NES The Metropolitan Government of Nashville and Davidson County (Tennessee) $110,000,000 Electric System Revenue Bonds, 2004 Series A

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1 NEW ISSUE (Book Entry Only) OFFICIAL STATEMENT* RATINGS: Standard & Poor's: AA Fitch: AA (See "RATINGS" herein) In the opinion of Bond Counsel, under existing law, and assuming compliance with the tax covenant described herein, interest on the 2004 Series A is excluded from gross income for Federal income tax purposes and is not a specific preference item for purposes of the Federal alternative minimum tax. Furthermore, in the opinion of Bond Counsel, under existing law interest on the 2004 Series A Bonds is exempt from all state, county, and municipal taxation in the State of Tennessee, except franchise, excise, privilege, transfer, inheritance, gift and estate taxes. See, however, "Tax Exemption" herein regarding certain other tax considerations. NES The Metropolitan Government of Nashville and Davidson County (Tennessee) $110,000,000 Electric System Revenue Bonds, 2004 Series A Dated: June 1, 2004 Due: May 15 as shown on the inside cover The Metropolitan Government of Nashville and Davidson County (Tennessee) (the "Metropolitan Government") $110,000,000 Electric System Revenue Bonds, 2004 Series A (herein referred to as the 2004 Series A Bonds ) will be issued in fully registered form, without coupons, and, when issued, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ("DTC"). DTC will act as securities depository of the Series A Bonds. Individual purchases of the 2004 Series A Bonds will be made in book-entry form only. The 2004 Series A Bonds will be issued in the aggregate principal amount of $110,000,000and will be dated the first day of the calendar month in which the 2004 Series A Bonds are issued. The 2004 Series A Bonds will be issuable in denominations of $5000 or any integral multiple thereof. Interest on the 2004 Series A Bonds will be payable semiannually on May 15 and November 15 of each year, commencing November 15, The principal and redemption price shall be payable upon surrender of the 2004 Series A Bonds at the corporate trust office of SouthTrust Bank, Nashville, Tennessee (the "Fiscal Agent") by check or draft of the Fiscal Agent or any Paying Agent. Interest will be paid to the registered Holder on each interest payment date by check or draft of the Fiscal Agent, as Paying Agent, mailed to the registered Holders at the addresses shown on the registration books of the Metropolitan Government kept at the principal corporate trust office of the Fiscal Agent, as Bond Registrar. Payments of principal of, redemption price, if applicable, and interest on the 2004 Series A Bonds are to be made to purchasers by DTC through the Participants (as such term is herein defined). Purchasers will not receive physical delivery of 2004 Series A Bonds purchased by them. See "Description of the 2004 Series A Bonds--Book-Entry-Only System." The 2004 Series A Bonds are subject to optional redemption prior to maturity as described herein. The 2004 Series A Bonds are being issued to provide financing for a portion of the estimated costs to be incurred in connection with the cost of acquisition, expansion and improvement of the Metropolitan Government's Electric Distribution System as described herein. The 2004 Series A Bonds are limited obligations of the Metropolitan Government, payable from the Net Revenues of the Metropolitan Government's Electric Distribution System, subject and subordinate to the lien and pledge of the Senior Bonds (as defined herein) (provision for the payment of which has been made pursuant to certain escrow arrangements from the proceeds of the 1985 Series A Bonds) and on a parity with the lien and pledge established by the Bond Resolution in favor of certain of the Metropolitan Government's Outstanding Electric System Revenue Bonds as described herein and any additional bonds issued under the Bond Resolution and any Bank Notes, all as more fully described herein. The 2004 Series A Bonds are not general obligations of the Metropolitan Government, and no Holder of the 2004 Series A Bonds shall ever have the right to compel the Metropolitan Government to exercise its taxing power to pay principal, redemption price of or interest on the 2004 Series A Bonds. Payment of the principal of and interest on certain maturities of the 2004 Series A Bonds when due will be insured by a financial guaranty insurance policy to be issued by Ambac Assurance Corporation simultaneously with the delivery of the 2004 Series A Bonds. The 2004 Series A Bonds are offered when, as and if issued by the Metropolitan Government, subject to approval as to legality by Boult, Cummings, Conners & Berry, PLC, Nashville, Tennessee, Bond Counsel. Certain legal matters will be passed upon for the Electric Power Board of the Metropolitan Government (the Board ) by Eugene W. Ward, Esq., General Counsel to the Board, and for the Underwriters by their counsel, Manson, Jones & Associates, Nashville, Tennessee. Certain other legal matters will be passed upon for the Metropolitan Government by Karl F. Dean, Director of Law. It is expected that the 2004 Series A Bonds will be available for delivery in New York, New York, on or about June 30, UBS Financial Services Inc. Wiley Bros.-Aintree Capital, LLC Morgan Keegan & Company, Inc. Merrill Lynch & Co. Harvestons Securities, Inc. * Dated June 16, 2004

2 2004 Series A Bonds $68,690,000 Serial Interest Bonds Maturity 2004 Series A Interest May 15 Principal Amount Rate Yield 2018* $ 5,260, % 4.60% 2018* 1,060, ,630, * 6,965, * 7,315, ,680, ,060, * 4,155, ,000, * 8,570, ,995, *$41,310,000 Term Bonds due May 15, 2029, Interest Rate 5.00%,Yield 5.15% (Accrued interest to be added) * Insured by Ambac

