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HomeMy WebLinkAbout08-21-18 F&A Committee Packet 1 OTAY WATER DISTRICT FINANCE AND ADMINISTRATION COMMITTEE MEETING and SPECIAL MEETING OF THE BOARD OF DIRECTORS 2554 SWEETWATER SPRINGS BOULEVARD SPRING VALLEY, CALIFORNIA BOARDROOM TUESDAY August 21, 2018 12:00 P.M. This is a District Committee meeting. This meeting is being posted as a special meeting in order to comply with the Brown Act (Government Code Section §54954.2) in the event that a quorum of the Board is present. Items will be deliberated, however, no formal board actions will be taken at this meeting. The committee makes recommendations to the full board for its consideration and formal action. AGENDA 1. ROLL CALL 2. PUBLIC PARTICIPATION – OPPORTUNITY FOR MEMBERS OF THE PUBLIC TO SPEAK TO THE BOARD ON ANY SUBJECT MATTER WITHIN THE BOARD'S JU- RISDICTION BUT NOT AN ITEM ON TODAY'S AGENDA DISCUSSION ITEMS 3. ADOPT RESOLUTION NO. 4350 APPROVING CERTAIN DOCUMENTS IN CONNECTION WITH THE ISSUANCE BY THE OTAY WATER DISTRICT FINANCING AUTHORITY OF ITS WATER REVENUE BONDS, SERIES 2018A IN AN AGGREGATE PRINCIPAL AMOUNT NOT-TO-EXCEED $29,000,000 AND CERTAIN AMENDMENTS WITH RESPECT TO THE DISTRICT’S 2013 AND 2016 WATER REVENUE REFUNDIUNG BONDS (KOEPPEN) [5 minutes] 4. OTAY WATER DISTRICT FINANCING AUTHORITY – ADOPT RESOLUTION NO. 2018-02 AUTHORIZING THE ISSUANCE NOT-TO-EXCEED $29,000,000 OF ITS WATER REVENUE BONDS, SERIES 2018A, AND APPROVE THE EXECUTION OF CERTAIN DOCUMENTS AND AUTHORIZING CERTAIN ACTS IN CONNECTION THEREWITH 5. APPROVE THE ADDITION OF KAISER PERMANENTE AS A HEALTH BENEFIT PLAN (WILLIAMSON) [5 minutes] 2 6. APPROVE THE ISSUANCE OF A PURCHASE ORDER TO Nth GENERATION IN THE AMOUNT $52,478.84 FOR PURCHASES OF NEXT GENERATION PALO ALTO FIREWALLS AND ARUBA CLEARPASS POLICY MANAGEMENT SOLUTION; AND, APPROVE ANOTHER PURCHASE ORDER TO GROUPWARE TECHNOLOGY IN THE AMOUNT OF $47,138.00 FOR ENGINEERING, TRAINING, AND IMPLEMENTATION OF PALO ALTO FIREWALLS AND ARUBA CLEARPASS POLICY MANAGEMENT SOLUTION (KERR) [5 minutes] 7. ADJOURNMENT BOARD MEMBERS ATTENDING: Mitch Thompson All items appearing on this agenda, whether or not expressly listed for action, may be delib- erated and may be subject to action by the Board. The Agenda, and any attachments containing written information, are available at the Dis- trict’s website at www.otaywater.gov. Written changes to any items to be considered at the open meeting, or to any attachments, will be posted on the District’s website. Copies of the Agenda and all attachments are also available through the District Secretary by contacting her at (619) 670-2280. If you have any disability which would require accommodation in order to enable you to par- ticipate in this meeting, please call the District Secretary at 670-2280 at least 24 hours prior to the meeting. Certification of Posting I certify that on August 17, 2018 I posted a copy of the foregoing agenda near the reg- ular meeting place of the Board of Directors of Otay Water District, said time being at least 24 hours in advance of the meeting of the Board of Directors (Government Code Section §54954.2). Executed at Spring Valley, California on August 17, 2018. /s/ Susan Cruz, District Secretary STAFF REPORT TYPE MEETING: Regular Board MEETING DATE: September 5, 2018 SUBMITTED BY: Kevin Koeppen, Assistant Chief of Finance W.O./G.F. NO: DIV. NO. All APPROVED BY: Joseph R. Beachem, Chief Financial Officer Mark Watton, General Manager SUBJECT: Otay Water District Adoption of Resolution No. 4350 Approving Certain Documents in Connection with the Issuance by the Otay Water District Financing Authority of its Water Revenue Bonds, Series 2018A in an Aggregate Principal Amount Not to Exceed $29,000,000 and Certain Amendments with Respect to the District’s 2013 and 2016 Water Revenue Refunding Bonds GENERAL MANAGER’S RECOMMENDATION: That the Board adopt Resolution No. 4350 approving certain documents in connection with the issuance by the Otay Water District Financing Authority of its Water Revenue Bonds, Series 2018A in an aggregate principal amount not to exceed $29,000,000 and certain amendments with respect to the District’s 2013 and 2016 Water Revenue Refunding Bonds. COMMITTEE ACTION: See Attachment A. PURPOSE: To obtain the Board’s authorization to issue up to $29,000,000 of Otay Water District Financing Authority (“Authority”) Water Revenue Bonds to fund the District’s three-year CIP Program and authorize the President, General Manager, District Secretary, and the Chief Financial Officer to execute and deliver related documents and take other related actions necessary for the issuance of the 2018 Water Revenue Bonds. In addition, further Board authorization is required to amend certain provisions of the Indenture of Trust for District’s 2013 Water Revenue Refunding Bonds and 2016 Water Revenue Refunding Bonds. ANALYSIS: The Authority was formed in 2010 to assist the District with financing capital improvements. Staff is recommending that the Authority issue Water Revenue Bonds and secure the bonds with Installment Payments payable by the District to the Authority. The debt issuance will be used to fund $28.0 million in Capital Improvement Program (CIP) expenditures, which will result in the District maintaining targeted reserve levels in accordance with the District’s Reserve Policy. Staff estimates that the actual amount of the bonds will be $28.3 million to fund $28.0 million of CIP projects and approximately $300,000 of debt issuance costs. Staff will not issue more debt than is needed for these purposes. As part of the FY 2019 Budget presented to the Board in May of 2018, staff recommended the issuance of bonds to fund $30 million of CIP and to maintain reserves at target levels. Due to the FY 2018 actual surplus exceeding the forecast by $1.2 million and actual healthcare increases for 2019 being less than budgeted, staff has reduced the recommended funding of CIP through the debt issuance to $28.0 million. The debt proceeds will be used to fund the following CIP project expenditures over the next three fiscal years. It should be noted that general unrestricted reserves will be designated to fund the additional expenditures, above the $28 million debt proceeds, that are necessary to fund the entire $30.3 CIP project listing. Project Title Total 3-year Expenditures ($000's) PS - 870-2 Pump Station Replacement $12,646 PL - 12-Inch Pipeline Replacement, 978 Zone, Pence Dr/Vista Sierra Dr $2,480 Res - 711-3 Reservoir Cover/Liner Replacement $2,130 PS - Temporary Lower Otay Pump Station Redundancy $1,700 PL - 12-Inch Pipeline Replacement, 978 Zone, Vista Vereda $1,660 PS - 1090-1 Pump Station Replacement (400 gpm) $1,450 PL - 12-inch, 978 Zone, Hidden Mesa Road $1,410 PL - 12-Inch Pipeline Replacement, 803 PZ, Vista Grande $1,180 Quarry Road Bridge Replacement and Utility Relocation $595 PL - 12-inch, 711 Zone, Pas de Luz/Telegraph Canyon Rd $485 PL - 8-inch, 1004 Zone, Eucalyptus St, Coronado/Date/La Mesa $480 SR-11 Utility Relocations $450 Heritage Road Bridge Replacement and Utility Relocation $450 RWCWRF Filtered Water Storage Tank Improvements $450 PL - 8-inch, 850 Zone, Coronado Ave, Chestnut/Apple $450 Vista Diego Hydropneumatic Tank Replacement $390 RecPL - 20-Inch, 680 Zone, Village 2 - Heritage/La Media $364 458/340 PRS Replacement, 1505 Oleander Ave $325 458/340 PRS Replacement, 1571 Melrose Ave $323 Rancho Jamul Hydropneumatic Tank Replacement $290 RecPRS - 927/680 PRS Improvements, Otay Lakes Road $195 Res - 1655-1 Reservoir 0.5 MG $165 Padre Dam - Otay Interconnection Dehesa Valley $70 PL - 624/340 PRS, Paseo Ranchero and Otay Valley Road $60 PS - 711-2 (PS 711-1 Replacement and Expansion) - 14,000 gpm $50 RecPL - 14-Inch, 927 Zone, Force Main Improvements $46 Total Proposed Debt Financed Projects $30,294 A tentative timeline of events related to the debt issuance is below. Finance Committee Approval August 22, 2018 Board Approval September 5, 2018 Rating Agency Call September 13, 2018 Notice of Bond Sale September 25, 2018 Award Sale of Bonds October 2, 2018 Closing Document Signing October 22, 2018 Closing October 25, 2018 Evaluating the Issuance of Debt During the preparation of each annual budget, staff prepares a six- year forecast evaluating the District’s debt coverage and reserve levels in conjunction with the District’s respective target levels and operational and CIP needs. Based on the status of each of these items staff recommends rate adjustments and, if necessary, debt issuances that are aimed at balancing the financial impacts of anticipated changes in both operating and CIP expenditures on the District’s rate payers. The goal of this process is to manage the District’s finances in a manner that ensures the District is able to meet its financial obligations including its operational requirements, CIP and debt covenants. In addition, the rate recommendations are also aimed at achieving targeted reserve levels as established by the District’s comprehensive Reserve Policy, which is also reviewed as part of the budget process. As part of this evaluation, staff compares the potential need and impact of issuing debt versus the impact of solely cash funding to achieve its financial targets. Based on the analysis, staff will make rate and debt recommendations aimed at the safe, effective, and efficient operation of the District in a manner that meets the District’s mission, values and strategic objectives. There are several benefits to a public agency utilizing debt to fund its CIP needs and it is considered an appropriate action by public agencies. Following is a discussion of the benefits and their impact to the District relative to this request:  The use of debt is an essential component of creating generational equity. Generational equity ensures that the individuals using and benefiting from system are the ones paying for it. The projects being financed under this proposal have useful lives of 30 years or more. The debt has a maturity of 25 years. By debt financing these projects a more equitable balance will be struck between those who will use the facilities and those who will pay for them.  Debt is an appropriate method for managing rates and avoiding rate spikes and fluctuations. These spikes and fluctuations go hand-in-hand with the cash requirements of a fluctuating CIP program. While unknown circumstances could potentially still arise causing rate fluctuations, using debt is an appropriate method to manage rates. If the District were to change its funding strategy and cash fund the CIP, the District’s reserves would be drawn below policy minimums by $17,000,000, adversely impacting the District’s liquidity position. The District could bring reserves back to target by 2022 with a 15.0% rate increase in FY 2020. This increase would be followed by no rate increases through FY 2024. This strategy would not provide rate stability for customers. This would also compromise the financial integrity of the District during 2019 and a portion of 2020. The following is a table comparing the FY 2019 rate model projections under debt funding and cash funding scenarios. 2019 2020 2021 2022 2023 2024 Rate Increase with Issue Debt (FY2019 Budget) 3.2% 3.2% 3.2% 3.2% 3.2% 3.2% Rate Increase without Debt (Cash Fund by 2022) 3.2% 15.0% 0.0% 0.0% 0.0% 0.0% By issuing debt the District is able to maintain low and level rate increases.  Debt is an acceptable method for managing reserve levels, which ensures that the District has adequate cash levels to fund the District’s operations and CIP projects in an efficient and effective manner. Utilizing this method, the District will use the debt proceeds to fund its CIP program for the next three years, and ensures the District’s reserves are maintained at target levels during the six-year budget period. There are some risks associated with debt financing. The following is a discussion of the risks and their impact to the District:  Creating a Fixed Obligation - Issuing debt creates a financial obligation that needs to be met regardless of external factors impacting the District, such as reduced water sales due to drought or wet years. On May 31, 2018, Governor Brown signed two bills building on the efforts to make water conservation a way of life in California and to establish an indoor water use standard of 55 gallons per capita per day (GPCD). Based on 2018 actual water usage in the most recent wet months, staff estimates the current indoor GPCD is 65. This would require a 15% reduction in indoor water usage by 2022. In this reduced water sales scenario, the District’s debt coverage ratios and cash reserves would remain at targeted levels, with an additional 0.3% annual rate increase, above the proposed 3.2% rate increases.  Utilizing District’s Debt Capacity – By utilizing the District’s debt capacity at this time, the amount of additional debt that can be issued is reduced. Based on the current rate model, the District does not need to issue additional debt for the water system CIP during the next six-year period. However, staff did evaluate the financial impact of issuing an additional $30.0 million of debt in the second half of the six-year budget. The debt coverage ratios would remain above target levels with no need for additional rate increases.  Incurring Interest Expense – Debt funding requires interest expense which would not be incurred under a cash funding scenario. While interest expense would be incurred, interest rates remain at relatively low levels and, if not at this time, the District would likely need to issue debt in the future at higher interest rates. In total, over the twenty-five year maturity this debt issuance will incur net interest costs of $12.9 million. Debt service will average approximately $1.8 million annually until FY 2036 and then decline each year until final maturity in FY 2044. The amounts are within the FY 2019 budgeted estimates, and are incorporated into the proposed rates and projected debt coverage levels. The current effective interest rate is estimated to be 3.5%. Interest rates can increase before the District brings the bonds to market in early October. Current Debt Coverage Ratios and Outstanding Debts At this time, the District’s estimated debt coverage ratios for FY 2019 are 318% including growth revenues, and 200% excluding growth revenues. This level of debt coverage is strong enough to support utilizing the proposed debt issuance to bring reserves to targeted levels. As of August 31, 2018, the District has approximately $91.0 million of outstanding debt, which is scheduled to mature over the next 22 years. Following is a schedule of the outstanding debt issuances, the years to maturity and call options. Debt Issuance Amount  Outstanding as of  June 30, 2018 Final Year of   Maturity  Years to Full  Maturity  Call Options  General Obligation Bonds  $               3,390,000 2022 4 Not Callable 1996 Certificates of Participation 7,600,000                 2026 8 Anytime 2010 Water Revenue Bonds Series A 7,880,000                2024 6   March 1, 2020 2010 Water Revenue Bonds Series B 36,355,000              2040 22 Anytime* 2013 Water Revenue Refunding Bonds 4,560,000                2023 5 Not Callable 2016 Water Revenue Refunding Bonds 31,170,000              2036 18   September 1, 2026 Total Current Outstanding Debt 90,955,000              19.02 Weighted Ave Years Proposed 2019 Water Revenue Bonds 28,500,000              2038 25 Total Proposed Outstanding Debt 119,455,000$          20.94 Weighted Ave Years *  The 2010 Series B issuance carries a make whole provision, which requires the District to make the debt holders whole on interest they would have  earned through maturity. The District currently maintains a split AA/AA- credit rating, which is comprised of a ‘AA’ rating from Standard & Poor’s (S&P) and a ‘AA-’ rating from Fitch Ratings (Fitch). The last credit rating update the District received from either credit agency was in 2016. A credit rating is an overall rating that considers many factors, with debt coverage being one of the main financial factors. These ratings are all related to the District’s water side of the business as no credit rating is issued for the District’s sewer system at this time. In September 2008, the District received a rating upgrade from S&P to ‘AA’, from ‘AA-’, as part of their global rating recalibration for municipal agencies. In March 2012, Fitch lowered their credit rating for the District from ‘AA’ to ‘AA-’, based on lower-than-budgeted water revenues and a corresponding lower debt coverage ratio. This debt issuance is not anticipated to adversely impact the District’s credit rating; however, the District’s current liquidity is projected to be lower than during past rating reviews. Liquidity and reserves comprise 40% of S&P’s financial risk profile assessment, and as noted in the Financial Advisor’s report to the Board in May 2018, while the District expects liquidity to remain above $20 million, there is a slight concern that the District could end with a lower factor in the S&P analysis of liquidity, but that is not likely to move the rating out of the Very Strong category on its own. Even if there is no downgrade in credit rating, there is always the possibility that as a result of the lower reserves, the rating agencies may put the District on a “rating watch” until the District’s reserves are replenished over the next few years. Documents to be Approved The Bonds will be issued by the Otay Water District Financing Authority (“Authority”) and secured by Installment Payments payable by the District to the Authority. This debt structure has been used by the District in prior borrowings in 2010. The following financing documents are approved in form by the resolution:  Installment Purchase Agreement, by and between the Authority and the District;  Preliminary Official Statement;  Continuing Disclosure Agreement; and  Notice of Sale for the Bonds. The draft documents are included with this report for review by the Board. Additional Requirements As part of the review of legal documents for the Bonds, Bond Counsel determined that a technical correction is required to the language in the indenture of trust for each of the outstanding 2013 Water Revenue Refunding Bonds and 2016 Water Revenue Refunding Bonds. The word “Taxes” was omitted from the Rate Covenant calculation language and it is recommended at this time that the District amend those documents to correct this omission. This has no impact on the District’s compliance with its Rate Covenant. To make this correction, the resolution also approves a form of a First Supplemental Indenture of Trust to the 2013 Bonds and a First Supplemental Indenture of Trust to the 2016 Bonds. Conclusion That the Board adopt Resolution No. 4350 approving certain documents in connection with the issuance by the Otay Water District Financing Authority of its Water Revenue Bonds, Series 2018A in an aggregate principal amount not to exceed $29,000,000 and certain amendments with respect to the District’s 2013 and 2016 Water Revenue Refunding Bonds. The Authority Board has separately been presented with a resolution approving documents and its actions relating to the Bonds. FISCAL IMPACT: Joe Beachem, Chief Financial Officer The $28.0 million debt funding of the CIP will ensure the District maintains its reserves at targeted levels. The cost of the principal, plus interest payments will be $41.2 million over the twenty-five year period, which equates to an average annual debt service of $1.8 million. The current estimate of the cost to issue the Bonds is $300,000. This includes $170,000 for the services of bond counsel, disclosure counsel, financial advisor, rating fees, and other costs necessary to issue the bonds. The remaining $130,000 of costs is the expected underwriting discount to be paid to the underwriter selected to purchase the bonds through a competitive bid process. The costs will be paid from bond proceeds. STRATEGIC GOAL: The District ensures its continued financial health through long-term financial planning and debt planning. LEGAL IMPACT: None. General Manager Attachments: A) Committee Action B) District Resolution No. 4350 C) Installment Purchase Agreement D) Continuing Disclosure Agreement E) Preliminary Official Statement F) Notice of Sale for the Bonds G) First Supplemental Indenture of Trust to the 2013 Bonds H) First Supplemental Indenture of Trust to the 2016 Bonds ATTACHMENT A SUBJECT/PROJECT: Otay Water District Adoption of Resolution No. 4350 Approving Certain Documents in Connection with the Issuance by the Otay Water District Financing Authority of its Water Revenue Bonds, Series 2018A in an Aggregate Principal Amount Not to Exceed $29,000,000 and Certain Amendments with Respect to the District’s 2013 and 2016 Water Revenue Refunding Bonds COMMITTEE ACTION: That the Finance, Administration and Communications Committee recommend that the Board adopt Resolution No. 4350 approving certain documents in connection with the issuance by the Otay Water District Financing Authority of its Water Revenue Bonds, Series 2018A in an aggregate principal amount not to exceed $29,000,000 and certain amendments with respect to the District’s 2013 and 2016 Water Revenue Refunding Bonds. NOTE: The “Committee Action” is written in anticipation of the Committee moving the item forward for board approval. This report will be sent to the Board as a committee approved item, or modified to reflect any discussion or changes as directed from the committee prior to presentation to the full board. RESOLUTION NO. 4350 RESOLUTION OF THE BOARD OF DIRECTORS OF THE OTAY WATER DISTRICT APPROVING CERTAIN DOCUMENTS IN CONNECTION WITH THE ISSUANCE BY THE OTAY WATER DISTRICT FINANCING AUTHORITY OF ITS WATER REVENUE BONDS, SERIES 2018A IN AN AGGREGATE PRINCIPAL AMOUNT NOT TO EXCEED $29,000,000 AND CERTAIN AMENDMENTS WITH RESPECT TO THE DISTRICT’S 2013 AND 2016 WATER REVENUE REFUNDING BONDS WHEREAS, the Otay Water District (the “District”) is a municipal water district duly organized and existing under and pursuant to the Constitution and laws of the State of California (the “State”); WHEREAS, the District proposes to finance the acquisition and construction of certain capital improvements to the District’s Water System (the “2018 Project”), as described in the form of the Installment Purchase Agreement, dated as of October 1, 2018 by and between the Otay Water District Financing Authority (the “Authority”) and the District on file with the Secretary of the Board; and; WHEREAS, the District desires to have the Authority issue its Water Revenue Bonds Series 2018A (the “Bonds”) for the purpose of financing the 2018 Project and paying costs of issuance in connection therewith; WHEREAS, the Bonds will be issued pursuant to the Marks-Roos Local Bond Pooling Act of 1985, commencing with Section 6584 of the California Government Code (the “Act”) and an Indenture of Trust by and between the Authority and MUFG Union Bank, N.A., as Trustee; WHEREAS, in accordance with the requirements of Government Code Section 5852.1, there has been presented to the Board of Directors of the District and disclosed at the meeting at which this resolution is being adopted the information required by Government Code Section 5852(a)(1) which is attached hereto as Exhibit A; WHEREAS, the District is authorized by Chapter 4 of Part 5, Division 20 of the Water Code of the State of California to acquire property for and make capital improvements to its water system; WHEREAS, in connection with the issuance of the Bonds, the District desires to authorize an amendment to the Indenture of Trust for its 2013 Water Revenue Refunding Bonds (the “2013 Indenture”) and to the Indenture of Trust for its 2016 Water Revenue Refunding Bonds (the “2016 Indenture”) as described herein; NOW, THEREFORE, the Board of Directors of the Otay Water District does hereby resolve as follows: Section 1. Each of the above recitals is true and correct and the Board of Directors hereby adopts each of the foregoing findings and determinations. Section 2. The issuance by the Authority of the Bonds in the principal amount not to exceed $29,000,000 to finance the 2018 Project and to pay the cost of issuance of the Bonds is hereby Attachment B 2 approved; provided, however, that the Bonds shall be issued only in accordance with the parameters set forth in Section 5 below. Section 3. The Installment Purchase Agreement by and between the District and the Authority, in substantially the form on file with the Secretary of the Board, is hereby approved, subject to final approval as to form by the District’s legal counsel and the law firm of Stradling Yocca Carlson & Rauth, a Professional Corporation (“Bond Counsel”). Subject to compliance with the provisions of Section 5 below, each of the General Manager of the District and the Chief Financial Officer of the District and their written designees (each an “Authorized Officer” and, collectively, the “Authorized Officers”), acting alone, is hereby authorized and directed to execute and deliver such Installment Purchase Agreement with such changes, insertions and omissions as may be approved by the District’s legal counsel and Bond Counsel, with the execution thereof by an Authorized Officer being conclusive evidence of such approval. Section 4. The Continuing Disclosure Agreement by and between the District and Harrell & Company Advisors, LLC, as Dissemination Agent in connection with the issuance of the Bonds, in substantially the form on file with the Secretary of the Board, is hereby approved, subject to final approval as to form by the District’s legal counsel and Bond Counsel. Each of the Authorized Officers, acting alone, is hereby authorized and directed to execute and deliver the Continuing Disclosure Agreement with such changes, insertions and omissions as may be approved by the District’s legal counsel and Bond Counsel, with the execution thereof by an Authorized Officer being conclusive evidence of such approval. Section 5. The form of notice of sale for the Bonds (the “Notice of Sale”), substantially in the form on file with the Board, is hereby approved and the Authority is authorized to direct the sale of the Bonds on a competitive basis in accordance with the terms hereof and the Notice of Sale in substantially said form, with such changes as the Authority may require or approve to reflect the final terms of the sale. A summary of the Notice of Sale shall be published by Harrell & Company Advisors, LLC (the “Municipal Advisor”) on behalf of the Authority in accordance with any notice requirements imposed by law. The Authorized Officers shall only execute the Installment Purchase Agreement if (i) the principal amount of the Bonds sold does not exceed the amount authorized in Section 2 above, (ii) the purchase price for the Bonds shall not be less than 99% of the aggregate amount of principal thereof, and (iii) the true interest cost of the Bonds as calculated by the Municipal Advisor shall not exceed 5.0%. Section 6. The form of the Preliminary Official Statement, presented to this meeting and on file with the Secretary of the Board, is hereby approved. The Authorized Officers are hereby authorized to make such changes to the Preliminary Official Statement as are necessary to make it final as of its date and are authorized and directed to execute and deliver a certificate deeming the Preliminary Official Statement final as of its date in accordance with Rule 15c2-12 promulgated under the Securities Exchange Act of 1934. Each of the Authorized Officers, acting alone, is hereby authorized and directed to execute, approve and deliver the final Official Statement in the form of the Preliminary Official Statement with such changes, insertions and omissions as the Authorized Officer executing said document may require or approve, such approval to be conclusively evidenced by the execution and delivery thereof by an Authorized Officer. Section 7. The First Supplemental Indenture of Trust to the 2013 Indenture and the First Supplemental Indenture of Trust to the 2016 Indenture, in substantially the forms on file with the Secretary of the Board, are hereby approved, subject to final approval as to form by the District’s legal 3 counsel and Bond Counsel. Each of the Authorized Officers, acting alone, is hereby authorized and directed to execute and deliver the First Supplemental Indenture of Trust to the 2013 Bonds and the First Supplemental Indenture of Trust to the 2016 Bonds with such changes, insertions and omissions as may be approved by the District’s legal counsel and Bond Counsel, with the execution thereof by an Authorized Officer being conclusive evidence of such approval. The Board hereby adopts each of the findings and determinations made therein by the District. Section 8. The Secretary of the Board, or persons as may have been designated by the General Manager, are hereby authorized and directed to attest the signature of any of the Authorized Officers designated herein to execute any documents, as may be required or appropriate in connection with the execution and delivery of the Purchase Contract, the Installment Purchase Agreement, the Continuing Disclosure Agreement, the First Supplemental Indenture of Trust to the 2013 Indenture and the First Supplemental Indenture of Trust to the 2016 Indenture and the Official Statement. Section 9. MUFG Union Bank, N.A.is hereby appointed as trustee for the Bonds and the General Manager is hereby authorized to appoint any replacement trustee while the Bonds are outstanding. Section 10. The Authorized Officers are each hereby authorized and directed, jointly and severally, to do any and all things and to execute and deliver any and all documents which each may deem necessary or advisable in order to consummate the issuance of the Bonds and the financing of the 2018 Project, and to otherwise carry out, give effect to and comply with the terms and intent of this Resolution, the Bonds, the Installment Purchase Agreement, the Continuing Disclosure Agreement, the Notice of Sale, the Preliminary Official Statement and the Official Statement. Such actions heretofore taken by such officers or designees are hereby ratified, confirmed and approved. Section 11. Unless otherwise defined herein, all terms used herein and not otherwise defined shall have the meanings given such terms in the Installment Purchase Agreement unless the context otherwise clearly requires. Section 12. This Resolution shall take effect immediately upon its passage. ADOPTED, SIGNED and APPROVED at a regular meeting of the District this 5th day of September, 2018. President of the Board of Directors Attest: Secretary of the Board of Directors 4 STATE OF CALIFORNIA ) ) ss COUNTY OF SAN DIEGO ) I, ________________, Secretary of the Board of Directors of the Otay Water District, do hereby certify that the foregoing Resolution No. 4350 was duly adopted by the Board of Directors of said District at a regular meeting thereof held on the 5th day of September, 2018, and that it was so adopted by the following vote: AYES: DIRECTORS: NOES: DIRECTORS: ABSENT: DIRECTORS: ABSTAIN: DIRECTORS: Secretary of the Board of Directors of the Otay Water District (SEAL) STATE OF CALIFORNIA ) ) ss COUNTY OF SAN DIEGO ) I, _____________________, Secretary of the Board of Directors of the Otay Water District, do hereby certify that the above and foregoing is a full, true and correct copy of Resolution No. 4350 of said Board, and that the same has not been amended or repealed. DATED: _________________, 2018. Secretary of the Board of Directors of the Otay Water District (SEAL) A-1 EXHIBIT A GOOD FAITH ESTIMATES The good faith estimates set forth herein are provided with respect to the Bonds in accordance with California Government Code Section 5852.1. Such good faith estimates have been provided to the District by the Municipal Advisor. Principal Amount. Based on the District’s financing plan and current market conditions, its good faith estimate of the aggregate principal amount of the Bonds to be sold is $28,300,000 (the “Estimated Principal Amount”). Assuming that the Estimated Principal Amount is sold and based on market interest rates prevailing at the time of preparation of these good faith estimates by the Municipal Advisor, the following good faith estimates are provided: (a) True Interest Cost of the Bonds. The true interest cost of the Bonds, which means the rate necessary to discount the amounts payable on the respective principal and interest payment dates to the purchase price received for the Bonds, is 3.5%. (b) Finance Charge of the Bonds. The finance charge of the Bonds, which means the sum of all fees and charges paid to third parties, consists of $300,000 to be paid from proceeds of the Bonds, of which $170,000 is for costs of issuance and $130,000 is discount to be paid to the purchaser of the Bonds, and an estimated $175,000 of fees paid to third parties over the life of the Bonds from funds other than Bond proceeds as further described in (d) below. (c) Amount of Proceeds to be Received. The amount of proceeds expected to be received by the Authority for sale of the Bonds, less the finance charge of the Bonds paid from Bond proceeds described in (b) above, is estimated to be $28,000,000. (d) Total Payment Amount. The total payment amount, which means the sum total of all payments the Authority will make to pay debt service on the Bonds, plus the finance charge for the Bonds as described in (b) above not paid with the proceeds of the Bonds, calculated to the final maturity of the Bonds, is $41,375,000, consisting of $41,200,000 principal and interest, $100,000 of Trustee fees, and $75,000 for continuing disclosure, CDIAC compliance, rebate compliance and other costs to administer the Bonds. The foregoing estimates constitute good faith estimates only. The actual principal amount of the Bonds issued and sold, the true interest cost thereof, the finance charges thereof, the amount of proceeds received therefrom and total payment amount with respect thereto may differ from such good faith estimates due to (a) the actual date of the sale of the Bonds being different than the date assumed for purposes of such estimates, (b) the actual principal amount of Bonds sold being different from the Estimated Principal Amount, (c) the actual amortization of the Bonds being different than the amortization assumed for purposes of such estimates, (d) the actual market interest rates at the time of sale of the Bonds being different than those estimated for purposes of such estimates, (e) other market conditions, or (f) alterations in the District’s financing plan, or a combination of such factors. The actual date of sale of the Bonds and the actual principal amount of Bonds sold will be determined by the Authority based on the timing of the need for proceeds of the Bonds and other factors. The actual interest rates borne by the Bonds will depend on market interest rates at the time of sale thereof. The actual amortization of the Bonds will also depend, A-2 in part, on market interest rates at the time of sale thereof. Market interest rates are affected by economic and other factors beyond the control of the District. INSTALLMENT PURCHASE AGREEMENT by and between OTAY WATER DISTRICT, as Purchaser and OTAY WATER DISTRICT FINANCING AUTHORITY, as Seller Dated as of October 1, 2018 Relating to $[AMOUNT] OTAY WATER DISTRICT FINANCING AUTHORITY WATER REVENUE BONDS, SERIES 2018A Attachment C TABLE OF CONTENTS Page i ARTICLE I DEFINITIONS Section 1.01 Definitions ................................................................................................................. 2 ARTICLE II REPRESENTATIONS AND WARRANTIES Section 2.01 Representations by the District .................................................................................. 7 Section 2.02 Representations and Warranties by the Authority ..................................................... 8 ARTICLE III ACQUISITION, CONSTRUCTION AND PURCHASE OF 2018 PROJECT; 2018 PROJECT FUND Section 3.01 Sale and Purchase of the 2018 Project; District as Agent .......................................... 8 Section 3.02 Construction of 2018 Project ..................................................................................... 8 Section 3.03 Title ............................................................................................................................ 9 Section 3.04 2018 Project Fund ...................................................................................................... 9 ARTICLE IV 2018 INSTALLMENT PAYMENTS Section 4.01 Purchase Price .......................................................................................................... 10 Section 4.02 Payment of 2018 Installment Payments .................................................................. 10 Section 4.03 Payment of 2018 Installment Payments to Trustee ................................................. 10 Section 4.04 Reimbursement for Costs ........................................................................................ 11 Section 4.05 Payment to Trustee .................................................................................................. 11 ARTICLE V SECURITY Section 5.01 Pledge of Taxes and Revenues ................................................................................ 11 Section 5.02 Allocation of Taxes and Revenues .......................................................................... 11 Section 5.03 Additional Contracts and Parity Bonds ................................................................... 12 Section 5.04 Investments .............................................................................................................. 13 ARTICLE VI COVENANTS OF THE DISTRICT Section 6.01 Compliance with Installment Purchase Agreement and Indenture .......................... 13 Section 6.02 Against Encumbrances ............................................................................................ 14 Section 6.03 Against Sale or Other Disposition of Property ........................................................ 14 Section 6.04 Against Competitive Facilities ................................................................................ 14 Section 6.05 Tax Covenants ......................................................................................................... 14 Section 6.06 Maintenance and Operation of the Water System ................................................... 14 Section 6.07 Payment of Claims ................................................................................................... 15 Section 6.08 Compliance with Contracts ...................................................................................... 15 Section 6.09 Insurance .................................................................................................................. 15 Section 6.10 Accounting Records; Financial Statements and Other Reports ............................... 15 Section 6.11 Protection of Security and Rights of the Authority ................................................. 16 TABLE OF CONTENTS (continued) Page ii Section 6.12 Payment of Taxes and Compliance with Governmental Regulations ..................... 16 Section 6.13 Amount of Rates and Charges ................................................................................. 16 Section 6.14 Collection of Rates and Charges .............................................................................. 16 Section 6.15 Eminent Domain Proceeds ...................................................................................... 16 Section 6.16 Further Assurances .................................................................................................. 17 Section 6.17 Continuing Disclosure ............................................................................................. 