest Rate Period and until 30 days after the Trustee shall have given notice to the Owners;

(viii) to provide for the procedures required to permit or implement an uncertificated system of registration of the Bonds;

(ix) to modify, alter, amend or supplement this Indenture in any other respect which is not materially adverse to the Owners and which does not involve a change described in the provisions of Section 13.03(i) hereof;

(x) to modify, alter, supplement or amend this Indenture to comply with changes in the Code affecting the status of interest on the Bonds as excluded from gross income for federal income tax purposes or the obligations of the Issuer or the Borrower in respect of Section 148 of the Code; and

(xi) to modify, alter, amend or supplement the provisions in the Indenture relating to the Bonds in Auction Rate Securities mode, at the time of conversion for the Bonds to Auction Rate Securities mode, in accordance with the then current market practice with respect to similar securities and provisions.

Before the Issuer shall adopt any Supplemental Indenture pursuant to this Section 13.02, there shall have been provided to the Issuer and the Trustee a Favorable Opinion of Bond Counsel.

Section 13.03 Modification with Consent of Owners .

(i) Except for any Supplemental Indenture entered into pursuant to Section 13.02 hereof, subject to the terms and provisions contained in this Section 13.03, the Owners of not less than a majority in aggregate principal amount of the Bonds shall have the right from time to time to consent to and approve with the consent of the Bond Insurer the adoption by the Issuer of any Supplemental Indenture deemed necessary or desirable by the Issuer for the purposes of modifying, altering, amending, supplementing or rescinding, in any particular, any of the terms or provisions contained in this Indenture; provided, however, that, unless approved in writing by the Owners of all the Bonds, nothing herein contained shall permit, or be construed as permitting, (i) a change in the times, amounts or currency of payment of the principal of or interest or any premium on any Bond, a change in the terms of the purchase of Bonds pursuant to Section 4.08 hereof (other than as permitted by Section 13.02(vii) hereof), or a reduction in the principal amount or redemption price of any Bond or a change in the method of determining the rate of interest thereon, or (ii) the creation of a claim or lien upon, or a pledge or assignment of, the Receipts and Revenues ranking prior to or on a parity with the claim, lien, pledge or assignment created by this Indenture, or (iii) a preference or priority of any Bond or Bonds over any other Bond or Bonds, or (iv) a reduction in the aggregate principal amount of Bonds the consent of the Owners of which is required for any such Supplemental Indenture or under Section 13.07 hereof, for any modification, alteration, amendment or supplement to the Agreement.

(ii) If at any time the Issuer shall determine to adopt any Supplemental Indenture for any of the purposes of this Section 13.03, the Trustee shall cause notice of the proposed Supplemental Indenture to be given to all Owners of the Bonds. Such

notice shall briefly set forth the nature of the proposed Supplemental Indenture and shall state that a copy thereof is on file at the Principal Office of the Trustee for inspection by all Owners of the Bonds.

(iii) Within two years after the date of the giving of such notice, the Issuer may adopt (the date of adoption shall be the date of passage and not the effective date) such Supplemental Indenture in substantially the form described in such notice, but only if there shall have first been filed with the Trustee (i) the required consents, in writing, of the Owners of the Bonds and (ii) a Favorable Opinion of Bond Counsel stating that such Supplemental Indenture is authorized or permitted by this Indenture and the Act, complies with their respective terms, and, upon the adoption thereof, will be valid and binding upon the Issuer in accordance with its terms and will not adversely affect the exclusion from gross income for federal income tax purposes of interest on the Bonds.

(iv) If Owners of not less than the percentage of Bonds required by this Section 13.03 shall have consented to and approved the adoption thereof as herein provided, no Owner shall have any right to object to the adoption of such Supplemental Indenture, or to object to any of the terms and provisions contained therein or the operation thereof, or in any manner to question the propriety of the execution and delivery thereof, or to enjoin or restrain the Issuer from enacting the same or from taking any action pursuant to the provisions thereof.

Section 13.04 Effect of Supplemental Indenture . Upon the adoption of any Supplemental Indenture pursuant to the provisions of this Article XIII, this Indenture shall be, and be deemed to be, modified and amended in accordance therewith, and the respective rights, duties and obligations under this Indenture of the Issuer, the Trustee and all Owners of Bonds then Outstanding shall thereafter be determined, exercised and enforced under this Indenture subject in all respects to such modifications and amendments.

Section 13.05 Consent of the Borrower, the Bank and the Bond Insurer . Anything herein to the contrary notwithstanding, the Trustee (i) shall not execute any Supplemental Indenture under this Article XIII which affects any rights, powers and authority of the Borrower under the Agreement, the Tender Agreement or the applicable Credit Facility or the Bond Insurance Policy or requires a revision of the Agreement, the Tender Agreement or the applicable Credit Facility or the Bond Insurance Policy unless and until the Borrower, the Bank, the Bond Insurer and the Tender Agent shall have consented to such Supplemental Indenture, and (ii) need not accept any Supplemental Indenture which affects its rights, duties and responsibilities hereunder or under the Agreement.

Section 13.06 Amendment of Agreement without Consent of Owners . Without the consent of or notice to the Owners of the Bonds but with the consent of the Borrower, the Bank and the Bond Insurer, the Issuer may modify, alter, amend or supplement the Agreement, and the Trustee may consent thereto, (a) as may be required by the provisions of the Agreement and this Indenture, (b) for the purpose of curing any formal defect, omission, inconsistency or ambiguity herein, or (c) in connection with any other change therein which is not materially adverse to the Owners. No extension, termination or provision of any substitute Credit Facility in accordance

with the provisions of the Agreement shall be deemed a modification, alteration, amendment or supplement to the Agreement, or to this Indenture, for any purpose of this Indenture.

Before the Issuer shall enter into, and the Trustee shall consent to, any modification, alteration, amendment or supplement to the Agreement, pursuant to this Section 13.06, there shall have been delivered to the Issuer and the Trustee, a Favorable Opinion of Bond Counsel.

Section 13.07 Amendment of Agreement with Consent of Owners . Except in the cases of modifications, alterations, amendments or supplements referred to in Sections 13.02 and 13.06 hereof, the Issuer shall not enter into, and the Trustee shall not consent to, any modification, alteration, amendment or supplement of the Agreement, without the written approval or consent of the Owners of not less than a majority in aggregate principal amount of the Bonds then Outstanding but with the consent of the Borrower, the Bank and the Bond Insurer, given and procured as provided in Sections 13.03 and 13.05 hereof; provided, however, that, unless approved in writing by the Owners of all Bonds then Outstanding, nothing in this Section 13.07 shall permit, or be construed as permitting, a change in the obligations of the Borrower under Section 5.02 or 10.01 of the Agreement. If at any time the Issuer or the Borrower shall request the consent of the Trustee to any such proposed modification, alteration, amendment or supplement, the Trustee shall cause notice thereof to be given in the same manner as provided by Section 13.03 hereof with respect to Supplemental Indentures. Such notice shall briefly set forth the nature of such proposed modification, alteration, amendment or supplement and shall state that copies of the instrument embodying the same are on file at the Corporate Trust office of the Trustee for inspection by all Owners of Bonds Outstanding. The Issuer may enter into, and the Trustee may consent to, any such proposed modification, alteration, amendment or supplement of the Agreement, subject to the same conditions and with the same effect as provided in Section 13.03 hereof with respect to Supplemental Indentures.

Section 13.08 Issuance of Bonds Under Other Indentures: Recognition of Prior Pledges . The Issuer hereby expressly reserves the right to issue, to the extent permitted by law, bonds in accordance with other ordinances and indentures for one or more purposes permitted by the Act. The Issuer hereby recognizes and protects any prior pledge or mortgage made to secure any prior issue of bonds.

ARTICLE XIV

REMARKETING AGENT; TENDER AGENT;

PURCHASE AND REMARKETING OF BONDS

Section 14.01 Remarketing Agent and Tender Agent .

(a) The Borrower shall appoint a Remarketing Agent for the Bonds, subject to the conditions set forth in Section 14.02(a) hereof. The Remarketing Agent shall designate its Principal Office and signify its acceptance of the duties and obligations imposed upon it hereunder by a written instrument of acceptance delivered to the Issuer, the Trustee, the Tender Agent and the Borrower under which the Remarketing Agent will agree, particularly, to keep such books and records with respect to the Bonds as shall be consistent with prudent industry practice and to make such books and records available for inspection by the Issuer, the Trustee, the Tender Agent and the Borrower at all reasonable times.

(b) The Borrower shall appoint a Tender Agent for the Bonds; subject to the conditions set forth in Section 14.02(b) hereof. The Tender Agent shall designate its Principal Office and signify its acceptance of the duties and obligations imposed upon it hereunder by a written instrument of acceptance delivered to the Issuer, the Trustee, the Borrower, the Bank, the Bond Insurer and the Remarketing Agent.

Section 14.02 Qualifications of Remarketing Agent and Tender Agent; Resignation; Removal .

(a) The Remarketing Agent shall be a member of the National Association of Securities Dealers, Inc., having a combined capital stock, surplus and undivided profits of at least $15,000,000 and authorized by law to perform all the duties imposed upon it by this Indenture and the Remarketing Agreement. Any successor Remarketing Agent shall have its obligations rated or be a wholly-owned subsidiary of an entity whose obligations are rated, so long as the Bonds shall be rated by Moody’s, at least Baa3/P-3 by Moody’s or otherwise qualified by Moody’s. The Remarketing Agent may at any time resign and be discharged of the duties and obligations created by this Indenture by giving notice to the Issuer, the Trustee, the Bank, if any, the Tender Agent and the Borrower. Such resignation shall take effect on the earlier of (i) the day a successor Remarketing Agent shall have been appointed by the Borrower and shall have accepted such appointment, or (ii) the 45th day after the receipt by the Issuer and the Borrower of the notice of resignation. The Remarketing Agent may be removed at any time, pursuant to the Remarketing Agreement.

(b) The Tender Agent shall be a corporation duly organized under the laws of the United States of America or any state or territory thereof, and, if not a bank or trust company, for so long as the Bonds shall be rated by Moody’s, shall have its obligations rated at least Baa3/P-3 by Moody’s or otherwise qualified by Moody’s, and in any case having a combined capital stock, surplus and undivided profits of at least $25,000,000 and authorized by law to perform all the duties imposed upon it by this Indenture and the Tender Agreement. The Tender Agent may at any time resign and be discharged of the duties and obligations created by this Indenture by giving at least 30 days’ notice to the Issuer, the Trustee, the Borrower, the Remarketing Agent, the Bank and the Bond Insurer. Such resignation shall take effect on the

day a successor Tender Agent shall have been appointed by the Borrower and shall have accepted such appointment. The Tender Agent may be removed at any time by an instrument signed by the Borrower, filed with the Tender Agent, the Issuer, the Trustee, the Remarketing Agent, the Bank and the Bond Insurer. In the event of the resignation or removal of the Tender Agent, the Tender Agent shall deliver any Bonds and moneys held by it in such capacity to its successor, or if there is no successor, to the Trustee.

Section 14.03 Remarketing of Bonds; Notice of Interest Rates .

(a) Upon notice of the tender for purchase of Bonds in accordance with Section 4.08 hereof, the Remarketing Agent shall offer for sale and use its best efforts to sell such Bonds (other than Bonds purchased with moneys derived from the source described in clause (i) of Section 6.02(b) hereof, if so directed by the Borrower), any such sale to be made on the date of such purchase in accordance with Section 4.08 at the best price available in the marketplace; provided, however, that, if a Credit Facility shall be in effect, the Remarketing Agent shall not sell any of such Bonds at a price below the principal amount thereof plus accrued interest thereon, if any. Any Bond which is tendered for purchase, pursuant to Section 4.08 hereof, and any Bond that has become subject to mandatory tender for purchase pursuant to Section 4.08 hereof, shall be sold only to a purchaser who agrees to refrain from selling that Bond other than under the terms of this Indenture and hold that Bond only to the date of mandatory purchase.

(b) The Remarketing Agent shall determine the rate of interest to be borne by the Bonds during each Interest Rate Period and by each Bond during each Bond Interest Term for such Bond and the Bond Interest Terms for each Bond during each Short-Term Interest Rate Period as provided in Section 2.01 hereof and shall furnish to the Trustee, the Tender Agent, the Borrower and the Bank on the Business Day of determination each rate of interest and Bond Interest Term so determined.

(c) The Remarketing Agent shall give telephonic or telegraphic notice, promptly confirmed by a written notice, to the Trustee and the Tender Agent on each date on which Bonds shall have been purchased pursuant to Section 6.02(b) hereof, specifying the principal amount of Bonds, if any, sold by it pursuant to Section 14.03(a) hereof.

Section 14.04 Delivery of Bonds .

(a) Bonds purchased with moneys described in clause (i) of Section 6.02(b) hereof shall be delivered to the Borrower and shall be registered in accordance with instructions from the Borrower.

(b) Bonds purchased with moneys described in clause (ii) of Section 6.02(b) hereof shall be delivered by the Trustee to the Tender Agent or the Remarketing Agent for delivery to the purchasers thereof against payment therefor in accordance with the Tender Agreement.

(i) except as otherwise provided in Section 14.04(c)(ii) or (iii) hereof, held by the Tender Agent for the account of the Borrower, if a Credit Facility provides for reinstatement in respect of the drawings for the purchase of Bonds tendered pursuant to Section 4.08 hereof and not remarketed by reimbursement to the Bank of the amount of such drawing together with interest thereon;

(ii) delivered to the Bank, as applicable, if a Credit Facility provides for immediate reinstatement in respect of drawings for the purchase of Bonds tendered pursuant to Section 4.08 hereof and not remarketed by the delivery to the Bank of such Bonds or otherwise requires that Bonds be delivered to the Bank;

(iii) held by the Tender Agent for the account of the Bank, if a Credit Facility provides for immediate reinstatement in respect of drawings for the purchase of Bonds tendered pursuant to Section 4.08 hereof and not remarketed by the holding for the account of the Bank of such Bonds or otherwise requires that Bonds be held for the account of the Bank; or

(iv) delivered to the Trustee for cancellation, if a Credit Facility does not provide for reinstatement in respect of drawings for the purchase of Bonds tendered pursuant to Section 4.08 hereof and not remarketed.

Upon delivery to the Bank, or to the Tender Agent for the account of the Bank, of the Bonds in accordance with clause (ii) or (iii) above, the Trustee shall deliver any certificate evidencing such reimbursement or delivery of Bonds to or for the account of the Bank, as applicable, required for reinstatement, in whole or in part, of any Credit Facility. Bonds held pursuant to clauses (i), (ii) and (iii) above shall be released for the purpose of remarketing or released to or upon the order of the Borrower only upon receipt by the Tender Agent from the Bank of a written notice to the effect that the Trustee is entitled to draw under a Credit Facility to pay principal of and interest on the Bonds and to pay the purchase price of Bonds purchased pursuant to Section 4.08 hereof and not remarketed in an amount equal to the amount that could be drawn under a Credit Facility if the drawing made to purchase such Bonds were disregarded.

(d) Bonds purchased with moneys described in clause (iv) of Section 6.02(b) hereof shall, at the direction of the Borrower, be (i) held by the Tender Agent for the account of the Borrower, (ii) delivered to the Trustee for cancellation or (iii) delivered to the Borrower; provided, however, that any Bonds so purchased after the selection thereof by the Trustee for redemption shall be delivered to the Trustee for cancellation.

(e) Bonds delivered as provided in this Section 14.04 shall be registered in the manner directed by the recipient thereof.

(f) Bonds purchased by the Trustee on behalf of or for the account of the Bank (or its nominee) pursuant to Section 4.07 shall be delivered promptly to the Bank (or its nominee, as the case may be), or as the Bank shall otherwise direct and thereafter, if requested by the Bank, remarketed in accordance with the provisions of Section 14.03 hereof and the Remarketing Agreement.

(g) So long as the Bonds are Book-Entry Bonds, the tender and put procedures of DTC, as in effect from time to time, shall take precedence over the tender procedures described herein to the extent of any inconsistency and the Remarketing Agent and the Trustee shall not be required to take any actions hereunder other than those required by DTC and the Remarketing Agent. The parties agree to cooperate to implement such procedures as needed.

Section 14.05 Drawings on Credit Facility . In accordance with the provisions of the Tender Agreement, on each day on which Bonds are to be purchased pursuant to Section 4.08 hereof, except to the extent that (i) moneys described in Section 6.02(b)(i) hereof shall be available for the purchase of such Bonds, or (ii) the Trustee shall have received telephonic or Electronic notification from the Remarketing Agent or the Tender Agent that such Bonds shall have been remarketed pursuant to Section 14.03 hereof and that the moneys described in Section 6.02(b)(ii) hereof will be sufficient to pay the purchase price of such Bonds or (iii) the Bank shall have purchased the Bonds pursuant to Section 4.07 hereof, the Trustee promptly shall draw under a Credit Facility, in accordance with its terms, an amount sufficient to make timely payment of the purchase price of such Bonds and furnish the proceeds of such drawing to the Tender Agent. Following payment of all amounts payable in respect of the purchase of Bonds pursuant to Section 4.08 hereof, the Trustee shall remit to the Bank any amount drawn under a Credit Facility in excess of the amount sufficient to make timely payment of the purchase price of such Bonds.

Section 14.06 Delivery of Proceeds of Sale . The proceeds of the sale by the Remarketing Agent of any Bonds delivered to it by, or held by it for the account of, the Borrower or the Bank, or delivered to it by the Bank or any other Owner, shall be turned over to the Borrower, the Bank or such other Owner, as the case may be. If the applicable Credit Facility provides for reinstatement in respect of the drawings for the purchase of Bonds tendered pursuant to Section 4.08 hereof by reimbursement to the Bank of the amount of such drawing, the Remarketing Agent shall deliver the proceeds of such remarketing to the Bank to the extent the Bank has not been reimbursed, and in connection therewith, the Trustee shall deliver any certificate required for reinstatement, in whole or in part, of any Credit Facility.

ARTICLE XV

MISCELLANEOUS

Section 15.01 Indenture to Bind and Inure to Benefit of Successors to Issuer . In the event of the dissolution of the Issuer, all the covenants, stipulations, promises and agreements in this Indenture contained by or on behalf of, or for the benefit of, the Issuer, shall bind or inure to the benefit of the successors of the Issuer from time to time and any entity, officer, board, commission, agency or instrumentality to whom or to which any power or duty of the Issuer shall be transferred.

Section 15.02 Parties in Interest . Except as herein otherwise specifically provided, nothing in this Indenture expressed or implied is intended or shall be construed to confer upon any person, firm or corporation, other than the Issuer, the Borrower, the Trustee, the Bank, the Bond Insurer and the Owners, any right, remedy or claim under or by reason of this Indenture,

this Indenture being intended to be for the sole and exclusive benefit of the Issuer, the Borrower, the Trustee, the Bank, the Bond Insurer and the Owners of the Bonds. Nothing in this Indenture is intended to create in the Borrower any interest in the Bond Fund or the moneys or Investment Securities therein.

Section 15.03 Severability . In case any one or more of the provisions of this Indenture or of the Bonds issued hereunder shall, for any reason, be held to be illegal or invalid, such illegality or invalidity shall not affect any other provisions of this Indenture, the Agreement, the Remarketing Agreement, the Tender Agreement or said Bonds, and this Indenture, the Agreement, the Remarketing Agreement, the Tender Agreement and the Bonds shall be construed and enforced as if such illegal or invalid provisions had not been contained herein or therein.

Section 15.04 No Personal Liability of Issuer Under Indenture . No covenant or agreement contained in the Bonds or in this Indenture shall be deemed to be the covenant or agreement of any official, officer, agent, or employee of the Issuer in his individual capacity, and neither the members of the Issuer’s Board of Directors nor any official executing the Bonds shall be liable personally on the Bonds or be subject to any personal liability or accountability by reason of the issuance thereof.

Section 15.05 Bonds Owned by the Issuer or the Borrower . In determining whether Owners of the requisite aggregate principal amount of the Bonds have concurred in any direction, consent or waiver under this Indenture, Bonds which are owned by the Issuer or the Borrower or by any affiliate of the Borrower (unless the Issuer, the Borrower and such persons own all Bonds which are then Outstanding, determined without regard to this Section 15.05) shall be disregarded and deemed not to be Outstanding for purpose of any such determination, except that, for the purpose of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver, only Bonds which the Trustee knows are so owned shall be so disregarded. Bonds so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee’s right so to act with respect to such Bonds and that the pledgee is not the Issuer or the Borrower or any affiliate of the Borrower. Bonds delivered to the Bank, the Bond Insurer or held by the Tender Agent for the account of the Bank pursuant to Section 14.04(c) hereof shall be regarded as Outstanding for purposes of this Section 15.05 and shall be owned by the Bank or the Bond Insurer for purposes of this Section 15.05.