3 This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of 2004 Series A Bonds in any jurisdiction to any person to whom it is unlawful to make such offer, solicitation or sale in such jurisdiction. No dealer, broker, salesman or any other person has been authorized to give any information or make any representation, other than those contained herein, in connection with the offering of the 2004 Series A Bonds, and if given or made, such information or representation must not be relied upon. The information and expressions of opinion herein are subject to change without notice and neither the delivery of this Official Statement nor the sale of any of the 2004 Series A Bonds implies that there has been no change in the affairs of the Metropolitan Government, the Board or the other matters described herein since the date hereof. The information set forth herein has been provided by the Metropolitan Government and the Board and by other sources believed to be reliable, but it is not guaranteed as to its accuracy or completeness and is not to be construed as a representation by the Underwriters. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE 2004 SERIES A BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

4 THE METROPOLITAN GOVERNMENT OF NASHVILLE AND DAVIDSON COUNTY (TENNESSEE) Honorable Bill Purcell Metropolitan Mayor ELECTRIC POWER BOARD Betty Chiles Nixon, Chairman Marilyn Robinson, Vice Chairman William F. Blaufuss Mary Jo Price Justin Wilson Management Donald Kohanski, President and Chief Executive Officer C. Allen Bradley, Sr., Executive Vice President and Chief Operating Officer Decosta E. Jenkins, Senior Vice President and Chief Financial Officer Eugene W. Ward, General Counsel Financial Advisor Public Financial Management, Inc. Memphis, Tennessee Auditors Deloitte & Touche, LLP Nashville, Tennessee Fiscal Agent SouthTrust Bank Nashville, Tennessee Bond Counsel Boult, Cummings, Conners & Berry, PLC Nashville, Tennessee

5 TABLE OF CONTENTS Introduction...1 Financing Plan...3 Description of the 2004 Series A Bonds...3 Security for the Bonds...7 The Ambac Insurance Corporation Policy...10 Construction and Financing Program...13 Sources and Uses of Funds...14 Parity Debt Obligations...15 The Electric Power Board...16 The Electric Distribution System...21 Management's Discussion and Analysis of Operations...36 Selected Financial Data...40 The Tennessee Valley Authority...46 Litigation and Other Proceedings...46 Tax Exemption...47 Approval of Legal Proceedings...48 Underwriting...48 Continuing Disclosure...48 Independent Auditors...48 Financial Advisor...49 Ratings...49 Miscellaneous...49 Appendix A - Electric Power Board of the Metropolitan Government of Nashville and Davidson County, Financial Statements for the Years Ended June 30, 2003 and 2002 and Independent Auditors' Report...A Appendix B - Electric Power Board of the Metropolitan Government of Nashville and Davidson County, Financial Statements for the Nine Months Ended March 31, 2004 Unaudited... B Appendix C - The Metropolitan Nashville and Davidson County Area Economic and Demographic Information... C Appendix D - Summary of Certain Provisions of the Bond Resolution...D Appendix E - Proposed Form of Opinions of Bond Counsel... E Appendix F - Proposed Form of Continuing Disclosure Agreement...F Appendix G Proposed Form of Financial Guaranty Insurance Policy...G

6 OFFICIAL STATEMENT Relating to THE METROPOLITAN GOVERNMENT OF NASHVILLE AND DAVIDSON COUNTY (TENNESSEE) $110,000,000 Electric System Revenue Bonds, 2004 Series A INTRODUCTION This Official Statement (including the cover page hereof and the Appendices hereto) is furnished by The Metropolitan Government of Nashville and Davidson County (Tennessee) (the "Metropolitan Government") to provide information concerning the offering of the Electric System Revenue Bonds, 2004 Series A (the "2004 Series A Bonds ) and the Metropolitan Government and the Electric Power Board of the Metropolitan Government (the "Board"). As described below under "Financing Plan Series A Bonds," the 2004 Series A Bonds are being issued for the principal purpose of providing financing for a portion of the estimated costs to be incurred in connection with the cost of acquisition, expansion and improvement of the Metropolitan Government's Electric Distribution System (the "Electric Distribution System" or the "Electric System"). Capitalized terms used herein and not otherwise defined are defined in Appendix D hereto. The 2004 Series A Bonds are being issued by the Metropolitan Government under and pursuant to Chapter 34, Title 7, Tennessee Code Annotated, Sections through , as amended (the "Act"), the Charter of the Metropolitan Government (the "Metropolitan Charter") which was approved by referendum on June 28, 1962, as amended, and a resolution of the Metropolitan Government adopted on November 5, 1985, entitled "Electric System Revenue Bond Resolution" as amended and supplemented (the "Bond Resolution"), including specifically, as supplemented by the Twentieth Supplemental Electric System Revenue Bond Resolution adopted by the Metropolitan Government on May 18, 2004 (the "Supplemental Resolution"). The 2004 Series A Bonds and all other bonds heretofore and hereafter issued under and pursuant to the Bond Resolution and Outstanding are hereinafter referred to as the "Bonds". 1