17 ARTICLE VII PREPAYMENT OF 2018 INSTALLMENT PAYMENTS Section 7.01 Prepayment .............................................................................................................. 17 Section 7.02 Method of Prepayment ............................................................................................ 18 ARTICLE VIII EVENTS OF DEFAULT AND REMEDIES OF THE AUTHORITY Section 8.01 Events of Default and Acceleration of Maturities ................................................... 18 Section 8.02 Application of Funds Upon Acceleration ................................................................ 19 Section 8.03 Other Remedies of the Authority ............................................................................. 19 Section 8.04 Non-Waiver ............................................................................................................. 19 Section 8.05 Remedies Not Exclusive .......................................................................................... 20 ARTICLE IX DISCHARGE OF OBLIGATIONS Section 9.01 Discharge of Obligations ......................................................................................... 20 ARTICLE X MISCELLANEOUS Section 10.01 Liability Limited of the District ............................................................................... 21 Section 10.02 Benefits of Installment Purchase Agreement Limited to Parties ............................. 21 Section 10.03 Successor Is Deemed Included in all References to Predecessor ............................ 21 Section 10.04 Waiver of Personal Liability .................................................................................... 21 Section 10.05 Article and Section Headings, Gender and References ........................................... 21 Section 10.06 Partial Invalidity ...................................................................................................... 22 Section 10.07 Assignment .............................................................................................................. 22 Section 10.08 Net Contract ............................................................................................................. 22 Section 10.09 California Law ......................................................................................................... 22 Section 10.10 Notices ..................................................................................................................... 22 Section 10.11 Effective Date .......................................................................................................... 22 Section 10.12 Execution in Counterparts ....................................................................................... 22 Section 10.13 Indemnification of Authority ................................................................................... 23 Section 10.14 Amendments Permitted ........................................................................................... 23 Section 10.15 Notice to Rating Agencies ....................................................................................... 23 EXHIBIT A DESCRIPTION OF 2018 PROJECT .................................................................... A-1 EXHIBIT B PURCHASE PRICE .............................................................................................. B-1 INSTALLMENT PURCHASE AGREEMENT This INSTALLMENT PURCHASE AGREEMENT is made and entered into as of October 1, 2018, by and between OTAY WATER DISTRICT, a municipal water district duly formed and existing under and by virtue of the laws of the State of California (the “District”), and OTAY WATER DISTRICT FINANCING AUTHORITY, a joint exercise of powers authority, operating and acting pursuant to the laws of the State of California (the “Authority”). WITNESSETH: WHEREAS, the District has determined that the acquisition and construction of improvements, betterments, renovations, and expansions of certain facilities within its water system, as more particularly described in Exhibit A attached hereto (the “2018 Project”) is in the best interests of the District; and WHEREAS, the Authority has agreed to assist the District in financing the acquisition and construction of the 2018 Project; and WHEREAS, the District is authorized by Chapter 4 of Part 5, Division 20 of the Water Code of the State of California, to acquire property for its water system and to construct, improve, expand or repair its water system; and WHEREAS, the Authority has determined to acquire and construct the 2018 Project for, and sell the 2018 Project to, the District upon the terms and conditions set forth herein; and WHEREAS, the District has determined to make installment purchase payments to the Authority for the payment of the Costs of the 2018 Project; and WHEREAS, the District has determined that the purchase of the 2018 Project is necessary and proper for District uses and purposes; and WHEREAS, the District and the Authority have duly authorized the execution and delivery of this Installment Purchase Agreement; and WHEREAS, all acts, conditions and things required by law to exist, to have happened and to have been performed precedent to and in connection with the execution and delivery of this Installment Purchase Agreement do exist, have happened and have been performed in regular and due time, form and manner as required by law, and the parties hereto are now duly authorized to execute and enter into this Installment Purchase Agreement; NOW, THEREFORE, IN CONSIDERATION OF THESE PREMISES AND OF THE MUTUAL AGREEMENTS AND COVENANTS CONTAINED HEREIN AND FOR OTHER VALUABLE CONSIDERATION, THE PARTIES HERETO DO HEREBY AGREE AS FOLLOWS: 2 ARTICLE I DEFINITIONS Section 1.01 Definitions. Unless the context otherwise requires, the terms defined in this section shall for all purposes hereof and of any amendment hereof or supplement hereto and of any report or other document mentioned herein or therein have the meanings defined herein, the following definitions to be equally applicable to both the singular and plural forms of any of the terms defined herein. All capitalized terms used herein and not defined herein shall have the meanings ascribed thereto in the Indenture. Authority. The term “Authority” means the Otay Water District Financing Authority, a joint exercise of powers authority, organized under the laws of the State of California. Business Day. The term “Business Day” means a day which is not (a) a Saturday or Sunday or any other day bank institutions located in New York, New York, or the city or cities in which the principal or other designated corporate office of the Trustee is located are required or authorized to close, or (b) a day on which the New York Stock Exchange is closed. Contracts. The term “Contracts” means this Installment Purchase Agreement and all contracts of the District authorized and executed by the District, the Installment Payments or payments under which are on a parity with the 2018 Installment Payments and which are secured by a pledge of and lien on the Taxes and Revenues, including the 1996 Installment Sale Agreement and the 2010 Installment Purchase Agreement. Corporation. The term “Corporation” means the Otay Service Corporation, a non-profit public benefit corporation duly organized and existing under and by virtue of the laws of the State of California. Debt Service. The term “Debt Service” means, for any Fiscal Year, the sum of: (1) the interest accruing during such Fiscal Year on all outstanding Parity Bonds, assuming that all outstanding serial Parity Bonds are retired as scheduled and that all outstanding term Parity Bonds are redeemed or paid from sinking fund payments as scheduled (except to the extent that such interest is capitalized); (2) that portion of the principal amount of all outstanding serial Parity Bonds maturing in such Fiscal Year or maturing in the next succeeding Fiscal Year accruing during such Fiscal Year in each case computed as if such principal amounts were deemed to accrue daily during such Fiscal Year in equal amounts; (3) that portion of the principal amount of all outstanding term Parity Bonds required to be redeemed or paid in such Fiscal Year or during the next succeeding Fiscal Year in each case computed as if such principal amounts were deemed to accrue daily during such Fiscal Year in equal amounts; and (4) that portion of the Installment Payments required to be made during such Fiscal Year or during the next succeeding Fiscal Year in each case computed as if such Installment Payments were deemed to accrue daily during such Fiscal Year in equal amounts (except to the extent that the 3 interest portion of such Installment Payments is capitalized); less the earnings derived from investment of moneys on deposit in any debt service reserve fund, and any construction fund created with respect to any Contracts or Parity Bonds to the extent such earnings are deposited in a debt service fund, including the Bond Payment Fund; provided that, as to any such Parity Bonds or Installment Payments bearing or comprising interest at other than a fixed rate, the rate of interest used to calculate Debt Service shall be one hundred ten percent (110%) of the greater of: (i) the then current variable interest rate borne by such Parity Bonds or Contracts plus 2%, and (ii) the highest variable rate borne over the preceding 12 months by outstanding variable rate debt issued by the District or, if no such variable rate debt is at the time outstanding, by variable rate debt of which the interest rate is computed by reference to an index comparable to that to be utilized in determining the interest rate for the debt then proposed to be issued; provided further that if any series or issue of such Parity Bonds or Installment Payments have twenty- five percent (25%) or more of the aggregate principal amount of such series or issue due in any one year, Debt Service shall be determined for the Fiscal Year of determination as if the principal of and interest on such series or issue of such Parity Bonds or Installment Payments were being paid from the date of incurrence thereof in substantially equal annual amounts over a period of thirty (30) years from the date of calculation; and provided further that the amount on deposit in a debt service reserve fund on any date of calculation of Debt Service shall be deducted from the amount of principal due at the final maturity of the Parity Bonds and Contracts for which such debt service reserve fund was established and in each preceding year until such amount is exhausted; provided further that Debt Service shall be reduced by the amount of investment earnings credited to any debt service fund created with respect to Contracts or Parity Bonds; provided further that if the Parity Bonds or Contracts constitute Paired Obligations, the interest rate on such Parity Bonds or Contracts shall be the resulting linked rate or the effective fixed interest rate to be paid by the District with respect to such Paired Obligations; and provided further that effective when the 1996 Certificates are no longer Outstanding, the calculation of Debt Service payable by the District on Parity Bonds or Contracts shall be reduced by the amount of Interest Subsidy Payments the District is entitled to receive during such twelve-month period. District. The term “District” means the Otay Water District, a municipal water district duly formed and existing under and by virtue of the laws of the State of California. Event of Default. The term “Event of Default” means an event described in Section 8.01. Fiscal Year. The term “Fiscal Year” means the period beginning on July 1 of each year and ending on June 30 of the next calendar year, or any other twelve-month period selected and designated as the official Fiscal Year of the District. 4 Indenture. The term “Indenture” means the Indenture of Trust, dated as of October 1, 2018, by and between the Authority and the Trustee, as originally executed and as it may from time to time be amended or supplemented in accordance with its terms. Independent Certified Public Accountant. The term “Independent Certified Public Accountant” means any firm of certified public accountants appointed by the District, and each of whom is independent pursuant to the Statement on Auditing Standards No. 1 of the American Institute of Certified Public Accountants. Independent Financial Consultant. The term “Independent Financial Consultant” means a financial consultant or firm of such consultants appointed by the District, and who, or each of whom: (1) is in fact independent and not under domination of the District; (2) does not have any substantial interest, direct or indirect, with the District; and (3) is not connected with the District as an officer or employee of the District, but who may be regularly retained to make reports to the District. Installment Payment Date; 2018 Installment Payment Date. The term “Installment Payment Date” means any date on which Installment Payments are scheduled to be paid by the District under and pursuant to any Contract. The term “2018 Installment Payment Date” means four (4) Business Days prior to September 1 and March 1 of each year, commencing on March 1, 2019. Installment Payments; 2018 Installment Payments. The term “Installment Payments” means the installment payments of interest and principal scheduled to be paid by the District under and pursuant to the Contracts. The term “2018 Installment Payments” means the Installment Payments scheduled to be paid by the District under and pursuant hereto. Installment Purchase Agreement. The term “Installment Purchase Agreement” means this Installment Purchase Agreement, by and between the District and the Authority, dated as of October 1, 2018, as originally executed and as it may from time to time be amended or supplemented in accordance herewith. Interest Subsidy Payments. The term “Interest Subsidy Payments” means cash subsidy payments entitled to be received by the District from the United States Treasury with respect to the 2010B Bonds and any Parity Bonds issued and Contracts executed by the District, including but not limited to “Build America Bonds” issued as contemplated by the American Recovery and Reinvestment Act of 2009. Law. The term “Law” means the sections of the Water Code of the State of California applicable to municipal water districts, including the sections commencing with Section 71000, and all laws amendatory thereof or supplemental thereto. Net Proceeds. The term “Net Proceeds” means, when used with respect to any casualty insurance or condemnation award, the proceeds from such insurance or condemnation award remaining after payment of all expenses (including attorneys’ fees) incurred in the collection of such proceeds. 5 Net Revenues. The term “Net Revenues” means, for any Fiscal Year or other twelve-month period, the Revenues for such Fiscal Year or other twelve-month period less the Operation and Maintenance Costs for such Fiscal Year or other twelve-month period. 1996 Certificates. The term “1996 Certificates” means the Otay Water District $15,400,000 Variable Rate Demand Certificates of Participation (1996 Capital Projects) executed and delivered pursuant to the 1996 Installment Sale Agreement. 1996 Installment Payments. The term “1996 Installment Payments” means the Installment Payments to be made by the District pursuant to the 1996 Installment Sale Agreement. 1996 Installment Sale Agreement. The term “1996 Installment Sale Agreement” means the Installment Sale Agreement, dated as of June 1, 1996, as amended by the First Amendment to Installment Sale Agreement, dated as of August 1, 2004, and by the Second Amendment to Installment Sale Agreement, dated as of July 1, 2011 each by and between the District and the Corporation. Operation and Maintenance Costs. The term “Operation and Maintenance Costs” means (i) costs spent or incurred for maintenance and operation of the Water System calculated in accordance with generally accepted accounting principles, including (among other things) the reasonable expenses of management and repair and other expenses necessary to maintain and preserve the Water System in good repair and working order, and including administrative costs of the District that are charged directly or apportioned to the Water System, including but not limited to salaries and wages of employees, payments to the Public Employees Retirement System, overhead, insurance, taxes (if any), fees of auditors, accountants, attorneys or engineers and insurance premiums, and including all other reasonable and necessary costs of the District or charges (other than Debt Service payments) required to be paid by it to comply with the terms of this Installment Purchase Agreement or any Contract or of any resolution or indenture authorizing the issuance of any Parity Bonds or of such Parity Bonds; and (ii) costs spent or incurred in the purchase of water for the Water System; but excluding in all cases depreciation, replacement and obsolescence charges or reserves therefor and amortization of intangibles or other bookkeeping entries of a similar nature and all capital charges. Paired Obligations. The term “Paired Obligations” means any Parity Bond or Contract (or portion thereof) designated as paired obligations in the resolution, indenture or other document authorizing the issuance or execution and delivery thereof, which are simultaneously issued or executed and delivered (i) the principal of which is of equal amount maturing and to be redeemed or prepaid (or cancelled after acquisition thereof) on the same dates and in the same amounts, and (ii) the interest rates which, taken together, result in an irrevocably substantially fixed interest rate obligation of the District for the term of such Parity Bond or Contract. Parity Bonds. The term “Parity Bonds” means all revenue bonds or notes of the District authorized, executed, issued and delivered by the District, the payments of which are on a parity with the 2018 Installment Payments and which are secured by a pledge of and lien on the Taxes and Revenues, including the 2013 Bonds and the 2016 Bonds. Project; 2018 Project. The term “Project” means any additions, betterments, extensions or improvements to the Water System or other District facilities designated by the Board of Directors of the District as a Project, the acquisition or construction of which is to be paid for by the proceeds of any Contracts or Parity Bonds. The term “2018 Project” means the acquisitions, repairs, additions, 6 betterments, extensions and improvements to the Water System, including real property and buildings, if any, described in Exhibit A hereto and as modified in conformance with Section 3.01 hereof. Purchase Price. The term “Purchase Price” means the principal amount plus interest thereon owed by the District to the Authority under the terms hereof as provided in Section 4.01. Revenue Fund. The term “Revenue Fund” means the fund previously established under Section 3.01 of the 1996 Installment Sale Agreement and continued by the terms of the 2010 Installment Purchase Agreement, the 2013 Bonds, the 2016 Bonds and Section 5.02 hereof. Revenues. The term “Revenues” means (i) all water availability charges imposed pursuant to Chapter 2 of Part 5 of the Law not exceeding $10 per acre per year; and (ii) all income, rents, rates, fees, charges and other moneys derived by the District from the ownership or operation of the Water System, or any portion thereof, including without limiting the generality of the foregoing (a) all income, rents, rates, fees, charges or other moneys derived from the sale, furnishing, and supplying of water and other services, facilities and commodities sold, furnished or supplied through the facilities of the Water System, including connection fees, (b) the earnings on and income derived from the investment of such income, rents, rates, fees and charges or other moneys, (c) the proceeds derived by the District directly or indirectly from the sale, lease or other disposition of a part of the Water System as permitted hereunder and (d) any Interest Subsidy Payments; provided that the term “Revenues” shall not include customers’ deposits or any other deposits subject to refund until such deposits have become the property of the District. Taxes. The term “Taxes” means all taxes, including ad valorem taxes of the District, other than taxes imposed pursuant to Chapter 1 of Part 9 of the Law to secure general obligation bonds of the District or any improvement district thereof. Tax Fund. The term “Tax Fund” means the fund previously established under Section 3.01(1) of the 1996 Installment Sale Agreement and continued by the 2010 Installment Purchase Agreement, the 2013 Bonds, the 2016 Bonds and Section 5.02 hereof. Trustee. The term “Trustee” means MUFG Union Bank, N.A., acting in its capacity as Trustee under and pursuant to the Indenture, and its successors and assigns. 2010 Installment Purchase Agreement. The term “2010 Installment Purchase Agreement” means the Installment Purchase Agreement, dated as of March 1, 2010 by and between the District and the Authority. 2010A Bonds. The term “2010A Bonds” means the Otay Water District Financing Authority Water Revenue Bonds, Series 2010A (Non-AMT Tax-Exempt Bonds) issued under the Trust Agreement, dated as of March 1, 2010, by and between the Authority and Union Bank, N.A., as trustee (now known as MUFG Union Bank, N.A.). 2010B Bonds. The term “2010B Bonds” means the Otay Water District Financing Authority Water Revenue Bonds, Series 2010B (Taxable Build America Bonds) issued under the Trust Agreement, dated as of March 1, 2010, by and between the Authority and Union Bank, N.A., as trustee (now known as MUFG Union Bank, N.A.). 7 2013 Bonds. The term “2013 Bonds” means the Otay Water District 2013 Water Revenue Refunding Bonds issued under the Indenture of Trust, dated as of June 1, 2013, by and between the District and MUFG Union Bank, N.A., as trustee. 2016 Bonds. The term “2016 Bonds” means the Otay Water District 2016 Water Revenue Refunding Bonds, issued under the Indenture of Trust, dated as of May 1, 2016, by and between the District and MUFG Union Bank, N.A., as trustee. 2018 Bonds. The term “2018 Bonds” means the Otay Water District Financing Authority Water Revenue Bonds, Series 2018A issued under the Indenture. 2018 Project Fund. The term “2018 Project Fund” means the fund by that name established pursuant to Section 3.04 of this Installment Purchase Agreement. Water Service. The term “Water Service” means the water distribution service made available or provided by the Water System. Water System. The term “Water System” means the entire potable and reclaimed water supply, treatment, storage and distribution system of the District, including but not limited to all facilities, properties and improvements at any time owned, controlled or operated by the District for the supply, treatment and storage of potable or reclaimed water to customers of the District, and any necessary lands, rights, entitlements and other property useful in connection therewith, together with all extensions thereof and improvements thereto at any time acquired, constructed or installed by the District. ARTICLE II REPRESENTATIONS AND WARRANTIES Section 2.01 Representations by the District. The District makes the following representations: (a) The District is a municipal water district duly organized and existing under and pursuant to the laws of the State of California. (b) The District has full legal right, power and authority to enter into this Installment Purchase Agreement and carry out its obligations hereunder, to carry out and consummate all other transactions contemplated by this Installment Purchase Agreement, and the District has complied with the provisions of the Law in all matters relating to such transactions. (c) By proper action, the District has duly authorized the execution, delivery and due performance of this Installment Purchase Agreement. (d) The District has determined that it is necessary and proper for District uses and purposes within the terms of the Law that the District finance the 2018 Project in the manner provided for in this Installment Purchase Agreement, in order to provide essential services and facilities to persons residing in the District. 8 Section 2.02 Representations and Warranties by the Authority. The Authority makes the following representations and warranties: (a) The Authority is a joint exercise of powers authority, operating and acting pursuant to the laws of the State of California, has full legal right, power and authority to enter into this Installment Purchase Agreement and to carry out and consummate all transactions contemplated by this Installment Purchase Agreement and by proper action has duly authorized the execution and delivery and due performance of this Installment Purchase Agreement. (b) The execution and delivery of this Installment Purchase Agreement and the consummation of the transactions herein contemplated will not violate any provision of law, any order of any court or other agency of government, or any indenture, material agreement or other instrument to which the Authority is now a party or by which it or any of its properties or assets is bound, or be in conflict with, result in a breach of or constitute a default (with due notice or the passage of time or both) under any such indenture, agreement or other instrument, or result in the creation or imposition of any prohibited lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of the Authority. ARTICLE III ACQUISITION, CONSTRUCTION AND PURCHASE OF 2018 PROJECT; 2018 PROJECT FUND Section 3.01 Sale and Purchase of the 2018 Project; District as Agent. (a) In consideration for the 2018 Installment Payments, the Authority hereby agrees to acquire, construct and install the 2018 Project and agrees to sell and hereby sells, to the District, and the District agrees to simultaneously purchase and hereby purchases, from the Authority, the 2018 Project at the Purchase Price (payable in installments) as specified in Article IV hereof and otherwise in the manner and in accordance with the provisions of this Installment Purchase Agreement. The Authority hereby transfers and assigns to the District all of the Authority’s right, title and interest to the 2018 Project; provided, that, title to the 2018 Project shall pass as provided in Section 3.03 hereof. (b) The Authority hereby appoints the District as its agent for the purposes of acquisition, construction and installation of the 2018 Project, and the District hereby agrees to enter into such engineering, design and construction contracts and purchase order as may be necessary, to provide for the complete acquisition, construction and installation of the 2018 Project. Notwithstanding the foregoing, it is hereby expressly understood and agreed that the Authority shall be under no liability of any kind or character whatsoever for the payment of any costs or expenses incurred by the District for the acquisition, construction and installation of the 2018 Project and that all such costs and expenses shall be paid by the District, regardless of whether the funds deposited in the 2018 Project Fund (established in Section 3.04 hereof) are sufficient to cover all such costs. Section 3.02 Construction of 2018 Project. From the moneys on deposit in the 2018 Project Fund (established in Section 3.04 hereof) and other moneys available therefor in the Revenue Fund, the District will acquire and construct the 2018 Project with all practicable dispatch, and such acquisition and construction will be made in an expeditious manner and in conformity with the law so as to complete the same as soon as possible. 9 (a) Time for Completion. The District expects that the 2018 Project will be completed on or before three years from the date of issuance of the 2018 Bonds. (b) Payment of Claims. The District will pay and discharge any and all lawful claims for labor, materials or supplies which, if unpaid, might become a lien or charge upon the 2018 Project Fund or the Revenue Fund or any part thereof, or upon any funds held by the Trustee, or which might impair the security of the Installment Payments; provided, that nothing herein contained shall require the District to make any such payments so long as the District in good faith shall contest the validity of any such claims and such nonpayment will not materially adversely affect the District’s ability to perform its obligations hereunder. (c) Changes to 2018 Project. The District may substitute other improvements for those listed as components of the 2018 Project in Exhibit A if the facilities being constructed in lieu of the ones listed in Exhibit A are determined by the District to be in its best interests to the proper functioning of the Water System at the time of said determination, or may add additional Projects or improvements determined by the District to be necessary for the operation of the Water System; provided that the District shall file a Written Order of the District with the Trustee informing the Trustee of the District’s determination. Section 3.03 Title. All right, title and interest in each element and component of the 2018 Project shall vest in the District immediately upon execution and delivery of this Installment Purchase Agreement or, if later, upon the acquisition of any rights with respect to such element or component. Such vesting shall be automatic and shall require no further action by the District or the Authority, but the Authority agrees to execute and deliver, from time to time, any documents the District deems necessary or desirable to evidence such vesting. Section 3.04 2018 Project Fund. The District shall establish, maintain and hold a fund separate from any other fund established and maintained by the District designated as the “2018 Project Fund” (the “2018 Project Fund”). The District hereby agrees to maintain the 2018 Project Fund until the 2018 Project has been acquired and constructed by the District or until all amounts therein are expended towards acquisition and construction. On the Closing Date, the Authority shall cause a portion of the proceeds of the 2018 Bonds to be transferred by the Trustee to, or at the direction of the District, as provided in Section 3.02(b)(ii) of the Indenture, for deposit in the 2018 Project Fund. Moneys in the 2018 Project Fund shall be expended by or at the direction of the District for Costs of the 2018 Project in accordance with this Section. (a) There shall be credited to the 2018 Project Fund the following amounts: (1) the proceeds of sale of the 2018 Bonds transferred by the Trustee to the District; and (2) any other funds from time to time deposited in the 2018 Project Fund to pay Costs of the 2018 Project, including interest earnings on investments. (b) Interest earned on amounts on deposit in the 2018 Project Fund shall be used by or at the direction of the District for Costs of the 2018 Project. 10 Upon a determination by the District that the work on the 2018 Project has been completed, any amounts remaining in the 2018 Project Fund and not otherwise committed for payment of Costs related to the 2018 Project shall be withdrawn from the 2018 Project Fund and transferred to the Trustee for deposit into the Bond Payment Fund established under the Indenture and the 2018 Project Fund shall be closed. ARTICLE IV 2018 INSTALLMENT PAYMENTS Section 4.01 Purchase Price. (a) The Purchase Price to be paid by the District hereunder to the Authority is the sum of the principal amount of the District’s obligations hereunder plus the interest to accrue on the unpaid balance of such principal amount from the effective date hereof over the term hereof, subject to prepayment as provided in Article VII. (b) The principal amount of the Purchase Price to be paid by the District hereunder is set forth in Exhibit B hereto. (c) The interest to accrue on the unpaid balance of the principal amount of the Purchase Price is as specified in Section 4.02 and Exhibit B hereto, and shall be paid by the District as and constitute interest paid on the principal amount of the District’s Purchase Price obligations hereunder. Interest shall be computed on the basis of a 360-day year consisting of twelve 30-day months. Section 4.02 Payment of 2018 Installment Payments. The District shall, subject to its rights of prepayment provided in Article VII, pay the Trustee as assignee of the Authority the Purchase Price in installment payments of interest and principal in the amounts and on the 2018 Installment Payment Dates as set forth in Exhibit B hereto. Section 4.03 Payment of 2018 Installment Payments to Trustee. Each 2018 Installment Payment shall be paid to the Authority in lawful money of the United States of America. In the event the District fails to make any of the payments required to be made by it under this section, such payment shall continue as an obligation of the District until such amount shall have been fully paid and the District agrees to pay the same with interest accruing thereon at the rate or rates of interest then applicable to the remaining unpaid principal balance of the 2018 Installment Payments if paid in accordance with their terms. The obligation of the District to make the 2018 Installment Payments is, subject to Section 10.01, absolute and unconditional, and until such time as the Purchase Price shall have been paid in full (or provision for the payment thereof shall have been made pursuant to Article IX), the District will not discontinue or suspend any 2018 Installment Payment required to be made by it under this section when due, whether or not the Water System or any part thereof is operating or operable or its use is suspended, interfered with, reduced or curtailed or terminated in whole or in part, and such payments shall not be subject to reduction whether by offset or otherwise and shall not be conditional upon the performance or nonperformance by any party of any agreement for any cause whatsoever. 11 Section 4.04 Reimbursement for Costs. The District shall reimburse the Authority for any costs incurred by the Authority in connection with the issuance of the 2018 Bonds including costs incurred by the Authority pursuant to Article VIII of the Indenture. Section 4.05 Payment to Trustee. The District shall pay or cause to be paid to the Trustee all amounts due and payable to the Trustee pursuant to Section 8.03 of the Indenture. ARTICLE V SECURITY Section 5.01 Pledge of Taxes and Revenues. All Taxes and Revenues and all amounts on deposit in the Revenue Fund and the Tax Fund are hereby irrevocably pledged to the payment of the 2018 Installment Payments as provided herein and the Taxes and Revenues shall not be used for any other purpose while any of the 2018 Installment Payments remain unpaid; provided that out of the Taxes and Revenues and amounts on deposit in the Tax Fund and the Revenue Fund there may be apportioned such sums for such purposes as are expressly permitted herein. This pledge shall constitute a first and exclusive lien on Taxes and Revenues and all amounts on deposit in the Tax Fund and the Revenue Fund on a parity with the pledge under any Contracts or Parity Bonds; subject to application of amounts on deposit therein as permitted herein, the Revenue Fund, the Tax Fund and the other funds and accounts created hereunder are pledged for the payment of the 2018 Installment Payments in accordance with the terms hereof and of the Indenture. Such lien on the Taxes and Revenues shall attach, be perfected and be valid and binding from and after the Delivery Date, without any physical delivery of the Revenues and Taxes or further act and shall be valid and binding against all parties having claims of any kind in tort, contract or otherwise against the District, irrespective of whether such parties have notice hereof. Section 5.02 Allocation of Taxes and Revenues. In order to carry out and effectuate the pledge and lien contained herein, the District agrees and covenants that all Taxes and Revenues shall be received by the District in trust hereunder and shall be deposited when and as received in separate special funds designated as the “Revenue Fund” and the “Tax Fund,” respectively, which funds were previously established under the Contracts and are hereby continued by the terms of this Section 5.02, and which funds the District agrees and covenants to maintain and to hold separate and apart from other funds so long as any Installment Payments, Contracts or Parity Bonds remain unpaid. Moneys in the Revenue Fund and Tax Fund shall be used and applied by the District as provided in this Installment Purchase Agreement and as provided in the Contracts. The District shall, from the moneys in the Revenue Fund, pay all Operation and Maintenance Costs (including amounts reasonably required to be set aside in contingency reserves for Operation and Maintenance Costs, the payment of which is not then immediately required) as they become due and payable. All moneys in the Tax Fund, and, to the extent such moneys are insufficient, all remaining moneys in the Revenue Fund, shall be set aside by the District at the following times in the following respective special funds in the following order of priority and all moneys in each of such funds shall be held in trust and shall be applied, used and withdrawn only for the purposes hereinafter authorized in this Section: (a) Bond Payment Fund and Other Debt Service Payments. On or before each 2018 Installment Payment Date, the District shall, from the moneys in the Tax Fund and, to the extent needed, the Revenue Fund, transfer to the Trustee for deposit in the Bond Payment Fund, the 2018 12 Installment Payment due and payable on that 2018 Installment Payment Date. The District shall also, from the moneys in the Tax Fund and, to the extent needed, the Revenue Fund, transfer to the applicable trustee or payee for deposit in the applicable payment fund, without preference or priority, and in the event of any insufficiency of such moneys ratably without any discrimination or preference, any other Debt Service in accordance with the provisions of any other Contract or Parity Bond or resolution or indenture relating thereto. No deposit need be made in the Bond Payment Fund as 2018 Installment Payments if the amount in the Bond Payment Fund is at least equal to the amount of the 2018 Installment Payment due and payable on the next succeeding 2018 Installment Payment Date. All money in the Bond Payment Fund shall be used and withdrawn by the Trustee in accordance with the Indenture. (b) Reserve Funds for Parity Bonds and Contracts. On or before each Installment Payment Date or other date on which Debt Service is due on any Parity Bonds, the District shall, from the remaining moneys in the Tax Fund and, to the extent needed, the Revenue Fund, thereafter, without preference or priority, and in the event of any insufficiency of such moneys ratably without any discrimination or preference, transfer to the applicable trustee for the reserve funds and/or accounts, if any, as may have been established in connection with any Parity Bonds or Contracts, that sum, if any, necessary to restore such funds or accounts to an amount equal to the reserve requirement with respect thereto and to transfer to any insurer any amounts due pursuant to any agreement related to the repayment of draws under any reserve policy or other credit instrument funding a reserve requirement for any Parity Bonds or Contracts. (c) Surplus. Moneys on deposit in the Tax Fund or Revenue Fund not necessary to make any of the payments required above or as required by any other Contract or Parity Bond may be expended by the District at any time for any purpose permitted by law. Section 5.03 Additional Contracts and Parity Bonds. The District may, at any time, execute any Contract or issue any Parity Bonds, as the case may be, in accordance herewith, provided an Independent Financial Consultant or an Independent Certified Public Accountant shall render to and file with the District and the Trustee a written report certifying that Taxes and Net Revenues for any twelve (12) consecutive calendar months in the eighteen (18) calendar months immediately preceding the issuance of the additional Contracts or Parity Bonds adjusted as set forth below are at least equal to 125% of Debt Service (including for purposes of such calculation the obligation of the District to repay costs related to any surety bond, reserve credit facility or other reserve fund funding instrument), assuming such additional Contracts had been executed or additional Parity Bonds had been issued at the beginning of such twelve-month period. When the 1996 Certificates are no longer Outstanding, then the Interest Subsidy Payments will be deducted from Net Revenues for purposes of the coverage calculations of this Section. For purposes of calculating Net Revenues as set forth in the preceding paragraph, adjustments to the computations of Net Revenues may be made for the following: (1) any change in service charges which has been adopted subsequent to the commencement of the twelve-month period but prior to the date of issuance or execution of the additional Parity Bonds or Contracts; 13 (2) customers added to the Water System subsequent to the commencement of the twelve-month period but prior to the date of issuance or execution of the additional Parity Bonds or Contracts; (3) the estimated change in Net Revenues which will result from the connection of existing residences or businesses to the Water System within one year following completion of any project to be funded or system to be acquired from the proceeds of such additional Parity Bonds or Contracts; and (4) the estimated change in Net Revenues which will result from services provided under any long-term, guaranteed contract that extends for the life of the additional Parity Bonds or Contracts if entered into subsequent to the commencement of the twelve-month period but prior to the date of issuance or execution of the additional Parity Bonds or Contracts. Notwithstanding the foregoing, Parity Bonds issued or Contracts executed to refund Parity Bonds or Contracts may be delivered without satisfying the conditions set forth above if Debt Service in each Fiscal Year after the Fiscal Year in which such Parity Bonds are issued or Contracts executed is not greater than Debt Service would have been in each such Fiscal Year prior to the issuance of such Parity Bonds or execution of such Contracts. In addition to the foregoing, in the event any amounts owed to any insurer are past due and owing, such insurer must provide written consent to the issuance of any Parity Bonds or the execution of any additional Contracts. Section 5.04 Investments. All moneys held by the District in the Tax Fund and Revenue Fund shall be invested in the manner authorized by the District’s financial policies or as otherwise permitted by law. Investment earnings thereon shall remain on deposit in such fund, except as otherwise provided herein. ARTICLE VI COVENANTS OF THE DISTRICT Section 6.01 Compliance with Installment Purchase Agreement and Indenture. The District will punctually pay the 2018 Installment Payments in strict conformity with the terms hereof, and will faithfully observe and perform all the agreements, conditions, covenants and terms contained herein required to be observed and performed by it, and will not terminate the Installment Purchase Agreement for any cause including, without limiting the generality of the foregoing, any acts or circumstances that may constitute failure of consideration, destruction of or damage to the 2018 Project, commercial frustration of purpose, any change in the tax or other laws of the United States of America or of the State of California or any political subdivision of either or any failure of the Authority to observe or perform any agreement, condition, covenant or term contained herein required to be observed and performed by it, whether express or implied, or any duty, liability or obligation arising out of or connected herewith or the insolvency, or deemed insolvency, or bankruptcy or liquidation of the Authority or any force majeure, including acts of God, tempest, storm, earthquake, war, rebellion, riot, civil disorder, acts of public enemies, blockade or embargo, strikes, industrial disputes, lock outs, lack of transportation facilities, fire, explosion, or acts or regulations of governmental authorities. 