Section 15.06 Governing Law . This Indenture and the Bonds shall be construed in accordance with and governed by the Constitution and laws of the State of Arizona, provided however, that the rights, protections and immunities of the Trustee shall be governed by the laws of the State of California.

Section 15.07 Notices . Except as otherwise provided in this Indenture, all notices, certificates, requests, requisitions or other communications by the Issuer, the Borrower; the Trustee, the Bond Insurer, the Tender Agent, the Paying Agent, the Registrar, the Remarketing Agent, Moody’s, S&P, the Bond Insurer and the Bank pursuant to this Indenture shall be in writing and shall be sufficiently given and shall be deemed given when mailed by first-class mail, postage prepaid, addressed as follows:

If to the Trustee:

Union Bank, N.A.

120 South San Pedro, 4th Floor

Los Angeles, CA 90012

Attention: Corporate Trust Department

If to the Remarketing Agent:

J.P. Morgan Securities Inc.

383 Madison Avenue, 23rd Floor

New York, NY 10179

Attention: Tax-Exempt Capital Markets

If to the Tender Agent:

Union Bank, N.A.

120 South San Pedro, 4th Floor

Los Angeles, CA 90012

Attention: Bond Redemption

If to Moody’s:

Moody’s Investors Service

99 Church Street

New York, New York 10007-2796

Attention: Structured Finance Group

If to S&P:

Standard & Poor’s Rating Services

55 Water Street, 38 ^th Floor

New York, New York 10041

Attention: Public Finance Department Structured Finance Group

If to the Registrar, the Paying Agent and the Bank, at the address designated herein or designated to the Issuer, the Borrower and the Trustee. Any of the foregoing may, by notice given hereunder to each of the others, designate any further or different addresses to which subsequent notices, certificates, requests or other communications shall be sent hereunder.

Section 15.08 Non-Business Days . If the last day of any period of grace, or the date for making any payment or the last date for performance of any act or the exercising of any right, as provided in this Indenture, is not a Business Day, the last day of such period of grace shall be deemed to be, any such payment may be made or act performed or right exercised, with the same force and effect as if done on the nominal date provided in this Indenture, on the next succeeding Business Day, and no interest shall accrue for the period after such nominal date.

Section 15.09 Opinions . Each opinion with respect to the validity of documents or Bonds may be qualified to the extent of the application of bankruptcy, insolvency, moratorium or reorganization laws or laws affecting the remedies for the enforcement of the rights and security provided therein and need not pass on the availability of the remedy of specific enforcement, injunctive relief or any other equitable remedy.

Section 15.10 Headlines; Table of Contents . The division of this Indenture into sections, the provision of a table of contents and the insertion of headings are for convenience of reference only and shall not affect the construction or interpretation hereof

Section 15.11 Execution in Several Counterparts . This Indenture may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original; and all such counterparts, or as many of them as the Issuer and the Trustee shall preserve undestroyed, shall together constitute but one and the same instrument.

Section 15.12 Bond Insurer as Third-Party Beneficiary . To the extent that this Indenture confers upon or gives or grants to the Bond Insurer any right, remedy, benefit, or claim under or by reason of this Indenture, the Bond Insurer is hereby explicitly recognized as being a third-party beneficiary hereunder and may enforce any such right, remedy, benefit, or claim conferred, given, or granted hereunder.

Section 15.13 Additional Covenants of the Issuer to Bond Insurer . The Issuer covenants to provide the Bond Insurer with the following information:

(a) Notice of the redemption, other than mandatory sinking fund redemption, of any of the Bonds, or of any advance refunding of Bonds, including the principal amount, maturities, and CUSIP numbers thereof,

(b) Notice of any material events pursuant to Rule 15c2-12 under the Securities Exchange Act of 1934, as amended;

(d) Full transcripts of all proceedings related to the execution of any Supplemental Indenture or any modification, alteration, amendment or supplement of the Agreement pursuant to Article XIII hereof; and

(e) Such additional information as the Bond Insurer may reasonably request from time to time.

Section 15.14 Bank and Bond Insurer . All references to the Bank or to the Bond Insurer shall be ignored and of no effect for so long as no Credit Facility or Bond Insurance Policy, as the case may be, is in effect.

Section 15.15 Statutory Notice . In accordance with the terms thereof, notice is hereby given of Title 38, Chapter 3, Section 38-51l, Arizona Revised Statutes, which provides, among other things, that the State of Arizona, its political subdivisions or any department or agency of either may, within three years after its execution, cancel any contract, without penalty or further

obligation, made by said State, its political subdivisions, or any of the departments or agencies of either if any person significantly involved in initiating, negotiating, securing, drafting or creating the contract on behalf of said State, its political subdivisions or any of the departments or agencies of either is, at any time while the contract or any extension of the contract is in effect, an employee or agent of any other party to the contract in any capacity or a consultant to any other party of the contract with respect to the subject matter of the contract.

IN WITNESS WHEREOF, the Issuer has caused this Indenture to be signed in its name by its duly authorized officer, and the Trustee, in token of its acceptance of the trust created hereunder, has caused this Indenture to be signed in its name by its duly authorized signatory, all as of the day and year first above written.


MARICOPA COUNTY, ARIZONA POLLUTION CONTROL CORPORATION

By:		/s/ Charles P. Dickinson, Jr.
		Charles P. Dickinson, Jr.
		Vice President


UNION BANK, N.A., as Trustee

By:		/s/ Lorraine McIntire
		Authorized Officer

EXHIBIT A

FORM OF BOND

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(Form for Transfer)

COMPLETE AND SIGN THIS FORM FOR

REGISTRATION OF TRANSFER OR TRANSFER

For value received hereby sells, assigns and transfers unto this Bond and hereby irrevocably constitutes and appoints , Attorney, to register such transfer on the books of registration in the office of the Registrar with full power of substitution in the premises.

Dated:

Signatures Guaranteed by:

NOTE: The signatures on this assignment must correspond with the names as written on the face of this Bond in every particular, without alteration, enlargement or any change whatsoever.



Signatures must be guaranteed in accordance with the terms of one of the nationally recognized medallion signature guarantee programs.

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EXHIBIT B

AUCTION PROCEDURES

Section 1. 01. Orders by Existing Owners and Potential Owners. (a) Prior to the Submission Deadline on each Auction Date:

(i) each Existing Owner of ARS may submit to a Broker-Dealer by telephone or otherwise an Order, consisting of information as to:

(A) the principal amount of Outstanding ARS, if any, held by such Existing Owner which such Existing Owner desires to continue to hold without regard to the Auction Rate for the next succeeding ARS Interest Period (a “Hold Order”);

(B) the principal amount of Outstanding ARS; if any, held by such Existing Owner which such Existing Owner offers to sell if the Auction Rate for the next succeeding ARS Interest Period shall be less than the rate per annum specified by such Existing Owner (a “Bid”); and/or

(C) the principal amount of Outstanding ARS, if any, held by such Existing Owner which such Existing Owner irrevocably offers to sell without regard to the Auction Rate for the next succeeding ARS Interest Period (a “Sell Order”); and

(ii) for the purpose of implementing the Auctions and thereby to achieve the lowest possible Auction Rate, one or more Broker-Dealers may contact Potential Owners, including Persons that are Existing Owners, to determine the principal amount of the ARS, if any, which each such Potential Owner irrevocably offers to purchase if the Auction Rate for the next succeeding ARS Interest Period is not less than the rate per annum then specified by such Potential Owner (also a “Bid”).

For the purposes hereof, each Hold Order, Bid and Sell Order is herein referred to as an “ Order ” and each Existing Owner and each Potential Owner placing an Order is herein referred to as “ Bidder ”.

(b) (i) Subject to provisions of Section 1.02 hereof, a Bid by an Existing Owner shall constitute an irrevocable offer to sell, in each case for settlement in same day funds on the next ARS Interest Payment Date therefor, at a price equal to 100% of the principal amount thereof

(A) the principal amount of Outstanding ARS specified in such Sell Order if Sufficient Clearing Bids exist; or

(B) such principal amount or a lesser principal amount of Outstanding ARS to be determined as described in subsection (a)(v) of Section 1.04 hereof, if the Auction Rate shall be equal to the rate specified in such Bid; or

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(C) such principal amount or a lesser principal amount of Outstanding ARS to be determined as described in subsection (b)(iv) of Section 1.04 hereof, if such specified rate shall be higher than the ARS Maximum Rate and Sufficient Clearing Bids have not been made.

(ii) Subject to provisions of Section 1.02 hereof, a Sell Order by an Existing Owner shall constitute an irrevocable offer to sell, in each case for settlement in same day funds on the next ARS Interest Payment Date therefor at a price equal to 100% of the principal amount thereof

(A) the principal amount of Outstanding ARS specified in such Sell Order if Sufficient Clearing Bids exist; or

(B) such principal amount or a lesser principal amount of Outstanding ARS as described in subsection (b)(iv) of Section 1.04 hereof, if Sufficient Clearing Bids have not been made.

(iii) Subject to provisions of Section 1.02 hereof, a Bid by a Potential Owner shall constitute an irrevocable offer to purchase, in each case for settlement in same day funds on the next ARS Interest Payment Date therefor at a price equal to 100% of the principal amount thereof.

(A) the principal amount of Outstanding ARS specified in such Bid if the Auction Rate shall be higher than the rate specified in such Bid; or

(B) such principal amount or a lesser principal amount of Outstanding ARS as described in subsection (a)(vi) of Section 1.04 hereof, if the Auction Rate shall be equal to the rate specified in such Bid.

(i) for purposes of any Auction, any Order which specifies the ARS to be held, purchased or sold in a principal amount which is not $25,000 or an integral multiple of $5,000 in excess thereof shall be rounded down to the nearest $25,000 or an integral multiple of $5,000 in excess thereof, and the Auction Agent shall conduct the Auction Procedures as if such Order had been submitted in such lower amount;

(ii) for purposes of any Auction, any portion of an Order of an Existing Owner which relates to an ARS which has been called for redemption on or prior to the Interest Payment Date next succeeding such Auction shall be invalid with respect to such portion and the Auction Agent shall conduct the Auction Procedures as if such portion of such Order had not been submitted;

(iii) for purposes of any Auction, no portion of an ARS which has been called for redemption on or prior to the Interest Payment Date next succeeding such Auction shall be included in the calculation of Available ARS for such Auction.

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Section 1.02. Submission of Orders by Broker Dealers to Auction Agent . (a) Each Broker-Dealer shall submit to the Auction Agent in writing or by such other method as shall be reasonably acceptable to the Auction Agent, including such electronic communication acceptable to the parties, prior to the Submission Deadline on each Auction Date, all Orders obtained by such Broker-Dealer and, if requested, specifying with respect to each Order:

(i) the name of the Bidder placing such Order;

(ii) the aggregate principal amount of the ARS, if any, that are the subject to such Order;

(iii) to the extent that such Bidder is an Existing Owner, each Broker-Dealer shall specify:

(A) the principal amount of the ARS, if any, subject to any Hold Order placed by such Existing Owner;

(B) the principal amount of the ARS, if any, subject to any Bid placed by such Existing Owner and the rate specified in such Bid; and

(iv) to the extent such Bidder is a Potential Owner, each Broker-Dealer shall specify the rate specified in such Potential Owner’s Bid.

(b) If any rate specified in any Bid contains more than three figures to the right of the decimal point, the Auction Agent shall round such rate up to the next higher one-thousandth of one percent (0.001%).

(c) If an Order or Orders covering all Outstanding ARS held by an Existing Owner is not submitted to the Auction Agent prior to the Submission Deadline, the Auction Agent shall deem a Hold Order to have been submitted on behalf of such Existing Owner covering the principal amount of Outstanding ARS held by such Existing Owner and not subject to Orders submitted to the Auction Agent; provided , however , that if there is a change from one Auction Period to another Auction Period and Orders have not been submitted to the Auction Agent prior to the Submission Deadline covering the aggregate principal amount of Outstanding ARS held by such Existing Owner, the Auction Agent shall deem a Sell Order to have been submitted on behalf of such Existing Owner covering the principal amount of Outstanding ARS held by such Existing Owner not subject to Orders submitted to the Auction Agent.

(d) If any Existing Owner submits through a Broker-Dealer to the Auction Agent one or more Orders covering in the aggregate more than the principal amount of Outstanding ARS held by such Existing Owner a, such Orders shall be considered valid as follows and in the order of priority described below:

(i) all Hold Orders shall be considered valid Hold Orders, but only up to and including in the aggregate the principal amount of Outstanding ARS held by such

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Existing Owner, and if the aggregate principal amount of ARS subject to such Hold Orders exceeds the aggregate principal amount of ARS held by such Existing Owner, the aggregate principal amount of ARS subject to each such Hold Order shall be reduced so that the aggregate principal amount of ARS subject to such Hold Orders equals the aggregate principal amount of Outstanding ARS held by such Existing Owner;

(ii) (A) any Bid of an Existing Owner shall be considered valid Bid of an Existing Owner up to and including the excess of the principal amount of Outstanding ARS held by such Existing Owner over the aggregate principal amount of the ARS subject to any Hold Orders referred to in paragraph (i) above;

(B) subject to clause (A) above, if more than one Bid with the same rate is submitted on behalf of such Existing Owner and the aggregate principal amount of Outstanding ARS subject to such Bids is greater than such excess, such Bids shall be considered valid up to and including the amount of such excess;

(C) subject to clauses (A) and (B) above, if more than one Bid with different rates is submitted on behalf of such Existing Owner, such Bids shall be considered valid Bids of an Existing Owner first in the ascending order of their respective rates until the highest rate is reached at which such excess exists and then at such rate up to and including the amount of such excess; and

(D) in any such event, the principal amount, if any, of such Outstanding ARS subject to Bids not considered to be valid Bids of an Existing Owner under the provisions described in this paragraph (ii) shall be treated as the subject of a Bid by a Potential Owner at the rate therein specified.

(iii) all Sell Orders shall be considered valid Sell Orders, but only up to and including the excess of the principal amount of Outstanding ARS subject to Hold Orders and valid Bids referred to in paragraphs (i) and (ii) above.

(e) If more than one Bid for ARS is submitted on behalf of any Potential Owner, each Bid submitted shall be a separate Bid with the rate and principal amount therein specified. Any Bid or Sell Order submitted by an Existing Owner covering an aggregate principal amount of ARS not equal to an Authorized Denomination shall be rejected and shall be deemed a Hold Order. Any Bid submitted by a Potential Owner covering an aggregate principal amount of ARS not equal to an Authorized Denomination shall be rejected. Any Bid specifying a rate higher than ARS Maximum Rate shall be treated as a Sell Order if submitted by an Existing Owner and will not be accepted if submitted by a Potential Owner. Any Bids submitted by Existing Owners or on behalf of Potential Owners specifying a rate lower than the All-Hold Rate shall be considered as valid Bids and shall be selected in the ascending order of their respective rates contained in the Submitted Bids.

A Hold Order, a Bid or a Sell Order that has been determined valid pursuant to the procedures described in paragraphs (a) through (e) above is referred to as a “Submitted Hold Order,” a “Submitted Bid” and a “Submitted Sell Order,” respectively (collectively, the “Submitted Orders”).

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(f) Any Order submitted in an Auction by a Broker-Dealer to the Auction Agent prior to the Submission Deadline on any Auction Date shall be irrevocable.

(g) Neither the Borrower, the Issuer, the Trustee nor the Auction Agent shall be responsible for any failure of any Broker-Dealer to submit an Order to the Auction Agent on behalf of any Existing Owner or Potential Owner, nor shall any of the Borrower, the Issuer, the Trustee or the Auction Agent be responsible for failure by any Securities Depository to effect any transfer or to provide the Auction Agent with current information regarding registration or transfers.

Section 1.03. Determination of Auction Rate . (a) Not later than 9:30 a.m., New York, New York time, on each Auction Date, the Auction Agent shall advise the Broker-Dealers and the Paying Agent by telephone or other electronic communication acceptable to the parties of the All-Hold Rate and the Index. Prior to the Submission Deadline, the Broker-Dealers will assemble information received from each Bidder and any internally initiated Broker-Dealers’ Bids.

(b) Not later than the Submission Processing Deadline on each Auction Date, the Auction Agent shall accept any Submitted Orders subject to a Submission Processing Representation and shall assemble all Submitted Orders and shall determine:

(i) the excess, if any, of the total principal amount of Outstanding ARS over the sum of the aggregate principal amount of Outstanding ARS subject to Submitted Hold Orders (such excess being hereinafter referred to as the “Available ARS”); and

(ii) from the Submitted Orders whether or not the aggregate principal amount of Outstanding ARS subject to Submitted Bids by Potential Owners specifying one or more rates equal to or lower than the ARS Maximum Rate exceeds or is equal to the sum of

(A) the aggregate principal amount of Outstanding ARS subject to Submitted Bids by Existing Owners specifying one or more rates higher than the ARS Maximum Rate; and

(B) the aggregate principal amount of Outstanding ARS subject to Submitted Sell Orders;

(it being understood that, in the event of such excess or such equality (other than because the sum of the principal amounts of Outstanding ARS in clauses (A) and (B) above is zero because all of the ARS are subject to Submitted Hold Orders), there shall be deemed to exist, and such Submitted Bids by Potential Owners shall be hereinafter called, collectively, “ Sufficient Clearing Bids ”); and

(iii) if Sufficient Clearing Bids exist, the lowest rate specified in the Submitted Bids (the “ Winning Bid Rate ”) such that if:

(A)(I) each such Submitted Bid from Existing Owners specifying such lowest rate, and (II) all other Submitted Bids from Existing Owners specifying

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lower rates were accepted, thus entitling such Existing Owners to continue to hold the ARS that are the subject of such Submitted Bids; and

(B)(I) each such Submitted Bid from Potential Owners specifying such lowest rate, and (II) all other Submitted Bids from Potential Owners specifying such lower rates were accepted, thus entitling and requiring such Potential Owners to purchase the ARS that are the subject of such Submitted Bids;

the result would be that such Existing Owners described in clause (A) above would continuing to hold an aggregate principal amount of Outstanding ARS, which, when added to the aggregate principal amount of Outstanding ARS to be purchased by such Potential Owners described in clause (B) above, would equal not less than the Available ARS.

(c) Promptly after the Auction Agent has made the determinations pursuant to subsection (b) above, the Auction Agent shall advise the Broker-Dealer and the Trustee by telephone (promptly confirmed in writing), telex or facsimile transmission or other electronic communication acceptable to the parties of the All-Hold Rate and the components thereof on the Auction Date and, based on such determinations, the Auction Rate for the next succeeding ARS Interest Period as follows:

(i)

if Sufficient Clearing Bids exist, that the Auction Rate for the next succeeding ARS Interest Period shall equal the Winning Bid Rate;

(ii)

if Sufficient Clearing Bids do not exist (other than because all of the Outstanding ARS are subject to Submitted Hold Orders), that the Auction Rate for the next succeeding ARS Interest Period shall equal the ARS Maximum Rate; or

(iii)

if all Outstanding ARS are subject to Submitted Hold Orders, that the Auction Rate for the next succeeding ARS Interest Period shall equal the All-Hold Rate.

(d) In the event the Auction Agent shall fail to calculate, or for any reason, shall fail to timely provide the Auction Rate for any Auction Period (i) if the preceding Auction Period was a period of 35 days or less, the new Auction Period shall be the same as the preceding Auction Period and the Auction Rate for the new Auction Period shall be the same as the Auction Rate for the preceding Auction Period, and (ii) if the preceding Auction Period was a period of greater than 35 days, the preceding Auction Period shall be extended to the seventh day following the day that would have been the last day of such Auction Period had it not been extended (or if such seventh day is not followed by a Business Day then to the next succeeding day which is followed by a Business Day) and the Auction Rate in effect for the preceding Auction Period shall continue in effect for the Auction Period as so extended. In the event an Auction Period is extended as set forth in clause (ii) of the preceding sentence, an Auction shall be held on the last Business Day of the Auction Period as so extended to take effect for an Auction Period beginning on the Business Day immediately following the last day of the Auction

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Period as extended which Auction Period will end on the date it would otherwise have ended on had the prior Auction Period not been extended. Notwithstanding the foregoing, no Auction Rate shall be extended for more than 35 days. If at the end of 35 days, the Auction Agent fails to calculate or provide the Auction Rate, the Auction Rate shall be the ARS Maximum Rate.