7 The 2004 Series A Bonds are secured on a parity with all other Bonds heretofore and hereafter issued under the Bond Resolution. In addition to the 2004 Series A Bonds which will be Outstanding under the Bond Resolution, on the date of delivery there will remain outstanding $15,735,000 aggregate principal amount of the Metropolitan Government's Electric System Revenue Bonds, 1992 Series B (the "1992 Series B Bonds"); $46,780,627 aggregate principal amount of the Metropolitan Government's Electric System Revenue Bonds, 1996 Series A (the "1996 Series A Bonds"), $86,705,380 aggregate principal amount of the Metropolitan Government's Electric System Revenue Bonds, 1998 Series A (the "1998 Series A Bonds"), $58,300,000 aggregate principal amount of the Metropolitan Government's Electric System Revenue Refunding Bonds, 1998 Series B (the "1998 Series B Bonds") (the 1998 Series A Bonds and the 1998 Series B Bonds are sometimes referred to herein collectively as the 1998 Series A and B Bonds ), $114,070,000 aggregate principal amount of the Metropolitan Government's Electric System Revenue Bonds, 2001 Series A (the "2001 Series A Bonds") and $18,400,000 aggregate principal amount of the Metropolitan Government's Electric System Revenue Refunding Bonds, 2001 Series B (the "2001 Series B Bonds") (the 2001 Series A Bonds and the 2001 Series B Bonds are sometimes referred to herein collectively as the 2001 Series A and B Bonds ). In 1985, the Metropolitan Government issued its Electric System Revenue Bonds, 1985 Series A to, among other things, provide for the payment of the Metropolitan Government's Electric Power Revenue Bonds, Series L, M and N, inclusive (the "Senior Bonds"), which Senior Bonds were issued from time to time under Ordinance No of the City of Nashville, enacted and approved June 21, 1939 and thereafter ratified, confirmed and contained as an ordinance of the Metropolitan Government, as supplemented (the "1939 Bond Ordinance"). The 2004 Series A Bonds and all other Bonds are limited obligations of the Metropolitan Government payable solely from and secured as to the payment of the principal and Redemption Price thereof, and interest thereon, in accordance with their terms, and the terms of the Bond Resolution, solely by a pledge of the Pledged Funds, which pledge is subject and subordinate with respect to the revenues and the funds pledged under the 1939 Bond Ordinance to the lien and pledge created in the 1939 Bond Ordinance in favor of the Senior Bonds and the rights of the holders of the Senior Bonds thereunder. As of May 31, 2004, there is $8.665 million of outstanding senior debt in three series, Series L, M, and N. These series have been economically defeased and have a final maturity of July 1, Pledged Funds are defined in the Bond Resolution to include, among other sources, the Net Revenues of the Electric Distribution System. The pledge of and lien on the Net Revenues in favor of the Bonds established by the Bond Resolution ranks on a parity with the pledge established in the Bond Resolution in favor of the Bank Notes, if any. The Metropolitan Government has covenanted in the Bond Resolution not to issue any additional bonds under the Bond Ordinance. See "SECURITY FOR THE BONDS" herein. The 2004 Series A Bonds are not general obligations of the Metropolitan Government, and no Holder of the 2004 Series A Bonds shall ever have the right to compel the Metropolitan Government to exercise its taxing power to pay the principal or Redemption Price of or interest on the 2004 Series A Bonds. 2

8 FINANCING PLAN The proceeds of the sale of the 2004 Series A Bonds, together with other available funds, will be used for the principal purpose of providing financing for a portion of the costs incurred in connection with the acquisition, expansion and improvement of the Electric System paid by the Board from April 1, 2004 to the date of issuance of the 2004 Series A Bonds and those improvements to the System scheduled to be paid over the three years after the date of issuance of the 2004 Series A Bonds (the "2004 System Improvements"). For a discussion of the Board's construction program and additional financing requirements for the Electric System, see "Construction and Financing Programs" herein. The Metropolitan Government will use the remaining proceeds of the 2004 Series A Bonds to fund the Debt Service Reserve Requirement with respect to the 2004 Series A Bonds, if needed, and to pay costs and expenses of issuing the 2004 Series A Bonds. DESCRIPTION OF THE 2004 SERIES A BONDS Authorization and Purpose The 2004 Series A Bonds are to be issued pursuant to the Act, the Metropolitan Charter and the Bond Resolution for the primary purpose of providing the funds necessary to finance a portion of the 2004 System Improvements. (See "Construction and Financing Program" herein.) Principal Amount, Interest, Maturity and Date The 2004 Series A Bonds will be issued as fully registered bonds in the aggregate principal amount of $ 110,000,000 and will be initially dated June 1, Interest on the 2004 Series A Bonds will be payable semiannually on May 15 and November 15 of each year, commencing November 15, The 2004 Series A Bonds will mature on the dates set forth on the inside cover page hereof. Redemption Optional Redemption The 2004 Series A Bonds are subject to redemption at the option of the Metropolitan Government, on or after May 15, 2014, in whole or in part, without premium, at 100% of the outstanding principal amount to be redeemed plus accrued interest to the redemption date. 3

9 Mandatory Redemption from Sinking Fund Installments The 2004 Series A Bonds maturing May 15, 2029 (the "2029 Term Bonds") are subject to mandatory redemption, in part, on each Sinking Fund Installment due date for the 2029 Term Bonds, at a redemption price equal to the principal amount thereof from the Sinking Fund Installments specified below. The following shall be the Sinking Fund Installments for the 2029 Term Bonds. Such Sinking Fund Installments shall be due on May 15 of each of the years set forth in the following table in the respective amounts set forth opposite such years: Year Principal Amount 2027 $13,105, $13,760, ** $14,445,000 **Maturity If less than all of the 2004 Series A Bonds are to be so redeemed, the Board may select the maturity or maturities to be redeemed. If less than all of the 2004 Series A Bonds of any maturity are to be redeemed, the particular Bonds of such maturity or portions thereof to be redeemed shall be selected at random by the Fiscal Agent in such manner as the Fiscal Agent in its discretion may deem fair and appropriate. The portion of any Bond of a denomination of more than $5,000 to be redeemed will be in the principal amount of $5,000 or an integral multiple thereof, and in selecting portions of such Bonds for redemption, the Fiscal Agent will treat each such Bond as representing that number of Bonds of $5,000 denomination which is obtained by dividing the principal amount of such Bond by $5,000. Notice of Redemption Notice of the redemption of 2004 Series A Bonds shall be mailed by the Fiscal Agent, postage prepaid, not less than twenty-five days prior to the redemption date, to the registered Holders of any 2004 Series A Bonds or portions of 2004 Series A Bonds to be redeemed, at their last addresses appearing upon the registration books of the Metropolitan Government, but failure to give any such notice by mail or any defect in any such notice shall not affect the validity of the proceedings for the redemption of any other 2004 Series A Bonds. Any notice that is mailed in the manner described in the preceding sentence shall be conclusively presumed to have been duly given, whether or not the registered Holder receives such notice. Effect of Redemption If, on the redemption date, moneys for the redemption of all the 2004 Series A Bonds to be redeemed, together with accrued interest to the redemption date, shall be held by the Paying 4