14 The District will faithfully observe and perform all the agreements, conditions, covenants and terms contained in the Indenture required to be observed and performed by it, and it is expressly understood and agreed by and among the parties to this Installment Purchase Agreement and the Indenture that, subject to Section 10.06 hereunder, each of the agreements, conditions, covenants and terms contained in each such agreement is an essential and material term of the by obligation of the District to pay the Purchase Price pursuant to, and in accordance with, and as authorized under the Law and this Installment Purchase Agreement. The District will faithfully observe and perform all the agreements, conditions, covenants and terms required to be observed and performed by it pursuant to all outstanding Contracts and Parity Bonds as such may from time to time be executed or issued, as the case may be. Section 6.02 Against Encumbrances. The District will not make any pledge of or place any lien on Revenues or the moneys in the Revenue Fund or Taxes or moneys in the Tax Fund except as provided herein and in the Contracts and Parity Bonds. The District may at any time, or from time to time, issue evidences of indebtedness or incur other obligations for any lawful purpose which are payable from and secured by a pledge of and lien on Revenues or any moneys in the Revenue Fund or Taxes or moneys in the Tax Fund as may from time to time be deposited therein (as provided in Section 5.02) provided that (i) any such pledge and lien, which shall be on a parity with the pledge of and lien thereon provided herein, shall satisfy the requirements of Section 5.03 hereof; or (ii) such pledge and lien shall be subordinate in all respects to, the pledge of and lien thereon provided herein. Section 6.03 Against Sale or Other Disposition of Property. The District will not enter into any agreement or lease which impairs the operation of the Water System or any part thereof necessary to secure adequate Revenues for the payment of the 2018 Installment Payments, or which would otherwise impair the rights of the Authority hereunder or the operation of the Water System. Any real or personal property which has become nonoperative or which is not needed for the efficient and proper operation of the Water System, or any material or equipment which has become worn out, may be sold if such sale will not impair the ability of the District to pay the 2018 Installment Payments and if the proceeds of such sale are deposited in the Revenue Fund. Nothing herein shall restrict the ability of the District to sell any portion of the Water System if such portion is immediately repurchased by the District and if such arrangement cannot by its terms result in the purchaser of such portion of the Water System exercising any remedy which would deprive the District of or otherwise interfere with its right to own and operate such portion of the Water System. Section 6.04 Against Competitive Facilities. The District will not, to the extent permitted by law, acquire, construct, maintain or operate and will not, to the extent permitted by law and within the scope of its powers, permit any other public or private agency, corporation, district or political subdivision or any person whomsoever to acquire, construct, maintain or operate within the District any water system competitive with the Water System. Section 6.05 Tax Covenants. The District shall comply with the tax covenants set forth in Section 6.02 the Indenture and the Tax Certificate. Section 6.06 Maintenance and Operation of the Water System. The District will maintain and preserve the Water System in good repair and working order at all times and will operate the Water System in an efficient and economical manner and will pay all Operation and Maintenance Costs as they become due and payable. 15 Section 6.07 Payment of Claims. The District will pay and discharge any and all lawful claims for labor, materials or supplies which, if unpaid, might become a lien on the Revenues, Taxes or the funds or accounts created hereunder or under the Indenture or on any funds in the hands of the District pledged to pay the 2018 Installment Payments or to the Owners prior or superior to the lien of the 2018 Installment Payments or which might impair the security of the 2018 Installment Payments. Section 6.08 Compliance with Contracts. The District will comply with, keep, observe and perform all agreements, conditions, covenants and terms, express or implied, required to be performed by it contained in all contracts for the use of the Water System and all other contracts affecting or involving the Water System, to the extent that the District is a party thereto. Section 6.09 Insurance. (a) The District will procure and maintain such other insurance which it shall deem advisable or necessary to protect its interests and the interests of the Authority, which insurance shall afford protection in such amounts and against such risks (including damage to or destruction of the Water System) as are usually covered in connection with facilities similar to the Water System so long as such insurance is available from reputable insurance companies. In the event of any damage to or destruction of the Water System caused by the perils covered by such insurance, the Net Proceeds thereof shall be applied to the reconstruction, repair or replacement of the damaged or destroyed portion of the Water System. The District shall begin such reconstruction, repair or replacement promptly after such damage or destruction shall occur, and shall continue and properly complete such reconstruction, repair or replacement as expeditiously as possible, and shall pay out of such Net Proceeds all costs and expenses in connection with such reconstruction, repair or replacement so that the same shall be completed and the Water System shall be free and clear of all claims and liens. If such Net Proceeds exceed the costs of such reconstruction, repair or replacement portion of the Water System, and/or the cost of the construction of additions, betterments, extensions or improvements to the Water System, then the excess Net Proceeds shall be deposited in the Revenue Fund. If such Net Proceeds are sufficient to enable the District to retire all of the 2018 Bonds as well as all Parity Bonds and Contracts then remaining unpaid prior to their final respective due dates, the District may elect not to reconstruct, repair or replace the damaged or destroyed portion of the Water System, and/or not to construct other additions, betterments, extensions or improvements to the Water System; and thereupon Net Proceeds in an amount sufficient to retire all of the 2018 Bonds shall be transferred to the Trustee and deposited to the Bond Payment Fund. (b) The District will procure and maintain such other insurance as it shall deem advisable or necessary to protect its interests and the interests of the 2018 Bond Owners, which insurance shall afford protection in such amounts and against such risks as are usually covered in connection with municipal water systems similar to the Water System. (c) Any insurance required to be maintained by paragraph (a) above and, if the District determines to procure and maintain insurance pursuant to paragraph (b) above, such insurance, may be maintained under a self-insurance program so long as such self-insurance is maintained in the amounts and manner usually maintained in connection with water systems similar to the Water System and is, in the opinion of an accredited actuary, actuarially sound. Section 6.10 Accounting Records; Financial Statements and Other Reports. The District will keep appropriate accounting records in which complete and correct entries shall be made 16 of all transactions relating to the Water System, which records shall be available for inspection by the Authority and the Trustee at reasonable hours and under reasonable conditions. Section 6.11 Protection of Security and Rights of the Authority. The District will preserve and protect the security hereof and the rights of the Authority to the 2018 Installment Payments hereunder and will warrant and defend such rights against all claims and demands of all persons. Section 6.12 Payment of Taxes and Compliance with Governmental Regulations. The District will pay and discharge all taxes, assessments and other governmental charges which may hereafter be lawfully imposed upon the Water System, or any part thereof or upon the Revenues when the same shall become due. The District will duly observe and conform with all valid regulations and requirements of any governmental authority relative to the operation of the Water System, or any part thereof, but the District shall not be required to comply with any regulations or requirements so long as the validity or application thereof shall be contested in good faith. Section 6.13 Amount of Rates and Charges. To the fullest extent permitted by law, the District shall fix and prescribe, at the commencement of each Fiscal Year, rates and charges for the Water Service which will be at least sufficient to yield during each Fiscal Year Taxes and Net Revenues equal to one hundred twenty-five percent (125%) of the Debt Service (including for purposes of such calculation the obligation of the District to repay costs related to any surety bond, reserve credit facility or other reserve fund funding instrument) for such Fiscal Year. The District may make adjustments from time to time in such rates and charges and may make such classification thereof as it deems necessary, but shall not reduce the rates and charges then in effect unless the Taxes and Net Revenues from such reduced rates and charges will at all times be sufficient to meet the requirements of this section. When the 1996 Certificates are no longer Outstanding, then the Interest Subsidy Payments will be deducted from Net Revenues for purposes of the coverage calculations of this Section. Section 6.14 Collection of Rates and Charges. The District will have in effect at all times by-laws, rules and regulations requiring each customer to pay the rates and charges applicable to the Water Service to such land and providing for the billing thereof and for a due date and a delinquency date for each bill. In each case where such bill remains unpaid in whole or in part after it becomes delinquent, the District may discontinue such service from the Water System, and such service shall not thereafter be recommenced except in accordance with the District laws or rules and regulations governing such situations of delinquency. Section 6.15 Eminent Domain Proceeds. If all or any part of the Water System shall be taken by eminent domain proceedings, the Net Proceeds thereof shall be applied as follows: (a) If: (1) the District files with the Trustee a certificate showing: (i) the estimated loss of annual Net Revenues, if any, suffered or to be suffered by the District by reason of such eminent domain proceedings; (ii) a general description of the additions, betterments, extensions or improvements to the Water System proposed to be acquired and constructed by the District from such Net Proceeds; and (iii) an estimate of the additional annual Net Revenues to be derived from such additions, betterments, extensions or improvements; and (2) the District, on the basis of such certificate filed with the Trustee, determines that the estimated additional annual Net Revenues will sufficiently offset the estimated loss of annual Net Revenues resulting from such eminent domain proceedings so that the ability of the District to meet its obligations hereunder will not be substantially impaired (which determination shall be final and conclusive), then the District shall promptly proceed with the 17 acquisition and construction of such additions, betterments, extensions or improvements substantially in accordance with such certificate and such Net Proceeds shall be applied for the payment of the costs of such acquisition and construction, and any balance of such Net Proceeds not required by the District for such purpose shall be deposited in the Revenue Fund. (b) If the foregoing conditions are not met, then such Net Proceeds shall be applied by the District, in part, to the payment of the 2018 Installment Payments due hereunder in the same proportion which the aggregate unpaid principal balance of 2018 Bonds then bears to the aggregate unpaid principal amount of such 2018 Bonds and all Parity Bonds and Contracts. Section 6.16 Further Assurances. The District will adopt, deliver, execute and make any and all further assurances, instruments and resolutions as may be reasonably necessary or proper to carry out the intention or to facilitate the performance hereof and for the better assuring and confirming unto the Authority of the rights and benefits provided to it herein. Section 6.17 Continuing Disclosure. The District covenants and agrees that it will comply with and carry out all of the provisions of the Continuing Disclosure Agreement. Notwithstanding any other provision of this Installment Purchase Agreement, failure of the District to comply with the Continuing Disclosure Agreement shall not be considered an Event of Default; provided however, the Authority may (and, at the request of any participating underwriter or the Owners of at least 25% aggregate principal amount of Outstanding 2018 Bonds, shall, after receiving indemnification to its satisfaction) or any Owner may take such actions as may be necessary and appropriate, including seeking mandamus or specific performance by court order, to cause the District to comply with its obligations under this Section. ARTICLE VII PREPAYMENT OF 2018 INSTALLMENT PAYMENTS Section 7.01 Prepayment. The District shall have the right at any time to prepay the 2018 Installment Payments corresponding to principal of and interest on the 2018 Bonds and at any time and from time to time from any available funds on any date on or after ____________ 1, 20__; provided that any prepayment of a principal component of the 2018 Installment Payments to be applied to the redemption or defeasance of 2018 Bonds shall be in an amount sufficient to provide for such redemption or defeasance of 2018 Bonds in integral multiples of five thousand dollars ($5,000) and otherwise in accordance with the provisions of the Indenture and Section 9.01 hereof. The Authority shall accept such prepayments when the same are tendered by the District. With respect to prepayments of 2018 Installment Payments pursuant to this Section, the District may determine, by written direction to the Authority and the Trustee, which 2018 Installment Payments are to be prepaid, including the principal component of the 2018 Installment Payment due on each 2018 Installment Payment Date to be prepaid, plus accrued interest to the date of prepayment, and, subject to the provisions of this Section, the date on which each such prepayment is to be made; provided, however, the remaining 2018 Installment Payments shall be sufficient to make the scheduled Debt Service payments on the 2018 Bonds. Notwithstanding any such prepayment, the District shall not be relieved of its obligations hereunder, including its obligations under Article IV, until the Purchase Price shall have been fully paid (or provision for payment thereof shall have been provided to the written satisfaction of the Authority). 18 Section 7.02 Method of Prepayment. Before making any prepayment pursuant to Section 7.01, the District shall give written notice to the Authority and the Trustee specifying the date on which the prepayment will be paid, which date shall be not less than forty-five (45) nor more than sixty (60) days from the date such notice is given. ARTICLE VIII EVENTS OF DEFAULT AND REMEDIES OF THE AUTHORITY Section 8.01 Events of Default and Acceleration of Maturities. Each of the following shall constitute an Event of Default hereunder: (1) the District shall default in the due and punctual payment of any 2018 Installment Payment or any Contract or Parity Bond when and as the same shall become due and payable; (2) the District shall default in the performance of any of the other agreements or covenants required herein to be performed by it, and such default shall have continued for a period of sixty (60) days after the District shall have been given notice in writing of such default by the Authority or the Trustee; (3) the District shall file a petition or answer seeking arrangement or reorganization under the federal bankruptcy laws or any other applicable law of the United States of America or any state therein, or if a court of competent jurisdiction shall approve a petition filed with or without the consent of the District seeking arrangement or reorganization under the federal bankruptcy laws or any other applicable law of the United States of America or any state therein, or if under the provisions of any other law for the relief or aid of debtors any court of competent jurisdiction shall assume custody or control of the District or of the whole or any substantial part of its property; or (4) an occurrence and continuance of any event of default under and as defined in any Contract or Parity Bond; then and in each and every such case during the continuance of an Event of Default, the Trustee as assignee of the Authority, shall have the right at its option and without any further demand or notice, but subject in all respects to the provisions of Article VII of the Indenture to declare the entire principal amount of the unpaid 2018 Installment Payments and the accrued interest thereon to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable, anything contained herein to the contrary notwithstanding. This Section, however, is subject to the condition that if at any time after the entire principal amount of the unpaid 2018 Installment Payments and the accrued interest thereon shall have been so declared due and payable and before any judgment or decree for the payment of the moneys due shall have been obtained or entered the District shall deposit with the Authority a sum sufficient to pay the unpaid principal amount of the 2018 Installment Payments or the unpaid payment of any other Contract or Parity Bond referred to in clause (1) above due prior to such declaration and the accrued interest thereon, with interest on such overdue installments, at the rate or rates applicable to the remaining unpaid principal balance of the 2018 Installment Payments or such Contract or Parity Bond if paid in accordance with their terms, and the reasonable expenses of the Authority, and any and all other defaults known to the Authority (other than in the payment of the entire principal amount of the unpaid 2018 Installment Payments and the accrued 19 interest thereon due and payable solely by reason of such declaration) shall have been made good or cured to the satisfaction of the Authority or provision deemed by the Authority to be adequate shall have been made therefor, then by written notice to the District, or the Authority may rescind and annul such declaration and its consequences; but no such rescission and annulment shall extend to or shall affect any subsequent default or shall impair or exhaust any right or power consequent thereon. Section 8.02 Application of Funds Upon Acceleration. Upon the date of the declaration of acceleration as provided in Section 8.01, all Taxes and Revenues thereafter received by the District shall be applied in the following order -- First, to the payment, without preference or priority, and in the event of any insufficiency of such Revenues or Taxes ratably without any discrimination or preference, of the fees, costs and expenses of the Authority and Trustee, if any, in carrying out the provisions of this article, including reasonable compensation to their respective accountants and counsel; Second, other than Taxes, to the payment of the Operation and Maintenance Costs; and Third, to the payment of the entire principal amount of the unpaid 2018 Installment Payments and the unpaid principal amount of all Parity Bonds and Contracts and the accrued interest thereon, with interest on the overdue installments at the rate or rates of interest applicable to the 2018 Installment Payments and such Parity Bonds and Contracts if paid in accordance with their respective terms. Section 8.03 Other Remedies of the Authority. The Authority shall have the right: (a) by mandamus or other action or proceeding or suit at law or in equity to enforce its rights against the District or any director, officer or employee thereof, and to compel the District or any such director, officer or employee to perform and carry out its or his duties under the Law and the agreements and covenants required to be performed by it or him contained herein; (b) by suit in equity to enjoin any acts or things which are unlawful or violate the rights of the Authority; or (c) by suit in equity upon the happening of an Event of Default to require the District and its directors, officers and employees to account as the trustee of an express trust. Notwithstanding anything contained herein, the Authority shall have no security interest in or mortgage on the 2018 Project, the Water System or other assets of the District and no default hereunder shall result in the loss of the 2018 Project, the Water System, or other assets of the District. Section 8.04 Non-Waiver. Nothing in this article or in any other provision hereof shall affect or impair the obligation of the District, which is absolute and unconditional, to pay the 2018 Installment Payments to the Authority at the respective due dates or upon prepayment from the Net Revenues, the Revenue Fund, the Tax Fund and the other funds herein pledged for such payment, or shall affect or impair the right of the Authority, which is also absolute and unconditional, to institute suit to enforce such payment by virtue of the contract embodied herein. A waiver of any default or breach of duty or contract by the Authority shall not affect any subsequent default or breach of duty or contract or impair any rights or remedies on any such subsequent default or breach of duty or contract. No delay or omission by the Authority to exercise 20 any right or remedy accruing upon any default or breach of duty or contract shall impair any such right or remedy or shall be construed to be a waiver of any such default or breach of duty or contract or an acquiescence therein, and every right or remedy conferred upon the Authority by the Law or by this article may be enforced and exercised from time to time and as often as shall be deemed expedient by the Authority. If any action, proceeding or suit to enforce any right or exercise any remedy is abandoned or determined adversely to the Authority, the District and the Authority shall be restored to their former positions, rights and remedies as if such action, proceeding or suit had not been brought or taken. Section 8.05 Remedies Not Exclusive. No remedy herein conferred upon or reserved to the Authority is intended to be exclusive of any other remedy, and each such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing in law or in equity or by statute or otherwise and may be exercised without exhausting and without regard to any other remedy conferred by the Law or any other law. ARTICLE IX DISCHARGE OF OBLIGATIONS Section 9.01 Discharge of Obligations. When (a) all or any portion of the 2018 Installment Payments shall have become due and payable in accordance herewith or a written notice of the District to prepay all or any portion of the 2018 Installment Payments shall have been filed with the Trustee; and (b) there shall have been deposited with the Trustee at or prior to the 2018 Installment Payment Dates or date (or dates) specified for prepayment, in trust for the benefit of the Authority, or its assigns, and irrevocably appropriated and set aside to the payment of all or any portion of the 2018 Installment Payments, sufficient moneys and Defeasance Obligations, the principal of and interest on which when due will provide money sufficient to pay all principal, prepayment premium, if any, and interest of such 2018 Installment Payments to their respective 2018 Installment Payment Dates or prepayment date or dates as the case may be; and (c) provision shall have been made for paying all fees and expenses of the Trustee, then and in that event, if an opinion of Bond Counsel acceptable to the Trustee is filed with the Trustee to the effect that the actions authorized by and taken pursuant to this Article IX shall not adversely affect the exclusion from gross income for federal income tax purposes of interest on the 2018 Bonds, the right, title and interest of the Authority herein and the obligations of the District hereunder shall, with respect to all or such portion of the 2018 Installment Payments as have been so provided for, thereupon cease, terminate, become void and be completely discharged and satisfied (except for the right of the Trustee and the obligation of the District to have such moneys and such Defeasance Obligations applied to the payment of such 2018 Installment Payments). In such event, upon request of the District the Trustee shall cause an accounting for such period or periods as may be requested by the District to be prepared and filed with the District and shall execute and deliver to the District all such instruments as may be necessary or desirable to evidence such total or partial discharge and satisfaction, as the case may be, and, in the event of a total discharge and satisfaction, the Trustee shall pay over to the District, after payment of all amounts due the Trustee 21 pursuant to the Indenture, as an overpayment of 2018 Installment Payments, all such moneys or such Defeasance Obligations held by it pursuant hereto other than such moneys and such Defeasance Obligations, as are required for the payment or prepayment of the 2018 Installment Payments, which moneys and Defeasance Obligations shall continue to be held by the Trustee in trust for the payment of the 2018 Installment Payments and shall be applied by the Trustee to the payment of the 2018 Installment Payments of the District. ARTICLE X MISCELLANEOUS Section 10.01 Liability Limited of the District. Notwithstanding anything contained herein, the District shall not be required to advance any moneys derived from any source of income other than the Revenues, Taxes, the Revenue Fund, the Tax Fund and the other funds provided herein for the payment of amounts due hereunder or for the performance of any agreements or covenants required to be performed by it contained herein. The District may, however, advance moneys for any such purpose so long as such moneys are derived from a source legally available for such purpose and may be legally used by the District for such purpose. The obligation of the District to make the 2018 Installment Payments is a special obligation of the District payable solely from the Taxes, Net Revenues and amounts on deposit in the Revenue Fund and the Tax Fund and does not constitute a debt of the District or of the State of California or of any political subdivision thereof in contravention of any constitutional or statutory debt limitation or restriction. Section 10.02 Benefits of Installment Purchase Agreement Limited to Parties. Except as set forth in Section 10.07 below, nothing contained herein, expressed or implied, is intended to give to any person other than the District or the Authority any right, remedy or claim under or pursuant hereto, and any agreement or covenant required herein to be performed by or on behalf of the District or the Authority shall be for the sole and exclusive benefit of the other party. Section 10.03 Successor Is Deemed Included in all References to Predecessor. Whenever either the District or the Authority is named or referred to herein, such reference shall be deemed to include the successor to the powers, duties and functions that are presently vested in the District or the Authority, and all agreements and covenants required hereby to be performed by or on behalf of the District or the Authority shall bind and inure to the benefit of the respective successors thereof whether so expressed or not. Section 10.04 Waiver of Personal Liability. No Board member, officer or employee of the District shall be individually or personally liable for the payment of the 2018 Installment Payments, but nothing contained herein shall relieve any director, officer or employee of the District from the performance of any official duty provided by any applicable provisions of law or hereby. Section 10.05 Article and Section Headings, Gender and References. The headings or titles of the several articles and sections hereof and the table of contents appended hereto shall be solely for convenience of reference and shall not affect the meaning, construction or effect hereof, and words of any gender shall be deemed and construed to include all genders. All references herein to “Articles,” “Sections” and other subdivisions or clauses are to the corresponding articles, sections, subdivisions or clauses hereof and the words “hereby,” “herein,” “hereof,” “hereto,” “herewith” and other words of 22 similar import refer to the Installment Purchase Agreement as a whole and not to any particular article, section, subdivision or clause hereof. Section 10.06 Partial Invalidity. If any one or more of the agreements or covenants or portions thereof required hereby to be performed by or on the part of the District or the Authority shall be contrary to law, then such agreement or agreements, such covenant or covenants or such portions thereof shall be null and void and shall be deemed separable from the remaining agreements and covenants or portions thereof and shall in no way affect the validity hereof. The District and the Authority hereby declare that they would have executed the Installment Purchase Agreement, and each and every other article, section, paragraph, subdivision, sentence, clause and phrase hereof irrespective of the fact that any one or more articles, sections, paragraphs, subdivisions, sentences, clauses or phrases hereof or the application thereof to any person or circumstance may be held to be unconstitutional, unenforceable or invalid. Section 10.07 Assignment. The Installment Purchase Agreement and the Authority’s rights hereunder (except the rights of the Authority set forth in Section 10.13 hereof) shall be assigned by the Authority, to the Trustee as provided in the Indenture, to which assignment the District hereby acknowledges and consents. Section 10.08 Net Contract. The Installment Purchase Agreement shall be deemed and construed to be a net contract, and the District shall pay absolutely net during the term hereof the 2018 Installment Payments and all other payments required hereunder, free of any deductions and without abatement, diminution or set-off whatsoever. Section 10.09 California Law. This Installment Purchase Agreement shall be construed and governed in accordance with the laws of the State of California. Section 10.10 Notices. All written notices to be given hereunder shall be given by mail to the party entitled thereto at its address set forth below, or at such other address as such party may provide to the other party in writing from time to time, namely: If to the District: Otay Water District 2554 Sweetwater Springs Boulevard Spring Valley, CA 91978 Attention: General Manager If to the Authority: Otay Water District Financing Authority 2554 Sweetwater Springs Boulevard Spring Valley, CA 91978 Attention: Executive Director Section 10.11 Effective Date. The Installment Purchase Agreement shall become effective upon its execution and delivery, and shall terminate when the Purchase Price shall have been fully paid (or provision for the payment thereof shall have been made to the written satisfaction of the Authority). Section 10.12 Execution in Counterparts. The Installment Purchase Agreement may be executed in several counterparts, each of which shall be deemed an original, and all of which shall constitute but one and the same instrument. 23 Section 10.13 Indemnification of Authority. The District hereby agrees to indemnify and hold harmless the Authority and its assignee to the extent permitted by law, from and against all claims, advances, damages and losses, including legal fees and expenses, arising out of or in connection with the acceptance or the performance of its duties hereunder and under the Indenture provided that no indemnification will be made to the Authority, or its assignee, as applicable for its willful misconduct, negligence or breach of an obligation hereunder or under the Indenture. Section 10.14 Amendments Permitted. (a) This Installment Purchase Agreement and the rights and obligations of the Authority and the District and of the Owners of the 2018 Bonds and of the Trustee may be modified or amended at any time by an amendment hereto which shall become binding when the written consents of the Owners of a majority in aggregate principal amount of the 2018 Bonds then Outstanding, exclusive of 2018 Bonds disqualified as provided in Section 9.02 of the Indenture. No such modification or amendment shall (1) extend the stated maturities of the 2018 Bonds, or reduce the rate of interest represented thereby, or extend the time of payment of interest, or reduce the amount of principal represented thereby, or reduce any premium payable on the prepayment thereof, without the consent of the Owner of each Bond so affected, or (2) reduce the aforesaid percentage of Owners of 2018 Bonds whose consent is required for the execution of any amendment or modification of this Installment Purchase Agreement, or (3) modify any of the rights or obligations of the Trustee or the Authority without its written consent thereto. (b) This Installment Purchase Agreement and the rights and obligations of the Authority and the District and of the Owners of the 2018 Bonds may also be modified or amended at any time by an amendment hereto which shall become binding upon adoption, without the consent of the Owners of any 2018 Bonds, but only to the extent permitted by law and only for any one or more of the following purposes-- (1) to add to the covenants and agreements of the Authority or the District contained in this Installment Purchase Agreement other covenants and agreements thereafter to be observed or to surrender any right or power herein reserved to or conferred upon the Authority or the District, and which shall not adversely affect the interests of the Owners of the 2018 Bonds; (2) to cure, correct or supplement any ambiguous or defective provision contained in this Installment Purchase Agreement or in regard to questions arising under this Installment Purchase Agreement, as the Authority or the District may deem necessary or desirable and which shall not adversely affect the interests of the Owners of the 2018 Bonds; and (3) to make such other amendments or modifications as may be in the best interests of the Owners of the 2018 Bonds. No amendment without consent of the Owners may modify any of the rights or obligations of the Trustee without the written consent thereto. Section 10.15 Notice to Rating Agencies. Copies of all amendments to this Installment Purchase Agreement to be made pursuant to Section 10.14(a) shall be mailed by first class mail to the Rating Agencies with published ratings that were requested by the District at least 15 days prior to the effective date of such amendment. 