(e) In the event of a failed conversion to a Daily Interest Rate Period, a Weekly Interest Rate Period, a Short-Term Interest Rate Period or a Long-Term Interest Rate Period or in the event of a failure to change the length of the current Auction Period due to the lack of Sufficient Clearing Bids at the Auction on the Auction Date for the first new Auction Period, the Auction Rate for the next Auction Period shall be the ARS Maximum Rate and the Auction Period shall be a seven-day Auction Period.

(f) If the ARS are no longer maintained in book-entry-only form by the Securities Depository, then the Applicable ARS Rate for any Auction Period commencing after the delivery of certificates representing the ARS shall be the ARS Maximum Rate.

Section 1.04. Allocation of the ARS . Existing Owners shall continue to hold the principal amount of ARS that are subject to Submitted Hold Orders. Submitted Bids and Submitted Sell Orders shall be accepted or rejected and the Auction Agent shall take such other action as set forth below:

(a) If the Sufficient Clearing Bids have been made, subject to the further provisions of subsections (c) and (d) below, all Submitted Sell Orders shall be accepted -or rejected as follows in the following order of priority and all other Submitted Bids shall be rejected:

(i) the Submitted Hold Order of each Existing Owner shall be accepted, thus requiring each such Existing Owner to continue to hold the aggregate principal amount of ARS that are the subject of such Submitted Hold Order;

(ii) the Submitted Sell Order of each Existing Owner shall be accepted and the Submitted Bid of each Existing Owner specifying any rate that is higher than the Winning Bid Rate shall be rejected, thus requiring each such Existing Owner to sell the aggregate principal amount of ARS that are the subject of such Submitted Sell Order or such Submitted Bid;

(iii) the Submitted Bid of each Existing Owner specifying any rate that is lower than the Winning Bid Rate shall be accepted, thus requiring each such Existing Owner to continue to hold the aggregate principal amount of ARS that are the subject of such Submitted Bid;

(iv) the Submitted Bid of each Potential Owner specifying any rate that is lower than the Winning Bid Rate shall be accepted, thus requiring each such Potential Owner to purchase the principal amount of ARS that are the subject of such Submitted Bid;

(v) the Submitted Bid of each Existing Owner specifying a rate that is equal to the Winning Bid Rate shall be accepted, thus requiring each such Existing Owner to continue to hold the aggregate principal amount of the ARS that are the subject of such

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Submitted Bid; but only up to and including the principal amount of the ARS obtained by multiplying (A) the aggregate principal amount of the Outstanding ARS which are not the subject of Submitted Hold Orders described in paragraph (i) above or of Submitted Bids described in paragraphs (iii) or (iv) above by (B) a fraction the numerator of which shall be the principal amount of the Outstanding ARS held by such Existing Owner subject to such Submitted Bid and the denominator of which shall be the aggregate principal amount of the Outstanding ARS subject to such Submitted Bids made by all such Existing Owners that specified a rate equal to the Winning Bid Rate, and the remainder, if any, of such Submitted Bid shall be rejected, thus requiring each such Existing Owner to sell any excess amount of the ARS;

(vi) the Submitted Bid of each Potential Owner specifying a rate that is equal to the Winning Bid Rate shall be accepted, thus requiring each such Potential Owner to purchase the ARS that are the subject of such Submitted Bid, but only in an amount equal to the principal amount of the ARS obtained by multiplying (A) the aggregate principal amount of the Outstanding ARS which are not the subject of Submitted Hold Orders described in paragraph (i) above or of Submitted Bids described in paragraphs (iii), (iv) or (v) above by (B) a fraction the numerator of which shall be the principal amount of the Outstanding ARS subject to such Submitted Bid and the denominator of which shall be the sum of the aggregate principal amount of the Outstanding ARS subject to such Submitted Bids made by all such Potential Owners that specified a rate equal to the Winning Bid Rate, and the remainder of such Submitted Bid shall be rejected; and

(vii) the Submitted Bid of each Potential Owner specifying any rate that is higher than the Winning Bid Rate shall be rejected.

(b) If Sufficient Clearing Bids have not been made (other than because all of the Outstanding ARS are subject to Submitted Hold Orders), subject to the further provisions of subsections (c) and (d) below, Submitted Orders shall be accepted or rejected as follows in the following order of priority:

(i) the Submitted Hold Order of each Existing Owner shall be accepted, thus requiring each such Existing Owner to continue to hold the aggregate principal amount of the ARS that are the subject of such Submitted Hold Order;

(ii) the Submitted Bid of each Existing Owner specifying any rate that is not higher than the ARS Maximum Rate shall be accepted, thus requiring each such Existing Owner to continue to hold the aggregate principal amount of the ARS that are the subject of such Submitted Bid;

(iii) the Submitted Bid of each Potential Owner specifying any rate that is not higher than the ARS Maximum Rate shall be accepted, thus requiring each such Potential Owner to purchase the aggregate principal amount of the ARS that are the subject of such Submitted Bid;

(iv) the Submitted Sell Orders of each Existing Owner shall be accepted as Submitted Sell Orders and the Submitted Bids of each Existing Owner specifying any

B-8

rate that is higher than the ARS Maximum Rate shall be deemed to be and shall be accepted as Submitted Sell Orders, in both cases only up to and including the principal amount of the ARS obtained by multiplying (A) the aggregate principal amount of the ARS subject to Submitted Bids described in paragraph (iii) of this subsection (b) by (B) a fraction the numerator of which shall be the principal amount of the Outstanding ARS held by such Existing Owner subject to such Submitted Sell Order or such Submitted Bid deemed to be a Submitted Sell Order and the denominator of which shall be the principal amount of the Outstanding ARS subject to all such Submitted Sell Orders and such Submitted Bids deemed to be Submitted Sell Orders, and the remainder of each such Submitted Sell Order or Submitted Bid shall be deemed to be and shall be accepted as a Hold Order and each such Existing Owner shall be required to continue to hold such excess amount of the ARS; and

(v) the Submitted Bid of each Potential Owner specifying any rate that is higher than the ARS Maximum Rate shall be rejected.

(c) If, as a result of the procedures described in subsection (a) or (b) above, any Existing Owner would be entitled or required to purchase or sell, or any Potential Owner would be entitled or required to purchase, an aggregate principal amount of the ARS that is not equal to an Authorized Denomination, the Auction Agent shall by lot, in such manner as it shall determine in its sole discretion, round up or down the principal amount of the ARS to be purchased or sold by any Existing Owner or Potential Owner on such Auction Date so that the aggregate principal amount of the ARS purchased or sold by each Existing Owner or Potential Owner on such Auction Date shall be equal to an Authorized Denomination, even if such allocation results in one or more of such Existing Owners or Potential Owners not purchasing or selling any ARS on such Auction Date.

(d) If, as a result of the procedures described in subsection (a) above, any Potential Owner would be entitled or required to purchase less than an Authorized Denomination, the Auction Agent shall by lot, in such manner as it shall determine in its sole discretion, allocate the ARS for purchase among Potential Owners so that only the principal amount of ARS in Authorized Denominations are purchased on such Auction Date by any Potential Owners, even if such allocation results in one or more of such Potential Owners not purchasing any ARS on such Auction Date.

Section 1.05. Notice of Auction Rate . (a) Not later than 3:00 p.m., New York City time, on each Auction Date, the Auction Agent shall notify by telephone or other telecommunication device or other electronic communication (or by other means acceptable to the parties) each Broker-Dealer that participated in the Auction held on such Auction Date and submitted an Order on behalf of an Existing Owner or Potential Owner of the following with respect to the ARS for which an Auction was held on such Auction Date:

(i) the Auction Rate determined on such Auction Date for the next ARS Interest Period;

(ii) whether Sufficient Clearing Bids existed for the determination of the Winning Bid Rate;

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(iii) if such Broker-Dealer (a “Seller’s Broker-Dealer”) submitted a Bid or a Sell Order on behalf of an Existing Owner, whether such Bid or Sell Order was accepted or rejected, in whole or in part, and the principal amount of the ARS, if any, to be sold by such Existing Owner;

(iv) if such Broker-Dealer (a “Buyer’s Broker-Dealer”) submitted a Bid on behalf of a Potential Owner, whether such Bid was accepted or rejected, in whole or in part, and the principal amount of the ARS, if any, to be purchased by such Potential Owner;

(v) if the aggregate principal amount of the ARS to be sold by all Existing Owners on whose behalf such Broker-Dealer submitted Bids or Sell Orders exceeds the aggregate principal amount of the ARS to be purchased by all Potential Owners on whose behalf such Broker-Dealer submitted a Bid, the name or names of one or more Buyer’s Broker-Dealers (and the name of the Agent Member, if any, of each such Buyer’s Broker-Dealer) acting for one or more purchasers of such excess principal amount of the ARS and the principal amount of the ARS to be purchased from one or more Existing Owners on whose behalf such Broker-Dealers acted by one or more Potential Owners on whose behalf each of such Buyer’s Broker-Dealers acted;

(vi) if the principal amount of the ARS to be purchased by all Potential Owners on whose behalf such Broker-Dealer submitted a Bid exceeds the aggregate principal amount of the ARS to be sold by all Existing Owners on whose behalf such Broker-Dealer submitted Bids or Sell Orders, the name or names of one or more Seller’s Broker-Dealers (and the name of the Agent Member, if any, of each such Seller’s Broker-Dealer) acting for one or more sellers of such excess principal amount of the ARS and the principal amount of the ARS to be sold to one or more Potential Owners on whose behalf such Broker-Dealer acted by one or more Existing Owners on whose behalf each of such Seller’s Broker-Dealers acted; and

(vi) the Auction Date for the next succeeding Auction.

(b) On each Auction Date, each Broker-Dealer that submitted an Order on behalf of any Existing Owner or Potential Owner shall:

(i) advise each Existing Owner and Potential Owner on whose behalf such Broker-Dealer submitted a Bid or Sell Order in the Auction on such Auction Date whether such Bid or Sell Order was accepted or rejected, in whole or in part;

(ii) in the case of a Buyer’s Broker-Dealer, advise each Potential Owner on whose behalf such Broker-Dealer submitted a Bid that was accepted, in whole or in part, to instruct such Potential Owner’s Agent Member to pay to such Broker-Dealer (or its Agent Member) through the Securities Depository the amount necessary to purchase the principal amount of the ARS to be purchased pursuant to such Bid against receipt of such ARS;

(iii) in the case of a Seller’s Broker-Dealer, instruct each Existing Owner on whose behalf such Broker-Dealer submitted a Sell Order that was accepted, in whole or

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in part, or a Bid that was accepted, in whole or in part, to instruct such Existing Owner’s Agent Member to deliver to such Broker-Dealer (or its Agent Member) through the Securities Depository the principal amount of the ARS to be sold pursuant to such Bid or such Sell Order against payment therefor;

(iv) advise each Existing Owner on whose behalf such Broker-Dealer submitted an Order and each Potential Owner on whose behalf such Broker-Dealer submitted a Bid of the Auction Rate for the next ARS Interest Period;

(v) advise each Existing Owner on whose behalf such Broker-Dealer submitted an Order of the next Auction Date; and

(vi) advise each Potential Owner on whose behalf such Broker-Dealer submitted a Bid that was accepted, in whole or in part, of the next Auction Date.

Section 1.06. Index . (a) The Index is LIBOR.

(b) If for any reason on any Auction Date the Index shall not be determined as hereinabove provided in this Section, the Index shall be the Index for the Auction Period ending on such Auction Date.

(c) The determination of the Index as provided herein shall be conclusive and binding upon the Issuer, the Borrower, the Trustee, the Paying Agent, the Broker-Dealers, the Auction Agent and the Owners and Beneficial Owners of the ARS.

Section 1.07. Miscellaneous Provisions Regarding Auctions . (a) In this Exhibit B , each reference to the purchase, sale or holding of “ARS” shall refer to beneficial interests in the ARS, unless the context clearly requires otherwise.

(b) During an Auction Period, the provisions of the Indenture and this Exhibit B and the definitions contained therein, including without limitation the definitions of All-Hold Rate, Index, Auction Rate, Interest Payment Date and ARS Maximum Rate, may be amended pursuant

to Section 13.03 of the Indenture by obtaining the consent of the owners of all affected Outstanding ARS bearing interest at the Auction Rate as follows: If on the first Auction Date occurring at least 20 days after the date on which the Trustee mailed notice of such proposed amendment to the Owners of the affected Outstanding ARS as required by Section 13.03, (i) the Auction Rate which is determined on such date is the Winning Bid Rate, and (ii) there is delivered to the Issuer, the Borrower and the Trustee a Favorable Opinion of Bond Counsel with respect to such amendment, the proposed amendment shall be deemed to have been consented to by the Owners of all affected Outstanding ARS bearing interest at an Auction Rate.

(c) If the Securities Depository notifies the Issuer or the Borrower that it is unwilling or unable to continue as owner of the ARS or if at any time the Securities Depository shall no longer be registered or in good standing under the Securities Exchange Act of 1934, as amended, or other applicable statute or regulation and a successor to the Securities Depository is not appointed by the Issuer, at the direction of the Borrower, within 90 days after the Issuer receives notice or becomes aware of such condition, as the case may be, the Issuer shall execute and the

B-11

Registrar shall authenticate and deliver certificates representing the ARS. Such ARS shall be registered in such names and Authorized Denominations as the Securities Depository, pursuant to instructions from the Agent Members or otherwise, shall instruct the Issuer and the Registrar.

During an Auction Period, so long as the ownership of the ARS is maintained in book-entry form by the Securities Depository, an Existing Owner or a Beneficial Owner may sell, transfer or otherwise dispose of an ARS only pursuant to a Bid or Sell Order in accordance with the Auction Procedures or to or through a Broker-Dealer, provided that (i) in the case of all transfers other than pursuant to Auctions, such Existing. Owner or its Broker-Dealer or its Agent Member advises the Auction Agent of such transfer, and (ii) a sale, transfer or other disposition of the ARS from a customer of a Broker-Dealer who is listed on the records of that Broker-Dealer as the holder of such ARS to that Broker-Dealer or another customer of that Broker-Dealer shall not be deemed to be a sale, transfer or other disposition for purposes of this Section 1.07 if such Broker-Dealer remains the Existing Owner of the ARS so sold, transferred or disposed of immediately after such sale, transfer or disposition.

Section 1,08. Changes in Auction Period or Auction Date .

(a) Changes in Auction Period .

(i) Subject to the provisions of the Indenture, during any Auction Period, the Borrower, with the consent of the Bond Insurer, may, from time to time and on any ARS Interest Payment Date, change the length of the Auction Period with respect to the ARS among seven-days, 28-days, 35-days and a Special Auction Period in order to accommodate economic and financial factors that may affect or be relevant to the length of the Auction Period and the interest rate borne by such ARS; provided, however, in the case of a change from a Special Auction Period, the date of such change shall be the Interest Payment Date immediately following the last day of such Special Auction Period. The Borrower shall initiate the change in the length of the Auction Period by giving written notice to the Issuer, the Trustee, the Bond Insurer, the Auction Agent, the Broker-Dealer, the Bank, if any, and-the Securities Depository that the Auction Period shall change if the conditions described in the Indenture are satisfied and the proposed effective date of the change, at least three (3) Business Days prior to the Auction Date for such Auction Period.

(ii) Any such changed Auction Period shall be for a period of seven-days, 28 days, 35 days or a Special Auction Period and shall be for all of the ARS.

(iii) The change in the length of the Auction Period shall not be allowed unless Sufficient Clearing Bids existed at both the Auction before the date on which the notice of the proposed change was given as provided in this subsection (a) and, in the sole discretion of the Broker-Dealer, at the Auction immediately preceding the proposed change. For purposes of the Auction for such first Auction Period only, each Existing Owner shall be deemed to have submitted Sell Orders with respect to all of its ARS except to the extent such Existing Owner submits an Order with respect to such ARS.

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(iv) The change in length of the Auction Period shall take effect only if Sufficient Clearing Bids exist at the Auction on the Auction Date for such first Auction Period. If the condition referred to in the first sentence of this paragraph (iv) is not met, the Auction Rate for the next Auction Period shall be the ARS Maximum Rate, and the Auction Period shall be a seven-day Auction Period.

(v) On the change date for the ARS selected for change from one Auction Period to another, any ARS which are not the subject of a specific Hold Order or Bid shall be deemed to be subject to a Sell Order.

(vi) The change in the length of the Auction Period shall not be allowed unless the notice from the Borrower of the proposed change in length of the Auction Period described above in Section 1.08(a)(i) is accompanied by a Favorable Opinion of Bond Counsel if the change is from an Auction Period having a duration in excess of one year to an Auction Period of one year or less in duration and vice versa.

(b) Changes in Auction Date . During any Auction Period, the Auction Agent, with the written consent of the Borrower, may specify an earlier Auction Date (but in no event more than five Business Days earlier) than the Auction Date that would otherwise be determined in accordance with the definition of “Auction Date” in order to conform with then current market practice with respect to similar securities or to accommodate economic and financial factors that may affect or be relevant to the day of the week constituting an Auction Date and the interest rate borne on the ARS. The Auction Agent shall provide notice of its determination to specify an earlier Auction Date for an Auction Period by means of a written notice delivered at least 45 days prior to the proposed changed Auction Date to the Trustee, the Paying Agent, the Borrower, the Issuer, the Broker-Dealers and the Securities Depository, which will, in turn, notify the holders. In the event the Auction Agent specifies an earlier Auction Date, the days of the week on which an Auction Period begins and ends, the days of the week on which a Special Auction Period begins and ends and the Interest Payment Date relating to a Special Auction Period shall be adjusted accordingly.

Section 1.09. Auction Agent. (a) The Auction Agent shall be Deutsche Bank Trust Company Americas, New York, New York, or any successor appointed by the Borrower to perform the functions specified herein. The Auction Agent shall designate its Principal Office and signify its acceptance of the duties and obligations imposed upon it hereunder by a written instrument, delivered to the Issuer, the Trustee, the Borrower and each Broker-Dealer which will set forth such procedural and other matters relating to the implementation of the Auction Procedures as shall be satisfactory to the Borrower and the Trustee.

(b) Subject to any applicable governmental restrictions, the Auction Agent may be or become the owner of or trade in the ARS with the same rights as if such entity were not the Auction Agent.

Section 1.10. Qualifications of Auction Agent: Resignation; Removal . The Auction Agent shall be (a) subject to the written approval of each Broker-Dealer, (b) a bank or trust company duly organized under the laws of the United States of America or any state or territory thereof having a combined capital stock, surplus and undivided profits of at least $30,000,000, or

B-13

(c) a member of NASD having a capitalization of at least $30,000,000 and, in either case, authorized by law to perform all of the duties imposed upon it by this Indenture and the Auction Agent Agreement and a member of or a participant in, the Securities Depository. The Auction Agent may at any time resign and be discharged of the duties and obligations created by this Indenture by giving at least 45 days’ notice to the Issuer, the Borrower, the Trustee, the Broker-Dealer and the Bond Insurer. The Auction Agent may be removed at any time by the Trustee, upon the written direction of (i) the Borrower, with the consent of the Bond Insurer, (ii) the Bond Insurer, or (iii) the ARS Beneficial Owners of 66-2/3% of the aggregate principal amount of the ARS then Outstanding with the consent of the Bond Insurer, by an instrument signed by the Trustee and filed with the Auction Agent, the Bond Insurer, the Issuer and the Borrower upon at least 30 days’ notice. Upon any such resignation or removal, the Borrower shall appoint a successor Auction Agent meeting the requirements of this Section. In the event of the resignation or removal of the Auction Agent, the Auction Agent shall pay over, assign and deliver any moneys and the ARS held by it in such capacity to its successor. The Auction Agent shall continue to perform its duties hereunder until its successor has been appointed by the Borrower. Notwithstanding the foregoing, the Auction Agent may terminate the Auction Agent Agreement if, within 30 days after notifying the Trustee, the Issuer, the Borrower, and the Bond Insurer in writing that it has not received payment of any Auction Agent Fee due it in accordance with the terms of the Auction Agent Agreement, the Auction Agent does not receive such payment.