10 Agents so as to be available therefor on the redemption date and if notice of redemption shall have been given as described above, the 2004 Series A Bonds or portions of 2004 Series A Bonds so called for redemption shall become due and payable at the applicable Redemption Price plus accrued interest; the interest on such 2004 Series A Bonds or portions of such 2004 Series A Bonds shall cease to accrue; the 2004 Series A Bonds or portions of Bonds so called for redemption shall cease to be entitled to any benefit or security under the Bond Resolution; and the registered Holders of such 2004 Series A Bonds or portions of such 2004 Series A Bonds shall have no rights in respect thereof except to receive payment of the Redemption Price thereof plus accrued interest and to receive 2004 Series A Bonds for any unredeemed portion of 2004 Series A Bonds. Transfer and Exchange The 2004 Series A Bonds shall be transferable only upon the registration books of the Metropolitan Government, which shall be kept for such purpose at the principal corporate trust office of the Bond Registrar, by the registered Holder thereof or by his attorney duly authorized in writing, upon surrender thereof together with an instrument of assignment duly executed by the registered Holder or his duly authorized attorney, in form satisfactory to such Bond Registrar. The 2004 Series A Bonds, upon surrender to the Bond Registrar, may, at the option of the registered Holder thereof, be exchanged for an equal aggregate principal amount of registered 2004 Series A Bonds of any Authorized Denomination or Denominations. The Metropolitan Government or the Bond Registrar may make a charge for every such exchange or transfer of 2004 Series A Bonds sufficient to reimburse it for any tax, fee or other governmental charge required to be paid, but no other charge shall be made to any registered Holder for the privilege of exchanging or transferring 2004 Series A Bonds. Book-Entry-Only System DTC will act as securities depository for the 2004 Series A Bonds. The ownership of one fully registered Bond for each maturity, in the aggregate principal amount of such maturity, will be registered in the name of Cede & Co. as nominee for DTC. DTC is a limited-purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934, as amended. DTC was created to hold securities of its participants (the "Participants") and to facilitate the clearance and settlement of securities transactions among Participants in such securities through electronic book-entry changes in accounts of the Participants, thereby eliminating the need for physical movement of securities certificates. Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations, some of whom (and/or their representatives) own DTC. Access to the DTC system is also available to others such as banks, brokers, dealers and 5

11 trust companies that clear through or maintain a custodial relationship with a Participant, either directly or indirectly (the "Indirect Participants") Purchase of ownership interests in the 2004 Series A Bonds may be made by or through a Participant or Indirect Participant. Such ownership interests will be recorded through the records of the Participant or Indirect Participant, whose interest will be recorded on a computerized book-entry system operated and maintained by DTC. Each purchaser of a 2004 Series A Bond (the "Beneficial Owner") is expected to receive a written confirmation of its purchase from a Participant or Indirect Participant which provides certain details concerning the 2004 Series A Bonds acquired. Beneficial Owners will not receive certificates representing their ownership interest in the 2004 Series A Bonds, except as provided below. Transfers of ownership interests will also be accomplished by book entries made by DTC and, in turn, by the Participants who act on behalf of the Indirect Participants and the Beneficial Owners. So long as Cede & Co. is the registered owner of the 2004 Series A Bonds, as nominee of DTC, references to the Bondholders or registered owners of the 2004 Series A Bonds shall mean Cede & Co. and shall not mean the Beneficial Owners of the 2004 Series A Bonds. Principal and interest payments on the 2004 Series A Bonds will be made to DTC or its nominee, Cede & Co. as registered owner of the 2004 Series A Bonds. Upon receipt of moneys, DTC's current practice is to immediately credit the accounts of the Participants in accordance with their respective holdings shown on the records of DTC. Payments by Participants and Indirect Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is now the case with municipal securities held for the accounts of customers in bearer form or registered in "street name", and will be the responsibility of such Participants or Indirect Participants and not of DTC or the Metropolitan Government, subject to any statutory and regulatory requirements as may be in effect from time to time. The Metropolitan Government will recognize DTC or its nominee as the Bondholder for all purposes, including notices. Conveyance of notices and other communications by DTC to Participants, by Participants to Indirect Participants, and by Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory and regulatory requirements as may be in effect from time to time. Whenever 2004 Series A Bonds are to be redeemed, the Fiscal Agent will give notice to DTC and DTC will determine the number of 2004 Series A Bonds to be redeemed from the account of each Participant and each Indirect Participant. The 2004 Series A Bonds to be redeemed will be determined in accordance with the then applicable established random lot procedures of the Participants and the Indirect Participants. Accordingly, a Participant or Indirect Participant may determine to redeem 2004 Series A Bonds from the account of some owners (which could include such Participant or Indirect Participant) without redeeming 2004 Series A Bonds from the account of other owners. In the event that (a) DTC determines to discontinue providing its service with respect to the 2004 Series A Bonds by giving notice to the Metropolitan Government and discharging its 6