24 25 IN WITNESS WHEREOF, the parties hereto have executed and attested this Installment Purchase Agreement by their officers thereunto duly authorized as of the day and year first written above. OTAY WATER DISTRICT By: Its: General Manager ATTEST: District Secretary OTAY WATER DISTRICT FINANCING AUTHORITY By: Its: Treasurer/Auditor ATTEST: Authority Secretary A-1 EXHIBIT A DESCRIPTION OF 2018 PROJECT The 2018 Project comprises all or a portion of the costs relating to the following capital improvements to the District’s Water System: PS - 870-2 Pump Station Replacement SR-11 Utility Relocations RecPL - 20-Inch, 680 Zone, Village 2 - Heritage/La Media Res - 1655-1 Reservoir 0.5 MG Heritage Road Bridge Replacement and Utility Relocation RecPL - 14-Inch, 927 Zone, Force Main Improvements RWCWRF Filtered Water Storage Tank Improvements PS - 1090-1 Pump Station Replacement (400 gpm) PL - 624/340 PRS, Paseo Ranchero and Otay Valley Road PL - 12-Inch Pipeline Replacement, 978 Zone, Vista Vereda RecPRS - 927/680 PRS Improvements, Otay Lakes Road 458/340 PRS Replacement, 1571 Melrose Ave PL - 8-inch, 850 Zone, Coronado Ave, Chestnut/Apple PL - 8-inch, 1004 Zone, Eucalyptus St, Coronado/Date/La Mesa Quarry Road Bridge Replacement and Utility Relocation PL - 12-inch, 711 Zone, Pas de Luz/Telegraph Canyon Rd PL - 12-Inch Pipeline Replacement, 803 PZ, Vista Grande PL - 12-Inch Pipeline Replacement, 978 Zone, Pence Dr/Vista Sierra Dr PS - Temporary Lower Otay Pump Station Redundancy Padre Dam - Otay Interconnection Dehesa Valley PL - 12-inch, 978 Zone, Hidden Mesa Road 458/340 PRS Replacement, 1505 Oleander Ave PS - 711-2 (PS 711-1 Replacement and Expansion) - 14,000 gpm Vista Diego Hydropneumatic Tank Replacement Res - 711-3 Reservoir Cover/Liner Replacement Rancho Jamul Hydropneumatic Tank Replacement In addition to the projects listed above, the District intends to acquire as part of the 2018 Project other improvements for the Water System including certain facilities required in connection with some of the above listed projects, pipelines, potable water reservoirs and pump stations, all as hereafter determined by the District and certified to the Trustee in accordance with Section 3.02(c) of the Installment Purchase Agreement to which this Exhibit A is attached. B-1 EXHIBIT B PURCHASE PRICE 1. The principal amount of payments to be made by the District hereunder is $__________. 2. The 2018 Installment Payments to be applied to the payment of the principal and interest on the 2018 Bonds are payable in the amounts and on the 2018 Installment Payment Dates as follows: 2018 Installment Payment Date (4 Business Days Prior to) Principal Interest Debt Service 1 CONTINUING DISCLOSURE AGREEMENT This Continuing Disclosure Agreement, dated _________, 2018 (the “Disclosure Agreement”) is executed and delivered by the Otay Water District (the “District”) and Harrell & Company Advisors, LLC (the “Dissemination Agent”) in connection with the issuance of $__________ Otay Water District Financing Authority Water Revenue Bonds, Series 2018A (the “Bonds”) by the Otay Water District Financing Authority (the “Authority”). The Bonds are being issued pursuant to an Indenture of Trust, dated as of October 1, 2018 (the “Indenture”), by and between MUFG Union Bank, N.A., as trustee (the “Trustee”) and the Authority. The District covenants as follows: SECTION 1. Purpose of the Disclosure Agreement. This Disclosure Agreement is being executed and delivered by the District for the benefit of the Holders and Beneficial Owners of the Bonds and in order to assist the Participating Underwriter in complying with the Rule. SECTION 2. Definitions. In addition to the definitions set forth in the Indenture, which apply to any capitalized term used in this Disclosure Agreement unless otherwise defined in this Section, the following capitalized terms shall have the following meanings: “Annual Report” shall mean the Annual Report provided by the District pursuant to, and as described in, Sections 3 and 4 of this Disclosure Agreement. “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 Bonds (including persons holding Bonds through nominees, depositories or other intermediaries), or (b) is treated as the owner of any Bonds for federal income tax purposes. “Disclosure Representative” shall mean the General Manager of the District and the Chief Financial Officer of the District, or their designee, or such other officer or employee as the District shall designate in writing from time to time. “Dissemination Agent” shall mean Harrell & Company Advisors, LLC, or any successor Dissemination Agent designated in writing by the District and which has filed with the District a written acceptance of such designation. “EMMA” shall mean the Electronic Municipal Market Access system of the MSRB. “Holder” shall mean the registered owner of any Bond. Listed Events” shall mean any of the events listed in Section 5(a) and (b) of this Disclosure Agreement. “MSRB” shall mean the Municipal Securities Rulemaking Board. “Official Statement” shall mean the Official Statement relating to the Bonds, dated _______, 2018. “Participating Underwriter” shall mean the original underwriter of the Bonds required to comply with the Rule in connection with the offering of the Bonds. “Repository” shall mean the EMMA system of the MSRB or any other entity designated under the Rule as the repository for filings made pursuant to the Rule. Attachment D 2 “Rule” shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time. “State” shall mean the State of California. SECTION 3. Provision of Annual Reports. (a) The District shall, or, upon delivery of the Annual Report to the Dissemination Agent, shall cause the Dissemination Agent to, not later than March 31 of each year, commencing March 31, 2019, provide to the Repository an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Agreement. The Annual Report shall be provided to the Repository in an electronic format as prescribed by the Repository and shall be accompanied by identifying information as prescribed by the Repository. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may cross-reference other information as provided in Section 4 of this Disclosure Agreement; provided that the audited financial statements of the District may be submitted separately from the balance of the Annual Report and later than the date required above for the filing of the Annual Report if they are not available by that date. If the District’s fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 5(c). (b) Not later than fifteen (15) business days prior to the date specified in subsection (a) for providing the Annual Report to the Repository, the District shall provide the Annual Report to the Dissemination Agent (if other than the District). If the District is unable to provide to the Repository an Annual Report by the date required in subsection (a), the Dissemination Agent shall send a notice to the Repository in the form provided by the Repository. (c) The Dissemination Agent shall: (i) confirm the electronic filing requirements of the Repository for the Annual Reports; and (ii) if the Dissemination Agent is other than the District, file a report with the District certifying that the Annual Report has been provided pursuant to this Disclosure Agreement, stating the date it was provided to the Repository. (d) Notwithstanding any other provision of this Disclosure Agreement, all filings shall be made in accordance with the MSRB’s EMMA system, or in another manner approved under the Rule. SECTION 4. Content of Annual Reports. The District’s Annual Report shall contain or include by reference the following: (a) The District’s audited financial statements, prepared in accordance with generally accepted auditing standards for municipalities in the State of California. If the District’s audited financial statements are not available by the time the Annual Report is required to be filed pursuant to Section 3(a), the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the final Official Statement, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available. (b) To the extent not contained in the audited financial statements filed pursuant to the preceding subsection (a) by the date required by Section 4 hereof, updates of Tables 1 through 4 and 8 through 11 under the caption “THE WATER SYSTEM.” 3 Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of the District or related public entities, which have been submitted to the Repository or the Securities and Exchange Commission. If the document included by reference is a final official statement, it must be available from the MSRB. The District shall clearly identify each such other document so included by reference. SECTION 5. Reporting of Significant Events. (a) Pursuant to the provisions of this Section 5, the District shall give, or cause the Dissemination Agent to give, notice of the occurrence of any of the following events with respect to the Bonds in a timely manner not more than ten (10) business days after the event: 1. principal and interest payment delinquencies; 2. unscheduled draws on debt service reserves reflecting financial difficulties; 3. unscheduled draws on credit enhancements reflecting financial difficulties; 4. substitution of credit or liquidity providers, or their failure to perform; 5. adverse tax opinions or the issuance by the Internal Revenue Service of proposed or final determinations of taxability or of a Notice of Proposed Issue (IRS Form 5701-TEB); 6. tender offers; 7. defeasances; 8. ratings changes; and 9. bankruptcy, insolvency, receivership or similar proceedings. Note: for the purposes of the event identified in subparagraph (9), the event is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for an obligated person in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the obligated person, or if such jurisdiction has been assumed by leaving the existing governmental body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the obligated person. (b) Pursuant to the provisions of this Section 5, the District shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Bonds, if material: 1. unless described in paragraph 5(a)(5) above, notices or determinations by the Internal Revenue Service with respect to the tax status of the Bonds or other material events affecting the tax status of the Bonds; 4 2. the consummation of a merger, consolidation or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms; 3. appointment of a successor or additional trustee or the change of the name of a trustee; 4. nonpayment related defaults; 5. modifications to the rights of Owners of the Bonds; 6. notices of redemption; and 7. release, substitution or sale of property securing repayment of the Bonds. (c) Whenever the District obtains knowledge of the occurrence of a Listed Event under 5(b) above, the District shall as soon as possible determine if such event would be material under applicable federal securities laws. (d) If the District determines that knowledge of the occurrence of a Listed Event would be material under applicable federal securities laws, within 10 business days after the event, the District shall file a notice of such occurrence with the Repository, or provide the notice to the Dissemination Agent for filing with the Repository. If the Dissemination Agent has been instructed by the District to report the occurrence of a Listed Event, the Dissemination Agent shall file a notice of such occurrence with the Repository. Notwithstanding the foregoing, notice of Listed Events described in subsection (b)(6) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to Holders of affected Bonds pursuant to the Trust Agreement. (e) The District hereby agrees that the undertaking set forth in this Disclosure Agreement is the responsibility of the District and that the Dissemination Agent shall not be responsible for determining whether the District’s instructions to the Dissemination Agent under this Section 5 comply with the requirements of the Rule. (f) Any of the filings required to be made under this Section 5 shall be made in accordance with the MSRB’s EMMA system or in another manner approved under the Rule. SECTION 6. Termination of Reporting Obligation. The District’s obligations under this Disclosure Agreement shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Bonds. If such termination occurs prior to the final maturity of the Bonds, the District shall give notice of such termination in the same manner as for a Listed Event under Section 5(c). SECTION 7. Dissemination Agent. The District may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Agreement, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. The Dissemination Agent shall not be responsible in any manner for the form or content of any notice or report prepared by the District pursuant to this Disclosure Agreement. The Dissemination Agent may resign by providing thirty days written notice to the District. The Dissemination Agent 5 shall not be responsible for the content of any report or notice prepared by the District and shall have no duty to review any information provided to it by the District. The Dissemination Agent shall have no duty to prepare any information report nor shall the Dissemination Agent be responsible for filing any report not provided to it by the District in a timely manner and in a form suitable for filing. SECTION 8. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement, the District may amend this Disclosure Agreement, and any provision of this Disclosure Agreement may be waived, provided that, in the opinion of nationally recognized bond counsel, such amendment or waiver is permitted by the Rule; provided, the Dissemination Agent shall have first consented to any amendment that modifies or increases its duties or obligations hereunder. In the event of any amendment or waiver of a provision of this Disclosure Agreement, the District shall describe such amendment in the next Annual Report, and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type (or in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented by the District. In addition, if the amendment relates to the accounting principles to be followed in preparing financial statements, (i) notice of such change shall be given in the same manner as for a Listed Event under Section 5(c), and (ii) the Annual Report for the year in which the change is made shall present a comparison (in narrative form and also, if feasible, in quantitative form) between the financial statements as prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. SECTION 9. Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent the District from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Agreement. If the District chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Agreement, the District shall have no obligation under this Disclosure Agreement to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event. SECTION 10. Default. In the event of a failure of the District to comply with any provision of this Disclosure Agreement, any Holder or Beneficial Owner of the Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the District to comply with its obligations under this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed an Event of Default under the Indenture, and the sole remedy under this Disclosure Agreement in the event of any failure of the District or the Dissemination Agent to comply with this Disclosure Agreement shall be an action to compel performance. No Bondholder or Beneficial Owner may institute such action, suit or proceeding to compel performance unless they shall have first delivered to the District satisfactory written evidence of such Holder’s or Beneficial Owner’s status as such, and a written notice of and request to cure such failure, and the District shall have refused to comply therewith within a reasonable time. SECTION 11. Duties, Immunities and Liabilities of Dissemination Agent. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Agreement, and the District agrees, to the extent permitted by law, to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including 6 the costs and expenses (including attorney’s fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent’s, its officers’, directors’, employees’ and agents’ negligence or willful misconduct. The Dissemination Agent shall be paid compensation by the District for its services provided hereunder in accordance with its schedule of fees as amended from time to time and all expenses, legal fees and advances made or incurred by the Dissemination Agent in the performance of its duties hereunder. In performing its duties hereunder, the Dissemination Agent shall not be deemed to be acting in any fiduciary capacity for the District, the Holders, or any other party. The obligations of the District under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Bonds. 7 SECTION 12. Notices. Any notices or communications to or among any of the parties to this Disclosure Agreement may be given as follows: District: Otay Water District 2554 Sweetwater Springs Boulevard Spring Valley, CA 91978 Attention: General Manager Dissemination Agent: Harrell & Company Advisors, LLC 333 City Boulevard West, Suite 1430 Orange, CA 92868 Attn: Suzanne Harrell SECTION 13. Beneficiaries. This Disclosure Agreement solely to the benefit of the District, the Dissemination Agent, the Participating Underwriter and Holders and Beneficial Owners from time to time of the Bonds, and shall create no rights in any other person or entity. SECTION 14. Signature. This Disclosure Agreement has been executed by the undersigned on the date hereof, and such signature binds the District to the undertaking herein provided. OTAY WATER DISTRICT By: Chief Financial Officer HARRELL & COMPANY ADVISORS, LLC, as Dissemination Agent By: Authorized Officer PRELIMINARY OFFICIAL STATEMENT DATED AUGUST 15, 2018 NEW ISSUE RATING BOOK-ENTRY ONLY S&P: __ (See “CONCLUDING INFORMATION - Rating on the Bonds” herein) In the opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California (“Bond Counsel”), under existing statutes, regulations, rulings and judicial decisions, and assuming the accuracy of certain representations and compliance with certain covenants and requirements described herein, interest (and original issue discount) on the Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals. In the further opinion of Bond Counsel, interest (and original issue discount) on the Bonds is exempt from State of California personal income tax. See “TAX MATTERS” herein. $28,300,000* OTAY WATER DISTRICT FINANCING AUTHORITY WATER REVENUE BONDS, SERIES 2018A Dated: Date of Delivery Due: September 1, as shown on the inside front cover page. The cover page contains certain information for general reference only. It is not a summary of the issue. Potential investors are advised to read the entire Official Statement to obtain information essential to the making of an informed investment decision. See “RISK FACTORS” herein for a discussion of special risk factors that should be considered in evaluating the investment quality of the Bonds. The Otay Water District Financing Authority Water Revenue Bonds, Series 2018A (the “Bonds”) are payable from revenues pledged under the Indenture (defined below) consisting of Installment Payments to be made by the Otay Water District (the “District”) to the Otay Water District Financing Authority (the “Authority”) as payment for certain real property and improvements (the “2018 Project”) pursuant to an Installment Purchase Agreement, as described herein and from investment earnings on funds held under the Indenture of Trust (the “Pledged Revenues”). The Bonds will be issued pursuant to an Indenture of Trust, dated as of October 1, 2018 (the “Indenture”), by and between the Authority and MUFG Union Bank, N.A., as trustee (the “Trustee”). The Bonds are being issued to provide funds for construction of water storage, treatment and transmission facilities of the District. See “THE FINANCING PLAN” herein. The District is required under the Installment Purchase Agreement to make installment payments in each fiscal year from Taxes and Net Revenues of the District’s water system (the “Water System”) in an amount sufficient to pay the annual principal and interest due on the Bonds, as described herein. See “SOURCES OF PAYMENT FOR THE BONDS” and “RISK FACTORS” herein. Interest on the Bonds is payable on March 1, 2019, and semiannually thereafter on September 1 and March 1 of each year until maturity. The Bonds are subject to optional and sinking account redemption prior to maturity (see “THE BONDS - General Provisions” and “THE BONDS - Redemption” herein). The Bonds are limited obligations of the Authority and are payable solely from and secured solely by the Pledged Revenues and amounts on deposit in the Bond Payment Fund under the Indenture. The District’s obligation to make the Installment Payments is a limited obligation of the District payable solely from Taxes and Net Revenues of the Water System, and neither the full faith and credit nor the taxing power of the District, the State of California or any of its political subdivisions is pledged for the payment of the Bonds. Neither the Bonds nor the obligation of the District to make Installment Payments constitutes an indebtedness of the Authority, the District, the State of California or any political subdivision thereof within the meaning of any constitutional or statutory debt limitation or restriction. The Bonds are offered, when, as and if issued, subject to the approval as to their legality by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, Bond Counsel, and certain other conditions. Certain legal matters will be passed on for the District and the Authority by Artiano Shinoff, San Diego, California, as General Counsel to the District and the Authority, and by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, as Disclosure Counsel. It is anticipated that the Bonds, in book-entry form, will be available for delivery through the facilities of The Depository Trust Company on or about October 25, 2018 (see “THE BONDS - General Provisions - Book-Entry-Only System” herein). The date of the Official Statement is _________, 2018. __________________________ * Preliminary, subject to change. Th i s P r e l i m i n a r y O f f i c i a l S t a t e m e n t a n d t h e i n f o r m a t i o n c o n t a i n ed h e r e i n a r e s u b j e c t t o c o m p l e t i o n o r a m e n d m e n t . U n d e r n o c i r cu m s t a n c e s sh a l l t h i s P r e l i m i n a r y O f f i c i a l S t a t e m e n t c o n s t i t u t e a n o f f e r t o s e l l o r a s o l i c i t a t i o n o f a n o ff e r t o b u y n o r s h a l l t h e r e b e an y s a l e o f t h e s e s e c u r i t i e s in a n y j u r i s d i c t i o n i n w h i c h s u c h o f f e r , s o l i c i t a t i o n o r s a l e w ou l d b e u n l a w f u l u n d e r t h e s e c u r i t i e s l a w s o f s u c h j u r i s d i c t i o n . $28,300,000* OTAY WATER DISTRICT FINANCING AUTHORITY WATER REVENUE BONDS, SERIES 2018A MATURITY SCHEDULE (Base CUSIP®† 68881R) Maturity Date Principal Interest Reoffering Reoffering September 1 Amount Rate Yield Price CUSIP®† 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 __________________________ * Preliminary, subject to change. † CUSIP® is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, managed by S&P Capital IQ on behalf of the American Bankers Association. CUSIP numbers have been assigned by an independent company not affiliated with the Authority, the District, the Municipal Advisor or the Underwriter and are included solely for the convenience of the holders of the Bonds. None of the Authority, the District, the Municipal Advisor or the Underwriter is responsible for the selection or use of these CUSIP numbers, and no representation is made as to their correctness on the Bonds or as indicated above. The CUSIP number for a specific maturity is subject to being changed after the execution and delivery of the Bonds as a result of various subsequent actions including, but not limited to, a refunding in whole or in part of such maturity or as a result of the procurement of secondary market portfolio insurance or other similar enhancement by investors that is applicable to all or a portion of certain maturities of the Bonds. GENERAL INFORMATION ABOUT THIS OFFICIAL STATEMENT Use of Official Statement. This Official Statement is submitted in connection with the offer and sale of the Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose. This Official Statement is not to be construed as a contract with the purchasers of the Bonds. Effective Date. This Official Statement speaks only as of its date, and the information and expressions of opinion contained in this Official Statement are subject to change without notice. Neither the delivery of this Official Statement nor any sale of the Bonds will, under any circumstances, create any implication that there has been no change in the affairs of the District or any other parties described in this Official Statement. Estimates and Forecasts. When used in this Official Statement and in any continuing disclosure by the District, any press release and any oral statement made with the approval of an authorized officer of the District or any other entity described or referenced herein, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “forecast,” “expect,” “intend” and similar expressions identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Any forecast is subject to such uncertainties. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances may occur. Therefore, there are likely to be differences between forecasts and actual results, and those differences may be material. Limit of Offering. No dealer, broker, salesperson or other person has been authorized by the District to give any information or to make any representations in connection with the offer or sale of the Bonds other than those contained herein and if given or made, such other information or representation must not be relied upon as having been authorized by the District or the Municipal Advisor. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the Bonds by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale. Preparation of this Official Statement. The information contained in this Official Statement has been obtained from sources that are believed to be reliable, but this information is not guaranteed as to accuracy or completeness. The information and expressions of opinions herein are subject to change without notice and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the District since the date hereof. This Official Statement is submitted in connection with the sale of the Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose, unless authorized in writing by the District. All summaries of the Bonds, the Indenture or other documents, are made subject to the provisions of such documents and do not purport to be complete statements of any or all of such provisions. Reference is hereby made to such documents on file with the District Secretary for further information. See “INTRODUCTION - Summaries Not Definitive.” The Underwriter has provided the following sentence for inclusion in this Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. Bonds are Exempt from Securities Laws Registration. The issuance, sale and delivery of the Bonds has not been registered under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, in reliance upon exemptions for the execution, sale and delivery of municipal securities provided under Section 3(a)(2) of the Securities Act of 1933 and Section 3(a)(l2) of the Securities Exchange Act of 1934. Stabilization of Prices. In connection with this offering, the Underwriter may overallot or effect transactions which stabilize or maintain the market price of the Bonds at a level above that which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. The Underwriter may offer and sell the Bonds to certain dealers and others at prices lower than the public offering prices set forth on the inside cover page hereof and said public offering prices may be changed from time to time by the Underwriter. District Website. The District maintains a website. The information on such website is not part of this Official Statement and is not intended to be relied on by investors with respect to the Bonds unless specifically set forth or incorporated herein. OTAY WATER DISTRICT SAN DIEGO COUNTY, CALIFORNIA BOARD OF DIRECTORS Tim Smith, President - Division 1 Mitch Thompson, Vice President - Division 2 Mark Robak, Treasurer - Division 5 Gary D. Croucher, Division 3 Hector Gastelum, Division 4 ______________________________________________ MANAGEMENT TEAM Mark Watton, General Manager Adolfo Segura, Chief, Administrative Services Rod Posada, PE, PLS, CCM, Chief, Engineering Joseph R. Beachem, Chief Financial Officer Pedro Porras, PE, Chief, Water Operations Dan Martin, Assistant Chief of Engineering Kevin Koeppen, Assistant Chief of Finance Jose Martinez, Assistant Chief, Water Operations ________________________________________ PROFESSIONAL SERVICES Bond Counsel and Disclosure Counsel Stradling Yocca Carlson & Rauth, a Professional Corporation Newport Beach, California General Counsel to the District and the Authority Artiano Shinoff San Diego, California Municipal Advisor Harrell & Company Advisors, LLC Orange, California Trustee MUFG Union Bank, N.A. Los Angeles, California TABLE OF CONTENTS INTRODUCTION ...................................................... 1  The District ................................................................ 1  The Authority ............................................................. 1  Sources of Payment for the Bonds ............................. 2  No Reserve Fund ....................................................... 3  Legal Matters ............................................................. 3  Offering of the Bonds ................................................ 3  Summaries Not Definitive ......................................... 3  THE BONDS ............................................................... 3  General Provisions ..................................................... 3  Redemption ................................................................ 4  Scheduled Debt Service ............................................. 7  THE FINANCING PLAN .......................................... 9  Estimated Sources and Uses of Funds ....................... 9  OTAY WATER DISTRICT ...................................... 11  THE WATER SYSTEM ........................................... 12  Existing Facilities .................................................... 12  Water Storage ........................................................... 13  Water Supply ........................................................... 13  Capital Improvement Program ................................. 18  Water Service ........................................................... 20  Water Charges .......................................................... 21  Taxes ........................................................................ 24  Personnel ................................................................. 26  Retirement Program ................................................. 26  Other Post-Employment Benefits ............................ 31  Insurance .................................................................. 33  District Reserves and Investment Policy ................. 34  Outstanding Indebtedness of the District ................. 35  Historical Operating Results .................................... 36  Historical Debt Service Coverage ............................ 39  Projected Debt Service Coverage ............................ 41  SOURCES OF PAYMENT FOR THE BONDS ..... 45  General ..................................................................... 45  2018 Installment Payments ...................................... 45  Taxes and Net Revenues .......................................... 45  Allocation of Taxes and Net Revenues .................... 46  No Reserve Fund for the Bonds ............................... 47  Event of Default and Acceleration of Maturities ..... 47  Rate Covenant .......................................................... 48  Parity Debt ............................................................... 48  Property Insurance ................................................... 49  CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS ...................... 49  Article XIIIB Gann Limit ........................................ 49  Proposition 218 ........................................................ 50  Future Initiatives ...................................................... 52  RISK FACTORS ....................................................... 53  System Demand ....................................................... 53  Drought .................................................................... 53  Increased Operation and Maintenance Costs ........... 53  Rate Covenant Not a Guarantee; Failure to Meet Projections............................................................. 53  Additional Obligations Payable from Taxes and Net Revenues ........................................................ 54  Risks Relating to Water Supplies ............................. 54  California WaterFix Costs and Long Term Rate Impacts .................................................................. 54  Environmental Regulation ....................................... 55  Proposition 218 ........................................................ 55  Natural Hazards ....................................................... 56  Interest Subsidy Payment; Sequestration ................. 57  Acceleration; Limited Recourse on Default ............. 57  Bankruptcy Risks ..................................................... 57  No Obligation to Tax................................................ 57  Change in Law ......................................................... 58  Loss of Tax Exemption ............................................ 58  IRS Audit of Tax-Exempt Bond Issues .................... 58  Secondary Market Risk ............................................ 58  TAX MATTERS ........................................................ 58  LEGAL MATTERS .................................................. 60  Enforceability of Remedies ...................................... 60  Approval of Legal Proceedings ................................ 60  Litigation .................................................................. 60  CONCLUDING INFORMATION .......................... 61  Rating on the Bonds ................................................. 61  Underwriting ............................................................ 61  The Municipal Advisor ............................................ 62  Continuing Disclosure ............................................. 62  Audited Financial Statements .................................. 6 2   References ................................................................ 62  Execution ................................................................. 62  APPENDIX A - SUMMARY OF LEGAL DOCUMENTS APPENDIX B - DISTRICT AUDITED FINANCIAL STATEMENTS APPENDIX C - ECONOMIC PROFILE FOR THE COUNTY OF SAN DIEGO APPENDIX D - FORM OF CONTINUING DISCLOSURE AGREEMENT APPENDIX E - PROPOSED FORM OF LEGAL OPINION OF BOND COUNSEL APPENDIX F - THE BOOK-ENTRY SYSTEM OTAY WATER DISTRICT LOCATION MAP 1 OFFICIAL STATEMENT $28,300,000* OTAY WATER DISTRICT FINANCING AUTHORITY WATER REVENUE BONDS, SERIES 2018A This Official Statement which includes the cover page, the inside cover page and appendices (the “Official Statement”) is provided to furnish certain information concerning the sale of the Otay Water District Financing Authority Water Revenue Bonds, Series 2018A (the “Bonds”), in the aggregate principal amount of $28,300,000*. INTRODUCTION This Introduction contains only a brief description of this issue and does not purport to be complete. The Introduction is subject in all respects to more complete information in the entire Official Statement and the offering of the Bonds to potential investors is made only by means of the entire Official Statement and the documents summarized herein. Potential investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision (see “RISK FACTORS” herein). For definitions of certain capitalized terms used herein and not otherwise defined, and the terms relating to the Bonds, see the summary included in “APPENDIX A - SUMMARY OF LEGAL DOCUMENTS” herein. The District The Otay Water District (the “District”) was established in 1956. The District is a municipal water district organized and existing under and in accordance with Division 20 of the Water Code of the State of California, commencing with Section 71000, as amended (the “Law”). The District’s boundaries currently encompass an area of approximately 125 square miles in San Diego County, lying immediately east of the San Diego metropolitan area and running from the City of El Cajon south to the Mexican border, abutting the cities of El Cajon and La Mesa and encompassing most of the City of Chula Vista and a small portion of the City of San Diego. The District currently serves a population of approximately 223,000 and expects the service area to experience moderate growth in the next ten years (see “OTAY WATER DISTRICT” and “APPENDIX C - ECONOMIC PROFILE FOR THE COUNTY OF SAN DIEGO” herein). The District is administered by a Board of Directors consisting of five members who are elected to four- year alternating terms by the voters residing within the District’s boundaries. The District is divided into five divisions, with each Director representing a specific division within which he or she must reside. The positions of General Manager and General Counsel are filled by appointments of the Board. The District employs 137 full-time equivalent employees. The Authority The Otay Water District Financing Authority (the “Authority”) is a joint exercise of powers authority organized and existing under and by virtue of the Joint Exercise of Powers Act, constituting Articles 1 through 4 (commencing with Section 6500) of Chapter 5, Division 7, Title 1 of the Government Code of the State of California (the “Joint Powers Act”). The District and the California Municipal Finance Authority, a joint exercise of powers authority, formed the Authority by the execution of a joint exercise of powers agreement on March 3, 2010. The Authority functions as an independent entity and was formed to assist the District in the financing of public capital improvements. Pursuant to the Joint Powers __________________________ * Preliminary, subject to change. 