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SECURITY AGREEMENT DEBTOR: Ute Water Activity Enterprise P.O. Box 460 Grand Junction, CO 81502-0460 FEDERAL TAX NUMBER: 84-6013629 COUNTY: MESA SECURED PARTY: State of Colorado - Colorado Water Conservation Board 1313 Sherman Street, Room 721 Denver, CO 80203 DEBTOR, for consideration, hereby grants to SECURED PARTY a security interest in the following property and any and all additions, accessions and substitutions thereto or therefor, hereinafter called the COLLATERAL: Water system revenues pledged to repay the indebtedness on the amount loaned to DEBTOR by SECURED PARTY, as described in pledge of revenues provisions in contract No. C150026 (CONTRACT). To secure payment of the indebtedness evidenced by the Promissory Note between the above named parties in the total amount of $7,000,000.00 at an interest rate of 4.75% per annum for a term of 30 years, payable by DEBTOR to the SECURED PARTY until all principal, interest, and late charges, if any, are paid in full in accordance with said Promissory Note. DEBTOR EXPRESSLY WARRANTS AND COVENANTS: 1. That except for the security interest granted hereby, DEBTOR is, or to the extent that this agreement states that the COLLATERAL is to be acquired after the date hereof, will be, the owner of the COLLATERAL free from any adverse lien, security interest or encumbrances, except for DEBTOR'S Water Revenue Refunding Bonds, Series 1995 and Series 1997 and existing loans from SECURED PARTY; and that DEBTOR will defend the COLLATERAL against all claims and demands of all persons at anytime claiming the same or any interest therein. 2. That the execution and delivery of this agreement by DEBTOR will not violate any law or agreement goveming DEBTOR or to which DEBTOR is a party. 3. That by its acceptance of the loan money pursuant to the terms of the CONTRACT and by its representations herein, DEBTOR shall be estopped from asserting for any reason that it is not authorized to grant a security interest in the COLLATERAL pursuant to the terms of this agreement. 4. To not permit or allow any adverse lien, security interest or encumbrance whatsoever upon the COLLATERAL and not to permit the same to be attached or replevined, without the prior written consent of SECURED PARTY. 5. That the DEBTOR will not use the COLLATERAL in violation of any applicable statutes, regulations, ordinances, articles of incorporation or by-laws. UNTIL DEFAULT DEBTOR may have possession of the COLLATERAL, provided that DEBTOR keeps the COLLATERAL in an account separate from other revenues of DEBTOR and does not use the COLLATERAL for any purpose not permitted by the CONTRACT. Upon default, SECURED PARTY shall have the immediate right to the possession of the COLLATERAl. DEBTOR SHALL BE IN DEFAULT under this agreement upon the happening of any of the following events or conditions: a. default in the payment or performance of any obligation, covenant or liability contained or referred to herein or in any note evidencing the same; Appendix 0 to Loan Contract C150026