12 responsibilities with respect thereto under applicable law, and the Metropolitan Government fails to appoint a successor securities depository for the 2004 Series A Bonds, or (b) the Metropolitan Government determines to discontinue the system of book-entry transfers through DTC (or a successor securities depository), then 2004 Series A Bond certificates are required to be delivered in registered form to the Beneficial Owners. Each Beneficial Owner, upon delivery of certificates held in the Beneficial Owner's name, will become the holder of that portion of the 2004 Series A Bonds. Unless otherwise noted, the information contained in the preceding paragraphs of this subsection "Book-Entry-Only System" has been extracted from a report prepared by DTC entitled "Book-Entry-Only Municipals." The Metropolitan Government makes no representation as to the completeness or the accuracy of such information or as to the absence of material adverse changes in such information subsequent to the date hereof. THE METROPOLITAN GOVERNMENT WILL NOT HAVE ANY RESPONSIBILITY OR OBLIGATION TO PARTICIPANTS, TO INDIRECT PARTICIPANTS OR TO ANY BENEFICIAL OWNER WITH RESPECT TO (I) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC, ANY PARTICIPANT, OR ANY INDIRECT PARTICIPANT; (II) THE PAYMENT BY DTC OR ANY PARTICIPANT OR INDIRECT PARTICIPANT OF ANY AMOUNT WITH RESPECT TO THE PRINCIPAL OF, OR PREMIUM, IF ANY, OR INTEREST ON THE 2004 SERIES A BONDS; (III) ANY NOTICE WHICH IS PERMITTED OR REQUIRED TO BE GIVEN TO PARTICIPANTS, INDIRECT PARTICIPANTS OR BENEFICIAL OWNERS; OR (IV) ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY DTC AS BONDHOLDER. Pledge Under the Bond Resolution SECURITY FOR THE BONDS The 2004 Series A Bonds constitute Bonds as defined in the Bond Resolution. All Bonds are limited obligations of the Metropolitan Government payable solely from and secured as to the payment of the principal and Redemption Price thereof and interest thereon, in accordance with their terms and the terms of the Bond Resolution, solely by a pledge of the Pledged Funds, which pledge is subject and subordinate with respect to the revenues and funds pledged under the Bond Ordinance to the lien and pledge created in the Bond Ordinance in favor of the Senior Bonds (provision for the payment of which has been made pursuant to certain escrow arrangements from the proceeds of the 1985 Series A Bonds) and the rights of the holders of the Senior Bonds thereunder. Pledged Funds are defined in the Bond Resolution to be the Net Revenues of the Electric Distribution System and the moneys and Investment Securities held in all funds and accounts established under the Bond Resolution (other than the Rate Stabilization Account), and subject to application as provided in the Bond Resolution. The pledge of the lien on the Net Revenues in favor of the Bonds established by the Bond Resolution ranks on a parity with the pledge established in the Bond Resolution in favor of the Bank Notes, if any. 7

13 The Bonds are not general obligations of the Metropolitan Government, and no Holder of the Bonds shall ever have the right to compel the Metropolitan Government to exercise its taxing power to pay the principal or Redemption Price of or interest on the Bonds. Rate Covenant The Bond Resolution provides that the Board shall at all times establish and collect rates, fees and charges for the use or the sale of the output, capacity or service of the Electric Distribution System as shall be required in order that in each fiscal year the Net Revenues, together with other available Revenues plus the amount of any transfers from the Rate Stabilization Account to the Operating Fund during such fiscal year minus the amounts, if any, required by the Bond Resolution to be deposited from Net Revenues into the Debt Service Reserve Account, the Subordinated Debt Fund, the Reserve and Contingency Fund and the General Account during such fiscal year shall equal at least (i) the Aggregate Debt Service on the Bonds for such fiscal year, (ii) the Debt Service, if any, on the Bank Notes and any Credit/Liquidity Facility Obligations for such fiscal year, and (iii) the deposits made into the Rate Stabilization Account during such fiscal year, and in any event, as shall be required, together with other available funds, to pay or discharge all other indebtedness, charges or liens whatsoever payable out of the Revenues under the Bond Resolution. Promptly upon any material change in the circumstances which were contemplated at the time such rates, fees and charges were most recently reviewed, but not less frequently than once in each fiscal year, the Board shall review the rates, fees and charges so established and shall promptly revise such rates, fees and charges as necessary to comply with the foregoing requirements, provided that such rates, fees and charges shall in any event produce moneys sufficient to enable the Metropolitan Government and the Board to comply with all their covenants under the Bond Resolution. The Act requires the Metropolitan Government to prescribe and collect reasonable rates, fees or charges for the services, facilities and commodities of the Electric Distribution System, and revise such rates, fees or charges from time to time whenever necessary so that the Electric Distribution System shall be and always remain self-supporting. The rates, fees and charges prescribed shall be such as will produce revenue at least sufficient (a) to pay when due all Bonds and interest thereon, for the payment of which the Revenues of the Electric Distribution System is or shall have been pledged, charged or otherwise encumbered, including reserves therefor, and (b) to provide for all expenses of operation and maintenance of the Electric Distribution System, including reserves therefor. Pursuant to the Metropolitan Charter, the Metropolitan Government has vested in the Board exclusive authority to prescribe and collect rates and charges for the Electric Distribution System obligations or indebtedness. Debt Service Reserve Account The Bond Resolution requires the Metropolitan Government to accumulate and maintain in the Debt Service Reserve Account an amount equal to the Debt Service Reserve Requirement. 8