2 Act, the Authority is authorized to issue revenue bonds to provide funds to acquire or construct public capital improvements, with such revenue bonds to be repaid from the installment payments for such improvements, such as the installment payments described herein. The Authority is governed by a five-member Board which consists of all members of the District’s Board of Directors. The Board President serves as the Chairman of the Authority. The General Manager acts as the Executive Director, the District Secretary acts as the Secretary, and the Chief Financial Officer acts as the Treasurer of the Authority. See “THE AUTHORITY” herein. Sources of Payment for the Bonds The Bonds. The Bonds are being issued pursuant to the Joint Powers Act and an Indenture of Trust, dated as of October 1, 2018 (the “Indenture”), by and between the Authority and MUFG Union Bank, N.A., Los Angeles, California, as trustee (the “Trustee”). The Bonds are being issued to provide funding for the 2018 Project, as defined below. The proceeds of the Bonds will be used by the District for the acquisition, construction and installation of the 2018 Project on behalf of the Authority. A portion of the proceeds will be used to pay costs of issuance. The Bonds are secured by Pledged Revenues (as defined in the Indenture), consisting of Installment Payments (the “2018 Installment Payments”) and other amounts (other than payments related to indemnification of the Authority) to be paid by the District to the Authority, pursuant to an Installment Purchase Agreement, dated as of October 1, 2018, by and between the Authority and the District (the “Installment Purchase Agreement”) and amounts held in the Bond Payment Fund established under the Indenture. The 2018 Installment Payments are scheduled to be sufficient to pay, when due, the annual principal and interest on the Bonds. Pursuant to the Indenture, the Authority will assign to the Trustee, for the benefit of the Owners of the Bonds, all of its rights, title and interest under the Installment Purchase Agreement except for its right to be indemnified by the District. For a summary of the Indenture and the Installment Purchase Agreement see “APPENDIX A - SUMMARY OF LEGAL DOCUMENTS” herein. The Installment Payments. The Installment Purchase Agreement is being executed and delivered to finance the construction of water storage, treatment and transmission projects, including but not limited to pump station replacements, utility relocations, pipeline replacement, force main improvements, storage tank improvements, tank replacements, new reservoir and/or reservoir cover/liner replacements (the “2018 Project”). See “THE FINANCING PLAN” and “THE WATER SYSTEM.” The 2018 Installment Payments are secured by a charge and lien on Taxes and Revenues of the Water System and are payable from Taxes and Net Revenues, on a parity with:  the payments required to be made by the District under an installment sale agreement dated as of June 1, 1996 (the “1996 Installment Sale Agreement”) securing the District’s outstanding Variable Rate Demand Certificates of Participation (1996 Capital Projects) (the “1996 Certificates”),  the payments required to be made by the District under an installment purchase agreement dated as of March 1, 2010 (the “2010 Installment Purchase Agreement”) securing the Otay Water District Financing Authority’s outstanding Water Revenue Bonds, Series 2010A and Water Revenue Bonds, Series 2010B (collectively, the “2010 Bonds”),  The debt service payments on the District’s 2013 Water Revenue Refunding Bonds (the “2013 Bonds”), and  The debt service payments on the District’s 2016 Water Revenue Refunding Bonds (the “2016 Bonds”). See “SOURCES OF PAYMENT FOR THE BONDS” herein. 3 Collectively, the 1996 Installment Sale Agreement, the 2010 Installment Purchase Agreement, the 2013 Bonds, the 2016 Bonds are referred to herein as the “Existing Parity Obligations.” See “THE WATER SYSTEM - Outstanding Indebtedness of the District” herein. The Bonds are limited obligations of the Authority and are payable solely from and secured solely by the Pledged Revenues and amounts deposited in the Bond Payment Fund established under the Indenture. The District’s obligation to make the 2018 Installment Payments is a limited obligation of the District payable solely from Taxes and Net Revenues of the Water System, and neither the full faith and credit nor the taxing power of the District, the State of California or any of its political subdivisions is pledged for the payment of the Bonds. Neither the Bonds nor the obligation of the District to make 2018 Installment Payments constitutes an indebtedness of the Authority, the District, the State of California or any political subdivision thereof within the meaning of any constitutional or statutory debt limitation or restriction. No Reserve Fund The Authority will not establish or fund a reserve fund for the Bonds. Legal Matters Certain legal matters relating to the issuance of the Bonds are subject to the approving opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, Bond Counsel. Certain legal matters will be passed on for the District and the Authority by Artiano Shinoff, as General Counsel for the District and the Authority, and by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, as Disclosure Counsel to the District. Offering of the Bonds Authority for Issuance and Delivery. The Bonds are to be issued pursuant to the Joint Powers Act, the Indenture and by Resolution No. ____ of the Authority adopted on _________, 2018. Offering and Delivery of the Bonds. The Bonds are offered, when, as and if issued, subject to the approval as to their legality by Bond Counsel. It is anticipated that the Bonds, in book-entry form, will be available for delivery on or about October 25, 2018 through the facilities of The Depository Trust Company. Summaries Not Definitive The summaries and references contained herein with respect to the Indenture, the Bonds and other statutes or documents do not purport to be comprehensive or definitive and are qualified by reference to each such document or statute, and references to the Bonds are qualified in their entirety by reference to the form thereof included in the Indenture. Copies of these documents may be obtained after delivery of the Bonds from the District at 2554 Sweetwater Springs Blvd., Spring Valley, California 91978. THE BONDS General Provisions Payment of the Bonds. The Bonds will be issued in the form of fully registered bonds in denominations of $5,000 or any integral multiple thereof. Interest on the Bonds is payable at the rates per annum set forth on the inside front cover page hereof, on March 1, 2019 and semiannually on September 1 and March 1 of each year to and including the date of maturity (each, an “Interest Payment Date”). Interest on the Bonds will be computed on the basis of a year consisting of 360 days and twelve 30-day months. 4 Principal with respect to the Bonds is payable on September 1 in each of the years and in the amounts set forth on the inside front cover page hereof. The Bonds shall bear interest from the Interest Payment Date next preceding the date of authentication thereof unless: (a) a Bond is authenticated after the 15th day of the calendar month prior to an Interest Payment Date (each, a “Record Date”) and on or before the following Interest Payment Date, in which event it shall bear interest from such Interest Payment Date; or (b) a Bond is authenticated on or before February 15, 2019, in which event it shall bear interest from the date of initial delivery; provided, however, that if, as of the date of authentication of any Bond, interest thereon is in default, such Bond shall bear interest from the Interest Payment Date to which interest has previously been paid or made available for payment thereon. Interest on the Bonds shall be payable on each Interest Payment Date to the person whose name appears on the Registration Books as the Owner thereof as of the Record Date immediately preceding each such Interest Payment Date. Both the principal of and interest on the Bonds shall be payable in lawful money of the United States of America. Book-Entry-Only System. The Depository Trust Company (“DTC”), New York, New York, will act as securities depository for the Bonds. The Bonds will be issued as fully registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. Interest and principal on the Bonds will be payable when due by wire transfer of the Trustee to DTC which will, in turn, remit such interest and principal to DTC Participants (as defined herein), which are obligated, in turn, to remit such interest and principal to Beneficial Owners (as defined herein) of the Bonds (see “APPENDIX F - THE BOOK-ENTRY SYSTEM” herein). As long as DTC is the registered owner of the Bonds and DTC’s book-entry method is used for the Bonds, the Trustee will send any notices to Bond Owners only to DTC and not the Beneficial Owners. Discontinuance of Book-Entry-Only System. DTC may discontinue providing its services as securities depository with respect to the Bonds at any time by giving reasonable notice to the Authority or the Trustee. Under such circumstances, in the event that a successor securities depository is not obtained, Bonds are required to be printed and delivered as described in the Indenture. The Authority may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, the Bonds will be printed and delivered as described in the Indenture. In the event that the Bonds are no longer held in book-entry form, any Bond may, in accordance with its terms, be transferred or exchanged, pursuant to the provisions of the Indenture, upon surrender of such Bond for cancellation at the principal corporate trust office of the Trustee. Whenever any Bond or Bonds shall be surrendered for transfer or exchange, the Trustee shall execute and deliver a new Bond or Bonds for an aggregate principal amount of Bonds of authorized denominations of the same maturity. The Trustee may require the payment by the Bond Owner requesting such transfer or exchange of any tax or other governmental charge required to be paid with respect to such transfer or exchange. Redemption Optional Redemption. The Bonds maturing on or before September 1, __, are not subject to optional redemption prior to their respective stated maturities. The Bonds maturing on or after September 1, ____ shall be subject to optional redemption, in whole or in part, on any date on or after September 1, ____, from such maturities as are selected by the District in a Written Request of the District delivered to the Trustee, from any source of available funds provided to the Authority, at a redemption price equal to the principal amount of the Bonds to be redeemed, plus accrued interest thereon to the date of redemption, without premium. Mandatory Sinking Fund Redemption. The Bonds maturing on September 1, ___ (the “___ Term Bonds”) shall be paid at maturity and are subject to mandatory sinking fund redemption, in part by lot, 5 from Sinking Account payments as set forth in the following schedule, at a redemption price equal to the principal amount thereof to be redeemed, together with interest accrued thereon to the date fixed for redemption, without premium; provided, however, that if some but not all of the ____Term Bonds have been redeemed pursuant to the optional redemption provisions of the Indenture, the total amount of Sinking Account payments to be made subsequent to such redemption will be reduced in an amount equal to the principal amount of the ____ Term Bonds so redeemed by reducing each such future Sinking Account payments on a pro rata basis (as nearly as practicable) in integral multiples of $5,000, as will be designated pursuant to written notice filed by the District with the Trustee: Redemption Date (September 1) Principal Amount ________________________ Final Maturity. In lieu of such redemption, the Trustee may apply amounts in the Sinking Account to the purchase of Term Bonds at public or private sale for cancellation, as and when and at such prices (including brokerage and other charges, but excluding accrued interest, which is payable from the Interest Account) as may be directed by the District, except that the purchase price (exclusive of accrued interest) may not exceed the redemption price then applicable to the Term Bonds, as set forth in a Written Request of the District and subsequently cancelled or surrendered to the Trustee for cancellation. If during the twelve-month period immediately preceding any August 15 on which a Sinking Account payment is due, the District has purchased Term Bonds and surrendered them to the Trustee for cancellation, the par amount of any Term Bonds so purchased will be credited towards and will reduce the principal amount of such Term Bonds required to be redeemed on the succeeding September 1. Notice of Redemption; Rescission. When redemption is authorized or required, notice of redemption shall be given by the Trustee, not less than 30 nor more than 60 days prior to the redemption date, (i) so long as the Bonds are held under the Book-Entry System by DTC electronically to DTC or by such method as is acceptable to DTC, (ii) if the Bonds are no longer held under the Book-Entry System, to the respective Owners of any Bonds designated for redemption at their addresses appearing on the bond registration books of the Trustee by first-class mail, and (iii) to the Information Services. Such notice shall state the date of the notice, the redemption date, the redemption place and the redemption price and shall designate the CUSIP numbers, if any, 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 will also state that on said date there will become due and payable on each of said Bonds the Redemption Price thereof or of said specified portion of the principal thereof in the case of a Bond to be redeemed in part only, together with interest accrued with respect thereto to the redemption date, and that (provided that moneys for redemption have been deposited with the Trustee) from and after such redemption date interest thereon ceases to accrue, and will require that such Bond be then surrendered to the Trustee. Any failure to receive such notice or any defect in the notice or the delivery of such notice will not affect the validity of the redemption of any Bond. With respect to any notice of any optional redemption of Bonds, such notice may state that such redemption shall be conditional upon the receipt by the Trustee on or prior to the date fixed for such redemption of moneys sufficient to pay the principal of, premium, if any, and interest on such Bonds to be redeemed and that, if such moneys shall not have been so received, said notice shall be of no force and effect and the Trustee shall not be required to redeem such Bonds. In the event that such notice of redemption contains such a condition and such 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 to whom, and, in 6 the manner in which the notice of redemption was given, that such moneys were not so received and that the redemption shall not take place. Selection of Bonds for Redemption. Whenever provision is made for the optional redemption of less than all of the Bonds, the Trustee shall select the Bonds to be redeemed from all Bonds or such given portion of the Bonds not previously called for redemption, among maturities as directed by the District in a Written Request and within each maturity by lot. For purposes of such selection, the Trustee will treat each Bond as consisting of separate $5,000 portions and each such portion will be subject to redemption as if such portion were a separate Bond. Partial Redemption of Bonds. Upon surrender of any Bonds redeemed in part only, the Authority shall execute and the Trustee shall authenticate and deliver to the Owner thereof, at the expense of the District, a new Bond a new Bond or Bonds of Authorized Denominations, and of the same maturity date and interest rate, equal in aggregate principal amount to the unredeemed portion of the Bond surrendered. Effect of Notice of Redemption. If notice of redemption having been duly given pursuant to the Indenture and moneys for payment of the redemption price of, together with interest accrued to the redemption date on, the Bonds (or portions thereof) so called for redemption is held by the Trustee, on the redemption date designated in such notice, the Bonds (or portions thereof) so called for redemption shall become due and payable at the redemption price specified in such notice together with interest accrued thereon to the date fixed for redemption, interest on the Bonds so called for redemption shall cease to accrue, such Bonds (or portions thereof) shall cease to be entitled to any benefit or security under the Indenture, and the Owners of such Bonds shall have no rights in respect thereof except to receive payment of the Redemption Price and accrued interest. Neither the failure to receive any notice nor any defect therein shall not affect the sufficiency of the proceedings of redemption. 7 Scheduled Debt Service The following presents the scheduled annual debt service on the Bonds, assuming no optional redemption prior to maturity. Fiscal Year Ending June 30 Principal Interest Total 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 Total 8 Annual 2018 Installment Payments related to the Bonds, along with the expected annual Installment Payments and debt service for the outstanding Existing Parity Obligations, are set forth in the following table. Otay Water District Aggregate Parity Obligations Fiscal 1996 2010 2013 Bonds 2016 Bonds 2018 Total Year Ending Installment Installment Debt Debt Installment Parity June 30 Payments (1) Payments Service Service Payments Obligations 2019 $1,011,300 $ 3,714,856 $ 853,700 $ 2,218,456 2020 980,500 3,709,981 855,700 2,219,831 2021 949,700 3,707,981 856,500 2,218,456 2022 1,015,600 3,708,356 856,100 2,219,206 2023 980,400 3,705,981 854,500 2,226,706 2024 1,041,900 3,705,731 851,700 2,225,831 2025 1,002,300 3,700,862 - 2,226,581 2026 1,059,400 3,693,345 - 2,228,706 2027 1,112,100 3,688,589 - 2,227,081 2028 - 3,688,093 - 2,229,931 2029 - 3,681,540 - 2,232,731 2030 - 3,678,609 - 2,232,731 2031 - 3,673,823 - 2,229,932 2032 - 3,669,728 - 2,268,394 2033 - 3,665,558 - 2,268,894 2034 - 3,662,508 - 2,266,860 2035 - 3,655,086 - 2,270,807 2036 - 3,652,634 - 2,266,888 2037 - 3,644,495 - 2,268,525 2038 - 3,640,010 - - 2039 - 3,633,357 - - 2040 - 3,628,716 - - 2041 - 3,620,262 - - 2042 - - - - 2043 - - - - 2044 - - - - 2045 - - - - Total $9,153,200 $84,530,101 $5,128,200 $42,546,547 ____________________________________ (1) Variable interest rate. Calculated using 4.40% 25 Year Revenue Bonds Index as of July 10, 2018 as the assumed variable rate interest. Actual amounts will vary. In the prior fiscal year actual rates ranged from 0.9% to 1.5%. 9 THE FINANCING PLAN Estimated Sources and Uses of Funds Under the provisions of the Indenture, the Trustee will receive the proceeds from the sale of the Bonds and other funds and will apply them as follows: Sources: Principal Amount of Bonds Net Original Issue Premium Total Sources Uses: 2018 Project Fund Underwriter’s Discount Costs of Issuance Fund (1) Total Uses ____________________________________ (1) Expenses include fees of Bond Counsel, the Municipal Advisor, Disclosure Counsel, the Trustee, rating fees, costs of printing the Official Statement, and other costs of delivery of the Bonds. Proceeds deposited in the 2018 Project Fund will be used to fund capital expenditures of the District for storage, treatment and transmission projects, including but not limited to pump station replacements, utility relocations, pipeline replacement, force main improvements, storage tank improvements, tank replacements, new reservoir and/or reservoir cover/liner replacements. ! ! ! ! ! !( !(!( !(!(!( !(!( !( !(!(!( !(!( !( !(!( !(!(!( !(!( !(!( !( !( !(!( !( !(!( !( !( !(!( !( !(!( !( !( !( !( !(!( !( !( !(!( !(!( !( !( !( !( !(!( !( !( !( !( !(!( !(!( !( !( !(!( !(!( !(!( !(!( !( "CD "CD PADRE DAM MUNICIPALWATER DISTRICT LOWER OTAYRESERVOIR UPPER OTAYRESERVOIR SWEETWATERRESERVOIR LAKEMURRAY LOVELANDRESERVOIR ^ LAKEJENNINGS EL CAPITANRESERVOIR ME X IC O RALPH W. CHAPMANWATER RECYCLINGFACILITY SOUTH BAY WATERRECLEMATION PLANT Otay Headquarters^ SEWER FACILITIES County Mains !(Lift Station Mains RECYCLED FACILITIES Mains !(Reservoir!(Pump Station POTABLE FACILITIES !(Reservoir!(Pump Station SDCWA MainsMains San Diego County Water Authority Connections! CITY OFSAN DIEGO SWEETWATER AUTHORITY HELIX WATERDISTRICT CITY OFSAN DIEGO OPEN SPACE OPEN SPACE CITY OFSAN DIEGO PADRE DAM MUNICIPALWATER DISTRICT PADRE DAM MUNICIPALWATER DISTRICT !(Hydropnuematic Pump Station 11 OTAY WATER DISTRICT The District was formed in January 1956 pursuant to Section 71000 et seq., of the California Water Code, and joined the San Diego County Water Authority (which is a member of the Metropolitan Water District of Southern California) in September 1956 to acquire the right to purchase and distribute imported water throughout its service area. The San Diego County Water Authority (“CWA” or the “Water Authority”) is an agency responsible for the wholesale supply of water to its 24 public agency members in San Diego County. The District’s boundaries currently encompass an area of approximately 125 square miles and is generally located within the south central portion of San Diego County. The District serves a wide spectrum of communities, including southern El Cajon, La Mesa, Rancho San Diego, Jamul, Spring Valley, Bonita, eastern Chula Vista, and a small portion of the City of San Diego on Otay Mesa (the “Service Area”). The southern boundary of the District is the international border with Mexico. The District is the sole provider of water in the Service Area. The District provides water service to about 72 percent of its projected ultimate population. Ultimately, the District is projected to serve 308,000 people by 2035, creating an average daily demand of 40.9 million gallons of potable water per day (“mgd”). The District currently meets its potable demands with imported treated water from the Water Authority. The potable water is delivered via the Second San Diego County Aqueduct, (“Pipeline No. 4”) which is owned and operated by the Water Authority. The water is treated at the Water Authority’s Twin Oaks Water Treatment Plant (“WTP”), the Metropolitan Skinner WTP located in Riverside County, and a private developer’s (Poseidon) desalinated seawater WTP in Carlsbad. Pipeline No. 4 is the District’s primary supply system. The Water Authority has multiple flow control facilities or connections to Pipeline No. 4 that feed into the District’s water system. In addition, the District entered into another agreement with the Water Authority, known as the East County Regional Treated Water Improvement Program (“ECRTWIP Agreement”). The ECRTWIP Agreement provides for transmission of raw water to the Helix Water District’s R. M. Levy Water Treatment Plant (“Levy WTP”) for treatment and delivery to the Northern Service area of the District. The ECRTWIP Agreement allows access to the region’s raw water supply system and also provides treatment at the local facility. The District receives an average of 8.4 mgd from the Levy WTP. This additional source provides the District with a more diversified water supply. Through a 1999 agreement with the City of San Diego, the District may obtain up to 10 mgd of supply from the City’s Otay Water Treatment Plant (“Otay WTP”). The Otay WTP was originally constructed in 1940, and has a current rated capacity of 34.4 mgd. Under the terms of the agreement, the City of San Diego’s obligation to supply treated water to the District is contingent upon its surplus treatment capacity, beyond what the City of San Diego needs for its own area system. The District owns and operates a recycled water distribution network. Recycled water is used to irrigate golf courses, landscaping at schools, public parks, public right of ways, and various other approved uses in eastern Chula Vista. The District has two sources of recycled water supply: Recycled water produced locally at the District’s Ralph W. Chapman Water Recycling Facility (“RWCWRF”) and a recycled water supply produced at the City of San Diego’s South Bay Water Reclamation Plant (“SBWRP”). The RWCWRF is located near the intersection of Campo Road/Highway 94 and Singer Lane within the Middle Sweetwater River basin. The RWCWRF was originally constructed in 1979 and upgraded in 2012. It has a rated design capacity to produce 1.2 mgd of recycled water. The SBWRP has a rated capacity of 15 mgd and is located at Monument and Dairy Mart Roads near the international border, adjacent to the Tijuana River. The agreement between the District and the City of San Diego for purchase of recycled water from the SBWRP was finalized on October 20, 2003. In accordance with the agreement, the City of San Diego will provide an annual amount of at least 6 mgd of recycled water to the District. The term of the agreement is 20 years from January 1, 2007. Using these resources to meet recycled water demands on the Water System has resulted in the District being able to allocate 12 approximately 4,300 acre-feet per year of potable water to other uses. The District has sued the City of San Diego with respect to the rates charged to the District for the recycled water. The District does not expect the litigation to disrupt the delivery of the recycled water to the District. The District also owns and operates a wastewater collection system, providing public sewer service to approximately 4,714 customer accounts within the Jamacha drainage basin, which is located in the northern section of the District. Revenues from the District’s wastewater collection system are not pledged to the payment of the Bonds. THE WATER SYSTEM The following information concerning the Water System was obtained from District officials except where otherwise indicated. The audited financial statements of the District for the Fiscal Year ended June 30, 2017 are attached hereto as “APPENDIX B” and should be read in their entirety. Existing Facilities The District is divided into two distinct systems; the North District and South District, and five geographic areas. These five areas contain five potable water systems and a recycled water distribution system with two sources of supply. The systems are called Hillsdale, Regulatory, La Presa, Central Area, and Otay Mesa. The Hillsdale, Regulatory, and La Presa systems are collectively referred to as the North District, while the Central Area and Otay Mesa systems are collectively referred to as the South District. Recycled water service is currently limited to the South District. There are multiple pressure zones within each system, except Otay Mesa. North District. The Hillsdale system serves the northernmost part of the North District. The Regulatory system serves the sparsely developed eastern portion of the North District. The La Presa system serves the western part of the North District near Sweetwater reservoir and is the southernmost system of the North District. Two 10 million gallon reservoirs are located within the La Presa system and provide storage for the treated water delivered through a 36 inch pipeline, which connects to the Helix Water District system. The reservoirs within the La Presa system provide operational and emergency storage for the entire North District. South District. The Central Area system is roughly bounded by Interstate 805 on the west, Otay River on the south, the Lower Otay Reservoir on the east, and the Regulatory System on the north. The Otay Mesa system includes the extreme south portion of the District Service Area and is generally located between the Otay River on the north and the international border with Mexico on the south. The South District is expected to experience the most growth in the District’s Service Area. Potable Water Facilities - The principal facilities of the existing potable water system consist of five water supply connections with CWA, six water supply connections with the City of San Diego, seven connections with Helix Water District and two connections with Sweetwater Authority, 21 pump stations, over 727 miles of pipelines, and 40 storage reservoirs. The District currently meets all of its potable demands with imported treated water from CWA. Forty percent of this water is in turn purchased from the region’s primary water importer, the Metropolitan Water District of Southern California (“MWD”). The District also has entered into an agreement with the CWA to have the neighboring Helix Water District treat imported water on behalf of the District at the Levy WTP. See “OTAY WATER DISTRICT.” This action brought regional water treatment closer to customers, which helps reduce dependence on water treatment facilities located outside of San Diego County. Recycled Water Facilities - The principal facilities of the existing recycled water system consist of 2 recycled water supply sources, 3 pump stations, 104 miles of pipelines, and 4 storage reservoirs. 13 The District currently produces recycled water at the RWCWRF, which is owned and operated by the District. Recycled water from the RWCWRF and purchased recycled water from the SBWRP are delivered into storage reservoirs that provide recycled water service to recycled water customers. See “OTAY WATER DISTRICT.” Only when treatment facilities are unavailable due to maintenance issues is potable water used to supplement the recycled water system. Water Storage The District currently operates 40 potable reservoirs and 4 recycled reservoirs as shown below with a total capacity of 262.3 million gallons. The District estimates that the reservoirs are 50 percent full on a typical day. System Reservoirs Capacity (million gallons) Hillsdale 6 13.9 Regulatory 14 58.8 La Presa 7 12.7 Central Area 11 85.5 Otay Mesa 2 47.7 Total Potable 40 218.6 Recycled 4 43.7 Total Storage 44 262.3 Water Supply Service Area Water Supply - Potable. The District does not have a local source of surface water. The District purchases all of its potable water from the CWA either directly or indirectly from Helix Water District. Under a contractual arrangement with the CWA, the District receives potable water from the Helix Water District’s Levy WTP, and also has an emergency agreement with the City of San Diego to receive treated water in the case of a shutdown of CWA treated water Pipeline 4. Service Area Water Supply - Recycled. The District produces approximately 1.2 mgd of recycled water at the RWCWRF. The District has contracted with the City of San Diego to purchase up to 6 mgd of recycled water produced by the SBWRP. Construction of the required pump station, reservoir, and the 6- mile delivery system allowing the District to connect to the City of San Diego’s recycled water pipeline was completed in 2007. CWA Water Supply. Historically, the principal source of supply for the CWA’s service area has been water purchased from MWD for sale to the CWA member agencies. For the Fiscal Year ended June 30, 2017, the CWA supplied the District 27,002 acre-feet of water, approximately 6.4 percent of total CWA water supplies. As an alternative to purchasing all of its imported water from MWD, CWA began to diversify its purchases through supply transfers and dry-year transfers. Since 2003, CWA has been receiving a portion of its imported water pursuant to the terms of the Quantification Settlement Agreement (“QSA”) among the State of California acting by and through the Department of Fish and Game, the Coachella Valley Water District (“CVWD”), the Imperial Irrigation District (“IID”) and CWA, executed on October 10, 2003, the Water Transfer Agreement (defined below) and other QSA related agreements. Water that CWA receives from IID is conveyed through the Colorado River Aqueduct pursuant to an exchange agreement with MWD. CWA began receiving transfer water from IID in December 2003. Starting with the initial delivery of 10,000 acre-feet, the amount of water to be delivered is increasing according to an agreed- 14 upon schedule until the maximum transfer yield of 200,000 acre-feet per year is achieved in 2021. In addition, CWA’s portfolio includes imported supplies from water conserved as a result of the lining of the All-American Canal and the Coachella Canal. CWA began receiving water from the Coachella Canal Lining Project in 2007 and from the All-American Canal Lining Project in 2009. In 2018, CWA received a total of approximately 80,000 acre-feet from the Coachella Canal Lining Project and the All-American Canal Lining Project transfers. In 2017, MWD purchases represented approximately 40 percent of total CWA water supplies. By 2020, MWD purchases are expected to represent about 21 percent of total CWA supplies. The CWA continues to pursue supply diversification efforts for itself and the region, including long-term planning, recycling of local surface water, groundwater, recycled water, local seawater desalination and conservation efforts. A significant milestone in local supply development was reached at the end of 2012, when the CWA board of directors approved a 30-year water purchase agreement (“Water Purchase Agreement”) with Poseidon Resources (Channelside) LP for the purchase of 48,000 to 56,000 acre-feet of desalinated seawater from the Carlsbad Desalination Project (the “Carlsbad Project”). The Carlsbad Project came online in December 2015. In 2017, the Carlsbad Project represented 9 percent of the region’s water demand and is a significant advance in CWA’s long-term strategy to diversify and improve the reliability of the region’s water supply portfolio. CWA made a number of improvements to its aqueduct system and a water treatment plant to integrate desalinated water into the CWA aqueduct system, which cost CWA $80 million. In addition, a substantial portion of the cost of financing the Carlsbad Project was made by CWA under various agreements, including the Water Purchase Agreement. CWA incorporated the payments required under these agreements into its charges for water to member agencies in future years. CWA estimates that the financial impact of the Carlsbad Project will increase the supply cost by $59.2 million and transportation cost by $7.4 million per year. These amounts were incorporated into the CWA calendar year 2019 rate and into the District’s budget. Under its rate structure, the District intends to pass any increase in CWA rates directly along to District customers. Water storage facilities are also critical to assuring consistent water availability notwithstanding fluctuation in available supply. CWA has entered into agreements to expand available storage capacity. In 2010, the CWA issued over $600 million in water bonds to finance its Capital Improvement Program. One of the purposes of the Capital Improvement Program was to interconnect a number of member agency storage facilities. Another purpose was to enhance the CWA’s own storage capacity. In June 2014, after five years of construction, the largest water storage project in San Diego County history was completed. The San Vicente Dam Raise added 152,000 acre-feet of water storage capacity to the reservoir, enough to serve more than 300,000 homes for one year. CWA faces various challenges in the continued supply of water to the District and other member agencies. A description of these challenges as well as a variety of other operating information with respect to the CWA is included in certain disclosure documents prepared by CWA. CWA has entered into certain continuing disclosure agreements pursuant to which CWA is contractually obligated, for the benefit of owners of certain of its outstanding obligations, to file certain annual reports, notices of certain material events as defined under Rule 15c2-12 of the Securities Exchange Act of 1934 (“Rule 15c2-12”) and annual audited financial statements (the “CWA Information”) with the Municipal Securities Rulemaking Board which are available online at www.emma.msrb.org. None of such information is incorporated by reference into this Official Statement. 15 CWA HAS NOT REVIEWED THIS OFFICIAL STATEMENT AND HAS MADE NO REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THE INFORMATION CONTAINED OR INCORPORATED HEREIN, INCLUDING INFORMATION WITH REGARD TO CWA. CWA IS NOT CONTRACTUALLY OBLIGATED, AND HAS NOT UNDERTAKEN, TO UPDATE SUCH CWA INFORMATION, FOR THE BENEFIT OF THE DISTRICT OR THE OWNERS OF THE BONDS UNDER RULE 15c2-12. MWD Water Supply. MWD obtains its water supply from two primary sources: the Colorado River, via MWD’s Colorado River Aqueduct, and the State of California Department of Water Resources’ State Water Project (“SWP”), via the Edmund G. Brown California Aqueduct. CWA purchased approximately 25.0 percent of MWD’s supplies in Fiscal Year 2016-17, and has preferential rights to 18.27 percent of MWD’s supplies. MWD faces various challenges in the continued supply of imported water to CWA and other member agencies. A description of these challenges as well as a variety of other operating information with respect to MWD is included in certain disclosure documents prepared by MWD. MWD has entered into certain continuing disclosure agreements pursuant to which MWD is contractually obligated, for the benefit of owners of certain of its outstanding obligations, to file certain annual reports, notices of certain material events as defined under Rule 15c2-12 and annual audited financial statements (the “MWD Information”) with the Municipal Securities Rulemaking Board which are available online at www.emma.msrb.org. None of such information is incorporated by reference into this Official Statement. MWD HAS NOT REVIEWED THIS OFFICIAL STATEMENT AND HAS MADE NO REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THE INFORMATION CONTAINED OR INCORPORATED HEREIN, INCLUDING INFORMATION WITH REGARD TO MWD. MWD IS NOT CONTRACTUALLY OBLIGATED, AND HAS NOT UNDERTAKEN, TO UPDATE SUCH MWD INFORMATION, FOR THE BENEFIT OF THE DISTRICT OR THE OWNERS OF THE BONDS UNDER RULE 15c2-12. Drought Conditions and Response. On January 17, 2014, the California Governor declared a drought state of emergency through Proclamation 1-17-2014 (the “Proclamation”) with immediate effect throughout the state. The Proclamation included the following orders, among others: (a) local urban water suppliers, including the District, were encouraged to implement their local water shortage contingency plans; (b) local urban water suppliers, including the District, were encouraged to update their urban water management plans to prepare for extended drought conditions; (c) The State Department of Water Resources (“DWR”) and the State Water Resources Control Board (the “SWRCB”) were directed to expedite the processing of water transfers; (d) the SWRCB was directed to put water rights holders on notice that they may be required to cease or reduce water diversions in the future; (e) the SWRCB was directed to consider modifying requirements for reservoir releases or diversion limitations; and (f) DWR was directed to take necessary actions to protect water quality and supply in the Sacramento-San Joaquin River Delta/San Francisco Bay Estuary (the “Delta”), including the installation of temporary barriers or temporary water supply connections, while minimizing impacts to aquatic species. In addition, on July 15, 2014, the SWRCB adopted emergency measures requiring water suppliers to implement mandatory Statewide water conservation actions. On March 17, 2015, the SWRCB adopted additional emergency regulations limiting outdoor irrigation to two days per week, extending certain measures set forth in the July 15, 2014 action for an additional 270 days, prohibiting outdoor irrigation for 48 hours following rain and prohibiting restaurants from serving water to customers unless requested. MWD also invoked its Water Supply Allocation Plan (the “WSAP”) in response to the March 17, 2015 regulations. The WSAP provided for the equitable distribution of available water supplies in case of extreme water shortage within MWD’s service area. On April 14, 2015, MWD approved implementation of WSAP Level 3 (Water Supply Allocation) effective July 1, 2015, which among other things imposed a surcharge of between $1,480 and $2,960 per acre foot 16 of water usage above MWD members’ water allocation. No surcharges were required to be imposed on CWA or the District. On April 1, 2015, the California Governor issued an Executive Order extending the measures set forth in the Proclamation and adopting the following additional orders, among others: (i) the SWRCB was directed to impose restrictions to reduce potable urban water usage, including usage by commercial, industrial and institutional properties and golf courses, by 25 percent from 2013 amounts through February 28, 2016; portions of a water supplier’s service area with higher per capita use must achieve proportionally greater reductions than areas with lower per capita use; (ii) DWR was directed to lead a Statewide initiative to replace 50 million square feet of lawns with drought tolerant landscaping; (iii) the California Energy Commission was directed to implement a rebate program for replacement of inefficient appliances; (iv) urban water suppliers were required to provide monthly water usage, conservation and enforcement information; (v) service providers were required to monitor groundwater basin levels in accordance with California Water Code § 10933; (vi) permitting agencies were required to prioritize approval of water infrastructure and supply projects; and (vii) DWR was required to plan salinity barriers in the Delta. On May 6, 2015, the SWRCB adopted regulations in response to the Governor’s executive order that required the District to effect a 20 percent reduction from 2013 water usage. On November 13, 2015, the Governor issued Executive Order B-36-15, which called for an extension of urban water use restrictions that remained in effect until November 25, 2017, when the emergency regulations expired. On May 31, 2018, the Governor signed two bills as part of the ongoing efforts to “make water conservation a California way of life.” SB 606 (Hertzberg) and AB 1668 (Friedman). The legislation calls for creation of new urban water use efficiency standards for indoor and outdoor use that the State Water Board will adopt by regulations no later than June 30, 2022. Each urban retail water agency will annually, beginning November 2023, calculate its own objective, based on the water needed in its service area for efficient indoor residential water use, outdoor residential water use, commercial, industrial and institutional (CII) irrigation with dedicated meters. At this time, the District does not have a water supply shortage. Based on availability of imported and local water supplies this year, CWA has sufficient supplies for 2018-19 and given statewide and regional storage reserves, it is unlikely that the San Diego region will see a water supply shortage, due to hydrology, in the near term. CWA has supplies for 97 percent of current demand. Historic and Projected Water Supply. At its peak in Fiscal Year 2006-07, the District purchased 41,909 acre-feet of potable water from CWA, which included 3,073 acre-feet of potable water that was needed to provide water to the customers of the District’s mandated recycled water system. The District developed additional sources of recycled water and no longer needs to purchase potable water to supplement the recycled system. This, along with economic factors, voluntary and mandated conservation efforts, additional rainfall in some years and cooler temperatures in some years has resulted in a reduction of purchased potable water from CWA from the high of 41,909 acre-feet in Fiscal Year 2006-07 to a low of 25,501 acre-feet in Fiscal Year 2015-16. The District purchased 29,638 acre-feet in Fiscal Year 2017-18. 