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Exhibit 4.02

LOAN AGREEMENT

Between

MARICOPA COUNTY, ARIZONA

POLLUTION CONTROL CORPORATION

and

EL PASO ELECTRIC COMPANY

relating to

$63,500,000

Maricopa County, Arizona

Pollution Control Corporation

Pollution Control Refunding Revenue Bonds, 2009 Series A

(El Paso Electric Company Palo Verde Project)

Dated as of March 1, 2009

TABLE OF CONTENTS


		Page

ARTICLE I DEFINITIONS

Section 1.01.	Definitions of Terms	2

Section 1.02.	Interpretation	7

Section 1.03.	Captions and Headings	7

ARTICLE II REPRESENTATIONS AND WARRANTIES

Section 2.01.	Representations and Warranties of the Issuer	8

Section 2.02.	Representations and Warranties of the Borrower	8

ARTICLE III CONSTRUCTION OF THE FACILITIES

Section 3.01.	Construction of the Facilities	9

ARTICLE IV ISSUANCE, SALE AND DISPOSITION OF PROCEEDS OF THE BONDS

Section 4.01.	Issuance and Sale of the Bonds	9

Section 4.02.	No Additional Bonds	9

Section 4.03.	Disposition of Proceeds of Bonds	9

Section 4.04.	Investment of Moneys Held in Funds Under the Indenture	9

ARTICLE V LOAN TO BORROWER, REPAYMENT PROVISIONS

Section 5.01.	Loan to Borrower	10

Section 5.02.	Amounts and Dates for Payment	10

Section 5.03.	Payments by Borrower to be Assigned to the Trustee; Obligation for Payments Absolute	11

Section 5.04.	Payment of Expenses	11

Section 5.05.	Maintenance of Facilities	11

Section 5.06.	Insurance	12

Section 5.07.	Indemnification of Issuer, Statements for Services	12


Section 5.08.	Notices of Damage	14

Section 5.09.	No Warrant by the Issuer	15

Section 5.10.	Liens	15

Section 5.11.	Payments of Taxes and Assessments; No Liens or Charges	15

Section 5.12.	Additional Payments by the Borrower	15

ARTICLE VI SPECIAL COVENANTS - CREDIT FACILITY

Section 6.01.	[RESERVED]	15

Section 6.02.	Maintenance of Existence	15

Section 6.03.	Agreement as to Ownership and Use of the Project	16

Section 6.04.	Cooperation in Applications for Permits and Licenses	16

Section 6.05.	Recordation and Other Instruments	16

Section 6.06.	Issuer’s Access to Facilities	16

Section 6.07.	Tax Covenants	16

Section 6.08.	Credit Facility	17

Section 6.09.	Annual Statement	18

ARTICLE VII ASSIGNMENT, LEASING AND SELLING

Section 7.01.	Assignment, Leasing or Selling of the Facilities by the Borrower	19

Section 7.02.	Authorized Financing	19

ARTICLE VIII EVENTS OF DEFAULT AND REMEDIES

Section 8.01.	Events of Default	19

Section 8.02.	Force Majeure	20

Section 8.03.	Remedies	21

Section 8.04.	No Remedy Exclusive	21

Section 8.05.	Reimbursement of Attorneys’ Fees	21

Section 8.06.	Waiver of Breach	21


ARTICLE IX OPTIONS OF BORROWER TO PREPAY.

Section 9.01.	Options of Borrower to Prepay Repayment Installments	22

Section 9.02.	Exercise of Option	22

Section 9.03.	Mandatory Prepayment of Repayment Installments	23

Section 9.04.	Amount of Prepayment	23

ARTICLE X PURCHASE AND REMARKETING OF BONDS

Section 10.01.	Purchase of Bonds	23

Section 10.02.	Optional Purchase of Bonds	24

Section 10.03.	Determination of Interest Rate Periods	24

ARTICLE XI MISCELLANEOUS

Section 11.01.	Term of Agreement	24

Section 11.02.	Notices	24

Section 11.03.	Parties in Interest	25

Section 11.04.	Extent of Covenants of the Issuer; No Personal Liability	25

Section 11.05.	Confirmation of Request by the Borrower	25

Section 11.06.	Amendments	26

Section 11.07.	Counterparts	26

Section 11.08.	Severability	26

Section 11.09.	Governing Law; Venue	26

Section 11.10.	Statutory Notice	26

Section 11.11.	Bond Insurer as Third-Party Beneficiary	26

EXHIBIT A	DESCRIPTION OF THE PROJECT

iii

LOAN AGREEMENT

THIS LOAN AGREEMENT, dated as of March 1, 2009 (this “Agreement”), is made by and between MARICOPA COUNTY, ARIZONA POLLUTION CONTROL CORPORATION, a nonprofit corporation designated as a political subdivision of the State of Arizona, incorporated for and with the approval of the County of Maricopa, Arizona, existing under the Constitution and laws of the State of Arizona (the “ Issuer ”), and EL PASO ELECTRIC COMPANY, a corporation organized and existing under the laws of the State of Texas (the “ Borrower ”).

W I T N E S S E T H :

WHEREAS, Title 35, Chapter 6, Arizona Revised Statutes (formerly Title 9, Chapter 12, Arizona Revised Statutes, enacted by Chapter 69, Section 2, Laws of Arizona of 1972), as amended (hereinafter called the “ Act ”), empowers any pollution control corporation organized pursuant to Article 1 of the Act to issue revenue bonds in accordance with Article 2 of the Act and to make secured or unsecured loans for the purpose of financing or refinancing the acquisition, construction, improvement or equipping of pollution control facilities, to charge and collect interest on such loans and pledge the proceeds of loan agreements as security for the payment of the principal of and interest on bonds, or designated issues of bonds, issued by the corporation and any agreements made in connection therewith, whenever the board of directors finds such loans to be in furtherance of the purposes of the corporation; and

WHEREAS, Chapter 69, Section 1, Laws of Arizona of 1972 declares it to be the purpose of the Act to authorize the incorporation in the several municipalities and counties of the State of Arizona (the “ State ”) of corporations which shall constitute political subdivisions of the State, to finance the acquisition and installation of, or the construction and leasing of, properties, machinery and equipment intended to prevent or limit air, water and other forms of pollution for the purpose of protecting the health and welfare of the citizens of the State, and to facilitate compliance with existing or future air, water and other quality standards designed to improve the environment, and declares that such corporations shall serve a public purpose and perform an essential governmental function; and

WHEREAS, in response to an application by four qualified electors of the County of Maricopa, Arizona (the “ County ”), a political subdivision of the State, the Board of Supervisors of said County on December 5, 1983, adopted a resolution by which it determined that it was wise, expedient, advisable and in the public interest that said application be approved, approved said application, and authorized said four electors to proceed with the incorporation of the Issuer as a pollution control corporation for said County, all in accordance with Section 35-802 of the Act to issue bonds and to carry out the other functions and fulfill the purposes of the Issuer; and

WHEREAS, the Issuer was thereupon organized and incorporated in accordance with the provisions of the Act, and, on December 5, 1983, the Articles of Incorporation of the Issuer were filed with the Arizona Corporation Commission, in accordance with Section 35-809 of the Act; and

WHEREAS, the Issuer has heretofore issued and sold its $63,500,000 aggregate principal amount of Pollution Control Refunding Revenue Bonds, 2005 Series B (El Paso Electric Company Palo Verde Project) (the “ Prior Bonds ”), the proceeds of which were used to refinance a portion of the costs of acquisition, construction, improvement or equipping of the Project; and

WHEREAS, the Issuer intends to issue its Pollution Control Refunding Revenue Bonds, 2009 Series A (El Paso Electric Company Palo Verde Project) (the “ Bonds ”) pursuant to an Indenture of Trust dated as of March 1, 2009, between the Issuer and Union Bank, N.A., as Trustee (the “ Indenture ”), and to lend the proceeds of the Bonds to the Borrower for the purpose of providing a portion of the moneys necessary to refund the outstanding principal amount of the Prior Bonds; and

WHEREAS, the appropriate agencies exercising jurisdiction over the Project have certified that the Project, as described in Exhibit A hereto, as designed, is in furtherance of the purpose of abating or controlling atmospheric or water pollutants or contaminants resulting from the generation of electricity at the Plant;

NOW, THEREFORE, in consideration of the premises and the respective representations and covenants herein contained, the parties hereto agree as follows (provided, that in the performance of the agreements of the Issuer herein contained, any obligation it may thereby incur shall not constitute or give rise to a pecuniary liability or a charge upon its general credit or against its taxing powers but shall be payable solely out of the Receipts and Revenues (as defined in the hereinabove defined Indenture) derived from this Agreement and the Bonds):

ARTICLE I

DEFINITIONS

Section 1.01. Definitions of Terms .

Capitalized terms not defined herein shall have the meanings set forth in the Indenture. As used herein:

“Administration Expenses” shall mean the reasonable expenses incurred by the Issuer with respect to this Agreement, the Indenture and any transaction or event contemplated by this Agreement or the Indenture, including, without limitation, the reasonable fees and disbursements of counsel and out-of-pocket expenses of the Issuer incurred in connection with the authorization, issuance and sale of the Bonds and the compensation and reimbursement of reasonable fees, expenses and advances payable to the Trustee, the Registrar, the Paying Agent, the Tender Agent, the Bank and the Remarketing Agent under the Indenture.

“Agreement” shall mean this Loan Agreement dated as of March 1, 2009 and any and all modifications, alterations, amendments and supplements hereto.

“Bank” shall mean the issuer of a Letter of Credit, if any, delivered in conjunction with the Bonds, and the issuer of any subsequently issued Credit Facility so long as such other Credit Facility shall be in effect, and in its capacity as such issuer, its successors in such capacity and their assigns.

“Bond” or “Bonds” shall mean the bonds authorized to be issued under the Indenture.

“Bond Counsel” shall mean any firm of nationally recognized bond counsel experienced in the financing of pollution control facilities and acceptable to the Issuer, the Remarketing Agent, the Trustee and the Borrower.

“Bond Fund” shall mean the fund created by Section 5.01 of the Indenture.

“Bond Insurance Policy” shall mean the municipal bond new issue insurance policy issued by the Bond Insurer that guarantees payment of principal of and interest on the Bonds.

“Bond Insurer” shall mean the issuer of a Bond Insurance Policy, if any, designated by the Issuer and the Borrower, or any successor thereto.

“Borrower” shall mean El Paso Electric Company, a corporation formed and existing under the laws of the State of Texas, its successors and their assigns and any transferee entity to the extent permitted by Section 6.02 hereof

“Borrower Indentures” shall mean (i) that certain Indenture of Mortgage, dated as of October 1, 1946, between the Borrower and State Street Bank and Trust Company, as trustee, as supplemented and modified by the indentures supplemental thereto, (ii) that certain Indenture of Mortgage, dated as of June 1, 1981, from the Borrower to IBJ Schroder Bank & Trust Company, as successor trustee, as the same has heretofore been supplemented and may be hereafter supplemented and modified, or (iii) any indenture or mortgage made by the Borrower in accordance with the plan of reorganization to secure substantially the same obligations as are currently secured by the Borrower Indentures, and subjecting thereto substantially the same property, and subject to substantially the same prior liens and encumbrances, and having substantially similar provisions for the issuance of additional debt thereunder, as the Borrower Indentures.

“Claim” shall mean liabilities, obligations, losses, damages, taxes (other than taxes on income), penalties, claims (including, without limitation, claims involving liability in tort, whether strict or otherwise), actions, suits, judgments, costs, interest, expenses and disbursements, whether or not any of the foregoing shall be founded or unfounded, contingent or

otherwise (including, without limitation, legal fees and expenses and costs of investigation) of any kind and nature whatsoever without any limitation as to amount.

“Counsel” shall mean an attorney at law selected by the Borrower (who may be counsel to either or both of the Issuer and the Borrower) and acceptable to the Trustee or, if not selected by the Borrower within a reasonable time following any request therefor, by the Issuer and acceptable to the Trustee.

“County” shall mean the County of Maricopa, Arizona.

“Credit Facility” shall mean, collectively, a Letter of Credit, if any, and any extensions thereof, and, upon the issuance and delivery of any Alternate Credit Support in accordance with Section 6.08 hereof, “Credit Facility” shall mean such Alternate Credit Support.

“Environmental Law” shall mean any federal, state or local law, rule, regulation, order, writ, judgment, injunction, decree, determination or award relating to the environment, health or safety or to the release or threatened release of any materials into the environment, including, without limitation, the Clean Air Act, as amended, the Clean Water Act of 1977, as amended, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, the Hazardous Materials Transportation Act, as amended, the Toxic Substance Control Act, as amended, and the Resource Conservation and Recovery Act of 1976, as amended.

“Facilities” or “Project” shall mean the pollution control systems and facilities presently existing, under construction and to be constructed at the Plant, which are described in Exhibit A hereto, as from time to time revised, changed, amended or modified and related improvements and any substitutions therefor.

“Fitch” shall mean Fitch Ratings Inc., a corporation organized and existing under the laws of the State of Delaware, its successors and their assigns, and, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, “Fitch” shall be deemed to refer to any other nationally recognized securities rating agency designated by the Borrower, with the approval of the Remarketing Agent and the Bank and the Bond Insurer, by notice to the Trustee, the Tender Agent and the Issuer.

“Hazardous Materials” shall mean all materials that are, or become, subject to any Environmental Law, including, without limitation, materials listed in 49 I.E. §172.101, materials defined as hazardous pursuant to Section 101(14) of the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, flammable, explosive or radioactive materials, hazardous or toxic wastes or substances, petroleum or petroleum distillates, PCB’s or asbestos or urea formaldehyde-containing materials.

“Insurance Agreement” shall mean the Insurance Agreement, if any, between the Bond Insurer and the Borrower, as amended or supplemented from time to time.

“Issuance Expenses” shall mean any and all expenses incurred in connection with the issuance of the Bonds including, but not limited to, any (a) underwriters’ compensation; (b) counsel fees; (c) financing advisor fees; (d) rating agency fees; (e) trustee fees; (f) paying agent and certifying and authenticating agent fees; (g) accounting fees; (h) printing costs; (i) costs incurred in connection with any required public approval process; (j) costs of engineering and feasibility studies necessary to the issuance of the Bonds (as opposed to such studies relating to completion of the Project); and (k) the issuance fee charged by, and expenses and disbursements of, the Issuer. Notwithstanding anything to the contrary herein, “Issuance Expenses” shall not include any bond insurance premiums and certain letter of credit fees that would be treated as interest expenses under the arbitrage restrictions of the Code.

“Letter of Credit” shall mean an irrevocable, direct-pay letter of credit, if any, issued by the Bank and delivered to the Trustee in accordance with Section 6.08 hereof and any extension thereof.

“Moody’s” shall mean Moody’s Investors Service, Inc., a corporation organized and existing under the laws of the State of Delaware, its successors and their assigns, and, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, “Moody’s” shall be deemed to refer to any other nationally-recognized securities rating-agency designated by the Borrower, with the approval of the Remarketing Agent and the Bank, by notice to the Trustee, the Tender Agent and the Issuer.

“Outstanding” when used in reference to the Bonds, shall mean, as at any particular date, the aggregate of all Bonds authenticated and delivered under the Indenture except;

(i) those cancelled at or prior to such date or delivered to or held by the Trustee at or prior to such date for cancellation;

(ii) those deemed to have been paid in accordance with Article IX of the Indenture;

(iii) those in lieu of, or in exchange, replacement or substitution for which, other Bonds shall have been authenticated and delivered pursuant to the Indenture unless proof satisfactory to the Trustee and the Borrower is presented that such Bond is held by a bona fide holder in due course; and

(iv) undelivered Bonds.

“Owner” or “Bondholder” or “holders” used with reference to the Bonds shall mean the person or entity in whose name any Bond is registered upon the registration books maintained pursuant to Section 2.04 of the Indenture.

“Permitted Encumbrances” shall mean and include (a) liens for taxes, assessments and other governmental charges not delinquent or which can be paid without penalty; (b) unfiled, inchoate mechanics’ and materialmen’s liens for construction work in progress; (c) workmen’s, repairmen’s, warehousemen’s and carriers’ liens and other similar liens, if any, arising in the ordinary course of business; (d) all the following, if they do not individually or in the aggregate materially impair the use of the Facilities or materially detract from the value thereof to the Borrower, viz. any easements, restrictions, mineral, oil, gas and mining rights and reservations, zoning laws and defects in title or other encumbrances to which the Facilities may be subject because of the installation thereof at the Plant; (e) any lien for the satisfaction and discharge of which a sum of money or surety bond deemed adequate by the Trustee is on deposit with the Trustee; (t) the rights of the Issuer under this Agreement or any other sale agreement or lease agreement between the Issuer and the Borrower relating to the issuance of bonds under the Act; and (g) the lien of the Borrower Indentures and the permitted encumbrances and other prior liens referred to therein.

“Plant” shall mean Units 1, 2 and 3 (each, a “Unit”) of the Palo Verde Nuclear Generating Station in Maricopa County, Arizona, at which the Project is located.

“Prior Bonds” shall mean the Maricopa County, Arizona Pollution Control Corporation Pollution Control Refunding Revenue Bonds, 2005 Series B (El Paso Electric Company Palo Verde Project).

“Purchase Date” shall mean the date on which the Bonds shall be required to be purchased pursuant to a mandatory or an optional tender in accordance with the Indenture.

“Purchase Price” shall have the meaning set forth in the forms of the Bonds.

“Reimbursement Agreement” shall mean (i) any Reimbursement Agreement, made by the Borrower in favor of the Bank, relating to payments for moneys drawn under the Letter of Credit, if any, and any amendments, modifications and supplements thereto, and (ii) from and after the issuance of an Alternate Credit Support, any letter of credit reimbursement agreement or other arrangement between the Borrower and the issuer of any Alternate Credit Support, and any amendments, modifications and supplements thereto.

“Remarketing Agent” shall mean any remarketing agent appointed in accordance with Section 14.01(x) of the Indenture.

“Repayment Installment” shall mean any amount that the Borrower is required to pay to the Trustee pursuant to Section 5.02 hereof as a repayment of the loan made by the Issuer under this Agreement.

“Representation and Indemnity Agreement” shall mean the Representation and Indemnity Agreement dated as of March 19, 2009 among the Issuer, the Borrower and the Underwriters.

any other nationally-recognized securities rating agency designated by the Borrower, with the approval of the Remarketing Agent and the Bank and the Bond Insurer, by notice to the Trustee, the Tender Agent and the Issuer.

“State” shall mean the State of Arizona.

“Tax Exempt” shall mean, with respect to interest on any obligations of a state or local government, including the Bonds, that such interest is excluded from the gross income of the holders thereof (other than any holder who is a “substantial user” of facilities financed with such obligations or a “related person” within the meaning of Section 147(a) of the Code) for federal income tax purposes, whether or not such interest is includable as an item of tax preference or otherwise includable directly or indirectly for purposes of calculating other tax liabilities, including any alternative minimum tax or environmental tax under the Code.

“Tender Agent” shall initially mean the Trustee, or any successor tender agent subsequently appointed in accordance with Section 14.01(b) of the Indenture.

“Trustee” shall mean Union Bank, N.A., as trustee under this Indenture, and its successor or successors hereunder. “Principal Office” of the Trustee shall mean the principal office of the Trustee so designated at which at any particular time its corporate trust business shall be administered in California, which office at the date of the execution of this Loan Agreement, is 120 South San Pedro Street, 4th Floor, Los Angeles, California 90012, Attention: Corporate Trust Department; except that with respect to the presentation of Bonds for payment or for registration of transfer, exchange or tender, such term shall mean the office or agency of the Trustee at Union Bank, N.A., Corporate Trust Department, 120 South San Pedro Street, 4th Floor, Los Angeles, California 90012, Attention: Bond Redemption.

“Underwriters” shall have the meaning set forth in the Official Statement for the Bonds.

“Unit” shall have the meaning set forth in the definition of “Plant” under this Section 1.01.

Section 1.02. Interpretation . Unless the context indicates otherwise, words importing the singular number include the plural number, and vice versa; the terms “hereof’, “hereby”, “herein”, “hereto”, “hereunder” and similar terms refer to this Agreement; and the term “hereafter” means after, and the term “heretofore” means before, the date of delivery of the Bonds. Words of any gender include the correlative words of the other genders, unless the sense indicates otherwise.

Section 1.03. Captions and Headings . The captions and headings in this Agreement are solely for convenience of reference and in no way define, limit or describe the scope or intent of any Articles, Sections, subsections, paragraphs, subparagraphs or clauses hereof.