14 Amounts in the Debt Service Reserve Account are to be applied to make up any deficiencies in the Debt Service Account. In the event that there shall be any Debt Service Reserve Account Deficiency, the Debt Service Reserve Account is required to be restored from the General Reserve Fund, the Reserve Contingency Fund and the Subordinated Debt Fund, in that order. Amounts in the Debt Service Reserve Account in excess of the Debt Service Reserve Requirement (after taking into account any surety bond, insurance policy or letter of credit deposited therein pursuant to the Bond Resolution) shall be deposited in the Revenue Fund. After the issuance of the 2004 Series A Bonds, the Debt Service Reserve Account for Bonds issued under the Bond Resolution will be fully funded at a total of $37,494, Additional Bonds Under the Bond Resolution, the Metropolitan Government may issue Bonds ("Additional Bonds") in addition to the 2004 Series A Bonds, the 1992 Series B Bonds, the 1996 Series A Bonds, the 1998 Series A and B Bonds and the 2001 Series A and B Bonds and ranking on a parity therewith as to security and payment for the purpose of paying all or a portion of the Cost of Acquisition and Construction of any part of the Electric Distribution System. Neither the Metropolitan Government nor the Board shall issue or cause to be issued any Additional Bonds unless an authorized representative of the Board (the "Authorized Board Representative"), files with the Fiscal Agent either (i) a certificate stating that the amount of Net Revenues during any twelve (12) consecutive months selected by the Board of the eighteen (18) months immediately preceding the issuance of said Additional Bonds were not less than one hundred twenty-five percent (125%) of the greatest amount of debt service scheduled to occur in any future fiscal year, with such debt service to be calculated to be the sum of (A) Adjusted Aggregate Debt Service in any future fiscal year on the then Outstanding Bonds and the Additional Bonds then proposed to be issued and (B) the debt service, if any, in any future fiscal year on any Bank Notes and any Credit/Liquidity Facility Obligations; provided, that, in the event that any adjustment in the rates, fees and charges collected by the Board for the services of the Electric Distribution System shall be effective at any time on or prior to the date of authentication and delivery of the Bonds then proposed to be issued, the Authorized Board Representative shall reflect in his certificate the Net Revenues he estimates would have been collected in such twelve month period if such new rates, fees and charges had been in effect for the entire twelve month period, or (ii) a certificate of a consulting engineer (the "Consulting Engineer") stating that the Net Revenues for each of the full Fiscal Years in the period specified in the next sentence, as such Net Revenues are estimated by the Consulting Engineer in accordance with the Bond Resolution, shall be at least equal to one hundred forty percent (140%) of the sum of (A) the Adjusted Aggregate Debt Service and (B) the debt service, if any, on any Bank Notes and any Credit/Liquidity Facility Obligations for each such fiscal year, as estimated by the Consulting Engineer in accordance with the Bond Resolution. The period to be covered by such certificate of the Consulting Engineer shall be the period beginning with the fiscal year in which the series of Additional Bonds is authenticated and delivered and ending with the later of (a) the fifth full fiscal year after such date of authentication and delivery or (b) the first full fiscal year in which less than 10% of the interest coming due on Bonds estimated by the Consulting Engineer to be 9

15 Outstanding is to be paid from deposits made from Bond proceeds in the Debt Service Account in the Debt Service Fund. Under the Bond Resolution, the Metropolitan Government may issue bonds ("Refunding Bonds") in addition to the 1992 Series B Bonds, 1996 Series A Bonds, the 1998 Series A and B Bonds, the 2001 Series A and B Bonds, the 2004 Series A Bonds and the Additional Bonds and ranking on a parity therewith as to security and payment for the purpose of refunding: (i) any Outstanding Bonds; (ii) any subordinate debt; (iii) any Bank Notes; and (iv) any Credit/Liquidity Facility Obligations. Refunding Bonds issued to refund any Outstanding Bonds may be issued without complying with any earnings test whatsoever. Refunding Bonds issued for any other purpose shall comply with the earnings test described in the immediately preceding paragraph. For a more extensive discussion of the terms and provisions of the Bond Resolution, the levels at which the funds and accounts established thereby are to be maintained and the purposes to which moneys in such funds and accounts may be applied, see Appendix D hereto. Bond Insurance Policy The payment of principal of and interest on the 2004 Series A Bonds maturing on May 15, 2018, May 15, 2020, May 15, 2021, May 15, 2025 and May 15, 2029, including Sinking Fund Installments on such 2004 Series A Bonds maturing on May 15, 2029, and $4,155,000 principal amount of the 2004 Series A Bonds maturing on May 15, 2024 (collectively the Insured 2004 Series A Bonds ) will be insured by a bond insurance policy issued by AMBAC Assurance Corporation (the Ambac Assurance ). See THE AMBAC INSURANCE CORPORATION POLICY and Appendix G Proposed Form of Financial Guaranty Insurance Policy. THE AMBAC INSURANCE CORPORATION POLICY Payment Pursuant to Financial Guaranty Insurance Policy Ambac Assurance has made a commitment to issue a financial guaranty insurance policy (the Financial Guaranty Insurance Policy ) relating to the Insured 2004 Series A Bonds effective as of the date of issuance of the Insured 2004 Series A Bonds. Under the terms of the Financial Guaranty Insurance Policy, Ambac Assurance will pay to The Bank of New York, New York, New York or any successor thereto (the Insurance Trustee ) that portion of the principal of and interest on the Insured 2004 Series A Bonds which shall become Due for Payment but shall be unpaid by reason of Nonpayment by the Obligor (as such terms are defined in the Financial Guaranty Insurance Policy). Ambac Assurance will make such payments to the Insurance Trustee on the later of the date on which such principal and interest becomes Due for Payment or within one business day following the date on which Ambac Assurance shall have received notice of Nonpayment from the Fiscal Agent. The insurance will extend from the term of the Insured 2004 Series A Bonds and once issued, cannot be canceled by Ambac Assurance. 10