17 Set forth below is a summary of the District’s sources of water supply for the last ten fiscal years. HISTORIC WATER SUPPLY IN ACRE-FEET PER YEAR Fiscal Year Ended June 30 Produced Recycled Water Purchased Recycled Water Purchased Potable Water Total 2009 844 3,658 34,971 39,473 2010 1,033 2,870 31,175 35,078 2011 1,058 2,969 29,861 33,888 2012 655 3,171 30,543 34,369 2013 1,117 3,250 31,884 36,251 2014 1,155 3,881 33,409 38,385 2015 1,017 3,326 30,299 34,642 2016 1,009 2,670 25,501 29,180 2017 557 (1) 3,183 27,002 30,742 2018 867 (1) 3,352 29,638 33,857 ____________________________________ (1) The RWCWRF was not in operation for planned maintenance, consistent with regulatory and operating permit requirements. Source: Otay Water District. For Fiscal Year 2017-18 the District’s potable and recycled sales unit volumes were 12.2 million and 1.8 million, respectively. This equates to a 16 percent increase in potable volumes and a 12 percent increase in recycled volumes compared to volumes experienced during the period of State drought mandates in 2016. The growth in water sales was supported by the cancellation of the drought mandates and District growth. During 2017-18 the District added approximately 400 new potable customer meters and estimates an additional 700 new potable customer meters will be installed in 2019. The District currently expects that demand for potable water may reach as high as 46,000 acre-feet per at buildout. The District currently obtains 100 percent of its potable water supply as imported water from CWA. CWA, in turn, obtains imported water from MWD and IID. The reliability of the District’s potable supply is currently dependent on these wholesale agencies. The District is committed to investing in alternative water sources, such as groundwater or desalination that would reduce its dependence on imported water. For example, a desalination project may be constructed in the Mexican State of Baja California but at present, the District is not part of this project. 18 Set forth below is a summary of the District’s projection of water sources for the current and five succeeding Fiscal Years. PROJECTED WATER SUPPLY IN ACRE-FEET PER YEAR Fiscal Year Ending June 30 Produced Recycled Water (1) Purchased Recycled Water (2) Purchased Potable Water (3) Total 2019 1,049 2,544 30,836 34,429 2020 1,057 2,563 31,144 34,764 2021 1,070 2,595 31,455 35,120 2022 1,087 2,635 31,826 35,548 2023 1,109 2,688 32,287 36,084 2024 1,137 2,757 32,758 36,652 ____________________________________ (1) Maximum capacity for the District’s treatment plant is 1,456 acre-feet. (2) Purchased from the City of San Diego’s South Bay Water Reclamation Plant. (3) Includes purchases from CWA, raw water treated to potable level by the City of San Diego and the Helix Water District, and assumes no desalinated water purchases. Source: Otay Water District. Capital Improvement Program The District currently serves a population of approximately 223,000. Ultimately, the District is projected to serve 308,000 people and it estimates an additional $318 million investment in capital assets will be required through ultimate buildout, over approximately 30 years. The District reviews and updates its six-year Capital Improvement Program (the “CIP”) annually based on an analysis of the potable and recycled water demands most recently projected by developers, demographics, and population estimates by the San Diego Association of Governments (“SANDAG”). In addition, the District has commissioned a study on the local economy to further refine its projections. In the latest annual updated report entitled “Economic Outlook Update for the Otay Water District”, prepared by the Expera Group (“Expera”) and dated March 2018 (the “Report”), Expera projected new residential construction for Fiscal Years 2018 - 2024. The average number of residential units (single- family homes, rental units and condominiums) identified in the Report for the next five years is 1,642 units per year. Growth projections by SANDAG for the Series 12 Planned Land Use Inventory identified the District as having 56.8 percent of the new industrial projected development in San Diego County and 20.1 percent of the new residential projected development with land use densities higher than 4 dwelling units per acre. The Water System capital improvements are categorized by operational area of the District, which includes potable and recycled water operations. The CIP is then further separated into improvement categories - Expansion, Betterment, Replacement and New Supply. 19 The table below summarizes the current six-year CIP for the Water System and the categories of work to be completed, updated as part of the 2018-19 budget. Fiscal Year Ending June 30 2019 2020 2021 2022 2023 2024 Total Expansion $ 78,000 $ 399,000 $ 192,000 $1,263,000 $ 2,448,000 $ 1,653,000 $ 6,033,000 Betterment 789,000 2,401,000 554,000 1,219,000 1,723,000 2,084,000 8,770,000 Replacement 18,886,000 14,143,000 11,257,000 7,222,000 7,362,000 7,903,000 66,773,000 New Supply 3,000 3,000 3,000 3,000 3,000 32,000 47,000 Total $19,756,000 $16,946,000 $12,006,000 $9,707,000 $11,536,000 $11,672,000 $81,623,000 _______________________________ Source: Otay Water District. The District has identified the timing and method of funding the capital improvements over the next six years. The above improvement categories are designed to be funded with operational net cashflow, proceeds of the Bonds, transfers between operational areas, other capital related charges, reserves or a combination of these sources, and currently, the District expects to fund $28,000,000 of these improvements with Bond proceeds, $47,590,000 with reserves and/or operating income, and $6,033,000 with capacity fees and other fees. The District does not expect that additional debt financing for the Water System will occur during the next six years. In order to implement the CIP, the District anticipates that it will need to increase its rates as described herein (see “Water Charges” herein). However, there is no guarantee that the District will implement such rate increases at the amount and at the time anticipated in its planning documents. See “CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS - Proposition 218.” 20 Water Service Historical Water Use. Table No. 1 shows the amount of water usage, connections and revenue generated from water and recycled water sales in the last five Fiscal Years. TABLE NO. 1 CONNECTIONS AND WATER SALES VOLUME AND REVENUE Fiscal Years 2013-14 through 2017-18 Estimated 2013-14 2014-15 2015-16 2016-17 2017-18 (5) Potable Residential - Volume in ccf (1) 8,050,828 7,248,930 5,832,549 6,266,299 6,987,742 - Volume in acre-feet 18,482 16,641 13,390 14,385 16,042 Residential - Connections 44,826 44,941 45,038 45,086 45,318 Residential - Sales Revenue (2) $ 26,984 $ 24,266 $ 19,287 $ 24,512 $ 29,507 All Others - Volume in ccf 5,669,291 5,495,495 4,642,741 4,984,032 5,682,216 - Volume in acre-feet 13,015 12,615 10,658 11,442 13,045 All Others – Connections 4,322 4,367 4,387 4,416 4,587 All Others - Sales Revenue (2) $ 19,872 $ 19,759 $ 17,957 $ 21,754 $ 24,707 Recycled (3) Recycled - Volume in ccf 2,068,330 1,841,956 1,591,677 1,625,768 1,661,454 - Volume in acre-feet 4,748 4,228 3,654 3,732 3,814 Recycled – Connections 702 705 708 721 720 Recycled - Sales Revenue (2) $ 9,245 $ 8,025 $ 7,637 $ 8,868 $ 9,177 Total Total Volume in ccf 15,788,449 14,586,381 12,066,967 12,876,099 14,331,412 Total Volume in acre-feet 36,245 33,484 27,702 29,559 32,900 Total Connections 49,850 50,013 50,133 50,223 50,625 Total Sales Revenue (2) $ 56,101 $ 52,050 $ 44,881 $ 55,134 $ 63,391 Fixed Charges (2) (4) $ 25,186 $ 27,085 $ 29,059 $ 28,586 $ 28,915 Total Revenue (2) $ 81,287 $ 79,135 $ 73,940 $ 83,720 $ 92,306 ____________________________________ (1) ccf refers to a measurement of 100 cubic feet (1 cubic foot = 7.48 gallons). (2) Dollars in thousands. (3) The District receives a credit of $185 per acre-foot and $200 per acre-foot from MWD and CWA, respectively for every acre-foot of recycled water sold. (4) Includes fixed charges, energy charges and delinquency collections on both potable and recycled water sales. (5) Includes fixed actual water sales value and revenue from June 1, 2018 to June 30, 2018, forecasted water sales volume and revenue from June 1, 2018 to June 30, 2018, and forecasted connections as of June 30, 2018. Source: Otay Water District. 21 Table No. 2 shows the 10 largest water users for Fiscal Year 2017-18. TABLE NO. 2 TEN LARGEST CUSTOMERS BY WATER SALES REVENUES (1) Year ended June 30, 2018 Customer Usage in CCF (2) % of Water System Consumption Water Sales Revenues % of Total Water Sales Revenues City of Chula Vista 658,655 4.7% $ 4,220,009 4.6% Eastlake III Community 217,434 1.5% 1,230,790 1.3% State of California 231,976 1.7% 1,127,462 1.2% County of San Diego 167,318 1.2% 981,647 1.1% Sweetwater Union High School District 137,010 1.0% 853,335 0.9% Chula Vista Elementary School District 117,774 0.8% 817,826 0.9% Eastlake Country Club 152,552 1.1% 569,602 0.6% Windingwalk Master Association 71,576 0.5% 438,215 0.5% Eastlake I HOA 66,871 0.5% 429,266 0.5% Elite Athlete Services, LLC 76,012 0.5% 400,748 0.4% Total 1,897,178 13.5% $11,068,900 12.0% ____________________________________ (1) Includes both potable and recycled water sales and excludes fixed charges. (2) Hundred cubic feet. Source: Otay Water District. Water Charges Water Service Rates. The District held a public hearing on October 4, 2017 and approved a five-year schedule of rates, which included authorization to raise rates by up to 10 percent per year during the five year period for costs other than CWA, City of San Diego and MWD rate increases. Authorization was also approved to pass through all CWA, City of San Diego and MWD increases without limitation during the five year period. There was no rate increase as of January 1, 2018. The adopted rate increase effective January 1, 2019 is 3.2% The Board of Directors is expected to continue to take action each year through 2022 to set rates in accordance with the October 4, 2017 rate action. However, there can be no assurance that rates will be increased as contemplated herein. All rate increases are subject to the procedural and substantive provisions of Proposition 218. See “CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS - Proposition 218” below. Based on its internal rate model updated in June 2018 and the need to fund the CIP, the District anticipates that it will need to increase its rates by approximately 3.2 percent in each of the next four years. The water rate structure uses both fixed and variable charges. All potable water customer classes are charged the two “monthly fixed charges” based on the meter size as shown in Table No. 3. Recycled customers do not receive water from MWD or CWA and therefore do not pay the pass-through charge. The commodity or consumption rates as outlined in Table No. 4 are variable in that they are charges per unit. The District also uses an inclining block rate structure for the commodity rate for residential uses. 22 TABLE NO. 3 MONTHLY FIXED CHARGES As of January 1, 2018 Meter Size Residential Multi- Residential Business/ Publicly Owned Irrigation/ Commercial Agriculture Recycled Irrigation Recycled Commercial MWD/CWA Passthrough (1) Fire Service 3/4” $17.38 $ 38.21 $ 35.99 $ 30.40 $ 31.11 $ 36.85 $ 15.45 1” 24.56 53.97 50.83 42.93 43.94 52.04 28.68 1 1/2” 42.49 93.37 87.95 74.28 76.04 90.06 64.85 2” 64.00 140.61 132.45 111.85 114.50 135.63 110.30 3” N/A 266.66 251.19 212.13 217.15 257.21 234.60 4” N/A 408.50 384.79 324.98 332.67 394.01 375.68 6” N/A 802.55 755.97 638.44 653.54 774.07 769.02 8” N/A 1,275.34 1,201.32 1,014.56 1,038.56 1,230.08 1,241.89 10” N/A 1,826.91 1,720.86 1,453.33 1,487.72 1,762.08 1,787.55 Fire Service: ≤ 3” $20.77 ≥ 4” 27.98 ____________________________________ (1) Potable only. Source: Otay Water District. TABLE NO. 4 COMMODITY RATES As of January 1, 2018 Units Residential Units Multi- Residential 1-10 $3.05 0-4 $2.85 11-22 5.44 5-9 5.17 23 + 7.03 10+ 6.35 Units Business/ Publicly Owned Irrigation/ Commercial Agriculture Recycled Irrigation Recycled Commercial All $3.61 $5.27 $4.26 $3.01 ____________________________________ Source: Otay Water District. 23 As previously noted, the District has projected that future rate increases will be necessary to implement the current six-year CIP. Additionally, the rates, charges and fees may be increased each year to pass- through additional actual cost increases imposed by the City of San Diego, CWA or MWD if such increases are greater than already factored in to the District’s rates. The average residential customer uses 13 units of water per month. One unit of water is equal to 100 cubic feet of water (one cubic foot of water equals 7.48 gallons). Customers outside the District and tanker trucks are charged two times the commodity rate. Table No. 5 compares average residential water rates charged by the District with surrounding cities and other water agencies in San Diego County. TABLE NO. 5 COMPARISON OF AVERAGE RESIDENTIAL WATER RATES As of July 1, 2018 City/Water Agency Average Rates (1) (2) (3) Lakeside $ 67.41 San Dieguito 76.01 Santa Fe 78.52 Otay Water District 84.25 Oceanside 85.54 Carlsbad 86.83 Poway 88.54 Sweetwater 89.88 Vallecitos 89.88 Helix 92.30 Olivenhain 92.92 San Diego 96.79 Del Mar 97.87 Vista 98.60 Escondido 105.17 Rincon 106.80 Valley Center 111.85 Yuima 113.06 Rainbow 114.76 Fallbrook 117.00 Ramona 119.56 Padre Dam 130.78 ____________________________________ (1) These amounts reflect the charges on the water bills of various agencies and cities. Availability fees and general obligation debt are not included in this total. (2) Average rates based on assumed 13 units (hcf) water use and 3/4” meter size. (3) Based on rates to be effective as of January 1, 2019. Source: Otay Water District. 24 Delinquencies. Accounts receivable that have not been paid in over 60 days represent less than 0.21 percent of the District’s annual water sales for the last two Fiscal Years. Accounts receivable between 30 to 60 days delinquent in payment have averaged 0.84 percent of the District’s annual water sales for the last two Fiscal Years. In the last three Fiscal Years, the District has written off less than $80,500 a year in uncollectible accounts. The collection process includes automatic dialers, making it possible to address collections of smaller balances. The District has improved the collection process related to properties in foreclosure by collecting deposits and locking all vacant properties. The District has also provided convenient payment options by introducing payments by telephone and via the Internet, electronic bill presentation, recurring payments via credit card, and the ability to make water payments at select retailers using the same electronic network used by the District’s bank. The District has increased the availability of account information by introducing 24/7 Interactive Voice Response. In addition, with the improvements in online banking systems, the turnaround time on payment processing is only 2 days. These improvements have all assisted the District in better managing its accounts receivable. The District continues to be focused on finding new ways to assist customers in managing their accounts. Recently, the District expanded its delinquent notification process to include an additional bill for closed accounts with outstanding balances and an email and auto dial notification for closed accounts one week prior to being sent to an outside collection agency. Other Charges. For all connections over a 450 foot elevation, the District charges an energy charge of $0.056 per 100 feet of elevation over 450 feet. Capacity Fees and Meter Fees. The District charges capacity fees to connect to the Water System. As of July 1, 2018, the capacity fees for a ¾-inch meter are $7,065 plus a new water supply charge of $825 for a single family residential connection, increased quarterly according to the Engineering News-Record index. The District also charges a meter fee for the materials and installation cost of a meter. The meter fees range from $235 for a single family residence to $11,841 for a 10” meter. Availability Fees. The District levies and collects annual standby availability charges. Current legislation provides that any availability charge in excess of $10 per acre shall be used only for the purpose of the improvement district for which it was assessed. Therefore, availability fees shown in “Availability/Annexation Fees” Table No. 13 include only the first $10 of availability fees. Annexation Fees. When service is requested outside the boundaries of the District, the land to be serviced is annexed and an annexation fee is charged by the District. Current annexation fees are $2,089 for single family residential connections and are adjusted quarterly according to the Engineering News- Record index. Taxes The County levies a 1% ad valorem tax on behalf of all taxing agencies in the County, including the District. For Fiscal Year 2017-18, the District’s share of such property tax was $3.8 million, representing an increase of approximately $350,000 from amounts received in Fiscal Year 2016-17. Such taxes are a source of payment for the Installment Payments due under the 1996 Installment Sale Agreement, the 2010 Installment Purchase Agreement and the 2018 Installment Purchase Agreement, and debt service on the 2013 Bonds and the 2016 Bonds. See “SOURCES OF PAYMENT FOR THE BONDS.” All property is assessed using full cash value as defined by Article XIIIA of the State Constitution. State law provides exemptions from ad valorem property taxation for certain classes of property such as churches, colleges, non-profit hospitals and charitable institutions. The taxes collected are allocated to taxing agencies within San Diego County, including the District, on the basis of a formula established by State law enacted in 1979 and modified from time to time. Under this formula, the County and all other taxing entities receive a base year allocation plus an allocation on the basis of “situs” growth in assessed value (due to new construction, change of ownership, or a 2% inflation allowance allowed under Article XIIIA of the State Constitution) prorated among the 25 jurisdictions which serve the tax rate area within which the growth occurs. Tax rate areas are groups of parcels which are taxed by the same taxing entities. Cities, counties, special districts and school districts share the growth of “base” revenues from each tax rate area. Assessed valuation growth is cumulative, i.e., each year’s growth in property value becomes part of each District’s allocation in the following year. Historical assessed valuations for the District may be found in the District’s Comprehensive Annual Financial Report, attached hereto as “APPENDIX B.” During the economic recession between 2008-09 and 2012-13, property values in the District declined by approximately 15 percent. The District’s assessed value has had moderate increases in recent years, with the Fiscal Year 2018-19 assessed value of $_______ billion slightly [higher] than the 2017-18 assessed value of $29.4 billion. A portion of the District’s tax base is within a redevelopment plan area. The availability of property tax revenue from growth in the tax base was affected by the establishment of redevelopment agencies which, under certain circumstances, were entitled to revenues resulting from the increase in certain property values. However, with the dissolution of redevelopment agencies Statewide as of February 1, 2012, the District receives additional property tax. In Fiscal Year 2017-18 the District received $26,568 in redevelopment related property tax. Litigation is pending against the County and certain taxing agencies relating to the calculation and distribution of redevelopment tax sharing amounts between school districts, college districts and other taxing agencies such as cities, the County and special districts. The District expects that any reallocation of the District’s share of redevelopment property tax sharing as a result of the litigation will not be material. California law exempts $7,000 of the assessed valuation of an owner-occupied dwelling but this exemption does not result in any loss of revenue to local agencies since an amount equivalent to the taxes which would have been payable on such exempt values is made up by the State. Under AB 454 (Statutes of 1987, Chapter 921), the State reports to each county auditor-controller only the county-wide unitary taxable value of State-assessed utility property, without an indication of the distribution of the value among tax rate areas. The provisions of AB 454 apply to all State-assessed property except railroads and non-unitary properties, and do not constitute an elimination of a revision of the method of assessing utilities by the State Board of Equalization. AB 454 allows generally valuation growth or decline of State-assessed unitary property to be shared by all jurisdictions within a county. From time to time, legislation has been considered as part of the State budget to shift the share of the 1% ad valorem property tax collected by counties from special districts to school districts or other governmental entities (the “ERAF Shift”). While legislation enacted in connection with the Fiscal Year 1992-93 State budget shifted approximately 35 percent of many special districts’ shares of the countywide 1% ad valorem tax, the share of the countywide 1% ad valorem tax pledged to debt service by special districts was exempted. None of the State budgets enacted since Fiscal Year 1992-93 have permanently reallocated additional portions of the special districts’ shares of the countywide 1% ad valorem tax, although there have been temporary shifts as well as deferrals. However, in 2009, the California legislature approved amendments to the 2009-10 Budget to close its anticipated $26.3 billion budget shortfall. The approved amendments included borrowing from local governments by withholding of the equivalent of 8 percent of Fiscal Year 2008-09 property related tax revenues from cities’, counties’ and special districts’ property tax collections under provisions of Proposition 1A (approved by the voters in 2004), which the State was required to repay with interest within three years. The first (and to date, only) shift occurred in Fiscal Year 2009-10. Fiscal Year 2012- 13 was the first year that another shift was allowable, but the State has not implemented another borrowing yet. There can be no assurance that the share of the 1% ad valorem property tax the District currently receives will not be reduced further or deferred or delayed pursuant to State legislation enacted in the future to 26 address future State budget deficits. See Table Nos. 12 and 13 for historic and projected receipts of Taxes. Personnel The District has 137 full-time positions budgeted for Fiscal Year 2018-19. The OWD Employee Association represents 100 of these full-time employees as a collective bargaining unit. The District has not experienced any strikes and continues to have positive labor relations, which includes a negotiated multi-year Collective Bargaining Agreement. This agreement, the Memorandum of Understanding (“MOU”), with amendments, is in effect from July 1, 2014 to June 30, 2019. Retirement Program This caption contains certain information relating to the California Public Employees Retirement System (“CalPERS”). The information is primarily derived from information produced by CalPERS, its independent accountants and its actuaries. The District has not independently verified the information provided by CalPERS and makes no representations nor expresses any opinion as to the accuracy of the information provided by CalPERS. The comprehensive annual financial reports of CalPERS are available on its Internet website at www.calpers.ca.gov. The CalPERS website also contains CalPERS’ most recent actuarial valuation reports and other information concerning benefits and other matters. The textual reference to such Internet website is provided for convenience only. None of the information on such Internet website is incorporated by reference herein. The District cannot guarantee the accuracy of such information. Actuarial assessments are “forward-looking” statements that reflect the judgment of the fiduciaries of the pension plans, and are based upon a variety of assumptions, one or more of which may not materialize or be changed in the future. Plan Description. The District provides retirement benefits, disability benefits, periodic cost-of-living adjustments, and death benefits to plan members and beneficiaries (the “Plan”). The Plan is part of the CalPERS, an agent multiple-employer plan administered by CalPERS, which acts as a common investment and administrative agent for participating public employers within the State. Benefit provisions are established by State statute and District Resolution. California Public Employees’ Pension Reform Act of 2013. On September 12, 2012, the Governor signed into law the California Public Employees’ Pension Reform Act of 2013 (the “Reform Act” or “PEPRA”), made changes to CalPERS Plans, most substantially affecting new employees hired after January 1, 2013 (the “Implementation Date”). For non-safety CalPERS participants hired after the Implementation Date, the Reform Act changes the normal retirement age by increasing the eligibility for the 2% age factor from age 55 to 62 and increases the eligibility requirement for the maximum age factor of 2.5% to age 67. The Reform Act also: (i) requires all new participants enrolled in CalPERS after the Implementation Date to contribute at least 50% of the total annual normal cost of their pension benefit each year as determined by an actuary to a maximum of 8% of salary, (ii) requires CalPERS to determine the final compensation amount for employees based upon the highest annual compensation earnable averaged over a consecutive 36-month period as the basis for calculating retirement benefits for new participants enrolled after the Implementation Date, and (iii) caps “pensionable compensation” for new participants enrolled after the Implementation Date at 100% of the federal Social Security contribution and benefit base for members participating in Social Security or 120% for members not participating in social security, while excluding previously allowed forms of compensation under the formula such as payments for unused vacation, annual leave, personal leave, sick leave, or compensatory time off. 27 Benefit Tiers. Due to PEPRA, the District has one benefit tier for employees hired prior to January 1, 2013 (“Tier 1”) and one for employees subject to PEPRA (“PEPRA Tier”). Ultimately, the Reform Act is expected to reduce the District’s long-term pension obligation as existing employees retire and new employees are hired to replace them. The Plans’ provisions and benefits in effect at June 30, 2018, are summarized as follows: Tier 1 PEPRA Tier Benefit Formula 2.7% at 55 2% at 62 Benefit Vesting Schedule 5 years service 5 years service Benefit Payments Monthly for life Monthly for life Retirement Age 50 - 55 52 - 67 Monthly Benefits, as a % of Eligible Compensation 2.0% to 2.7% 1.0% to 2.5% Required Employee Contribution Rates 8% 6.25% Required Employer Contribution Rates for 2018-19 (1) 11.150% 11.150% ____________________________________ (1) Normal cost only, excludes funding of the unfunded actuarial liability which is calculated as a fixed amount and no longer as a percent of payroll. See Table No. 7 below. Funding Policy. Active members in the Plan are required to contribute 8% of their annual covered salary and employees in the PEPRA Tier are required to contribute 6.25% of their annual covered salary. Actuarial Methods and Assumptions Used to Determine Total Pension Liability. The total pension liabilities in the June 30, 2017 actuarial valuation were determined using the following actuarial assumptions: Valuation Date June 30, 2016 Measurement Date June 30, 2017 Actuarial Cost Method Entry-Age Normal Cost Method Actuarial Assumptions: Discount Rate 7.25% Inflation 2.75% Payroll Growth 3.0% Projected Salary Increase 3.3% - 14.2% (1) Investment Rate of Return 7.5% (2) ____________________________________ (1) Depending on age, service and type of employment. (2) Net of pension plan investment expenses, including inflation. The underlying mortality assumptions and all other actuarial assumptions used in the June 30, 2017 valuation were based on the results of a January 2014 actuarial experience study for the period 1997 to 2011. Further details of the Experience Study can be found on the CalPERS website. Changes in Actuarial Assumptions. Changes in Actuarial Assumptions generally take two years to affect the District’s contribution rate due to the time required by CalPERS to calculate and implement the change. For example, a change made effective July 1, 2017 will be reflected in the District’s contribution rates (normal cost or unfunded liability) for Fiscal Year 2019-20. 28 On March 14, 2012, the CalPERS Board of Administration approved a change in the inflation assumption used in the actuarial assumptions used to determine employer contribution rates. This reduced the assumed investment return from 7.75% to 7.50%, reduced the long-term payroll growth assumption from 3.25% to 3.0%, and adjusted the inflation component of individual salary scales from 3% to 2.75%. On April 17, 2013, the CalPERS Board of Administration approved a plan: (i) to replace the current 15- year asset-smoothing policy with a 5-year direct-rate smoothing process; and (ii) to replace the current 30-year rolling amortization of unfunded liabilities with a 30-year fixed amortization period. CalPERS’ Chief Actuary stated that the revised approach provides a single measure of funded status and unfunded liabilities, less rate volatility in extreme years, a faster path to full funding and more transparency to employers about future contribution rates. These changes accelerate the repayment of unfunded liabilities (including CalPERS’ Fiscal Year 2009 market losses) of the District’s Plan in the near term. These changes are reflected beginning with the June 30, 2014 actuarial valuation, which affected contribution rates for Fiscal Year 2015-16 and thereafter. On February 19, 2014, the CalPERS Board of Administration approved changes to actuarial assumptions and methods based upon a recently completed experience study. These changes include: moving from using smoothing of the market value of assets to obtain the actuarial value of assets to direct smoothing of employer contribution rates; increased life expectancy; changes to retirement ages (earlier for some groups and later for others); lower rates of disability retirement; and other changes. On December 21, 2016, the CalPERS Board of Administration approved an incremental lowering of the discount rate from 7.5% to 7.0% over the following three Fiscal Years. For Fiscal Years 2017-18, 2018- 19 and 2019-20, the Board of Administration approved discount rates of 7.375%, 7.25% and 7.0%, respectively. While the full impact of the discount rate changes on the District is not yet reflected in the District’s contribution rates, CalPERS expected such changes to increase the District’s employer rates by approximately 2% of normal cost as a percent of payroll. CalPERS also expected the discount rate changes to result in increased unfunded accrued liability payments for employers, and estimated that the District will see such payments increase by 30% to 40%. Based on the revised discount rates, over the next seven years the District expected its annual payments to double compared to the amount paid in Fiscal Year 2017-18. The District paid $30,000,000 to CalPERS in August 2018 to reduce its unfunded liability and future contribution rate increases. The District expects that the CalPERS contribution rates will stabilize as a result of the contribution toward the unfunded liability. Contribution Rates. The contribution requirements of Plan members and the District are established by CalPERS. The District’s percentage of payroll for CalPERS payments for the Tier 1 employee Plan for Fiscal Years 2013-14 through 2016-17 are shown in the table below. These rates do not include the employees’ contribution rates. TABLE NO. 6 EMPLOYER RETIREMENT CONTRIBUTION RATES Normal Unfunded Actuarial Total Fiscal Year Cost Liability (UAL) Rate Rate 2013-14 10.250% 15.185% 25.435% 2014-15 9.715 19.437 29.152 2015-16 10.408 20.404 30.812 2016-17 10.748 21.883 32.631 ____________________________________ Source: California Public Employees’ Retirement System. 29 CalPERS modified the calculation of the contribution rates beginning in Fiscal Year 2017-18. They now represent only the employer’s normal cost as a percentage of payroll, and include a dollar amount for the amortization of the unfunded actuarial liability (“UAL”). Shown in Table No. 7 are the June 30, 2017 CalPERS projections of the normal cost and amortization of the UAL prior to the District’s early payment of $31.8 million in August 2018, and the District’s projected new estimated UAL payments following the payment. For comparison, the normal cost for 2016-17 was 10.748% of payroll. TABLE NO. 7 ACTUAL AND PROJECTED EMPLOYER RETIREMENT CONTRIBUTIONS Fiscal Year Normal Cost Original Amortization of UAL (1) Projected Amortization of UAL (2) 2017-18 10.692% $3,190,518 $3,190,518 2018-19 11.150 3,577,723 3,577,723 2019-20 11.545 4,005,195 1,092,000 2020-21 12.300 4,317,000 1,287,000 2021-22 12.300 4,691,000 1,430,000 2022-23 12.300 5,021,000 1,501,000 ____________________________________ (1) Projected by CalPERS based on various assumptions as of July 2018. (2) Projected by the District to reflect payment of $31.8 million to CalPERS in August 2018. Source: California Public Employees’ Retirement System. Annual Pension Costs. A five-year history of the District’s required annual pension costs is shown in the table below. The required contribution was determined as part of an annual actuarial valuation. The most recent actuarial assumptions are described above under the caption “Actuarial Methods and Assumptions Used to Determine Total Pension Liability.” TABLE NO. 8 FIVE-YEAR TREND INFORMATION FOR ANNUAL PENSION COSTS COMBINED EMPLOYER AND EMPLOYEE COSTS Fiscal Year Annual Pension Cost (APC) 2013-14 $3,294,341 2014-15 3,525,338 2015-16 3,870,544 2016-17 4,157,354 2017-18 4,310,436 30 Pension Liabilities. The District’s net pension liability for the Plan is measured as the total pension liability, less the pension plan’s fiduciary net position. The net pension liability of the Plan was measured as of June 30, 2017, using the annual actuarial valuation as of June 30, 2016 rolled forward to June 30, 2017 using standard update procedures. The District’s changes in net pension liability for the Plan between June 30, 2016 and 2017 was as follows: Increase (Decrease) Total Pension Liability Plan Fiduciary Net Position Net Pension Liability/(Asset) Balance at: 6/30/2016 $119,095,572 $73,846,128 $45,249,444 Changes Recognized for the Measurement Period: Service Cost 2,556,902 - 2,556,902 Interest on Total Pension Liability 8,836,284 - 8,836,284 Changes of Benefit Terms - - - Changes of Assumptions 7,308,486 - 7,308,486 Differences Between Actual and Expected Experience (1,208,593) - (1,208,593) Contribution – Employer - 4,105,810 (4,105,810) Contribution – Employee - 1,014,329 (1,014,329) Net Investment Income - 8,149,097 (8,149,097) Benefit Payments, Including Refunds of Employee Contributions (5,779,040) (5,779,040) - Administrative Expense - (109,029) 109,029 Net Changes during 2016-17 11,714,039 7,381,167 4,332,872 Balance at: 6/30/2017 $130,809,611 $81,227,295 $49,582,316 These figures do not reflect the $30 million payment by the District to CalPERS in August 2018. Sensitivity of the Net Pension Liability to Changes in the Discount Rate. The following presents the District’s net pension liability as of June 30, 2017, calculated by CalPERS using the discount rate of 7.25%, as well as what the District’s net pension liability would be if it were calculated using a discount rate of 6.0%, 7.0% and 8.0%. Discount Rate Unfunded Accrued Liability (UAL) 7.25% $47,725,131 6.0 68,916,533 7.0 51,277,763 8.0 36,636,951 See Note 6 of the District’s Comprehensive Annual Financial Report included in “APPENDIX B” for further information about the Plan. These figures also do not reflect the District’s $30 million payment towards the UAL in August 2018. 