ARTICLE II

REPRESENTATIONS AND WARRANTIES

Section 2.01. Representations and Warranties of the Issuer . The Issuer makes the following representations and warranties as the basis for its undertakings herein contained:

(a) The Issuer is an Arizona nonprofit corporation designated as a political subdivision under the laws of the State, incorporated pursuant to the Act for and with the approval of the County, created and existing under the Constitution and laws of the State;

(b) The Issuer has the power to enter into the transactions contemplated by this Agreement and the Indenture and to carry out its obligations hereunder and thereunder;

(c) The Issuer has the power to enter into this Agreement and by proper corporate action has duly authorized the execution and delivery hereof; and

(d) The execution and delivery of this Agreement and the Indenture and compliance with the provisions hereof and thereof will not conflict with, or constitute on the part of the Issuer a breach of or a default under, any existing law, court or administrative regulation, decree or order to which the Issuer is subject or any agreement, ordinance, indenture, mortgage, lease or other instrument by which the Issuer is or may be bound.

Section 2.02. Representations and Warranties of the Borrower . The Borrower makes the following representations and warranties as the basis for the undertakings on the part of the Issuer herein contained:

(a)(i) The Borrower is a corporation duly incorporated under the laws of the State of Texas and is in good standing under the laws of the State of Texas, has power to enter into this Agreement and to perform and observe the agreements and covenants on its part contained herein, and by proper corporate action has duly authorized the execution and delivery hereof, (ii) the Borrower is duly qualified to hold property and transact business as a foreign corporation and is in good standing under the laws of the State of Arizona, (iii) all of the proceeds of the Bonds will be used to redeem and refund the Prior Bonds, (iv) prior to the issuance of the Bonds, the Federal Energy Regulatory Commission will have approved all matters relating to the Borrower’s participation in the transactions contemplated by this Agreement which require said approval, and no other consent, approval, authorization or other order of any regulatory body or administrative agency or other governmental body is legally required for the Borrower’s participation therein except such as have been or will have been obtained prior to the issuance of the Bonds or such, if any, as may be required under state securities or Blue Sky laws, and (v) the execution and delivery of this Agreement by the Borrower do not, and consummation of the transactions contemplated hereby and fulfillment of the terms hereof will not, result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust or other agreement or instrument to which the Borrower is a party, or the Restated Articles of Incorporation or Bylaws of the Borrower, or any order, rule or regulation applicable to the Borrower of any court or of any Federal or state regulatory body or administrative agency or other governmental body having jurisdiction over

the Borrower or over any of its properties, or any statute of any jurisdiction applicable to the Borrower other than breaches or defaults that individually or in the aggregate are not expected to have a material adverse effect on the Borrower.

(b) The Facilities meet applicable Federal, state and local requirements for the control of pollution now in effect and are used for the reduction, abatement and prevention of pollution.

(c) The Borrower does not presently expect that the description of the Facilities contained in Exhibit A hereto will be revised.

(d) To the extent necessary to preserve the security for the Bonds, the validity of the Bonds under the Act and the Tax-Exempt status of interest on the Bonds, all material certificates, approvals, permits and authorizations of agencies of applicable local governmental entities, the State and the federal government have been obtained with respect to the construction of the Project and, pursuant to such certificates, approvals, permits and authorizations, the Project has been constructed and is in operation.

(e) To the best knowledge of the Borrower, no member, officer or other official of the Issuer has any interest whatsoever in the Borrower or in the transactions contemplated by this Agreement.

ARTICLE III

CONSTRUCTION OF THE FACILITIES

Section 3.01. Construction of the Facilities . The Borrower has caused the acquisition, construction, improvement or equipping of the Facilities.

ARTICLE IV

ISSUANCE, SALE AND DISPOSITION OF PROCEEDS OF THE BONDS

Section 4.01. Issuance and Sale of the Bonds . The Issuer agrees with the Borrower that it will cooperate with the Borrower and will issue and deliver the Bonds in accordance with its obligations hereunder.

Section 4.02. No Additional Bonds . It is understood and agreed that the Issuer shall not issue any additional series of Bonds, other than the Bonds pursuant to the Indenture.

Section 4.03. Disposition of Proceeds of Bonds . The proceeds of the Bonds will be used as provided in the Indenture.

Section 4.04. Investment of Moneys Held in Funds Under the Indenture . (a) The Borrower and the Issuer agree that any moneys held in the Bond Fund and the Purchase Fund or any other trust fund created by the Indenture (except any moneys held by the Trustee pursuant to Section 5.07 of the Indenture) or any moneys held by the Trustee pursuant to Section 8.02 of the

Indenture shall be invested or reinvested only as provided in Articles VII and XIV of the Indenture.

(b) The Issuer and the Borrower mutually covenant for the benefit of the purchasers of the Bonds and the Issuer that, with respect to the proceeds of the Bonds and the earnings thereon, no use thereof will be made which would (1) but for the covenant contained in this Section 4.04, have been reasonably expected at the time of issuance of the Bonds, and (2) if so reasonably expected, have caused the Bonds to be “arbitrage bonds” within the meaning of Section 148 of the Code and the regulations proposed or in effect hereunder on the date of such use and applicable to obligations issued on the issue date of the Bonds. Pursuant to such covenant, the Borrower and the Issuer obligate themselves to comply throughout the term of the Bonds with the requirements of Section 148 of the Code and any regulations promulgated thereunder.

ARTICLE V

LOAN TO BORROWER, REPAYMENT PROVISIONS

Section 5.01. Loan to Borrower . The Issuer covenants and agrees, upon the terms and conditions in this Agreement, to make a loan to the Borrower for the purpose of refunding the Prior Bonds. Pursuant to said covenant and agreement, the Issuer will issue the Bonds upon the terms and conditions contained in this Agreement and the Indenture. The Issuer and the Borrower agree that the application of the proceeds of sale of the Bonds to refund and redeem the Prior Bonds will be deemed to be and treated for all purposes as a loan to the Borrower of an amount equal to the aggregate principal amount of the Bonds. The Borrower covenants and agrees to pay to the trustee for the Prior Bonds an amount which, when added to the amounts transferred to such trustee pursuant to Section 3.02 of the Indenture, will be sufficient to pay, on or before April 3, 2009, the redemption price of the Prior Bonds and all other amounts due under the indenture pursuant to which such Prior Bonds were issued all in accordance with the terms of such indenture.

Section 5.02. Amounts and Dates for Payment .

(a) With respect to the Bonds, the Borrower shall, and hereby covenants and agrees to: (i) pay to the Trustee as a Repayment Installment on or before each date provided in the Indenture, an amount equal to the aggregate principal, premium, if any, and interest due on the Bonds as the same become due, whether at maturity, by reason of redemption, upon acceleration or otherwise, and (ii) pay on or before each Purchase Date a sum equal to the Purchase Price of any Bonds required to be purchased by the Paying Agent pursuant to Section 4.08 of the Indenture and Section 10.01 hereof. The Borrower shall, and hereby agrees to, pay the Repayment Installment by delivery or causing delivery of such further installments, in immediately available funds, necessary on the dates and in the amounts and in the manner in the Indenture as may be necessary to enable the Issuer to cause payment to be made to the Trustee of principal of and premium, if any, and interest on the Bonds, whether at maturity, upon redemption, or otherwise, provided that any amount credited under the Indenture against any cash payment required to be made by the Issuer thereunder shall be credited against the corresponding cash payment required to be made by the Borrower hereunder.

(b) The Borrower shall, and hereby agrees to, pay in addition to the Repayment Installment an amount equal to the aggregate of all other payments to be made out of the Bond Fund, payment thereof to be made not later than the principal or interest payment date next following any such payment out of the Bond Fund but in any event in time to prevent any failure to pay when due the principal of, premium, if any, and interest on any of the Bonds.

(c) In the event the Borrower shall fail to make any of the payments required in this Section 5.02, the item or installment so in default shall continue as an obligation of the Borrower until the amount in default shall have been fully paid. Draws by the Trustee under the Credit Facility to pay the principal of, premium, if any, or interest on the Bonds shall be deemed to satisfy the Borrower’s obligation to make purchase price payments to the extent of such draws.

(d) The obligation of the Borrower to make the payments described in subsection (a) of this Section may be accelerated or prepaid in accordance with the provisions of this Agreement, notwithstanding the provisions of this Section.

Section 5.03. Payments by Borrower to be Assigned to the Trustee; Obligation for Payments Absolute .

It is understood and agreed that all payments under Section 5.02 hereof are, by the Indenture, to be pledged by the Issuer to the Trustee, and that all rights and interest of the Issuer under this Agreement, except for the Issuer’s rights under Sections 5.04, 5.07 and 8.05 of this Agreement and any rights of the Issuer to receive notices, certificates, requests, requisitions, directions and other communications hereunder, are to be pledged and assigned to the Trustee. The Borrower assents to such pledge and assignment and agrees that the obligation of the Borrower to make the payments under Section 5.02 hereof shall be absolute, irrevocable and unconditional and shall not be subject to any defense (other than payment) or any right of set-off counterclaim, abatement, offset, diminution or recoupment arising out of any breach under this Agreement, the Reimbursement Agreement, the Indenture, the Credit Facility or otherwise by the Issuer, the Trustee, the Tender Agent, the Remarketing Agent, the Bank or any other party, or out of any obligation or liability at any time owing to the Borrower by the Issuer, the Trustee, the Tender Agent, the Remarketing Agent, the Bank or any other party. The Issuer directs the Borrower, and the Borrower agrees, to pay to the Trustee at its Corporate Trust Office all payments pursuant to Section 5.02 hereof.

Section 5.04. Payment of Expenses . The Borrower agrees to pay all compensation and reasonable fees and expenses of, and to reimburse for the expenses and advances incurred by each of the Trustee, the Registrar, the Remarketing Agent, the Paying Agent and the Tender Agent under the Indenture. So long as any Bonds are Outstanding, the Borrower will pay to the Issuer semiannually, on a date to be agreed upon, or within 30 days of receipt of a statement therefor submitted to the Borrower pursuant to Section 5.07 hereof, the amount of any other Administration Expenses not theretofore provided for which have accrued and become payable.

to make or cause to be made all necessary and proper repairs, replacements and renewals; provided, however, that the Borrower will have no obligation to maintain, preserve, keep, repair, replace or renew any item or portion of such Facilities (a) the maintenance, preservation, keeping, repair, replacement or renewal of which becomes uneconomic to the Borrower because of damage or destruction by a cause not within the control of the Borrower, or obsolescence (including economic obsolescence) or change in governmental standards and regulations, or the termination by the Borrower of the operation of the generating facilities to which the portion of such Facilities is an adjunct, and (b) with respect to which the Borrower has furnished to the Issuer and the Trustee a certificate executed by an Authorized Borrower Representative that the maintenance, preservation, keeping, repair, replacement or renewal of such portion of such Facilities is being discontinued for one of the foregoing reasons, which shall be stated therein.

The Borrower shall have the privilege at its own expense of remodeling such Facilities or making substitutions, modifications and improvements to such Facilities from time to time as it, in its discretion, may deem to be desirable for its uses and purposes, which remodeling, substitutions, modifications and improvements shall be included under the terms of this Agreement as part of such Facilities.

Section 5.06. Insurance . So long as any Bonds are Outstanding and the Borrower, itself or through its agents, operates the Facilities, the Borrower shall maintain or cause to be maintained, through a program of self-insurance or otherwise, such fire, casualty, public liability and other insurance with respect to the Facilities owned or leased by the Borrower as is customarily carried by electric utility companies with respect to similar facilities.

Section 5.07. Indemnification of Issuer, Statements for Services . The Borrower agrees, whether or not any of the transactions contemplated hereby shall be consummated and whether or not this Agreement, the Indenture, the Credit Facility or any other document relating to the Bonds shall have expired or been terminated, to release, to assume liability for, and to indemnify and hold harmless, on an after-tax basis, the Issuer, the Trustee, the Paying Agent and the Registrar and each of the officers, officials, directors, employees, staff members, agents, shareholders and partners of each of the Trustee, the Paying Agent and the Registrar (each an “Indemnified Party” and collectively, the “Indemnified Parties”) from and against, any and all Claims that are imposed on, incurred by or asserted against any Indemnified Party (whether or not because of an act or omission by such Indemnified Party and whether or not such Indemnified Party shall also be indemnified by another person), in whole or in part, as a result of, caused by, arising out of or in any way relating to:

(a) any injury to or death of any person or damage to property in or upon the Facilities or growing out of or connected with the use, non-use, condition or occupancy of the Facilities or any part thereof;

(b) violation of any agreement or condition of this Agreement;

(d) violation of any law, ordinance or regulation affecting the Facilities or a part thereof or the ownership, occupancy or use thereof,

(e) any statement or information contained in the Indenture, this Agreement, any official statement, any certificate or any other documents relating to the Bonds and the proceedings relating to their issuance and sale, furnished by the Borrower to the Issuer which is misleading, untrue or incorrect in any material respect or use thereof;

(f) any investigation, litigation, proceeding, cleanup, audit, violation or other matter, related to, of, or involving the application or compliance with any Environmental Law, the protection of the environment or the release by the Borrower of any Hazardous Material;

(g) the presence on or under, or the escape, seepage, leakage, spillage, discharge, emission, discharging or releases from, any property owned or operated by the Borrower of any Hazardous Material, whether caused by, or within the control of, the Borrower; and

(h) the administration of the trust created by the Indenture, the exercise of any rights under the Indenture and the performance of any remedial measures permitted by the Indenture,

except for a Claim against an Indemnified Party (other than the Issuer) that arises by reason of such Indemnified Party’s gross negligence or willful misconduct or, in the case of clause (h) above, negligence or willful misconduct; provided, however, if and to the extent the foregoing agreement to indemnify is unenforceable for any reason, the Borrower agrees to make the maximum contribution to the payment and satisfaction of each of the agreed indemnities that is permissible under applicable law.

In addition, the Borrower will indemnify and hold the Issuer, the Trustee, the Paying Agent, the Registrar, the Trustee’s, the Paying Agent’s and the Registrar’s officers, directors, employees and agents free and harmless from any loss, claim, damage, tax, penalty, liability (including but not limited to liability for any patent infringement), disbursement, cause of action, suit, demand, judgment, litigation expenses, attorneys’ fees and expenses or court costs arising out of or in any way relating to (a) any errors or omissions of any nature whatsoever contained in any legal proceedings or other official representation or inducement made by the Issuer pertaining to the Bonds, (b) any fraud or misrepresentations or omissions contained in the proceedings of the Issuer relating to the issuance of the Bonds or pertaining to the financial condition of the Borrower which, if known to a purchaser or holder of the Bonds, might be considered a material factor in a decision whether or not to buy the Bonds, and (c) the execution or performance of this Agreement, the issuance-or sale of the Bonds and actions taken under the Indenture or any other cause whatsoever pertaining to the Facilities and the approval under the Act.

Promptly after receipt by an Indemnified Party under this Section 5.07 of written notice of the existence of a claim in respect of which indemnity hereunder may be sought or of the commencement of any action against the Indemnified Party in respect of which indemnity hereunder may be sought, the Indemnified Party shall notify the Borrower in writing of the

existence of such Claim or commencement of such action. In case any such action shall be brought against an Indemnified Party under this Section 5.07, the Indemnified Party shall notify the Borrower of the commencement thereof and the Borrower shall be entitled to participate in and, to the extent that it may wish, to assume the defense thereof, with counsel satisfactory to the Indemnified Party; provided, however, that if the Indemnified Party shall have been advised in an opinion of counsel to the Indemnified Party that there may be legal defenses available to it which are adverse to or in conflict with those available to the Borrower or other Indemnified Parties, which in the opinion of counsel to the Indemnified Party, should be handled by separate counsel, the Borrower shall not have the right to assume the defense of such action on behalf of the Indemnified Party, but shall be responsible for the reasonable fees and expenses of the Indemnified Party in conducting its defense; and provided, further, that if the Borrower shall not have assumed the defense of such action, and shall not have employed counsel therefor satisfactory to the Indemnified Party within a reasonable time after notice of commencement of such action, such reasonable fees and expenses incurred by the Indemnified Party in conducting its own defense shall be borne by the Borrower.

The Borrower’s responsibility for the reasonable fees and expenses of any Indemnified Party in conducting its defense as provided in the preceding paragraph shall commence from the time the Claim is known of by the Borrower, and such responsibility shall exist and continue regardless of the merits of the Claim.

In addition, the Borrower agrees that if it initiates any action, suit or other proceeding with respect to any claim, demand or request for relief, whether judicial or administrative, in which the Issuer, the Trustee, the Registrar or the Paying Agent is named or joined as a party, the Borrower will pay and reimburse to such party the full amount of all reasonable fees and expenses incurred by such party with respect to such party’s defense of or participation in such action, suit or other proceeding.

The Issuer may submit to the Borrower periodic statements, not more frequently than monthly, for the reasonable value of services of any Issuer employees utilized, and for the full amount of any Issuer expenses incurred by the Issuer in connection with the performance or attainment by the Issuer of its obligations and rights under the Indenture, the Bonds or this Agreement, and the Borrower shall make payment to the Issuer of the full amount of each such statement within 30 days after the Borrower receives such statement; provided that the Borrower within such 30-day period may in writing and in good faith specifically protest all or any portion of the amounts included in such statement and in such event the Borrower shall not be obligated to make payment to the Issuer of the amount which has been protested in such manner until ten days after such protest shall have been resolved either by agreement between the Issuer and the Borrower or by an appropriate tribunal.

Under this Section 5.07, the Borrower shall also be deemed to release, indemnify and agree to hold harmless each employee, official or officer of the Issuer to the same extent as the Issuer.

Section 5.08. Notices of Damage . After the occurrence of any material damage or loss to the Facilities, if any Bonds are then Outstanding, the Borrower shall notify the Issuer and the

Trustee as to the nature and extent of such damage or loss and whether it is practicable and desirable to rebuild, repair, or restore such damage or loss.

Section 5.09. No Warrant by the Issuer . The Issuer makes no warranty, either express or implied, as to the Project or that it will be suitable for the purposes of the Borrower or needs of the Borrower.

Section 5.10. Liens . The Borrower hereby agrees not to create any lien upon the Bond Fund or upon the Receipts and Revenues (as defined in the Indenture) other than the lien created in the Indenture. The Borrower hereby agrees that it shall not have any interest in the Bond Fund or the moneys or Investment Securities (as defined in the Indenture) therein.

Section 5.11. Payments of Taxes and Assessments; No Liens or Charges .

The Borrower will: (a) pay, or make provision for payment of, (i) all lawful taxes and assessments, including income, profits, property or excise taxes, if any, or (ii) other municipal or governmental charges, levied or assessed by any Federal, state or municipal government or political body, upon the Project, or upon any part of either (i) or (ii) above, or upon any installment payments hereunder when the same shall become due, and (b) pay or cause to be discharged or make adequate provision to satisfy and discharge, within sixty (60) days after the same shall accrue, any lien or charge upon any installment payment hereunder and all lawful claims or demands for labor, materials, supplies or other charges which, if unpaid, might be or become a lien upon any installment payment hereunder, except Permitted Encumbrances; provided with respect to both clause (a) and clause (b) of this Section 5.11 that the Borrower may in good faith contest any such tax, assessment, lien, charge, claim or demand in appropriate legal proceedings if the Borrower shall notify the Issuer and the Trustee of its intention so to do at or prior to the time of initiating such contest, and in such event may permit the items so contested to remain unpaid, undischarged and unsatisfied during the period of such contest and any appeal therefrom, unless the Issuer or the Trustee shall notify the Borrower in writing that, in the opinion of Counsel, by nonpayment of any such items the lien of the Indenture as to the payments of the Repayment Installments will be materially endangered, in which event the Borrower shall promptly pay and cause to be satisfied and discharged all such unpaid items. The Issuer will cooperate fully with the Borrower in any such contest.

Section 5.12. Additional Payments by the Borrower . The Borrower will pay, or cause to be paid, in addition to the payments provided for in Section 5.02(a) hereof, all of the expenses of operation of the portions of the Project including, without limitation, the cost of all necessary and proper repairs, replacements and renewals made pursuant to Section 5.05 hereof and premiums for insurance pursuant to Section 5.06 hereof.

ARTICLE VI

SPECIAL COVENANTS - CREDIT FACILITY

Section 6.01. [RESERVED] .