16 The Financial Guaranty Insurance Policy will insure payment only on stated maturity dates and on mandatory sinking fund installment dates, in the case of principal, and on stated dates for payment, in the case of interest. If the Insured 2004 Series A Bonds become subject to mandatory redemption and insufficient funds are available for redemption of all outstanding Insured 2004 Series A Bonds, Ambac Assurance will remain obligated to pay principal of and interest on outstanding Insured 2004 Series A Bonds on the originally scheduled interest and principal payment dates including mandatory sinking fund redemption dates. In the event of any acceleration of the principal of the Insured 2004 Series A Bonds, the insured payments will be made at such times and in such amounts as would have been made had there not been acceleration. In the event the Fiscal Agent has notice that any payment of principal of or interest on the Insured 2004 Series A Bonds which has become Due for Payment and which is made to a Holder by or on behalf of the Obligor has been deemed a preferential transfer and theretofore recovered from its registered owner pursuant to the United States Bankruptcy Code in accordance with a final, nonappealable order of a court of competent jurisdiction, such registered owner will be entitled to payment from Ambac Assurance to the extent of such recovery if sufficient funds are not otherwise available. The Financial Guaranty Insurance Policy does not insure any risk other than Nonpayment, as defined in the Policy. Specifically, the Financial Guaranty Insurance Policy does not cover: 1. payment on acceleration, as a result of a call for redemption (other than mandatory sinking fund redemption) or as a result of any other advancement of maturity. 2. payment of any redemption, prepayment or acceleration premium. 3. nonpayment of principal or interest caused by the insolvency or negligence of any Trustee, Paying Agent or Bond Registrar, if any. If it become necessary to call upon the Financial Guaranty Insurance Policy, payment of principal requires surrender of Insured 2004 Series A Bonds to the Insurance Trustee together with an appropriate instrument of assignment so as to permit ownership of such Insured 2004 Series A Bonds to be registered in the name of Ambac Assurance to the extent of the payment under the Financial Guaranty Insurance Policy. Payment of interest pursuant to the Financial Guaranty Insurance Policy requires proof of Holder entitlement to interest payments and an appropriate assignment of the Holder s right to payment to Ambac Assurance. Upon payment of the insurance benefits, Ambac Assurance will become the owner of the Insured 2004 Series A Bonds, appurtenant coupon, if any, or right to payment of principal or interest on such Insured 2004 Series A Bonds and will be fully subrogated to the surrendering Holder s rights to payment. Ambac Assurance Corporation 11

17 Ambac Assurance is a Wisconsin-domiciled stock insurance corporation regulated by the Office of the Commissioner of Insurance of the State of Wisconsin and licensed to do business in 50 states, the District of Columbia, the Territory of Guam, the Commonwealth of Puerto Rico and the U. S. Virgin Islands, with admitted assets of approximately $7,670,000,000 (unaudited) and statutory capital of $4,683,000,000 (unaudited) as of March 31, Statutory capital consists of Ambac Assurance s policyholders surplus and statutory contingency reserve. Standard & Poor s Credit Markets Services, a Division of The McGraw-Hill Companies, Moody s Investors Service and Fitch Ratings have each assigned a triple A financial strength rating to Ambac Assurance. Ambac Assurance has obtained a ruling from Internal Revenue Service to the effect that the insuring of an obligation by Ambac Assurance will not affect the treatment for federal income tax purposes of interest on such obligation and that insurance proceeds representing maturing interest paid by Ambac Assurance under policy provisions substantially identical to those contained in its Financial Guaranty Insurance Policy shall be treated for federal income tax purposes in the same manner as if such payments were made by the Obligor of the Insured 2004 Series A Bonds. Ambac Assurance makes no representation regarding the Insured 2004 Series A Bonds or the advisability of investing in the Insured 2004 Series A Bonds and make no representation regarding, nor has it participated in the preparation of the Official Statement other than the information supplied by Ambac Assurance and present under the heading The Ambac Insurance Corporation Policy. Available Information The parent company of Ambac Assurance, Ambac Financial Group, Inc. (the Company ), is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act ), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the SEC ). These reports, proxy statements and other information can be read and copied at the SEC s public reference room at 450 Fifth Street, N. W., Washington, D. C Please call the SEC at SEC-0330 for further information on the public reference room. The SEC maintains an internet site at that contains reports, proxy and information statements and other information regarding companies that file electronically with the SEC, including the Company. These reports, proxy statements and other information can also be read at the offices of the New York Stock Exchange, Inc. (the NYSE ), 20 Broad Street, New York, New York Copies of Ambac Assurance s financial statements prepared in accordance with statutory accounting standards are available from Ambac Assurance. The address of Ambac Assurance s administrative offices and its telephone number are One State Street Plaza, 19 th Floor, New York, New York, and (212) Incorporation of Certain Documents by Reference 12