31 Other Post-Employment Benefits Plan Description. The District’s defined benefit post-employment healthcare plan (“DPHP”) provides medical benefits to eligible retired District employees and beneficiaries. DPHP is part of the Public Agency portion of the California Employers’ Retiree Benefit Trust Fund (“CERBT”), an agent multiple employer plan administered by CalPERS, which acts as a common investment and administrative agent for participating public employers within the State of California. CalPERS issues a separate Comprehensive Annual Financial Report. Copies of the CalPERS’ annual financial report may be obtained from the CalPERS Executive Office, 400 P Street, Sacramento, California 95814. Funding Policy. The contribution requirements of plan members and the District are established and may be amended by the Board of Directors. Effective January 1, 2013, represented employees hired prior to January 1, 2013 or hired on or after January 1, 2013 from another public agency that has reciprocity without having a break in service of more than six months, contribute .75% of covered salaries. In addition, unrepresented and represented employees hired on or after January 1, 2013, and do not have reciprocity from another public agency, contribute 1.75% and 2.5% of covered salaries, respectively. DPHP members receiving benefits contribute based on their selected plan options of EPO, HMO or PPO and whether they are outside the State of California. Contributions by plan members range from $0 to $165 per month for coverage to age 65, and from $0 to $202 per month, respectively, thereafter. Annual Other Post-Employment Benefits (OPEB) Cost and Net OPEB Obligation/Asset. The District’s annual OPEB cost (expense) is calculated based on the annual determined contribution (“ADC”) of the employer, an amount actuarially determined in accordance with the parameters of GASB Statement 45. The ADC represents a level of funding that, if paid on an ongoing basis, is projected to cover the normal annual cost. Any unfunded actuarial liability (or funding excess) is amortized over a period not to exceed thirty years. The current ADC rate of annual covered payroll is 8.9%. The following table shows the components of the District’s annual OPEB cost for the year ended June 30, 2017, the amount actually contributed to the plan, and changes in the District’s net OPEB obligation/asset: Annual Required Contribution (ADC) $ 1,245,000 Interest on Net OPEB (Asset) (907,667) Adjustment to ARC 911,000 Annual OPEB Cost 1,248,333 Contributions Made 2,284,420 Increase in Net OPEB (Asset) (1,036,087) Net OPEB (Asset) - Beginning of Year (12,519,549) Net OPEB (Asset) - End of Year $(13,555,636) In addition to the ADC, the District has contributed cash benefit payments outside the trust (healthcare premium payments for retirees to Special District Risk Management Authority (“SDRMA”), which are included in the contributions shown above. 32 The District’s annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation (asset) for the Fiscal Years ending June 30, 2017, 2016 and 2015 were as follows: TREND INFORMATION FOR CERBT Fiscal Year Annual OPEB Cost % of OPEB Cost Contributed Net OPEB (Asset) (1) 2016-17 $1,248,333 183% $(13,555,636) 2015-16 1,217,252 186 (12,519,549) 2014-15 1,373,063 179 (11,472,386) ____________________________________ (1) Represents funds on deposit with the CERBT administrator, CalPERS. Source: Otay Water District. Funded Status and Funding Progress. Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress presents information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for the benefits. Actuarial Valuation Date Actuarial Valuation of Assets Entry Age Actuarial Accrued Liability (AAL) Unfunded AAL (UAAL) Funded Ratio Covered Payroll UAAL as a Percent of Covered Payroll 6/30/2017 $21,739,035 $26,449,527 $4,710,492 82.20% $12,513,000 37.60% 6/30/2015 16,920,000 23,689,000 6,769,000 71.43 12,668,000 53.43 6/30/2013 11,831,000 22,891,000 11,060,000 51.68 11,969,000 92.41 6/30/2011 7,893,000 18,289,000 10,396,000 43.16 12,429,000 83.64 6/30/2009 6,273,000 10,070,000 3,797,000 62.29 11,878,000 31.97 ____________________________________ Source: Otay Water District. 33 Actuarial Methods and Assumptions. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial assets, consistent with the long-term perspective of the calculations. The following is a summary of the actuarial assumptions and methods: Valuation Date: June 30, 2017 Actuarial Cost Method: Entry Age Normal Cost Method Amortization Method: Level Percent of Payroll Remaining Amortization Period: 20 Years Fixed (Closed) Period as of the Valuation Date Asset Valuation Method: 5-Year Smoothed Market Actuarial Assumptions: Investment Rate of Return: 7.00% (Net of Administrative Expenses) Projected Salary Increase: 3.00% Inflation: 2.75% Individual Salary Growth: CalPERS 2007-2011 Experience Study Healthcare Cost Trend Rate: Medical: 10% per annum graded down in approximately one-half percent increments to an ultimate rate of 5%. Dental: 4% per annum. See Note 7 in the District’s Comprehensive Annual Financial Report included in “APPENDIX B” for further information about the DPHP. Insurance General Liability and Property Damage The District is exposed to various risks of loss related to torts, theft, damage and destruction of assets, errors and omissions, and natural disasters. Beginning in July 2003, the District began participation in a risk financing pool under California Government Code Section 6500 et seq., through SDRMA. Coverages through SDRMA are as follows: property coverage (excluding earthquake) - replacement cost to a combined total of $1 billion per occurrence for scheduled property; replacement cost to $100 million per occurrence for boiler and machinery; $500,000 per occurrence for personal liability coverage for board members; $1 million per loss for employee dishonesty coverage; $10 million per occurrence for each of the following types of coverage - auto liability, public officials errors and omissions, employment practices liability and general liability; and $2 million cyber security coverage. Separate financial statements for SDRMA may be obtained at: Special District Risk Management Authority, 1112 I Street, Suite 300, Sacramento, California 95814. Workers’ Compensation Through SDRMA, the District is insured up to the statutory limit per occurrence for Workers’ Compensation and $5 million in Employer’s Liability. Health Insurance The District provides health insurance through SDRMA covering all of its employees, retirees, and other dependents. SDRMA is a self-funded pooled medical program administered in conjunction with the California State Association of Counties. 34 District Reserves and Investment Policy As of June 30, 2018, the District had approximately $89.0 million in cash and investments, of which the Board had designated $24.5 million for capital projects and reserved $30 million for the payment toward the UAL. The District’s reserves are not pledged to and do not secure the District’s obligation to pay the 2018 Installment Payments. In accordance with State of California law, the District Board of Directors has approved an investment policy (the “Investment Policy”) which complies with Sections 53601 through 53630 of the Government Code of the State of California providing legal authorization for the investment or deposit of funds of local agencies. All investments of the District conform to the restrictions of those laws. The District’s investments by category and their respective market value and book value as of June 30, 2018 are set forth in Table 9 below. For additional information relating to the District’s investments, see “APPENDIX B - DISTRICT AUDITED FINANCIAL STATEMENTS,” Note 2. TABLE NO. 9 SUMMARY OF INVESTMENTS As of June 30, 2018 Investments Market Value Book Value % of Portfolio Federal Agency Issues – Callable $64,967,885 $65,624,952 73.70% Local Agency Investment Fund (LAIF) 11,204,070 11,225,096 12.61% San Diego County Pool 12,131,000 12,194,528 13.69% $88,302,955 $89,044,577 100.00% ____________________________________ Source: Otay Water District. The Investment Policy may be changed at any time at the discretion of the District (subject to the State law provisions relating to authorized investments) and as the California Government Code is amended. Any exception to the Investment Policy must, however, be formally approved by the Board of Directors of the District. There can be no assurance the State law or the Investment Policy will not be amended in the future to allow for investments which are currently not permitted under such State law or the Investment Policy, or that the objectives of the District with respect to investments will not change. 35 Outstanding Indebtedness of the District The District had outstanding indebtedness as of June 30, 2018 as shown in Table No. 10. The District has not issued any additional debt since June 30, 2018. TABLE NO. 10 OTAY WATER DISTRICT OUTSTANDING INDEBTEDNESS As of June 30, 2018 Original Amount Final Debt Issue Issue Outstanding Maturity (1) 1996 Certificates of Participation $15,400,000 $ 7,600,000 2026 (2) 2009 General Obligation Refunding Bonds 7,780,000 3,390,000 2023 (3) 2010 Water Revenue Bonds Series A 13,840,000 7,880,000 2025 (3) 2010 Water Revenue Bonds Series B 36,355,000 36,355,000 2041 (4) 2013 Water Revenue Refunding Bonds 7,735,000 4,560,000 2023 (4) 2016 Water Revenue Refunding Bonds 33,385,000 31,700,000 2036 _______________________________________ (1) The 1996 Certificates are payable from installment payments which are secured by a pledge of and lien on Net Revenues and Taxes on a parity with other Existing Parity Obligations and the 2018 Installment Purchase Agreement. Interest is payable at a variable rate of interest, and the interest rate at July 24, 2018 was 0.94% and was 0.90% at June 30, 2017. At an average rate of 1.5%, debt service is expected to be $800,000 each year for the next several years. (2) Voters within Improvement District No. 27 of the District authorized $100 million general obligation bonds in 1989. The District issued $11,500,000 general obligation bonds in 1992 and refinanced the bonds in 1998 and again in 2009. Annual debt service is approximately $764,000. The District also has approximately $29 million of issued general obligation bonds authorized between 1960 and 1978 for various Improvement Districts throughout the District, but unissued. The general obligation bonds are payable solely from ad valorem property tax revenues, which are not a part of Taxes which secure the installment payments relating to Existing Parity Obligations or the debt service on the 2018 Installment Purchase Agreement. The District has no current plans to issue any of the authorized but unissued general obligation bonds. (3) The 2010 Bonds were sold by the Otay Water District Financing Authority to provide funds for the construction of water storage and transmission facilities. The 2010 Bonds are payable from installment payments which are secured by a pledge of and lien on Net Revenues and Taxes on a parity with other Existing Parity Obligations and the 2018 Installment Purchase Agreement. (4) The District issued the 2013 Bonds and 2016 Bonds to refinance its previously issued 2004 Refunding Certificates of Participation and 2007 Certificates of Participation respectively. The 2013 Bonds and 2016 Bonds are payable from Net Revenues and Taxes on a parity with the other Existing Parity Obligations and the 2018 Installment Purchase Agreement. Source: Otay Water District. 36 Historical Operating Results The following table summarizes the Statement of Net Position included in the District’s audited financial statements for the last four fiscal years with estimated results for the Fiscal Year ended June 30, 2018. The audited financial statements of the District for the Fiscal Year ended June 30, 2017 are attached hereto as “APPENDIX B” and should be read in their entirety. The District accounts for moneys received and expenses paid in accordance with generally accepted accounting principles applicable to governmental agencies such as the District (“GAAP”). In certain cases, GAAP requires or permits moneys collected in one Fiscal Year to be recognized as revenue in a subsequent Fiscal Year and requires or permits expenses paid or incurred in one Fiscal Year to be recognized as expenses in a subsequent Fiscal Year. See “APPENDIX B.” Except as otherwise expressly noted herein, all financial information derived from the District’s audited financial statements reflects the application of GAAP. Reporting obligations under Governmental Accounting Standards Board Statement (“GASB”) No. 68 - Accounting and Financial Reporting for Pensions - an amendment of GASB Statement No. 27 (“GASB No. 68”), and GASB Statement No. 71 - Pension Transitions for Contributions Made Subsequent to the Measurement Date-an amendment of GASB No. 68, commenced with financial statements for Fiscal Year 2014-15. Under GASB No. 68, an employer reports the net pension liability, pension expense and deferred outflows/deferred inflows of related to pensions in its financial statements as part of its financial position. The result of the implementation of these standards was to decrease the net position at July 1, 2014 by $40.4 million which consists of net pension liability, deferred outflows of resources, deferred inflows of resources, and pension expense. The audited financial statements of the District for the Fiscal Year ended June 30, 2017 included in “APPENDIX B” contain additional information about the retirement liability and the application of GASB No. 68. 37 TABLE NO. 11 OTAY WATER DISTRICT STATEMENT OF NET POSITION For the Fiscal Years Ended June 30 Unaudited 2014 2015 2016 2017 2018 ASSETS Current Assets: Cash and Cash Equivalents $ 30,493,474 $ 23,168,511 $ 21,122,543 $ 17,427,875 Restricted Cash and Cash Equivalents 116,639 47,083 8,208 50,204 Investments 27,631,622 35,888,511 36,806,704 38,401,158 Board Designated Investments 21,605,368 22,395,347 23,876,678 24,743,895 Restricted Investments 4,564,972 4,532,725 4,394,093 4,256,520 Accounts Receivable, Net 12,879,121 9,987,050 11,116,393 12,372,840 Accrued Interest Receivable 83,679 97,291 157,620 216,011 Taxes and Availability Charges Receivable, Net 333,589 321,178 341,651 222,092 Restricted Taxes and Availability Charges Receivable, Net 41,091 31,848 32,173 34,375 Inventories 775,007 807,008 722,225 737,185 Prepaid Items and Other Receivables 1,047,708 988,882 1,309,335 962,019 Total Current Assets 99,572,270 98,265,434 99,887,623 99,424,174 Non-current Assets: Net OPEB Asset 10,385,336 11,472,386 12,519,549 13,555,636 Capital Assets: Land 13,714,963 13,714,963 14,085,251 14,389,187 Construction in Progress 11,642,506 15,106,336 12,541,701 14,201,511 Capital Assets, Net of Accumulated Depreciation 441,293,934 430,370,095 427,341,594 421,606,252 Total Capital Assets, Net of Depreciation 466,651,403 459,191,394 453,968,546 450,196,950 Total Non-Current Assets 477,036,739 470,663,780 466,488,095 463,752,586 Total Assets 576,609,009 568,929,214 566,375,718 563,176,760 DEFERRED OUTFLOWS OF RESOURCES Deferred Amount on Refunding 78,118 - 1,339,997 191,428 Deferred Actuarial Pension Costs - 3,575,595 7,001,426 10,681,129 Total Deferred Outflows of Resources $ 78,118 $ 3,575,595 $ 8,341,423 $ 10,872,557 Continued on next page. 38 TABLE NO. 11 OTAY WATER DISTRICT STATEMENT OF NET POSITION For the Fiscal Years Ended June 30 Continued from previous page. Unaudited 2014 2015 2016 2017 2018 LIABILITIES Current Liabilities: Current Maturities of Long-term Debt $ 3,495,000 $ 3,690,000 $ 3,920,000 $ 3,820,000 Accounts Payable 11,906,026 9,779,477 11,497,728 11,544,414 Accrued Payroll Liabilities 3,054,520 3,335,149 574,037 785,496 Other Accrued Liabilities 3,397,500 3,642,511 3,813,262 3,771,503 Customer and Developer Deposits 2,418,754 2,227,173 3,313,631 3,451,690 Accrued Interest 1,564,992 1,540,122 1,197,113 1,417,440 Unearned Revenues - - 421,800 305,560 Liabilities Payable From Restricted Assets: Restricted Accrued Interest 70,804 65,304 59,604 53,267 Total Current Liabilities 25,907,596 24,279,736 24,797,175 25,149,370 Non-current Liabilities: Long-term Debt: General Obligation Bonds 5,283,563 4,697,208 4,095,853 3,474,498 Certificates of Participation 44,980,314 43,355,103 8,191,803 7,592,548 Revenue Bonds 55,058,490 53,402,993 87,483,686 84,519,618 Net Pension Liability - 38,723,345 40,143,128 45,249,444 Other Non-current Liabilities 649,344 656,158 3,040,648 3,074,313 Total Non-Current Liabilities 105,971,711 140,834,807 142,955,118 143,910,421 Total Liabilities 131,879,307 165,114,543 167,752,293 169,059,791 DEFERRED INFLOWS OF RESOURCES Deferred Actuarial Pension Costs - 4,967,940 5,677,071 3,802,537 Total Deferred Inflows of Resources - 4,967,940 5,677,071 3,802,537 NET POSITION Net Investment in Capital Assets 357,912,154 354,046,090 351,617,201 350,981,714 Restricted for Debt Service 3,855,673 4,658,306 4,402,301 4,306,724 Unrestricted 83,039,993 43,717,930 (1) 45,268,275 45,898,551 Total Net Position $444,807,820 $402,422,326 (1) $401,287,777 $401,186,989 ____________________________________ (1) The District’s Net Position decreased in Fiscal Year 2014-15 primarily due to an adjustment as a result of the implementation of GASB No. 68, which required the District to record the net pension liability as described above. Source: Otay Water District Audited Financial Statements. 39 Historical Debt Service Coverage Table No. 12 on the following page sets forth historical Taxes and Net Revenues and Debt Service coverage ratio for the Fiscal Years 2013-14 through 2016-17 and the estimated amounts for the 2017-18 Fiscal Year. The historical debt service coverage set forth in Table No. 13 has been calculated in accordance with the Indenture. Such calculations, which are derived from definitions of Revenues, Operation and Maintenance Costs, Net Revenues set forth in Appendix A, are intended to reflect the District’s compliance with the rate covenant and additional debt covenants contained in the 2018 Installment Purchase Agreement and described under the caption “SOURCES OF PAYMENT FOR THE BONDS” and for no other purpose. Such calculations may reflect non-recurring or extraordinary accounting transactions permitted under the 2018 Installment Purchase Agreement and GAAP. In providing a rating on the Bonds, Standard & Poor’s may have performed independent calculations of coverage ratios using its own internal formulas and methodology which may not reflect the provisions of the Indenture. See the caption “CONCLUDING INFORMATION - Rating on the Bonds.” The District makes no representations as to any such calculations, and such calculations should not be construed as a representation by the District as to past or future compliance with any bond covenants, the availability of particular revenues for the payment of Debt Service or for any other purpose. 40 TABLE NO. 12 HISTORICAL TAXES AND NET REVENUES (in ‘000’s) AND DEBT SERVICE COVERAGE For the Fiscal Year Ended June 30 2014 2015 2016 2017 2018 Revenues: Water Sales $81,287 $79,135 $73,940 $83,720 $ 88,910 Meter Fees 2,494 2,120 2,243 3,653 1,742 Availability/Annexation Fees 686 641 544 638 629 Capacity Fees 1,245 2,344 3,010 1,054 7,568 Betterment Fees 742 567 491 511 461 BABS Subsidy (1) 768 752 791 773 775 Investment Earnings 832 959 1,045 744 880 Total Revenue $88,054 $86,518 $82,064 $91,093 $100,965 Operation and Maintenance Costs: Water Purchases $48,239 $46,198 $43,874 $48,406 $ 53,586 Utilities 2,663 2,895 2,570 2,781 2,956 Payroll 17,943 18,149 17,975 19,062 20,730 Administrative 5,313 5,596 6,342 7,395 6,975 Materials and Maintenance 1,418 1,483 1,357 1,419 1,570 Total Operation and Maintenance Costs $75,576 $74,321 $72,118 $79,063 $ 85,817 Net Revenues $12,478 $12,197 $ 9,946 $12,030 $ 15,148 Taxes $ 2,894 $ 3,129 $ 3,354 $ 3,458 $ 3,802 Taxes and Net Revenues $15,372 $15,326 $13,300 $15,488 $ 18,950 Debt Service: 1996 Installment Payments $ 683 $ 627 $ 719 $ 763 $ 785 2004 Installment Payments 57 - - - - 2007 Installment Payments 2,509 2,502 2,475 - - 2010 Installment Payments 3,725 3,720 3,712 3,707 3,709 2013 Bonds 857 864 855 850 849 2016 Bonds - - - 2,435 2,222 Total Debt Service $ 7,831 $ 7,713 $ 7,761 $ 7,755 $ 7,565 Coverage Ratio 196% 199% 171% 200% 250% ____________________________________ (1) Build America Bonds interest rate subsidy payable by federal government with respect to the 2010B Bonds. There is no assurance that the federal government will continue to pay the full amount of the subsidy in each year. See “RISK FACTORS - Interest Subsidy Payment; Sequestration.” Source: Otay Water District. 41 Projected Debt Service Coverage The projections of Revenues and the corresponding Taxes and Net Revenues shown in Table No. 13 are based on the assumptions shown below. The District believes the assumptions used for the projections are reasonable based on its own data and on projections from outside sources regarding expected growth in the District; however, some assumptions may not materialize and unanticipated events and circumstances may occur (see “RISK FACTORS”). To the extent that the assumptions are not actually realized the coverage levels shown in Table No. 13 will likely be reduced and, if substantial reductions in Net Revenues were to result, the District’s ability to timely pay the 2018 Installment Payments, which, in turn, pay debt service on the Bonds, may be adversely affected. Following is a discussion of assumptions used in the projection of Revenues, Net Revenues and Taxes: (a) Potable connections in equivalent dwelling units (“EDU”) are projected to increase as shown below, for an overall 5.4 percent increase during the next five year period. Recycled connections in EDUs are projected to increase by 4.9 percent during the next five year period as shown below. The District has based its projections for growth on information contained in the Expera Report (see “THE WATER SYSTEM - Capital Improvement Program” herein). Potable System Recycled System Number of Number of Additional EDUs % Increase Additional EDUs % Increase 2019 884 1.3% 41 0.9% 2020 888 1.3% 44 1.0% 2021 738 1.0% 44 1.0% 2022 708 1.0% 44 1.0% 2023 534 0.7% 44 1.0% ____________________________________ Note: EDUs do not reflect actual number of projected connections. An EDU is the approximate equivalent of 1 single-family home. (b) Water usage in the District in Fiscal Year 2018-19 is anticipated to be slightly higher than the 2017-18 level. The District expects some growth in water sales due to new customers as shown in (a) above. Water sales volume (in acre-feet) is projected as follows. Potable System Recycled System Total 2019 29,377 3,593 32,971 2020 29,671 3,629 33,300 2021 29,968 3,675 33,643 2022 30,321 3.732 34,053 2023 30,761 3,807 34,568 The District receives a credit of $185 per acre-foot and $200 per-acre foot from MWD and CWA, respectively, for each acre-foot of recycled water. These credits are included in water sales revenue. (c) Water rates to District customers are projected to increase based on the District’s most recently updated projections (see “Water Charges” herein). These projected rates reflect the District’s estimate of potential rate increases that would be passed through to the District’s customers as a result of rate increases by CWA and MWD. The District intends, but does not guarantee, to continue to pass-through any increases in water costs by CWA and MWD. 42 (d) Capacity and annexation fee rates are estimated to increase 3 percent in each year based on the projected Engineering News-Record index increases. Revenue from these fees will also increase as the number of connections increase as shown in (a) above. The District has based its projections for growth on information contained in the Expera Report (see “Capital Improvement Program” herein). (e) Water availability charges, included in Availability Fees, are limited to an amount not exceeding $10 per acre per year. To the extent the water availability charges exceeding $10 per acre and are authorized for operational purposes, such fees are included in Betterment Fees. (f) Taxes do not include ad valorem taxes levied for the purpose of paying debt service on the District’s 2009 General Obligation Refunding Bonds. Taxes are projected to increase by approximately 2 percent annually (see “Taxes” herein). (g) Non-operating income is excluded from the projection. Non-operating revenues within “Miscellaneous Revenues” shown in the District’s financial statements consists of property rental and golf course income. Golf course operations have ceased as of the end of Fiscal Year 2017-18. (h) Water Supply costs are projected to increase 3.6 percent in 2018-19 and are anticipated to increase annually as a result of increases in cost of purchased water and usage by new customers as follows: 2020 6.5% 2021 6.5% 2022 6.1% 2023 5.0% 2024 5.0% These projected increases in supply costs reflect supply cost increase by CWA resulting from the funding of the Carlsbad Project desalination plant by CWA (see “Water Supply - CWA Water Supply” herein.) (i) Operating costs shown in Fiscal Year 2018-19 are based on current year budget estimates. Costs for subsequent fiscal years include the annual average inflationary factors shown below. Utilities 3.5% Materials and Maintenance 4.0% Administrative Costs 3.0% Salaries 0.0% Medical Benefits 5.3% Workers Comp 5.0% Other Benefits (7.2)% Base operating costs are also increased based on the projected growth in District operations, similar to the growth rates shown for connections in (a) above. (j) The debt service on the 1996 Certificates is calculated based on the existing principal repayment schedule and the Bond Buyer 25 Year Revenue Bond Index as of July 26, 2018 of 4.40%. The current letter of credit expires in June 2020. The projections do not include the letter of credit fees of approximately $80,000 annually. 43 (k) The Interest Subsidy Payment reflects an estimated $118,600 reduction from the maximum 35% of interest on the 2010B Bonds as a result of sequestration, allocated proportionately between fiscal years. See “RISK FACTORS - Interest Subsidy Payment; Sequestration” herein. 44 TABLE NO. 13 PROJECTED TAXES AND NET REVENUES (in ‘000’s) AND DEBT SERVICE COVERAGE For the Fiscal Year ended June 30 (1) 2019 2020 2021 2022 2023 Revenues: Water Sales $ 96,360 $100,735 $104,917 $109,474 $114,549 Meter Fees 2,193 2,462 2,484 2,506 2,269 Availability/Annexation Fees 634 638 645 652 662 Capacity Fees 7,220 7,376 6,171 6,280 4,860 Betterment Fees 461 479 498 518 539 BABS Subsidy 712 712 712 712 712 Investment Earnings 1,133 1,239 1,407 1,623 1,840 Total Revenue $108,713 $113,641 $116,834 $121,765 $125,431 Operation and Maintenance Costs: Water Purchases $ 56,329 $ 60,239 $ 64,537 $ 69,073 $ 73,655 Utilities 3,016 3,153 3,297 3,455 3,632 Payroll 20,915 19,529 19,731 19,955 20,303 Administrative 5,869 6,013 6,211 6,415 6,625 Materials and Maintenance 2,574 2,677 2,784 2,895 3,011 Repairs and Replacement - - - - - Total Operation and Maintenance Costs $ 88,703 $ 91,611 $ 96,560 $101,793 $107,226 Net Revenues $ 20,010 $ 22,030 $ 20,274 $ 19,972 $ 18,205 Taxes $ 3,745 $ 3,820 $ 3,896 $ 3,974 $ 4,053 Taxes and Net Revenues $ 23,755 $ 25,850 $ 24,170 $ 23,946 $ 22,258 Debt Service 1996 Installment Payments $ 894 $ 877 $ 860 $ 939 $ 920 2010 Installment Payments 3,706 3,697 3,694 3,694 3,690 2013 Bonds 847 849 849 848 846 2016 Bonds 2,203 2,204 2,201 2,201 2,208 2018 Installment Payments 532 1,925 1,925 1,925 1,925 Total $ 8,182 $ 9,552 $ 9,529 $ 9,607 $ 9,589 Coverage Ratio 290% 271% 254% 249% 232% ____________________________________ (1) For the purpose of calculating the coverage ratio, when the 1996 Certificates are no longer outstanding, the BABs Subsidy payments will be deducted from Net Revenues and the calculation of Debt Service payable by the District on Parity Bonds or Contracts will be reduced by the amount of the Interest Subsidy Payments the District is entitled to receive during such twelve-month period. See “RISK FACTORS - Interest Subsidy Payment; Sequestration.” Source: Otay Water District. 45 The projected Revenues, Taxes and Operation and Maintenance Costs shown above are subject to several variables as described on the previous pages. The District provides no assurance that the projected Taxes and Net Revenues or Coverage Ratios will be achieved (see “RISK FACTORS” herein). SOURCES OF PAYMENT FOR THE BONDS General The Bonds are limited obligations of the Authority and are payable solely from the Pledged Revenues (as defined in the Indenture) and amounts on deposit in the Bond Payment Fund established under the Indenture. Pledged Revenues consist of the 2018 Installment Payments and other payments paid by the District and received by the Authority pursuant to the Installment Purchase Agreement (other than payments related to the indemnification of the Authority) and all interest or other income from any investment of any money in the Bond Payment Fund established pursuant to the Indenture. The Pledged Revenues, amounts on deposit in the Bond Payment Fund and all rights of the Authority under the Installment Purchase Agreement (other than its right to indemnify thereunder) will be assigned to the Trustee and irrevocably pledged to the payment of the interest and redemption premium, if any, on and principal of the Bonds as provided in the Indenture. The Pledged Revenues are not permitted to be used for any other purpose while any of the Bonds remain Outstanding. The 2018 Installment Payments are calculated to be sufficient to pay, when due, the principal and interest represented by the Bonds. 2018 Installment Payments The 2018 Installment Payments are payable from and secured by Taxes and Net Revenues held under the Installment Purchase Agreement, all as set forth in the Installment Purchase Agreement and in the manner described herein. The District’s obligation to pay the 2018 Installment Payments is a limited obligation of the District payable solely from Taxes and Net Revenues of the Water System, and neither the full faith and credit nor the taxing power of the District, the State of California or any if its political subdivisions is pledged for the payment of the 2018 Installment Payments. Taxes and Net Revenues The following definitions are from the Installment Purchase Agreement and the Indenture and capitalized terms used below have the meanings set forth in the Indenture, except for the term “Bonds” as defined in the Indenture which is referred to below as “Parity Bonds.” See “APPENDIX A - SUMMARY OF LEGAL DOCUMENTS.” The Taxes and Net Revenues securing the 2018 Installment Payments are payable on parity with installment payments securing the District’s 1996 Certificates and the 2010 Bonds and debt service on the 2013 Bonds and 2016 Bonds (the “Existing Parity Obligations”) and other Contracts and Parity Bonds issued in the future. “Taxes” means all taxes, including ad valorem taxes of the District, other than taxes imposed pursuant to Chapter 1 of Part 9 of the Law to secure general obligation bonds of the District or any improvement district thereof. “Revenues” means (i) all water availability charges imposed pursuant to Chapter 2 of Part 5 of the Law not exceeding $10 per acre per year; (ii) all income, rents, rates, fees, charges and other moneys derived by the District from the ownership or operation of the Water System, including, without limiting the 46 generality of the foregoing, (a) all income, rents, rates, fees, charges or other moneys derived from the sale, furnishing, and supplying of water and other services, facilities and commodities sold, furnished or supplied through the facilities of the Water System, including connection fees, (b) the earnings on and income derived from the investment of such income, rents, rates, fees and charges or other moneys, (c) the proceeds derived by the District directly or indirectly from the sale, lease or other disposition of a part of the Water System as permitted under the Installment Purchase Agreement, and (d) any Interest Subsidy Payments; provided that the term “Revenues” shall not include customers’ deposits or any other deposits subject to refund until such deposits have become the property of the District. “Operation and Maintenance Costs” means (i) costs spent or incurred for maintenance and operation of the Water System calculated in accordance with generally accepted accounting principles, including (among other things) the reasonable expenses of management and repair and other expenses necessary to maintain and preserve the Water System in good repair and working order, and including administrative costs of the District that are charged directly or apportioned to the Water System, including but not limited to salaries and wages of employees, payments to the Public Employees Retirement System, overhead, insurance, taxes (if any), fees of auditors, accountants, attorneys or engineers and insurance premiums, and including all other reasonable and necessary costs of the District or charges (other than Debt Service payments) required to be paid by it to comply with the terms of the Installment Purchase Agreement, or any Contract or of any resolution or indenture authorizing the issuance of any Parity Bonds or of such Parity Bonds; and (ii) costs spent or incurred in the purchase of water for the Water System; but excluding in all cases depreciation, replacement and obsolescence charges or reserves therefor and amortization of intangibles or other bookkeeping entries of a similar nature and all capital charges. “Net Revenues” means, for any Fiscal Year, the Revenues for such Fiscal Year or other 12-month period less the Operation and Maintenance Costs for such Fiscal Year. See “Rate Covenant” and “Parity Debt” herein. “Interest Subsidy Payments” means cash subsidy payments entitled to be received by the District from the United States Treasury with respect to the 2010B Bonds and any Parity Bonds issued and Contracts executed by the District, including but not limited to “Build America Bonds” issued as contemplated by the American Recovery and Reinvestment Act of 2009. The District will timely submit all required documentation to the United States Treasury and take any and all action necessary to receive and collect the Interest Subsidy Payments. Allocation of Taxes and Net Revenues In order to carry out and effectuate the pledge and lien contained in the Installment Purchase Agreement, the District has agreed and covenanted that all Revenues and Taxes shall be received by the District in trust and shall be deposited when and as received in special funds designated as the “Revenue Fund” and the “Tax Fund,” respectively, which funds were previously maintained by the District in accordance with the provisions of the Existing Parity Obligations, and are continued by the terms of the Installment Purchase Agreement, and which funds the District has agreed and covenanted to maintain and to hold separate and apart from other funds so long as any Contracts or Parity Bonds remain unpaid, including the Installment Purchase Agreement securing the Bonds. Moneys in the Revenue Fund and Tax Fund shall be used and applied by the District as provided in the Installment Purchase Agreement and in the other Contracts and Parity Bonds. All moneys in the Revenue Fund shall be held in trust and shall be applied, used and withdrawn for the purposes set forth in the Installment Purchase Agreement. The District shall, from the moneys in the Revenue Fund, pay all Operation and Maintenance Costs (including amounts reasonably required to be set aside in contingency reserves for Operation and Maintenance Costs, the payment of which is not then immediately required) as such Operation and Maintenance Costs become due and payable. All moneys in the Tax Fund, and, to the extent such moneys 47 are insufficient, all remaining moneys in the Revenue Fund shall be set aside by the District at the following times for the transfer to the following respective special funds in the following order of priority: (i) Bond Payment Fund and other Debt Service Payments. On or before each Installment Payment Date, the District shall, from the moneys in the Tax Fund and, to the extent needed, the Revenue Fund, transfer to the Trustee for deposit in the Bond Payment Fund, the 2018 Installment Payment due and payable on that Installment Payment Date. The District shall also, from the moneys in the Tax Fund and, to the extent needed, the Revenue Fund, transfer to the applicable trustee or payee for deposit in the applicable payment fund, without preference or priority, and in the event of any insufficiency of such moneys ratably without any discrimination or preference, Debt Service payments due in accordance with any other Contract or Parity Bond or resolution or Indenture relating thereto. No deposit need be made in the Bond Payment Fund as 2018 Installment Payments if the amount in the Bond Payment Fund is at least equal to the amount of the Installment Payment due and payable on the next succeeding Installment Payment Date. All money in the Bond Payment Fund shall be used and withdrawn by the Trustee in accordance with the Indenture. (ii) Reserve Funds for Parity Bonds and Contracts. On or before each Installment Payment Date or other date on which Debt Service is due on any Parity Bonds, the District shall, from the remaining moneys in the Tax Fund, and to the extent needed, the Revenue Fund, thereafter, without preference or priority and in the event of any insufficiency of such moneys ratably without any discrimination or preference, transfer to the applicable trustee for the reserve funds and/or accounts, if any, as may have been established in connection with any Parity Bonds or Contracts, that sum, if any, necessary to restore such funds or accounts to an amount equal to the reserve requirement with respect thereto and to transfer to any insurer any amounts due pursuant to any agreement related to the repayment of draws under any reserve policy or other credit instrument funding a reserve requirement for any Parity Bonds or Contracts. (iii) Surplus. Moneys on deposit in the Tax Fund or the Revenue Fund on any date when the Authority reasonably expects such moneys will not be needed for the purposes described above may be expended by the District at any time for any purpose permitted by law. No Reserve Fund for the Bonds There is no reserve fund established for the Bonds, the 2016 Bonds, 2013 Bonds or the 1996 Certificates. With respect to the reserve requirement attributable to the 2010 Bonds, the District deposited $3,738,105.85 in the 2010 Bonds reserve fund. None of the amounts deposited in the 2010 Bonds reserve fund are available for payment of the Bonds. Event of Default and Acceleration of Maturities The 2018 Installment Payments are not secured by, and the Owners of Bonds have no security interest in or mortgage on the property of the Water System, or of the District. Default by the District will not result in loss of any property to the District. Should the District default, the Trustee may declare the entire principal amount of the 2018 Installment Payments and the accrued interest thereon, to be due and payable immediately, whereupon the same shall become due and payable, and take whatever action at law or in equity may appear necessary or desirable to enforce performance and observance of any obligation, agreement or covenant of the District under the Installment Purchase Agreement. A default under the Installment Purchase Agreement is also an Event of Default under the Indenture which may result in an 48 acceleration of Bonds. See “APPENDIX A - SUMMAY OF LEGAL DOCUMENTS - Installment Purchase Agreement - Events of Default and Remedies of Authority” and “RISK FACTORS - Acceleration; Limited Recourse on Default.” Rate Covenant Pursuant to the Installment Purchase Agreement, to the fullest extent permitted by law, the District shall fix and prescribe, at the commencement of each Fiscal Year, rates and charges for the Water Service which are reasonably expected to be at least sufficient to yield during each Fiscal Year Taxes and Net Revenues equal to one hundred twenty-five percent (125%) of the Debt Service (including for purposes of such calculation the obligation of the District to repay costs related to any surety bond, reserve credit facility or other reserve fund