Section 6.02. Maintenance of Existence . The Borrower covenants that it will maintain its corporate existence, will not dissolve or otherwise dispose of all or substantially all its assets

and will not consolidate with or merge into another corporation; provided, however, that the Borrower may consolidate with or merge with or into, or sell or otherwise transfer all or substantially all of its assets (and may thereafter dissolve), to another corporation, incorporated under the laws of the United States, one of the states thereof or the District of Columbia, provided, in the event the Borrower is not the surviving, resulting or transferee corporation, as the case may be, such corporation prior to such merger, consolidation, sale or transfer assumes, by delivery to the Trustee of an instrument in writing satisfactory in form and substance to the Trustee, all the obligations of the Borrower herein.

If consolidation, merger or sale or other transfer is made as permitted by this Section, the provisions of this Section shall continue in full force and effect and no further consolidation, merger or sale or other transfer shall be made except in compliance with the provisions of this Section. The Borrower shall notify the Trustee of its affiliates from time to time and of the filing of a petition in bankruptcy by or on behalf of any of itself or its affiliates from time to time.

Section 6.03. Agreement as to Ownership and Use of the Project . The Issuer and the Borrower agree that title to the Project shall be in and remain in the Borrower, and that the Project shall be the sole property of the Borrower in which the Issuer shall have no interest. Notwithstanding the provisions of this Section 6.03, the Borrower in its sole discretion and business judgment may choose to cease operation of the Project or transfer the Project to another entity which may cease such operation, and in such circumstances the covenants contained in this Section 6.03 shall no longer apply.

Section 6.04. Cooperation in Applications for Permits and Licenses . In the event it may be necessary for the proper performance of this Agreement on the part of the Issuer or the Borrower that any application or applications for any permit or license to do or to perform certain things be made to any governmental or other agency by or on behalf of the Borrower or the Issuer, the Borrower and the Issuer each agree, upon the request of either, to execute such application or applications.

Section 6.05. Recordation and Other Instruments . The Borrower shall cause such security agreements, financing statements and all supplements thereto and other instruments as may be required from time to time to be kept, to be recorded and to be filed in such manner and in such places as may be required by law in order to fully preserve, protect and perfect the security of the holders of the Bonds and the rights of the Trustee and to perfect the security interest created by the Indenture.

Section 6.06. Issuer’s Access to Facilities . The Borrower agrees that the Issuer and the Trustee shall have the right, upon appropriate prior notice to the Borrower, to have reasonable access to the Facilities owned or leased by the Borrower during normal business hours for the purpose of making examinations and inspections of the same; provided, however, that the Borrower reserves the right to restrict access to any of its generating facilities in accordance with reasonably adopted procedures relating to safety and security.

income tax purposes (other than a “substantial user” of the Facilities or a “related person” as those terms are used, in Section 147(a) of the Code).

The Borrower covenants that it will pay to the United States of America, on behalf of the issuer, at or before the times required by or under Section 1480 of the Code, the amounts required to cause to be met with respect to the Bonds the rebate requirement of said Section and such rules and regulations applicable to the Bonds. The Borrower covenants that in directing the investment of the gross proceeds of the Bonds it will comply with the applicable requirements of Section 148 of the Code. The Borrower covenants that it will maintain on behalf of the Issuer such records and file such reports, and file copies thereof with the Issuer and, if requested by the Trustee, with the Trustee, as may be necessary to be maintained to demonstrate compliance with this paragraph.

Section 6.08. Credit Facility .

(a) A Credit Facility shall be required if the Bonds are converted into any Interest Rate Period other than an ARS Interest Rate or a Long-Term Interest Rate Period, and the terms of such Credit Facility in such event shall be satisfactory to the Bond Insurer, if any. The Borrower hereby authorizes and directs the Trustee to draw moneys under the Credit Facility, if any, in accordance with the terms thereof and of the Indenture.

(b) Any Credit Facility, at the option of the Borrower, may provide that drawings may be made thereunder to pay to the Trustee, in accordance with the terms thereof, (i) an amount equal to (A) the principal of the Bonds when due upon maturity, redemption or acceleration and (B) the portion of the purchase price of Bonds purchased pursuant to Section 14.03(b) of the Indenture equal to the principal amount thereof; (ii) an amount equal to a specified number of days’ interest, computed at the Maximum Interest Rate (as defined in the Indenture), on the Bonds to pay (A) accrued and unpaid interest on the Bonds, and (B) the portion of the purchase price of Bonds purchased pursuant to Section 14.03(b) of the Indenture equal to the accrued interest thereon; (iii) any part of the portion of the purchase price of Bonds purchased pursuant to Section 14.03(b) of the Indenture corresponding to redemption premium on the Bonds; and (iv) an amount to pay redemption premium, if any, on the Bonds which may be payable upon the redemption thereof. The Credit Facility shall be reduced to the extent of any drawings thereunder and reinstated in accordance with the terms thereof.

The Borrower may, at its election, provide for one or more extensions of any Credit Facility in accordance with the terms of the Reimbursement Agreement in respect thereof.

(c) On or prior to the 35th day preceding the mandatory purchase date occurring pursuant to Section 4.08(c) of the Indenture, the Borrower shall deliver to the Trustee, the Tender Agent, the Remarketing Agent and the Bank:

(i) a notice which (A) states the effective date of expiration or termination of the existing Credit Facility, (B) describes any substitute Credit Facility which may be provided in lieu thereof, and (C) directs the Trustee, after taking such actions thereunder as are required to be taken to provide moneys due under the Indenture in respect of the Bonds or the purchase thereof, to surrender the Credit Facility to expire

or to be terminated to the obligor thereon on the effective date of the substitute Credit Facility to be provided in lieu of the Credit Facility to expire or to be terminated or, if no such Credit Facility is to be so provided, on the effective date of such expiration or termination; and

(ii) written evidence from Moody’s, if the Bonds are then rated by Moody’s, and S&P, if the Bonds are then rated by S&P, and Fitch, if the Bonds are then rated by Fitch, of the action that such rating agency will take with respect to the rating assigned to the Bonds on such expiration or termination and delivery of a new Credit Facility, if any.

(d) On or prior to the 35th day preceding the effective date of expiration or termination of any Credit Facility and the substitution of another Credit Facility that does not result in a downgrading or withdrawal of any rating assigned to the Bonds, the Borrower shall deliver to the Trustee, the Tender Agent, the Remarketing Agent and the Bank:

(i) a notice which (A) states the effective date of expiration or termination of the existing Credit Facility, (B) describes the Credit Facility which is to be provided in lieu thereof, and (C) directs the Trustee to surrender the Credit Facility to expire or to be terminated to the obligor thereon on the effective date of the substitute Credit Facility to be provided in lieu of the Credit Facility to expire or to be terminated; and

(ii) written evidence from Moody’s, if the Bonds are then rated by Moody’s, and S&P, if the Bonds are then rated by S&P, and Fitch, if the Bonds are then rated by Fitch, that such expiration or termination and delivery of a new Credit Facility will not result in a downgrading or withdrawal of the rating assigned to the Bonds by such rating agency.

(e) In connection with any termination of a Credit Facility and/or the provision of a new Credit Facility, if any, the Borrower also shall furnish to the Trustee a Favorable Opinion of Bond Counsel (as defined in the Indenture) and such other opinions of counsel as to such other matters as the Issuer or the Trustee may request.

Section 6.09. Annual Statement . The Borrower agrees during the term of this Agreement to have an annual audit made by its regular independent certified public accountants and to furnish the Trustee (within 30 days after receipt by the Borrower) with a balance sheet and statement of income and surplus showing the financial condition of the Borrower and its consolidated subsidiaries, if any, at the close of each fiscal year and the results of operations of the Borrower and its consolidated subsidiaries, if any, for each fiscal year, accompanied by a report of said accountants that such statements have been prepared in accordance with generally accepted accounting principles. The Borrower’s obligations under this Section 6.09 may be satisfied by delivering a copy of the Borrower’s Annual Report to the Trustee at the same time that it is mailed to stockholders. The Trustee shall have no duty or obligation with respect to such financial statements or reports except to make them available to any requesting Bondholders.

ARTICLE VII

ASSIGNMENT, LEASING AND SELLING

Section 7.01. Assignment, Leasing or Selling of the Facilities by the Borrower . The Borrower may assign its interest in this Agreement in whole or in part, and may sell or lease the Facilities as a whole or in part or an interest therein, subject, however, to the following conditions:

(a) No assignment, sale or lease (other than pursuant to Section 6.02 hereof) shall relieve the Borrower from primary liability for any of its obligations hereunder, and, without limiting the generality of the foregoing, in the event of any such assignment, sale or lease, the Borrower shall continue to remain primarily liable for its payments specified in Articles V and X hereof and for performance and observance of the other covenants and agreements on its part herein provided;

(b) To the extent not retained by the Borrower, the purchaser, assignee or lessee shall assume the obligations of the Borrower hereunder with respect to the operation, maintenance and insurance of the portion of or interest in the Facilities sold or leased, including, without limitation, the obligations provided for in Article V hereof, and with respect to the interest in this Agreement assigned;

(c) There shall have been delivered an opinion of Bond Counsel to the effect that such sale, lease, assignment or other transfer of the Borrower’s interest in any of the Facilities does not adversely affect the exclusion from gross income of the interest on the Bonds for federal income tax purposes; and

(d) The Borrower shall, within 15 days after the delivery thereof, furnish or cause to be furnished to the Issuer and the Trustee a true and complete copy of each such assignment, sales agreement or lease, as the case may be.

Section 7.02. Authorized Financing . Nothing in Section 7.01(a), (b) or (d) shall be deemed to prohibit the sale or lease of the Facilities in connection with any authorized financing thereof under the Act; provided, however, that no such sale or lease of the Facilities shall affect the payment obligations of the Borrower hereunder.

ARTICLE VIII

EVENTS OF DEFAULT AND REMEDIES

Section 8.01. Events of Default . Each of the following events shall be and is referred to in this Agreement as an “Event of Default”:

(a) failure by the Borrower to pay or cause to be paid any amounts required to be paid under Section 5.02 or Section 10.01(a) hereof when due which failure shall have resulted in an “Event of Default” under clause (i), (ii) or (iii) of Section 10.01(a) of the Indenture;

(b) a failure by the Borrower (i) to pay when due any other payment required to be made under this Agreement or (ii) to observe and perform any other covenant, condition or agreement on its part to be observed or performed, other than as referred to in this Section 8.01, which failure continues for a period of 30 days after written notice, specifying such failure and requesting that it be remedied, is given to the Borrower by the Issuer or the Trustee, which may give such notice in its discretion and shall give such notice at the written request of the holders of not less than a majority in principal amount of the Bonds then Outstanding (other than Bonds held by, or on behalf of the Borrower), unless the Issuer and the Trustee or the Issuer, the Trustee and the holders of a principal amount of Bonds not less than the principal amount of Bonds the holders of which requested such notice, as the case may be, shall agree to an extension of such period prior to its expiration; or

(c) the dissolution or liquidation of the Borrower, or the filing by the Borrower of a voluntary petition in bankruptcy, or failure by the Borrower promptly to forestall or lift any execution, garnishment or attachment of such consequence as will impair its ability to continue its business or to make any payments under this Agreement, or the entry of an order for relief by a court of competent jurisdiction in any proceeding for its liquidation or reorganization under the provisions of any bankruptcy act or under any similar act which may be hereafter enacted, or an assignment by the Borrower for the benefit of its creditors, or the entry by the Borrower into an agreement of composition with its creditors (the term “dissolution or liquidation of the Borrower”, as used in this clause, shall not be construed to include the cessation of the existence of the Borrower resulting from a dissolution or liquidation of the Borrower following a transfer of all or substantially all its assets as an entirety, under the conditions permitting such actions contained in Section 6.02 hereof); or

(d) the occurrence and continuance of an Event of Default under the Indenture; or

(e) the occurrence and continuance of an Event of Default under the Insurance Agreement, if any, or the Reimbursement Agreement, if any.

The Issuer (or the Borrower, in the case of clause (c)) shall promptly notify the Trustee and the Bank, if any, of the occurrence of any Event of Default under this Section 8.01.

Section 8.02. Force Majeure . The provisions of Section 8.01(b) hereof are subject to the following limitations: If by reason of acts of God; strikes, lockouts or other industrial disturbances; acts of public enemies; orders of any kind of the government of the United States or of the State of Arizona or any department, agency, political subdivision, court or official of any of them, or any civil or military authority; insurrections; riots; epidemics; landslides; lightning; earthquakes; volcanoes; fires; hurricanes; tornados; floods; washouts; droughts; arrests; restraint of government and civil disturbances; explosions; breakage or accident to machinery; or entire failure of utilities; or any cause or event not reasonably under the control of the Borrower, the Borrower is unable in whole or in part to carry out any one or more of its agreements or obligations contained herein other than its obligations under Sections 5.02, 5.04, 5.08, 5.12, 6.02, 8.05 and 10.01 (a) hereof, the Borrower shall not be deemed in default by reason of not carrying out said agreement or agreements or performing said obligation or obligations during the continuance of such inability. The Borrower shall use reasonable efforts

to remedy the cause or causes preventing it from carrying out its agreements; provided that the settlement of strikes, lockouts and other industrial disturbances shall be entirely within the discretion of the Borrower, and the Borrower shall not be required to make settlement of strikes, lockouts and other disturbances by acceding to the demands of the opposing party or parties when such course is, in the judgment of the Borrower, unfavorable to the Borrower.

Section 8.03. Remedies .

(a) Upon the occurrence and continuance of any Event of Default described in Section 8.01 hereof, and further upon the condition that, in accordance with the terms of the Indenture, the Bonds shall have been declared to be immediately due and payable pursuant to any provision of the Indenture, the unpaid balance of the loan payable under Section 5.02 hereof shall, without further action, become and be immediately due and payable.

(b) Any waiver of any “Event of Default” under the Indenture and a rescission and annulment of its consequences shall constitute a waiver of the corresponding Event or Events of Default under this Agreement and a rescission and annulment of the consequences thereof.

(c) Upon the occurrence and continuance of any Event of Default, the Issuer may take, or cause to be taken, any action at law or in equity to collect any payments then due and thereafter to become due, or to enforce performance and observance of any obligation, agreement or covenant of the Borrower hereunder.

(d) Any amounts collected from the Borrower pursuant to this Section 8.03 shall be applied in accordance with the Indenture.

Section 8.04. No Remedy Exclusive . No remedy conferred upon or reserved to the Issuer hereby is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute. No delay or omission to exercise any right or power accruing upon any default shall impair any such right or power or shall be construed to be a waiver thereof, but any such right or power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the Issuer to exercise any remedy reserved to it in this Article VIII, it shall not be necessary to give any notice other than such notice as may be herein expressly required.

Section 8.05. Reimbursement of Attorneys’ Fees . If the Borrower shall default under any of the provisions hereof (i) and the Issuer or the Trustee shall employ attorneys or incur other reasonable expenses for the collection of payments due hereunder or for the enforcement of performance or observance of any obligation or agreement on the part of the Borrower contained herein, the Borrower will on demand therefor reimburse the Issuer or the Trustee, as may be, for the reasonable fees of such attorneys and such other reasonable expenses so incurred, to the extent permitted by law, and (ii) the Borrower shall pay the Trustee reasonable compensation for extraordinary services, including default administration.

Section 8.06. Waiver of Breach . In the event any obligation created hereby shall be breached by either of the parties and such breach shall thereafter be waived by the other party,

such waiver shall be limited to the particular breach so waived and shall not be deemed to waive any other breach hereunder. In view of the assignment of certain of the Issuer’s rights and interests hereunder to the Trustee, the Issuer shall have no power to waive any default hereunder by the Borrower in respect of such rights and interests without the consent of the Trustee, and the Trustee may exercise any of the rights of the Issuer hereunder.

ARTICLE IX

OPTIONS OF BORROWER TO PREPAY.

Section 9.01. Options of Borrower to Prepay Repayment Installments .

(a) The Borrower shall have, and is hereby granted, the option to prepay the loan payable under Section 5.02 hereof in whole or in part by causing the Bonds to be called for redemption pursuant to Section 4.01 of the Indenture in which case all or a portion of the balance of the loan payable under Section 5.02 hereof shall become due and payable on the redemption date specified pursuant to Section 9.02 hereof in an amount sufficient to pay the principal of any premium, if any, and interest on the Bonds so called for redemption.

(b) The Borrower shall also have, and is hereby granted, the option to prepay the amounts payable under Section 5.02 hereof in whole or in part by causing Bonds to be deemed to have been paid pursuant to Section 9.01 of the Indenture by depositing with the Trustee moneys or obligations, or a combination thereof, as required by such Section 9.01 and by giving the irrevocable instructions required by such Section 9.01.

Section 9.02. Exercise of Option .

(a) To exercise an option granted in Section 9.01 hereof, the Borrower shall give written notice to the Trustee which shall designate therein the principal amount of the Bonds to be caused to be redeemed, or to be deemed to be paid in accordance with Section 9.01 of the Indenture and, in the event a redemption of Bonds is to be effected, such notice shall be given to the Trustee not less than five Business Days (as defined in the Indenture) prior to the day on which the Trustee shall be required to give notice of any such redemption and shall specify therein (i) the date or dates of redemption, and (ii) the applicable redemption provision of the Indenture. The exercise of an option granted in Section 9.01 hereof shall be revocable by the Borrower at any time before the receipt by the Trustee of the Repayment Installments to be prepaid.

(b) Upon receipt of a notice furnished pursuant to this Section 9.02, the Issuer shall cooperate fully with the Trustee to permit the Trustee to take or cause to be taken all actions required of it under the Indenture to cause Bonds to be paid or redeemed in accordance with such notice.

or order to effect the redemption of the Bonds entitled to the benefits of the Credit Facility or cause such Bonds to be deemed to have been paid as provided in Section 9.01 of the Indenture.

Section 9.03. Mandatory Prepayment of Repayment Installments .

The Borrower shall prepay the necessary portion of the unpaid balance of the Repayment Installments on such dates on which the Bonds are required to be redeemed pursuant to Section 4.01(b) of the Indenture.

Section 9.04. Amount of Prepayment .

The Borrower agrees to and shall pay (or cause to be paid) directly to the Trustee any amount permitted or required to be paid by it under this Article IX. The Trustee shall use the moneys so paid to it by the Borrower to effect redemption of the Bonds in accordance with Article IV of the Indenture.

ARTICLE X

PURCHASE AND REMARKETING OF BONDS

Section 10.01. Purchase of Bonds .

(a) In consideration of the issuance of the Bonds by the Issuer, but for the benefit of the Owners of the Bonds, the Borrower does hereby covenant and agree to cause the necessary arrangements to be made and to be thereafter continued whereby, from time to time, the Bonds will be purchased from the owners thereof under the circumstances provided in Section 4.08 of the Indenture. In furtherance of the foregoing covenant of the Borrower, the Issuer, at the direction of the Borrower, has set forth in Section 4.08 of the Indenture the terms and conditions relating to such purchases and has set forth in Article VI and Article XIV of the Indenture the duties and responsibilities of the Tender Agent with respect to the purchase of Bonds and in Article XIV of the Indenture the duties and responsibilities of the Remarketing Agent with respect to the remarketing of Bonds. At the direction of the Borrower, J.P. Morgan Securities Inc. has been designated as the initial Remarketing Agent, the Trustee has been designated as the initial Tender Agent and the Borrower hereby authorizes and directs the Tender Agent and the Remarketing Agent to purchase, offer, sell and deliver Bonds in accordance with the provisions of Section 4.08 and Article XIV of the Indenture.

Without limiting the generality of the foregoing covenant of the Borrower, and in consideration of the Issuer having set forth in the Indenture the aforesaid provisions of Section 4.08 and Article XIV thereof, the Borrower covenants, for the benefit of the Owners of the Bonds, to pay, or cause to be paid, to the Tender Agent such amounts as shall be necessary to enable the Tender Agent to pay the purchase price of Bonds, all as more particularly described in the Indenture.

(b) The Issuer shall have no obligation or responsibility, financial or otherwise, with respect to the purchase or remarketing of Bonds or the making or continuation of arrangements therefor, except that the Issuer shall generally cooperate with the Borrower, the

Trustee, the Tender Agent and the Remarketing Agent as contemplated in Article XIV of the Indenture.

Section 10.02. Optional Purchase of Bonds . Subject to the limitations of the Indenture, the Borrower, at any time and from time to time, may furnish moneys to the Tender Agent accompanied by a notice directing that such moneys be applied to the purchase of Bonds to be purchased pursuant to Section 4.08 and Article XIV of the Indenture. Bonds so purchased shall be delivered to the Borrower in accordance with Section 14.05(a) of the Indenture.