18 The following documents filed by the Company with the SEC (File No ) are incorporated by reference in this Official Statement: 1. The Company s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and filed on March 15, The Company s Current Report on Form 8-K dated April 21, 2004 and filed on April 22, 2004; and 3. The Company s Quarterly Report on Form 10-Q for the fiscal quarterly period ended March 31, 2004 and filed on May 10, All documents subsequently filed by the Company pursuant to the requirements of the Exchange Act after the date of this Official Statement will be available for inspection in the same manner as described above in Available Information. Construction Program CONSTRUCTION AND FINANCING PROGRAM The Board's construction program for the fiscal years ending June 30, 2004 through June 30, 2007 consists primarily of capital improvements and construction of the transmission and distribution facilities described herein under "The Electric Distribution System." The estimated construction costs to be incurred by the Board in each of the Fiscal Years 2004 through 2007 are set forth herein under "Engineering, Construction and Maintenance." The Board believes that these cost estimates contain sufficient allowances for inflation, cost escalation and other possible increases. However, for a number of reasons, including unforeseen inflation, compliance with governmental procedures and regulations and changes in the Board's plan, actual costs may vary from the construction program estimates. Financing Program Under the Board's current financing plans, the estimated construction costs shown in "Engineering, Construction and Maintenance" would be funded from the following sources: (i) approximately $106,955, from proceeds of the 2004 Series A Bonds and (ii) the balance of construction costs for April 1, 2004 through June 30, 2004 and for fiscal years from internally generated funds. In the opinion of management of the Board ("Management"), the available proceeds of the 2004 Series A Bonds and internally generated funds will be sufficient to complete the financing of the Board's construction program through Fiscal Year 2007, including the construction costs summarized above, interest during construction and provisions for reserves, bond discount and other financing expenses. 13

19 SOURCES AND USES OF FUNDS The sources and uses of funds are estimated as follows: Sources of Funds: 2004 Series A Bonds Bond Par Amount (Current Interest Bonds).. $ 110,000, Accrued Interest , Less: Net Original Issue Discount. (638,603.15) Total Sources.... $ 109,804, Uses of Funds: Cost of Issuance.... $ 242, Underwriter's Discount , Deposit to Construction Fund ,955, Deposit to Debt Service Reserve Fund.... 1,184, Cost of Insurance , Deposit to Debt Service Fund , Contingency Total Uses... $ 109,804, PARITY DEBT OBLIGATIONS The following are the projected debt service requirements for Bonds payable from Net Revenues of the Electric System. 14

20 PARITY DEBT OBLIGATIONS Debt Service on Bonds YEAR ENDING May 15, SERIES B SERIES A SERIES A SERIES B SERIES A SERIES B SERIES A Total 2005 $ 16,600,425 $ - $ 3,852,908 $ 3,245,106 $ 7,286,930 $ 1,012,000 $ 5,250,491 $ 37,247, $ - $ 13,150,000 $ 3,852,907 $ 6,696,596 $ 7,286,505 $ 1,012,000 $ 5,494,700 $ 37,492, $ - $ 13,150,000 $ 3,852,908 $ 6,690,281 $ 7,292,930 $ 1,012,000 $ 5,494,700 $ 37,492, $ - $ 13,155,000 $ 3,852,907 $ 6,689,069 $ 7,290,755 $ 1,012,000 $ 5,494,700 $ 37,494, $ - $ 13,145,000 $ 3,852,908 $ 6,694,894 $ 7,291,255 $ 1,012,000 $ 5,494,700 $ 37,490, $ - $ 13,155,000 $ 3,852,907 $ 6,689,919 $ 7,287,255 $ 1,012,000 $ 5,494,700 $ 37,491, $ - $ 13,150,000 $ 3,852,908 $ 6,695,175 $ 7,288,605 $ 1,012,000 $ 5,494,700 $ 37,493, $ - $ 13,150,000 $ 3,852,907 $ 6,693,925 $ 7,290,605 $ 1,012,000 $ 5,494,700 $ 37,494, $ - $ 6,575,000 $ 3,852,908 $ 6,691,900 $ 7,503,180 $ 7,377,000 $ 5,494,700 $ 37,494, $ - $ - $ 5,152,907 $ 6,690,300 $ 7,459,330 $12,696,925 $ 5,494,700 $ 37,494, $ - $ - $ 14,496,283 $ 6,693,300 $ 10,809,715 $ - $ 5,494,700 $ 37,493, $ - $ - $ 14,497,395 $ 6,694,800 $ 10,803,965 $ - $ 5,494,700 $ 37,490, $ - $ - $ 14,495,320 $ 6,693,975 $ 10,809,775 $ - $ 5,494,700 $ 37,493, $ - $ - $ 14,495,320 $ - $ 9,720,150 $ - $11,814,700 $ 36,030, $ - $ - $ 14,495,320 $ - $ 9,719,825 $ - $11,814,000 $ 36,029, $ - $ - $ 14,495,320 $ - $ 9,719,125 $ - $11,817,500 $ 36,031, $ - $ - $ 14,494,900 $ - $ 9,717,281 $ - $11,819,250 $ 36,031, $ - $ - $ 14,492,500 $ - $ 9,718,525 $ - $11,818,500 $ 36,029, $ - $ - $ 14,496,560 $ - $ 9,716,831 $ - $11,814,500 $ 36,027, $ - $ - $ - $ - $ 13,011,431 $ - $11,506,500 $ 24,517, $ - $ - $ - $ - $ 13,007,431 $ - $11,513,750 $ 24,521, $ - $ - $ - $ - $ 13,009,219 $ - $11,510,250 $ 24,519, $ - $ - $ - $ - $ - $ - $15,170,500 $ 15,170, $ - $ - $ - $ - $ - $ - $15,170,250 $ 15,170, $ - $ - $ - $ - $ - $ - $15,167,250 $ 15,167,250 15