Section 10.03. Determination of Interest Rate Periods . The Borrower may determine the duration and type of the Interest Rate Periods and certain other provisions relating to Interest Rate Periods as, and to the extent, set forth in Section 2.01 of the Indenture.

ARTICLE XI

MISCELLANEOUS

Section 11.01. Term of Agreement . This Agreement shall remain in full force and effect from the date hereof until the right, title and interest of the Trustee in and to the Trust Estate shall have ceased, terminated or become void in accordance with Article IX of the Indenture and until all payments required under this Agreement shall have been made.

Section 11.02. Notices . All notices, certificates, requests or other communications hereunder shall be sufficiently given and shall be deemed given when delivered or telecopied or if mailed, when mailed by registered mail, postage prepaid, addressed as follows:

If to the Issuer:

Maricopa County, Arizona

Pollution Control Corporation

c/o Ryley Carlock & Applewhite

One North Central Avenue, Suite 1200

Phoenix, Arizona 85004-4417

Attention: President

If to the Borrower:

El Paso Electric Company

100 North Stanton

El Paso, Texas 79901

Attention: Treasurer

If to the Trustee:

Union Bank, N.A.

120 S San Pedro Street, 4th Floor

Los Angeles, CA 90012

Attention: Corporate Trust Department

If to the Remarketing Agent:

J.P. Morgan Securities Inc.

383 Madison Avenue, 23rd Floor

New York, NY 10179

Attention: Ivan Naguit

If to the Tender Agent:

Union Bank, N.A.

120 S San Pedro Street, 4th Floor

Los Angeles, CA 90012

Attention: Bond Redemption

A copy of each notice, certificate, request or other communication given hereunder to the Issuer, the Borrower, the Trustee, the Bank, the Bond Insurer, if any, the Tender Agent or the Remarketing Agent shall also be given to the others. The Issuer, the Borrower, the Trustee, the Bank, the Tender Agent and the Remarketing Agent may, by notice given hereunder, designate further or different addresses to which subsequent notices, certificates, requests or other communications shall be sent. Such notice shall be given to all others listed above.

Section 11.03. Parties in Interest . This Agreement shall inure to the benefit of and shall be binding upon the Issuer, the Borrower, and their respective successors and assigns, and no other person, firm or corporation, other than the Owners, the Trustee, the Registrar or the Paying Agent under the Indenture, the Tender Agent, the Remarketing Agent, the Bank, and the Bond Insurer, if any, shall have any right, remedy or claim under or by reason of this Agreement; provided, however, that the obligations of the Borrower under Section 5.07 hereof shall inure to the benefit of the persons specified therein, and such obligations shall be enforceable by such persons as a third-party beneficiary; and subject to the limitation that any obligation of the Issuer created by or arising out of this Agreement shall not be a general debt of the Issuer, but shall be payable solely out of the revenues derived from this Agreement or the sale of the Bonds or income earned on invested funds as provided herein and in the Indenture.

Section 11.04. Extent of Covenants of the Issuer; No Personal Liability . All covenants, obligations and agreements of the Issuer contained in this Agreement or the Indenture shall be effective to the extent authorized and permitted by applicable law. No such covenant, obligation or agreement shall be deemed to be a covenant, obligation or agreement of any official, officer, agent, or employee of the Issuer in other than his official capacity, and neither the members of the Issuer’s Board of Directors nor any official executing the Bonds shall be liable personally on the Bonds or be subject to any personal liability or accountability by reason of the issuance thereof or by reason of the covenants, obligations or agreements of the Issuer contained in this Agreement or in the Indenture.

Section 11.05. Confirmation of Request by the Borrower . The Borrower hereby confirms that it has requested that the Issuer enter into the Indenture including, without limitation, all of the terms and provisions relating to the Bonds, the Trustee, Paying Agent, Registrar, Remarketing Agent and Tender Agent and designating the parties named therein as Trustee, Paying Agent, Registrar, Remarketing Agent and Tender Agent.

Section 11.06. Amendments . This Agreement may be amended only by written agreement of the parties hereto with the consent of the Bank, if any, the Bond Insurer, if any, or the provider of any other Credit Facility, for so long as the Credit Facility is in effect, subject to the limitations set forth herein and in the Indenture.

Section 11.07. Counterparts . This Agreement may be executed in any number of counterparts, each of which, when so executed and delivered, shall be an original; but such counterparts shall together constitute but one and the same Agreement.

Section 11.08. Severability . If any clause, provision or section of this Agreement shall, for any reason, be held illegal or invalid, such illegality or invalidity shall not affect any other provision of this Agreement, and this Agreement shall be construed and enforced as if such illegal or invalid provisions had not been contained herein.

Section 11.09. Governing Law; Venue . This Agreement shall be construed in accordance with and governed by the Constitution and laws of the State of Arizona.

Section 11.10. Statutory Notice . In accordance with the terms thereof, notice is hereby given of Title 38, Chapter 3, Section 38-511, Arizona Revised Statutes, which provides, among other things, that the State, its political subdivisions or any department or agency of either may, within three years after its execution, cancel any contract, without penalty or further obligation, made by said State, its political subdivisions, or any of the departments or agencies of either if any person significantly involved in initiating, negotiating, securing, drafting or creating the contract on behalf of said State, its political subdivisions, or any of the departments or agencies of either is, at any time while the contract or any extension of the contract is in effect, an employee or agent of any other party to the contract in any capacity or a consultant to any other party of the contract with respect to the subject matter of the contract.

Section 11.11. Bond Insurer as Third-Party Beneficiary . To the extent that this Agreement confers upon or gives or grants to a Bond Insurer any right, remedy, benefit, or claim under or by reason of this Agreement, the Bond Insurer is hereby explicitly recognized as being a third-party beneficiary hereunder and may enforce any such right, remedy, benefit or claim conferred, given or granted hereunder.

IN WITNESS WHEREOF, the Issuer has caused this Agreement to be executed in its name by its duly authorized officer, and the Borrower has caused this Agreement to be executed in its name all as of the date fast above written.


MARICOPA COUNTY, ARIZONA POLLUTION CONTROL CORPORATION

By:		/s/ Charles P. Dickinson, Jr.
Name:		Charles P. Dickinson, Jr.
Title:		Vice President

EL PASO ELECTRIC COMPANY

By:		/s/ Steven P. Busser
Name:		Steven P. Busser
Title:		VP- Treasurer & Chief Risk Officer

EXHIBIT A

DESCRIPTION OF THE PROJECT

The Project consists of the following systems at the Plant and, in each case, include related machinery, equipment and facilities:

Section 1.01 Condensate Demineralizer Resin Regeneration System . The Condensate Demineralizer Resin Regeneration System for each Unit recycles spent resin from the full flow condensate demineralizers, and is located in the Unit’s turbine building. This system recycles spent resin by chemical regeneration using acid and caustic treatment. Spent resin is transferred from the condensate demineralizers to the regeneration vessels where it is chemically regenerated and then transferred to the resin mix and hold vessel prior to transfer back to the demineralizer.

The resin regeneration system includes the following components and equipment:

(a) One resin separation cation regeneration vessel that is a rubber-lined, vertical-cylindrical tank, with internal baffles and distributors.

(b) One anion regeneration vessel that is a rubber-lined vertical-cylindrical tank, with internal baffles and distributors.

(c) One resin mix and hold vessel that is a rubber-lined, vertical-cylindrical tank, with internal baffle and distributor plate.

(d) One acid day-tank that is a vertical-cylindrical tank of 400-gallon capacity, with a hinged cover, desiccant air breather and gauge glass.

(e) Two motor-driven, diaphragm type, acid pumps with adjustable stroke.

(f) One caustic day-tank that is a plastic-lined vertical-cylindrical tank of 2500 gallon capacity, with a gauge glass and electric heaters.

(g) Two motor-driven centrifugal type caustic pumps.

(h) Waste collection tank.

(i) The portions of the central acid and caustic chemical supply systems that are dedicated solely to the Condensate Demineralizer Resin Regeneration System.

(j) Associated piping, valves, instrumentation and mechanical equipment.

Section 1.02 Steam Generator Blowdown Demineralizer Resin Regeneration System . The Steam Generator Blowdown Demineralizer Resin Regeneration System for each Unit recycles spent resin in the steam generator blowdown demineralizer and is located in the Unit’s

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turbine building. This system recycles spent resin by chemical regeneration using acid and caustic treatment. Spent resin is treated in place by injecting these chemicals directly into the steam generator blowdown demineralizer vessels that hold the resin. There are two mixed-bed demineralizer vessels operated in series for each Unit. This allows isolation of an individual vessel for chemical regeneration while blowdown flow is maintained in the other vessel.

The Steam Generator Blowdown Demineralizer Resin Regeneration System includes the following equipment and components:

(a) One acid day-tank that is a 30 inch diameter x 35 inch plasite lined tank.

(b) One acid supply package including acid supply pumps with associated piping and instrumentation.

(d) One caustic supply package including caustic supply pumps, instantaneous heater and associated piping and instrumentation.

(e) Waste collection equipment including sumps and piping.

(f) The portions of the central acid and caustic chemical supply systems that are dedicated solely to the Steam Generator Blowdown Demineralizer Resin Regeneration System.

(g) Associated piping, valves, instrumentation and mechanical equipment.

Section 1.03 Make-up Demineralizer Resin Regeneration System . The Make-up Demineralizer Resin Regeneration System serves all three Units and recycles spent resin from the make-up water demineralizer by chemical regeneration using acid and caustic treatment. Spent resin is treated in place by injecting chemicals directly into the make-up demineralizer vessels that hold the resin. There are three mixed bed demineralizers. The system is operated with two mixed beds in series with the third bed isolated for regeneration.

The Make-up Demineralizer Resin Regeneration System includes the following components and equipment:

(a) One acid regenerant day tank that is a 238 gallon unlined steel tank.

(b) One caustic regenerant day tank that is a fiberglass reinforced tank of 3,395 gallon capacity and contains an electric immersion heater.

(d) Two rinse water pumps.

(e) Two acid injection pumps.

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(f) Two caustic feed pumps.

(g) The portions of the central acid and caustic chemical supply systems that are dedicated solely to the Make-up Demineralizer Resin Regeneration System.

(h) Associated piping, valves, instrumentation and mechanical equipment.

Section 1.04 Decontamination Facilities . The Decontamination Facilities recycle solid waste consisting of contaminated tools and equipment by removing radioactive contamination from such items.

There are four Decontamination Facilities; one in the Radwaste Building for each Unit and a central facility for handling heavier tools and equipment that cannot be handled by the smaller individual Decontamination Facilities.

The central decontamination facility includes the following equipment:

(a) Ultrasonic cleaning system.

(b) Spray booth with pressure and steam washers.

(d) Decontamination tanks and sinks.

(e) Central decontamination building consisting of shielded walls, filtered ventilation systems, air lock, laydown areas and associated building services.

Each of the three Radwaste Building Decontamination Facilities includes the following equipment:

(a) Ultrasonic cleaning system.

(b) Spray booth with turntable, pressure and steam washers.

(d) The portion of each Radwaste Building housing Decontamination Facilities.

Section 1.05 Water Reclamation Facility . The Water Reclamation Facility will receive the sewage effluent from the Effluent Pipeline System and provide a multistage biochemical treatment process, including (a) reduction of ammonia and alkalinity by the use of trickling filters; (b) addition of lime slurry and polymer in first stage solid contact clarifiers to remove phosphate, magnesium, silica and some calcium; (c) addition of soda ash, polymer and carbon dioxide gas in second-stage solid contact clarifiers to remove calcium carbonate; (d) injection of sulfuric acid to reduce pH, polymer to aid in removal of suspended solids and chlorine to control biological growth; and (e) gravity filtration through graded media filters equipped for backwash. Sludge extracted from the backwash and solid contact clarifier and dewatered in the Water

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Reclamation Facility Water Pollution Control Facilities (which are not a part of the Series C Facilities) will be recalcined in a furnace provided for this purpose. The Water Reclamation Facility also includes related valves, piping, instrumentation, monitoring and other equipment.

Section 1.06 Sanitary Drainage and Treatment System (ST) . The sanitary drainage system collects and transports sanitary waste from Power Block facilities, Water Reclamation Facility ancillary buildings and construction facilities to the on-site sanitary treatment system.

The sanitary treatment system treats, clarifies, and returns the wastewater to the WRF for reuse. Equipment includes: a wet well, a sewage lift station, a surge tank, three package sewage treatment plants, a chlorine contact chamber, a sump with two sump pumps, and piping, valves, controls, and instrumentation.

Also included are related groundwater monitoring wells and equipment.

Section 1.07 Oil Waste and Nonradioactive Waste Systems (OW) . The oily waste system for each Unit collects, for processing and disposal, nonradioactive waste from normally nonradioactive areas where oil may be present.

(a) Turbine building - OW drains and collects waste from the equipment and floor drains. The waste is collected in one turbine building sump and two condenser area sumps. The waste is normally discharged from the sumps to the oil/water separator, oil/water separator sump, retention basin, and eventually to the evaporation pond.

(b) Control building and diesel generator building - OW drains and collects waste from the equipment and floor drains. The waste is discharged from two control room sumps and two diesel generator sumps to the oil/water separator, oil water separator sump, retention basin, and eventually to the evaporation pond.

Each oily waste system consists of floor drains, equipment drains, vertical drain risers, pipes, sumps, sump pumps, an oil/water separator, an oil/water separator sump and associated valves, instrumentation and controls. Also included are related groundwater monitoring wells and equipment.

Section 1.08 Chemical Waste Systems (CM) . The chemical waste system for each Unit consists of five subsystems:

(a) The radioactive chemical waste subsystem collects by gravity the corrosive radioactive waste from the chemical laboratory and decontamination stations and transfers the waste to the chemical drain tank. The chemical drain tank effluent is handled by the liquid radwaste system. This subsystem consists only of drains and piping.

(b) The cooling water waste subsystem collects by gravity the chemically treated cooling water from the auxiliary and radwaste building for disposal. The waste collects in the cooling water holdup tank and is pumped to the chemical waste neutralizer tank. From the neutralizer tank it is pumped to either the retention basin and evaporation pond or the liquid radwaste holdup tank. This subsystem consists of drains, a cooling water holdup tank, pumps, valves, piping, controls and instrumentation.

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(c) The condensate polishing demineralizer waste subsystem collects and neutralizes the potentially radioactive waste for disposal to the retention basin or the evaporation pond if it is nonradioactive, or discharges to the liquid radwaste system if it is radioactive. This subsystem consists of drains, sumps, sump pumps, chemical waste neutralizer tanks with agitators, transfer pumps, piping, valves, controls and instrumentation.

(d) The spent regenerate waste subsystem collects and neutralizes the rinse wastes from the makeup demineralizers for disposal. This subsystem consists of drains, sumps, sump pumps, valves, controls and instrumentation

(e) The chemical tank drains located in the yard areas are installed on concrete slabs with retaining curbs. Small sumps are provided to collect equipment leakage. In some locations portable pumps are used to dispose of the waste.

Also included is related groundwater monitoring equipment.

Section 1.09 Retention Basin (Sedimentation _Basin – J._Hook ). The retention basin collects and disposes (by evaporation) of yard drainage to prevent discharge of sedimentation to the Gila River and the groundwater regional aquifer well water system. The basin consists of earthen dikes and related groundwater monitoring wells and equipment.

Section 1.10 Evaporation Pond . The evaporation pond collects start-up flush water and cooling tower blowdown wastewater for disposal. This allows for disposal of settleable solids and pollutants on a rubberized liner which prevents the start-up and blowdown wastewater from entering the Gila River and the groundwater regional aquifer well water system. The present pond is 250 surface acres. The future ponds will comprise an additional 455 acres. This system includes the earthen dike surrounding the pond, a rubberized liner and related environmental monitoring wells and equipment.

Section 1.11 Water Reclamation Facility Pollution Control Systems . The Water Reclamation Facility (WRF) air and water pollution control facilities collect environmental pollutants to prevent their discharge to the environment and/or treat such pollutants prior to such discharge. This pollution control equipment includes:

(a) Air Pollution Control Facilities - Furnace stack gas pollution control components include the cyclone separator, lime dust return screw and rotary feeder, the precooler and venturi scrubber, the impingement tray separator, the induced draft fan, all associated ducting, piping valves, controls and instrumentation and all piping to supply process water to this equipment.

Lime and soda ash dust collection equipment includes dust collectors on each of the storage and supply silos and associated instrumentation and piping, and the filter separator at each unloading station and the associated piping and instrumentation.

(b) Water Pollution Control Facilities - Sludge handling and dewatering equipment includes:

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(i) Sludge pumps and associated piping, valves, controls, instrumentation and flush water piping at the first and second stage clarifiers;

(ii) Thickeners and associated structures and sludge pumps, tunnel sump pumps and associated piping, valves, controls, instrumentation, and flush water piping for the first and second stage thickeners, the waste thickeners, and the spent wastewater thickeners;

(iii) Centrifuges, piping, valves, controls, instrumentation, flush water piping, screw conveyors, and associated structures for the classification, dewatering, and waste centrifuges;

(iv) Also included is related groundwater monitoring equipment.

Section 1.12 Gaseous Radwaste Systems (GRS) . The gaseous radwaste system (GRS) for each Unit collects and processes potentially radioactive gases generated within the Plant so that offsite exposure is kept as low as reasonably achievable (ALARA). High activity waste gas, containing primarily hydrogen and nitrogen, is collected and stored in the oxygen-free system to guard against a rapid hydrogen/oxygen reaction and to permit decay of short-lived isotopes. Subsequent to decay, the decayed gases are sampled to determine their constituency and radioactivity content, filtered, monitored, and released at a controlled rate to the plant vent.

Each system is comprised of a surge tank, two prefilters, two waste gas compressors, three waste gas decay tanks, one discharge filter, discharge flow control valves and instrumentation and related radiation monitoring equipment.

Section 1.13 Solid Radwaste Systems (SRS) . The solid radwaste system (SRS) for each Unit handles radioactive waste consisting of trash, spent ion exchange resins, waste evaporator concentrates, chemical drain tank effluents, crud tank effluents, used filter cartridges, contaminated steam generator blowdown demineralizer resins and contaminated condensate polishing demineralizer resins. The wastes are solidified in the waste solidification system and stored in a shielded storage location while awaiting shipment off site.

Spent resin from the fuel pool cooling system, liquid radwaste system ion exchangers, the chemical and volume control system preholdup ion exchanger, deborating ion exchanger and purification ion exchangers are sluiced to the high activity spent resin tank or the low activity spent resin tank. The spent resin tanks hold the resin until it is ready -to be sluiced to the waste feed tank.

Radwaste from the crud tank, chemical drain tanks, spent resin tanks, and concentrates from the liquid radwaste system are piped directly into the waste feed tank.

Chemicals are added to the waste feed tank to adjust pH by the chemical addition storage and feed subsystem. The cement handling and storage subsystem delivers cement to the radwaste/cement mixing and filling subsystem.

The dry additive storage and feed subsystem delivers the dry chemical additive to the radwaste/cement mixing and filling subsystem.

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The radwaste/cement mixing and filling subsystem delivers radwaste from the waste feed tank, mixes the radwaste with cement and dry chemical additives and discharges the mixture to either a 55 gallon drum or disposable liner. This subsystem also provides for capping, decontamination, swiping and placement of solidified waste containers in a shielded storage location in the Unit, transportation and temporary storage of the solidified waste containers.

Spent filter cartridges are transported to the solidification system disposable liner or drum via a monorail, and remotely placed in a filter basket inside the container. The filter basket holds the filter cartridge in place while cement is poured around the filter cartridge encapsulating it.

Each system consists of a low activity spent resin tank and associated piping, a high activity spent resin tank and associated piping, a resin transfer/dewatering pump, a waste feed pump, a waste feed tank, a chemical addition pump, a chemical addition tank, a waste/cement processor, a 30-ton capacity overhead bridge crane, a container transfer cart and related switches, valves and instrumentation. The system also includes related radiation monitoring equipment.

Section 1.14 Future Interim on Site Low-level Radioactive Waste Storage Facility ((RS ). The function of the Future Interim On Site Low-Level Radioactive Waste Storage Facility (RS) is to provide the capabilities for handling and storing for up to a maximum of five (5) years, solidified wastes and dry active wastes, prior to shipment off site. Wastes temporarily held in the RS will be ready for shipment off site without further processing.

This facility consists of a non-seismic concrete building, a metal sided building, a truck bay and docking area, a control room, a container inspection and decontamination station, a truck washdown station, a remotely operated overhead crane, associated lighting, heating and ventilation systems, sumps, drains and related instrumentation and monitoring equipment and related access road and fencing.

Section 1.15 Liquid Radwaste Systems (LRS) . The major functions of the liquid radwaste system (LRS) for each Unit are to:

(a) Collect and store for processing radioactive or potentially radioactive waste fluids from the following sources external to the Liquid Radwaste System:

(i)

Containment radwaste sumps

(ii)

Radwaste building sumps

(iii)

Auxiliary building sumps

(iv)

Fuel building sumps

(v)

Decontamination facility (Unit One only)

(vi)

Radiochemistry lab

(vii)

Solid radwaste resin transfer/dewatering pump

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(viii)

Condensate polishing and blowdown demineralizer regenerant wastes

(ix)

Turbine building sumps

(x)

Auxiliary steam condensate receiver tank

(xi)

Chemical waste neutralizer tank

(xii)

Boric acid concentrator (BAC) bottoms

(xiii)

BAC distillate.

(b) Process revived wastes by filtration, absorption, ion exchange, and evaporation to obtain a maximum amount of high grade water for reuse in the reactor plant systems. This system also includes related radiation monitoring equipment.

Each system consists of three holdup tanks, two holdup pumps, chemical drain tanks and pumps, ion exchange prefilters, an evaporator package, mixed bed ion exchangers and an adsorption bed, recycle monitor tanks and pump, concentrate monitor tanks and pumps, a caustic tank and batch tank, an acid tank and batch tank, an anti-foam tank and pump, Y-strainers, a desiccant breather and associated instrumentation, switches, valves and piping.

Section 1.l6 Radwaste Buildings . The radwaste building for each Unit contains systems used for the processing of liquid, solid, and gaseous radioactive wastes generated in such Unit. The hot machine shop and the decontamination station which have not been financed are also housed in the radwaste building.

Each radwaste building is a three-story rectangular, seismic (category IIe), reinforced concrete structure. A series of interior reinforced concrete walls form compartments for housing waste-related equipment and provide radiation shielding. The solid waste solidification, storage, and disposal areas are serviced by a crane and monorail system. Each radwaste building is designed to be independent of any other structure and is supported on a rigid foundation mat.

Section 1.17 Filtration Equipment . The auxiliary building and the containment building for each Unit each contain normal exhaust air filtration units (AFU). Each AFU contains high efficiency particulate air (HEPA) filter banks and charcoal absorbers that have been included in the financing. The laundry and decontamination facility AFU contains HEPA filters that have been included in the financing. The function of the HEPA filter banks and charcoal absorbers is to maintain offsite exposure ALARA.

The condenser air removal system for each Unit contains HEPA filters, charcoal absorbers and related mechanical equipment necessary to remove radioactive contaminants from condenser vacuum pump discharges in order to maintain offsite exposure ALARA. Also included is related effluent monitoring equipment.

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Section 1.18 Radiation Laundry . The system is housed in the laundry and decontamination facility which is located near the radwaste building of Unit 1, and is -a common facility for three units. The system uses four “RADKLEEN” dry cleaning machines, especially designed by Health Physics Systems, Inc., for decontamination of cloth and rubber protective clothing, and utilizes Dupont’s Valclene dry cleaning solvent. The system consists of cleaning chamber, solvent tank, still drying fan, evaporator refrigeration compressor, and several filters. The system contains two separate filtration systems. One set of micron filters, arranged in the parallel banks, filters solvent before it enters the cleaning drum. The other set of filters, arranged in series, comprises a recirculation filtration system which continually removes contamination from solvent in the contaminated sump, then returns the solvent to the clean sump. The system does not require any cooling water, plumbing, or connected cooling towers.

Section 1.19 Spent Fuel Storage and Handling System (SFS) . There are three Fuel Buildings at this three unit plant, one for each unit. Each Fuel Building is a five-story reinforced concrete structure located adjacent to the Containment Building. Each Fuel Building is approximately 107 feet tall (above and below grade), 88 feet wide, and 124 feet long. Each Fuel Building contains one spent fuel storage pool, new fuel unloading and storage areas, spent fuel cask loading pit, fuel transfer canal, spent fuel cask washdown area, spent fuel pool equipment rooms, spent fuel equipment laydown area, new fuel container storage area and a railroad loading bay for spent fuel containers. The SFS for each Unit includes the spent fuel storage pool, spent fuel cask loading pit, spent fuel cask washdown area, spent fuel pool equipment rooms, spent fuel equipment laydown area and the railroad loading bay and the portion of the Fuel Building that houses such equipment.

Fuel assemblies are brought into the fuel handling building by truck in shipping containers containing two assemblies each. The assemblies are unloaded by means of the new fuel handling crane and stored on racks in the new fuel storage pit. When needed, the new fuel handling crane lifts the fuel assembly from the new fuel storage pit and carries it to a new fuel elevator, located at the containment building end of the transfer canal, which lowers the assembly to the floor of the transfer canal. The fuel handling machine then picks up the assembly and places it on an upending device (upender) in the transfer canal. The upender lowers the upright fuel assembly to a horizontal position and puts it on the fuel transfer car. The car carries the assembly through the transfer tube to the reactor containment building. Spent fuel is removed from the containment building and transferred back to the fuel handling building in the reverse process. Once inside the fuel handling building, the spent fuel handling machine places the spent fuel into high density storage racks in the spent fuel pool for storage. Spent fuel is stored in the spent fuel pools prior to shipment offsite. When spent fuel is to be shipped offsite a spent fuel cask is brought into the fuel handling building by rail. The cask is then cleaned. The cask handling bridge crane lifts the cask from the railcar into the cask loading pit and the lid of the cask is removed. The cask loading pit is then flooded and the spent fuel handling machine removes the fuel assembly to be shipped from the spent fuel pool storage rack and transfers them into the spent fuel cask in the cask loading pit. The cask is then capped and transferred by the bridge crane to the spent fuel cask washdown area where it is inspected, cleaned and decontaminated. The cask handling bridge crane then lifts the loaded cask to a railcar for shipment offsite.

Each SFS consists of the following components:

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(a) Spent Fuel Cask Handling Bridge Crane - This 150-ton crane is designed to lift and transport the spent fuel casks.

(b) Spent Fuel Pool (SFP) - The SFP is designed to contain 1329 spent fuel assemblies in high density storage racks after addition of inserts which have not been included in the financing. It is 41 feet 6 inches deep, 28 feet wide, and 39 feet long and contains approximately 352,000 gallons of borated water at operating level. The outer walls of the Fuel Building form two walls of the SF? and the SFP is an integral structural part of the Fuel Building. It is lined with stainless steel plate.

(c) Cask Loading Pit (CLP) - The CLP is designed to allow loading of spent fuel into a cask for shipment offsite. It is approximately 45 feet deep, 16 feet wide and 16 feet long. It is connected to the SFP by a short canal.

(d) Cask Washdown Area - This area is designed to washdown a loaded cask and inspect it prior to shipment.

(e) Spent Fuel Railroad Loading Bay - This area is 76 feet long by 25 feet wide and is used to bring railroad cars into the building in order to load the spent fuel casks on the railroad cars for off site shipment.

(f) Spent Fuel Equipment Laydown Area - This area is reserved for the spent fuel cask handling tools and crane rigging.

(g) Spent-Fuel Pool Cooling and Cleanup System - This system is designed to remove decay heat from the spent fuel assemblies and maintain clarity and chemistry of the spent fuel pool water. The system is composed of two subsystems, the spent fuel pool cooling system (SFPCS) and the spent fuel pool cleanup system. The SFPCS is a closed loop system consisting of two pumps, two heat exchangers, piping, valves, controls and instrumentation required to form a complete functional system. All equipment is located within the Fuel Building.

The spent fuel pool cleanup system is composed of two flow trains, each consisting of a strainer, pump, filter and a mixed bed ion exchanger. Either-one or both trains can be aligned to clean the water in the Spent Fuel Pool. The system also consists of the piping, valves, controls and instrumentation to form a complete functional system. The pumps are located in the Fuel Building with the remaining equipment contained in the Auxiliary Building. Only the equipment and piping related to the spent fuel pool cleanup system that is located in the Auxiliary Building itself is financed. No part of the Auxiliary Building is included as part of the SFS.

(h) Fuel Building Ventilation System - This system filters, purifies, and monitors normal building exhaust.

Section 1.20 Effluent Pipeline System . The Effluent Pipeline system is an underground sewage effluent conveyance pipeline system to convey sewage effluent from the Phoenix 91st Avenue and City of Tolleson water treatment plants to the water reclamation facility at the site of the Plant, and includes (a) approximately 28.5 miles of 114- and 96-inch diameter pipe operating by gravity flow from the 91st Avenue and Tolleson interfaces to the Hassayampa Pumping

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Station, (b) the Hassayampa Pumping Station, and (c) approximately 8 miles of 66-inch diameter pipe from the Hassayampa Pumping Station to the water reclamation facility.

Section 1.21 Containment Building . Each Unit has a Containment Building housing the reactor and reactor coolant system for such Unit.

Each Containment Building is a Seismic Category I pre-stressed concrete cylinder with a hemispherical dome. The base mat is a flat circular slab of reinforced concrete. The interior of the structure is lined with a continuous, welded steel plate one quarter inch thick. The Containment Building has an approximate inside diameter of 106 feet and an inside height of 206.5 feet. The base mat has an approximate diameter of 161 feet and a thickness of 10.5 feet. Wall thickness varies from approximately 4 feet in the vertical walls to approximately 3.5 feet at the apex of the dome.

Under the most severe of postulated loading conditions — including the combined effects of permanent loads, design basis Loss of Coolant Accident loads, and either the safe-shutdown earthquake or tornado loads — the Containment Building is designed to maintain its structural and leak-tight integrity. Together with isolation valves, penetration assemblies, and its continuous, welded-steel liner, the structure contains the released fission products and maintains a leak rate below the design leak rate levels.

The Containment Building is designed to provide long-term control of fission products following an accident.

Housed within the Containment Building and supported by the base mat are the reinforced concrete and structural steel internal structures which support the reactor and reactor coolant system. These internal structures, the reactor and reactor coolant system are not included in this financing.

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Exhibit 4.03

EXECUTION COPY

INDENTURE OF TRUST

between

MARICOPA COUNTY, ARIZONA POLLUTION CONTROL CORPORATION

and

UNION BANK, N.A.,

as Trustee

Dated as of March 1, 2009

Relating to

$37,100,000

Maricopa County, Arizona Pollution Control Corporation

Pollution Control Refunding Revenue Bonds

2009 Series B

(El Paso Electric Company Palo Verde Project)

TABLE OF CONTENTS


		Page

ARTICLE I DEFINITIONS
Section 1.01	Definitions	3
Section 1.02	Number and Gender	19
Section 1.03	Articles, Sections, Etc	19
Section 1.04	Content of Certificates and Opinions	19
Section 1.05	Findings	19

ARTICLE II THE BONDS
Section 2.01	Authorization and Terms of Bonds	20
Section 2.02	Execution of Bonds	33
Section 2.03	Transfer and Exchange of Bonds	34
Section 2.04	Bond Register	35
Section 2.05	Bonds Mutilated Lost Destroyed or Stolen	35
Section 2.06	Disposition of Cancelled Bonds	36
Section 2.07	CUSIP Number	36
Section 2.08	Other Obligations	36
Section 2.09	Temporary Bonds	36

ARTICLE III ISSUANCE OF BONDS
Section 3.01	Authentication and Delivery of Bonds	36
Section 3.02	Application of Proceeds of Bonds	37
Section 3.03	Payment of Principal and Interest	37

ARTICLE IIIA ARS PROVISIONS
Section 3A.01	Amendments with Conversion to Applicable ARS Rate	37
Section 3A.02	Payments with Respect to ARS	38
Section 3A.03	Calculation of All-Hold Rate	40
Section 3A.04	Notification of Rates, Amounts and Payment Dates	40
Section 3A.05	Adjustments with Respect to ARS Provisions	41
Section 3A.06	Maximum Bond Interest Rate, Non-Payment Rate	41
Section 3A.07	Auction Agent	42
Section 3A.08	Broker-Dealers	43
Section 3A.09	Provisions Relating to Auctions	43
Section 3A.10	Agreement of Holders	43
Section 3A.11	Changes in Auction Period or Auction Date	43
Section 3A.12	Conversion of Bonds to Applicable ARS Rate	45
Section 3A.13	Conversion to from ARS to Other Interest Rate Modes	45


ARTICLE IV REDEMPTION AND PURCHASE OF BONDS
Section 4.01	Redemption of Bonds	46
Section 4.02	Selection of Bonds to be Redeemed	49
Section 4.03	Notice for Redemption	49
Section 4.04	Partial Redemption of Bonds	50
Section 4.05	Effect of Redemption	51
Section 4.06	Payment of Redemption Price	51
Section 4.07	Bank Purchase Option	52
Section 4.08	Purchase of Bonds	54
Section 4.09	Delivery of Tendered Bonds	57
Section 4.10	Bonds Deemed Purchased	57
Section 4.11	Payment Procedure Pursuant to Bond Insurance Policy	57
Section 4.12	Purchase in Lieu of Redemption	59

ARTICLE V THE BOND FUND
Section 5.01	Creation of Bond Fund	59
Section 5.02	Deposits into Bond Fund	59
Section 5.03	Use of Moneys in Bond Fund	59
Section 5.04	Credit Facility	60
Section 5.05	Custody of Bond Fund; Withdrawal of Moneys	62
Section 5.06	Bonds Not Presented for Payment	62
Section 5.07	Moneys Held in Trust	62
Section 5.08	Payment to the Bank and to the Borrower	63

ARTICLE VI PURCHASE FUND
Section 6.01	Tender Agent	63
Section 6.02	Notice of Bonds Delivered for Purchase; Purchase of Bonds	64

ARTICLE VII INVESTMENTS
Section 7.01	Investments	66

ARTICLE VIII GENERAL COVENANTS
Section 8.01	Limited Obligation; Payment of Principal and Interest	66
Section 8.02	Performance of Agreements; Authority	67
Section 8.03	Maintenance of Corporate Existence; Compliance with Laws	67
Section 8.04	Enforcement of Borrower’s Obligations under the Agreement	67
Section 8.05	Further Assurances	67
Section 8.06	No Disposition or Encumbrance of Issuer’s Interests	67
Section 8.07	Trustee’s Access to Books Relating to Facilities	68
Section 8.08	Filing of Financing Statements	68
Section 8.09	Tax Covenant	68
Section 8.10	Notices by Trustee	68
Section 8.11	No Transfer of Credit Facility	69


ARTICLE IX DEFEASANCE
Section 9.01	Defeasance	69
Section 9.02	Survival of Certain Provisions	70

ARTICLE X DEFAULTS AND REMEDIES
Section 10.01	Events of Default	70
Section 10.02	Remedies	73
Section 10.03	Restoration to Former Position	73
Section 10.04	Bond Insurer’s Right to Direct Proceedings	74
Section 10.05	Limitation on Owners’ Right to Institute Proceedings	74
Section 10.06	No Impairment of Right to Enforce Payment	74
Section 10.07	Proceeding by Trustee Without Possession of Bonds	74
Section 10.08	No Remedy Exclusive	74
Section 10.09	No Waiver of Remedies	75
Section 10.10	Application of Moneys	75
Section 10.11	Severability of Remedies	76
Section 10.12	Waivers of Events of Default	77
Section 10.13	No Obligation of Issuer to Act	77

ARTICLE XI TRUSTEE, PAYING AGENT, REGISTRAR
Section 11.01	Acceptance of Trusts	77
Section 11.02	Trustee Not Responsible for Recitals, Maintenance, Insurance, etc	78
Section 11.03	Limitations on Liability	78
Section 11.04	Compensation, Expenses and Advances	79
Section 11.05	Notice of Events of Default	79
Section 11.06	Action by Trustee	80
Section 11.07	Good Faith Reliance	80
Section 11.08	Dealings in Bonds and with the Issuer and the Borrower	80
Section 11.09	Several Capacities	81
Section 11.10	Construction of Indenture	81
Section 11.11	Resignation of Trustee	81
Section 11.12	Removal of Trustee	81
Section 11.13	Appointment of Successor Trustee	81
Section 11.14	Qualifications of Successor Trustee	82
Section 11.15	Judicial Appointment of Successor Trustee	82
Section 11.16	Acceptance of Trusts by Successor Trustee	82
Section 11.17	Successor by Merger or Consolidation	82
Section 11.18	Standard of Care	83
Section 11.19	Notice of Event of Default	83
Section 11.20	Intervention in Litigation	83
Section 11.21	Paying Agent	83
Section 11.22	Qualifications of Paying Agent; Resignation; Removal	84
Section 11.23	Registrar	84
Section 11.24	Qualifications of Registrar; Resignation; Removal	85

iii


Section 11.25	Appointment of Co-Trustee	85
Section 11.26	Notices to Rating Agencies	86

ARTICLE XII EXECUTION OF INSTRUMENTS BY OWNERS AND PROOF OF OWNERSHIP OF BONDS
Section 12.01	Execution of Instruments Proof of Ownership	86

ARTICLE XIII MODIFICATION OF INDENTURE DOCUMENTS
Section 13.01	Limitations	87
Section 13.02	Modification without Consent of Owners	87
Section 13.03	Modification with Consent of Owners	88
Section 13.04	Effect of Supplemental Indenture	89
Section 13.05	Consent of the Borrower, the Bank and the Bond Insurer	89
Section 13.06	Amendment of Agreement without Consent of Owners	89
Section 13.07	Amendment of Agreement with Consent of Owners	90
Section 13.08	Issuance of Bonds Under Other Indentures: Recognition of Prior Pledges	90

ARTICLE XIV REMARKETING AGENT; TENDER AGENT; PURCHASE AND REMARKETING OF BONDS
Section 14.01	Remarketing Agent and Tender Agent	91
Section 14.02	Qualifications of Remarketing Agent and Tender Agent; Resignation; Removal	91
Section 14.03	Remarketing of Bonds; Notice of Interest Rates	92
Section 14.04	Delivery of Bonds	92
Section 14.05	Drawings on Credit Facility	94
Section 14.06	Delivery of Proceeds of Sale	94

ARTICLE XV MISCELLANEOUS
Section 15.01	Indenture to Bind and Inure to Benefit of Successors to Issuer	94
Section 15.02	Parties in Interest	94
Section 15.03	Severability	95
Section 15.04	No Personal Liability of Issuer Under Indenture	95
Section 15.05	Bonds Owned by the Issuer or the Borrower	95
Section 15.06	Governing Law	95
Section 15.07	Notices	95
Section 15.08	Non-Business Days	96
Section 15.09	Opinions	97
Section 15.10	Headlines; Table of Contents	97
Section 15.11	Execution in Several Counterparts	97
Section 15.12	Bond Insurer as Third-Party Beneficiary	97
Section 15.13	Additional Covenants of the Issuer to Bond Insurer	97
Section 15.14	Bank and Bond Insurer	97
Section 15.15	Statutory Notice	97


Exhibit A – Form of Bond		A-1
Exhibit B – Auction Procedures		B-1

W I T N E S S E T H:

WHEREAS, the Issuer was thereupon organized and incorporated in accordance with the provisions of the Act, and, on December 5, 1983, the Articles of Incorporation of the Issuer were

filed with the Arizona Corporation Commission, in accordance with Section 35-809 of the Act; and

WHEREAS, the Issuer has heretofore issued and sold its $37,100,000 aggregate principal amount of Pollution Control Refunding Revenue Bonds, 2005 Series C (El Paso Electric Company Palo Verde Project) (the “Prior Bonds”), the proceeds of which were used to refinance a portion of the costs of acquisition, construction, improvement or equipping of the Project; and

WHEREAS, certain findings and determinations relating to the Agreement and the Generating Station and the Project have heretofore been made and are set forth in this Indenture; and

ARTICLE I

DEFINITIONS

“Applicable ARS Rate” shall mean, with respect to ARS, the rate per annum at which interest accrues on the Bonds for any Auction Period.

“ARS Defaulted Interest” shall mean interest on any ARS which is payable but is not punctually paid or duly provided for on any ARS Interest Payment Date.

“ARS Interest Payment Date” shall mean, when used with respect to ARS in an Auction Period other than a Special Auction Period, the Business Day immediately following each Auction Period, and, when used with respect to a Special Auction Period of seven days or more but fewer than 183 days, the Business Day immediately following such Special Auction Period, and, when used with respect to a Special Auction Period of 183 days or more, each April 1 and October 1 and on the Business Day immediately following such Special Auction Period.