funding instrument) for such Fiscal Year. The District may make adjustments from time to time in such rates and charges and may make such classification thereof as it deems necessary, but shall not reduce the rates and charges then in effect unless the Taxes and Net Revenues from such reduced rates and charges will at all times be sufficient to meet the requirements of this Section. When the 1996 Certificates are no longer Outstanding, then the Interest Subsidy Payments will be deducted from Net Revenues for purposes of the coverage calculations of this provision of the Installment Purchase Agreement. See “APPENDIX A - SUMMARY OF LEGAL DOCUMENTS.” Parity Debt Pursuant to the Existing Parity Obligations and the Installment Purchase Agreement, the District may at any time execute any contract or issue any bonds the payments under or of which are on a parity with the 2018 Installment Payments (“Contracts” or “Parity Bonds”), as the case may be, provided an Independent Financial Consultant or Independent Certified Public Accountant shall render to and file with the District and the Trustee a written report certifying that Taxes and Net Revenues for any 12 consecutive calendar months in the 18 calendar months immediately preceding the issuance of the additional Contracts or Parity Bonds adjusted as set forth below are at least equal to 125% of Debt Service (including for purposes of such calculation the obligation of the District to repay costs related to any surety bond, reserve credit facility or other reserve fund funding instrument), assuming such additional Contracts had been executed or Parity Bonds had been issued at the beginning of such twelve-month period. For purposes of calculating the ratio required for the issuance of additional Contracts or Parity Bonds, when the 1996 Certificates are no longer outstanding, the Interest Subsidy Payments will be deducted from Net Revenues and the calculation of Debt Service payable by the District on Parity Bonds or Contracts will be reduced by the amount of the Interest Subsidy Payments the District is entitled to receive during such twelve-month period. For purposes of calculating Net Revenues as set forth in the preceding paragraph, adjustments to the computations of Net Revenues may be made for the following: (1) any change in service charges which has been adopted subsequent to the commencement of the twelve-month period but prior to the date of issuance or execution of the additional Parity Bonds or Contracts; (2) customers added to the Water System subsequent to the commencement of the twelve-month period but prior to the date of issuance or execution of the additional Parity Bonds or Contracts; (3) the estimated change in Net Revenues which will result from the connection of existing residences or businesses to the Water System within one year following completion of any project to be funded or system to be acquired from the proceeds of such additional Parity Bonds or Contracts; and 49 (4) the estimated change in Net Revenues which will result from services provided under any long- term, guaranteed contract that extends for the life of the Parity Bonds or additional Contracts if entered into subsequent to the commencement of the twelve-month period but prior to the date of issuance or execution of the additional Parity Bonds or Contracts. Notwithstanding the foregoing, Parity Bonds issued or Contracts executed to refund Parity Bonds or Contracts (including refunding of the Existing Parity Obligations or the Bonds), may be delivered without satisfying the conditions set forth above if Debt Service in each Fiscal Year after the Fiscal Year in which such Parity Bonds are issued or Contracts executed is not greater than Debt Service would have been in each such Fiscal Year prior to the issuance of such Parity Bonds or execution of such additional Contracts. Further, for the purpose of calculating Debt Service for any Parity Bonds or Contracts which bear a variable interest rate, the rate of interest used to calculate Debt Service shall be 110% of the greater of (i) the then current variable interest rate borne by such Parity Bonds or additional Contracts (which includes outstanding 1996 Certificates) plus 2%, and (ii) the highest variable rate borne over the preceding 12 months by outstanding variable rate debt issued by the District or, if no such variable rate debt is at the time outstanding, by variable rate debt of which the interest rate is computed by reference to an index comparable to that to be utilized in determining the interest rate for the debt then proposed to be issued. See “APPENDIX A - SUMMARY OF LEGAL DOCUMENTS.” In addition to the foregoing, in the event any amounts are past due and owing to any insurer of Parity Bonds or with respect to any Contracts, such insurer must provide written consent to the issuance of any additional Parity Bonds or the execution of any Contracts. Property Insurance The Installment Purchase Agreement requires the District to maintain or cause to be maintained with respect to the properties of the Water System, insurance in such amounts and against such risks (including accident to or destruction of the Water System which are of an insurable nature) as are usually covered in connection with facilities similar to the Water System so long as such insurance is available from reputable insurance companies. All proceeds of insurance against property damage and all proceeds of condemnation awards shall be payable to the District alone, and the District shall retain and collect such proceeds. All claims under any such insurance policy or with respect to any condemnation proceeding relating to the Water System may be settled by the District without the consent of the Trustee. Such proceeds shall be applied by the District to the repair or rebuilding of the Water System or to repay the Bonds, other Contracts and Parity Bonds. See also “APPENDIX A - SUMMARY OF LEGAL DOCUMENTS - Particular Covenants - Insurance” herein. CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS Article XIIIB Gann Limit Article XIIIB of the California State Constitution limits the annual appropriations of the State and of any city, county, school district, authority or other political subdivision of the State to the level of appropriations of the particular governmental entity for the prior fiscal year, as adjusted for changes in the cost of living and population. The “base year” for establishing such appropriation limit is the 1978-79 fiscal year and the limit is to be adjusted annually to reflect changes in population and consumer prices. Adjustments in the appropriations limit of an entity may also be made if (i) the financial responsibility for a service is transferred to another public entity or to a private entity, (ii) the financial source for the provision of services is transferred from taxes to other revenues, or (iii) the voters of the entity approve a change in the limit for a period of time not to exceed four years. 50 Appropriations subject to Article XIIIB generally include the proceeds of taxes levied by the State or other entity of local government, exclusive of certain State subventions and refunds of taxes. “Proceeds of taxes” include, but are not limited to, all tax revenues and the proceeds to an entity of government from (i) regulatory licenses, user charges, and user fees (but only to the extent such proceeds exceed the cost of providing the service or regulation), and (ii) the investment of tax revenues. Article XIIIB includes a requirement that if an entity’s revenues in any year exceed the amounts permitted to be spent, the excess would have to be returned by revising tax rates or fee schedules over the subsequent two years. Certain expenditures are excluded from the appropriations limit including payments of indebtedness existing or legally authorized as of January 1, 1979, or of bonded indebtedness thereafter approved by the voters and payments required to comply with court or federal mandates which without discretion require an expenditure for additional services or which unavoidably make the providing of existing services more costly. The District is of the opinion that its charges with respect to Water Service do not exceed the costs that it reasonably bears in providing Water Service and are not subject to the limits of Article XIIIB. Proposition 218 General. On November 5, 1996, California voters approved Proposition 218, the so-called “Right to Vote on Taxes Act.” Proposition 218 added Articles XIIIC and XIIID to the State Constitution, which affect the ability of local governments to levy and collect both existing and future taxes, assessments, and property-related fees and charges. Proposition 218, which generally became effective on November 6, 1996, changed, among other things, the procedure for the imposition of any new or increased property- related “fee” or “charge,” which is defined as “any levy other than an ad valorem tax, a special tax or an assessment, imposed by a local government upon a parcel or upon a person as an incident of property ownership, including user fees or charges for a property related service” (and referred to in this section as a “property related fee or charge”). On November 2, 2010, California voters approved Proposition 26, the so-called “Supermajority Vote to Pass New Taxes and Fees Act.” Section 1 of Proposition 26 declares that Proposition 26 is intended to limit the ability of the State Legislature and local government to circumvent existing restrictions on increasing taxes by defining the new or expanded taxes as “fees.” Proposition 26 amended Articles XIIIA and XIIIC of the State Constitution. The amendments to Article XIIIA limit the ability of the State Legislature to impose higher taxes (as defined in Proposition 26) without a two-thirds vote of the Legislature. Proposition 26’s amendments to Article XIIIC broadly define “tax,” but specifically exclude, among other things:  A charge imposed for a specific benefit conferred or privilege granted directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of conferring the benefit or granting the privilege.  A charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of providing the service or product.  A charge imposed as a condition of property development.  Assessments and property-related fees imposed in accordance with the provisions of Article XIIID. Property-Related Fees and Charges. Under Article XIIID, before a municipality may impose or increase any property-related fee or charge, the entity must give written notice to the record owner of each parcel of land affected by that fee or charge. The municipality must then hold a hearing upon the proposed 51 imposition or increase at least 45 days after the written notice is mailed, and, if a majority of the property owners of the identified parcels present written protests against the proposal, the municipality may not impose or increase the property-related fee or charge. Further, under Article XIIID, revenues derived from a property-related fee or charge may not exceed the funds required to provide the “property-related service” and the entity may not use such fee or charge for any purpose other than that for which it imposed the fee or charge. The amount of a property-related fee or charge may not exceed the proportional cost of the service attributable to the parcel, and no property- related fee or charge may be imposed for a service unless that service is actually used by, or is immediately available to, the owner of the property in question. Initiative Power. In addition, Article XIIIC states that “the initiative power shall not be prohibited or otherwise limited in matters of reducing or repealing any local tax, assessment, fee or charge. The power of initiative to affect local taxes, assessments, fees and charges shall be applicable to all local governments and neither the Legislature nor any local government charter shall impose a signature requirement higher than that applicable to Statewide statutory initiatives.” Judicial Interpretation of Articles XIIIC and XIIID. After Proposition 218 was enacted in 1996, appellate court cases and an Attorney General’s opinion initially indicated that fees and charges levied for water and wastewater services would not be considered property-related fees and charges, and thus not subject to the requirements of Article XIIID regarding notice, hearing and protests in connection with any increase in the fees and charges being imposed. However, three cases have held that certain types of water and wastewater charges could be subject to the requirements of Article XIIID under certain circumstances. In Richmond v. Shasta Community Services District (2004) 32 Cal.4th 409, the California Supreme Court addressed the applicability of the notice, hearing and protest provisions of Article XIIID to certain charges related to water service. In Richmond, the Court held that capacity charges are not subject to Proposition 218. The Court also indicated in dictum that a fee for ongoing water service through an existing connection could, under certain circumstances, constitute a property-related fee and charge, with the result that a local government imposing such a fee and charge must comply with the notice, hearing and protest requirements of Article XIIID. In Howard Jarvis Taxpayers Association v. City of Fresno (2005) 127 Cal.App.4th 914, the California Court of Appeal, Fifth District, concluded that water, sewer and trash fees are property-related fees subject to Proposition 218, and a municipality must comply with Article XIIID before imposing or increasing such fees. The California Supreme Court denied the City of Fresno’s petition for review of the Court of Appeal’s decision on June 15, 2005. In July 2006, the California Supreme Court, in Bighorn-Desert View Water Agency v. Verjil (2006) 39 Cal.4th 205, addressed the validity of a local voter initiative measure that would have (a) reduced a water agency’s rates for water consumption (and other water charges), and (b) required the water agency to obtain voter approval before increasing any existing water rate, fee, or charge, or imposing any new water rate, fee, or charge. The court adopted the position indicated by its statement in Richmond that a public water agency’s charges for ongoing water delivery are “fees and charges” within the meaning of Article XIIID, and went on to hold that charges for ongoing water delivery are also “fees” within the meaning of Article XIIIC’s mandate that the initiative power of the electorate cannot be prohibited or limited in matters of reducing or repealing any local tax, assessment, fee or charge. Therefore, the court held, Article XIIIC authorizes local voters to adopt an initiative measure that would reduce or repeal a public agency’s water rates and other water delivery charges. (However, the court ultimately ruled in favor of the water agency and held that the entire initiative measure was invalid on the grounds that the second part of the initiative measure, which would have subjected future water rate increases to prior voter approval, was not supported by Article XIIIC and was therefore invalid.) 52 The court in Bighorn specifically noted that it was not holding that the initiative power is free of all limitations; the court stated that it was not determining whether the electorate’s initiative power is subject to the statutory provision requiring that water service charges be set at a level that will pay for operating expenses, provide for repairs and depreciation of works, provide a reasonable surplus for improvements, extensions, and enlargements, pay the interest on any bonded debt, and provide a sinking or other fund for the payment of the principal of such debt as it may become due. On April 20, 2015, the California Court of Appeal, Fourth District, issued an opinion in Capistrano Taxpayers Association, Inc. v. City of San Juan Capistrano, 235 Cal. App. 4th 1493 (2015) (the “SJC Case”) upholding tiered water rates under Proposition 218 provided that the tiers correspond to the actual cost of furnishing service at a given level of usage. The opinion was specific to the facts of the case, including a finding that the City of San Juan Capistrano did not attempt to calculate the actual costs of providing water at various tier levels. The District’s tiered water rates, are described under the caption “THE WATER SYSTEM - Water Charges.” District management believes that this case will not have any material impact on the District’s ability to make the 2018 Installment Payments or to meet its rate covenant. Conclusion. It is not possible to predict how the courts will further interpret Article XIIIC and Article XIIID in future judicial decisions and what, if any, further implementing legislation will be enacted. Under the Bighorn case, local voters could adopt an initiative measure that reduces or repeals water rates and charges, though it is not clear whether (and California courts have not decided whether) any such reduction or repeal by initiative would be enforceable in a situation in which such rates and charges are pledged to the repayment of bonds or other indebtedness, as is the case with respect to the Bonds. The District believes that its rates with respect to the Water Service comply with the requirements of Proposition 218 and expect that future fees and charges will comply with Proposition 218’s procedural and substantive requirements to the extent applicable thereto. The requirements of, or a voter initiative pursuant to, Proposition 218 could impact the ability of the District to set or raise service charges. There can be no assurance that the courts will not further interpret, or the voters will not amend, Article XIIIC and Article XIIID to limit the ability of local agencies to impose, levy, charge and collect increased fees and charges for water, or to call into question previously adopted water rate increases. Future Initiatives Articles XIIIB, XIIIC and XIIID were adopted as measures that qualified for the ballot pursuant to California’s initiative process. From time to time other initiatives could be proposed and adopted affecting the revenues of the District. 53 RISK FACTORS The following information should be considered by prospective investors in evaluating the Bonds. However, the following does not purport to be an exhaustive listing of risks and other considerations which may be relevant to investing in the Bonds. In addition, the order in which the following information is presented is not intended to reflect the relative importance of any such risks. System Demand There can be no assurance that the local demand for service provided by the Water System will be consistent with to levels described in this Official Statement under the heading “THE WATER SYSTEM.” Reduction in the level of new connections could require an increase in rates or charges in order to produce Taxes and Net Revenues sufficient to comply with the District’s rate covenant in the Installment Purchase Agreement. Such rate increases could increase the likelihood of nonpayment, and could also further decrease demand. Another factor that can impact demand is economic conditions, including associated impacts of economic recession such as job losses, income losses, housing foreclosure and vacancies. Furthermore, there can be no assurance that any other entity with regulatory authority over the Water System will not adopt further restrictions on the operation of the Water System. Drought Hydrological conditions in California can vary widely from year to year. The State recently announced the end of a period of extreme and prolonged drought after a season of heavy rainfall in the winter of 2017. The recent drought led to a number of executive orders mandating across the board reductions in water usage (see “THE WATER SYSTEM - Water Supply - Drought Conditions and Response.” Such executive orders, or additional actions or legislation could be implemented again when the next prolonged drought occurs. In addition, lower water usage by customers in response to new State laws regarding water conservation and consumption and drought measures imposed by the State or adopted by the District could result in reduced water consumption, and absent a corresponding increase in water rates, lower Net Revenues. Increased Operation and Maintenance Costs There can be no assurance that Operation and Maintenance Costs of the Water System will be consistent with the levels contemplated in this Official Statement. Changes in technology, increases in the cost of operation, increased water treatment requirements or other costs mandated by regulatory agencies, (see “THE WATER SYSTEM - Water Supply - Historic and Projected Water Supply”), pension costs or other expenses could require increases in rates or charges in order to comply with the rate covenant described herein and in the Installment Purchase Agreement, and could increase the possibility of nonpayment of the Bonds. Rate Covenant Not a Guarantee; Failure to Meet Projections The ability of the District to make the 2018 Installment Payments thereby providing the Trustee with sufficient Pledged Revenues to pay the Bonds, depends on the ability of the District to generate Taxes and Net Revenues in the levels required by the Installment Purchase Agreement. Although, as more particularly described herein, the District expects that sufficient revenues will be generated through the imposition and collection of water charges and fees for the Water Service, there is no assurance that such imposition of water charges and fees will result in the generation of Taxes and Net Revenues in the amounts required by the Installment Purchase Agreement. As a result, the District’s covenant does not 54 constitute a guarantee that sufficient Taxes and Net Revenues will be available to make the 2018 Installment Payments when due. The projected operating results included herein are based on certain assumptions and forecasts. Any forecast is subject to uncertainties. There will usually be differences between actual and forecast results because not all events and circumstances occur as expected, and those differences may be material. Accordingly, the projected operating results are not necessarily indicative of future performance, and the District does not assume any responsibility for the failure to meet such projections. In addition, certain assumptions with respect to future business and financing decisions of the District are subject to change. No representation is made or intended, nor should any representation be inferred, with respect to the likely existence of any particular future set of facts or circumstances, and prospective purchasers of the Bonds are cautioned not to place undue reliance upon the projected operating results. If actual results are less favorable than the results projected or if the assumptions used in preparing such projections prove to be incorrect, the amount of Net Revenues may be materially less than expected and consequently, the ability of the District to make timely payment of the 2018 Installment Payments may be materially adversely affected. Neither the District’s independent auditors, nor any other independent accountants have compiled, examined or performed any procedures with respect to the projected operating results, nor have they expressed any opinion or any form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, projected operating results, nor have they expressed any opinion or any form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, projected operating results. Additional Obligations Payable from Taxes and Net Revenues The District may issue additional Parity Bonds or enter into additional Contracts payable from Taxes and Net Revenues on a parity with its pledge of such Taxes and Net Revenues to the 2018 Installment Payments, and the debt service or the installment payments relating to the Existing Parity Obligations. The ability of the District to enter into such Parity Bonds and Contracts is subject to certain requirements set forth in the Installment Purchase Agreement. See “SOURCES OF PAYMENT FOR THE BONDS - Parity Debt.” The District may also enter into obligations payable from Taxes and Net Revenues which are subordinate to the Installment Purchase Agreement and Existing Parity Obligations. Risks Relating to Water Supplies The District’s current potable water supply primarily comes from purchases from CWA, which in turn currently purchases approximately __% of its water supply from MWD and IID. This source of water could become limited due to possible events that include prolonged droughts or similar changes in State- wide weather patterns, earthquakes or other natural disasters, contamination by environmental hazards, or acts of terrorism or civil unrest. There can be no assurance that currently available water supplies would be sufficient to meet demand under current conditions in the event of a prolonged drought or other interruption of the District’s source of water supply, or that the District would be able to secure alternate sources of water to meet its customer demand. See “THE WATER SYSTEM - Water Supply” herein for a discussions of the water supply in the region and the District’s sources of water in particular. California WaterFix Costs and Long Term Rate Impacts California WaterFix is a project that was approved by DWR in July 2017. Upon completion, it would provide new conveyance facilities for the transportation of State Water Project and Central Valley Project 55 water from the north Delta, principally from three new intakes through two 30-mile long tunnels running under the Delta, to the existing aqueduct systems in the south Delta. According to DWR, the California WaterFix is expected to improve the reliability of Southern California’s water delivery system by updating aging infrastructure. In addition to the more efficient and effective delivery of water supplies through the Delta, DWR has identified other benefits of the California WaterFix, including: allowing for more operational flexibility to deliver water through the Delta, and enabling a more natural flow of rivers in the Delta to protect sensitive fish species; providing greater opportunity to capture and convey water from storm flows in wet and above-normal hydrological weather years to the State Water Contractors to refill reservoirs and replenish groundwater basins; improving the quality of water for export; reducing climate change risk of increased salinity from rising sea levels; and reducing the risks from a catastrophic seismic event in the Delta. DWR estimates that it will take approximately 15 years to substantially complete the·California WaterFix after commencement of construction. Based upon DWR’s preliminary estimate, the capital costs of California WaterFix are estimated to be approximately $17 billion (in 2017 dollars). The preliminary cost estimate includes contingencies for construction costs and unknown expenses related to land acquisition. Given the scope of the project and the length of time it will take DWR to construct the project, this cost estimate may change based on numerous factors and the actual cost of construction of the project may differ materially. On April 10, 2018, MWD’s Board approved the funding of up to 64.6 percent (approximately $10.8 billion in 2017 dollars) of the overall capital cost of the California WaterFix necessary to allow for the construction of the full project. In its official statement dated June 5, 2018 relating to the issuance of its Subordinate Water Revenue Refunding Bonds, 2018 Series A and Subordinate Water Revenue Bonds, 2018 Series B, MWD stated that it has projected that the impact on overall water rates and charges of an investment of this magnitude, based on MWD’s 2017-18 revenue requirements and assuming financing over a 40-year term at an assumed annual interest cost of 4.0 percent, would be an incremental increase in overall water rates and charges of approximately 2.2 percent per year over the anticipated construction timeline, or an approximate cumulative 33 percent at the end of 15 years. It is not possible to calculate the precise water rate impacts on retail ratepayers because of the wide variation of costs and water sources for each retail agency, and the fact that each retail agency makes its own retail rate decisions based on various factors. However, there will be an impact on the cost of water that is purchased by CWA from MWD and the cost of water that the District purchases from CWA as a result of the California WaterFix project, if and when constructed. Environmental Regulation The kind and degree of water treatment effected through the water system is regulated, to a large extent, by the federal government and the State of California. Treatment standards set forth in federal and state law control the operations of the Water System and mandate the use of water treatment technology. If the federal government, acting through the Environmental Protection Agency, or the State of California, acting through the Department of Health Services, or additional federal or state agencies, should impose stricter water quality standards upon the Water System, the District’s expenses could increase accordingly and rates and charges would have to be increased to offset those expenses. It is not possible to predict the direction federal or state regulation will take with respect to water quality standards, although it is likely that, over time, both will impose more stringent standards with attendant higher costs. Proposition 218 On November 5, 1996, California voters approved Proposition 218-Voter Approval for Local Government Taxes-Limitation on Fees, Assessments, and Charges-Initiative Constitutional Amendment. Proposition 218 added Articles XIIIC and XIIID to the California Constitution, imposing certain vote requirements 56 and other limitations on the imposition of new or increased taxes, assessments and property-related fees and charges. See “CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS - Proposition 218” for a discussion of specific issues and risks raised by Proposition 218. The District’s current projections assume future rate increases which will be subject to the Proposition 218 notice process, will be needed during the time that the Bonds are Outstanding. Natural Hazards Any natural disaster or other physical calamity, including drought, wildfires, floods, landslides, high winds or earthquakes, may have the effect of reducing Revenues and Taxes through damage to the Water System and/or adversely affecting the economy of the surrounding area. The Installment Purchase Agreement requires the District to maintain insurance or self-insurance, but only if and to the extent available at a reasonable cost from reputable insurers, and the District is not expressly required to provide earthquake insurance. The District is located in a seismically active region and structures in the District could be impacted by a major earthquake originating from the numerous faults in the area. Seismic hazards encompass both potential surface rupture and ground shaking. In the event of total loss of the Water System, there can be no assurance that there will be any insurance coverage for the loss or that any insurance proceeds will be adequate to rebuild the Water System or to repay all Outstanding Bonds or that losses in excess of the insured amount will not occur. The District’s facilities are generally located in urbanized areas, and not likely to be significantly impacted by wildfire. Climate Change. The issue of climate change has become an important factor in water resources planning in the State, and it is being considered during planning for water supplies and systems. Many studies cite evidence that increasing concentrations of greenhouse gases have caused and will continue to cause a rise in temperatures around the world, which will result in a wide range of changes in climate patterns. Moreover, they cite evidence that a warming trend occurred during the latter part of the 20th century and will likely continue through the 21st century. These changes could have a direct effect on water resources in the State, and numerous studies on climate and water in the State have been conducted to determine the potential impacts. Based on these studies, global warming could result in the following types of water resources impacts in the State, including impacts on water supplies and systems:  Sea level rise and an increase in saltwater intrusion into groundwater,  Changes in the timing, intensity, and variability of precipitation, and an increased amount of precipitation falling as rain instead of as snow,  Reductions in the average annual snowpack due to a rise in the snowline and a shallower snowpack in the low- and medium-elevation zones, and a shift in snowmelt runoff to earlier in the year,  Long-term changes in watershed vegetation and increased incidence of wildfires that could affect water quality,  Increased water temperatures with accompanying adverse effects on some fisheries,  Increases in evaporation and concomitant increased irrigation need, and  Changes in urban and agricultural water demand. Other than the general trends listed above, there is no specific information on exactly how global warming will quantitatively affect water supplies with respect to the Water System. However, there can 57 be no assurance that climate change will not affect the District’s water sources, costs of operation and revenue coverage. Interest Subsidy Payment; Sequestration The 2010B Bonds were designated as “Build America Bonds,” and as such, qualified for the Interest Subsidy Payment from the United States Treasury equal to 35% of the interest payable with respect to the 2010B Bonds. From time to time, Congress has reduced the maximum Interest Subsidy Payment. For the federal government Fiscal Year ending September 30, 2018, the Interest Subsidy Payment was 32.7%. The District has included the Interest Subsidy Payment in its Revenues. In 2018-19, this amount is $712,000. The District cannot predict the amount of reduction in Interest Subsidy Payments due to any future sequestration by the federal government or the period of time that Interest Subsidy Payments will be reduced due to any future sequestration. The projected operating results set forth under the caption “THE WATER SYSTEM - Projected Debt Service Coverage” reflect announced reductions in Interest Subsidy Payments. Acceleration; Limited Recourse on Default If the District defaults on its obligation to pay the 2018 Installment Payments when due, the Trustee has the right to accelerate the total unpaid principal amount of the 2018 Installment Payments and/or the Bonds. However, in the event of a default and such acceleration there can be no assurance that the District will have sufficient Taxes and Net Revenues to pay the accelerated principal. Default by the District will not result in loss of the Water System or any other assets of the District. So long as the Bonds are in book-entry form, DTC (or its nominee) will be the sole registered owner of the Bonds, and the rights and remedies of the Bond Owners will be exercised through the procedures of DTC. Bankruptcy Risks The enforceability of the rights and remedies of the owners of the Bonds and the obligations of the District may become subject to the following: the federal bankruptcy code and applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or affecting the enforcement of creditors’ rights generally, now or hereafter in effect; usual equitable principles which may limit the specific enforcement under state law of certain remedies: the exercise by the United States of America of the powers delegated to it by the federal Constitution; and the reasonable and necessary exercise, in certain exceptional situations of the police power inherent in the sovereignty of the State of California and its governmental bodies in the interest of servicing a significant and legitimate public purpose. Bankruptcy proceedings, or the exercise of powers by the federal or state government, if initiated, could subject the owners of the Bonds to judicial discretion and interpretation of their rights in bankruptcy or otherwise and consequently may entail risks of delay, limitation, or modification of their rights. No Obligation to Tax The obligation of the District to pay the 2018 Installment Payments does not constitute an obligation of the District for which the District is obligated to levy or pledge any form of taxation or for which the District has levied or pledged any form of taxation, except the Taxes. The obligation of the District to pay the 2018 Installment Payments does not constitute a debt or indebtedness of the District, the State of California or any of its political subdivisions, within the meaning of any constitutional or statutory debt limitation or restriction. 58 Change in Law In addition to the other limitations described herein, the California electorate or Legislature could adopt a constitutional or legislative initiative with the effect of reducing revenues payable to or collected by the District. There is no assurance that the California electorate or Legislature will not at some future time approve additional limitations that could have the effect of reducing the Taxes and Net Revenues and adversely affecting the security of the Bonds. Loss of Tax Exemption In order to maintain the exclusion from gross income for federal income tax purposes of the interest on the Bonds, the Authority will covenant in the Indenture and the District will covenant in the Installment Purchase Agreement to comply with each applicable requirement of Section 103 and Sections 141 through 150 of the Internal Revenue Code. The interest on the Bonds could become includable in gross income for purposes of federal income taxation retroactive to the date of execution and delivery of the Bonds, as a result of acts or omissions of the Authority or the District in violation of this or other covenants in the Indenture or the Installment Purchase Agreement. Should such an event of taxability occur, the Bonds are not subject to prepayment or any increase in interest rates and will remain outstanding until maturity. See “- Acceleration; Limited Recourse on Default” and “TAX MATTERS” herein. IRS Audit of Tax-Exempt Bond Issues The Internal Revenue Service has initiated an expanded program for the auditing of tax-exempt bond issues, including both random and targeted audits. It is possible that the Bonds will be selected for audit by the Internal Revenue Service. It is also possible that the market value of the Bonds might be adversely affected as a result of such an audit of the Bonds (or by an audit of similar bonds). Secondary Market Risk There can be no assurance that there will be a secondary market for purchase or sale of the Bonds, and from time to time there may be no market for them, depending upon prevailing market conditions, the financial condition or market position of firms who may make the secondary market and the financial condition of the District. Secondary market prices for the Bonds could be more or less than the original issue price depending on market factors. TAX MATTERS In the opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California (“Bond Counsel”), under existing statutes, regulations, rulings and judicial decisions, and assuming the accuracy of certain representations and compliance with certain covenants and requirements described herein, interest (and original issue discount) on the Bonds is excluded from gross income for federal income tax purposes, and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals. In the further opinion of Bond Counsel, interest (and original issue discount) on the Bonds is exempt from State of California personal income tax. In the opinion of Bond Counsel, the difference between the issue price of a Bond (the first price at which a substantial amount of the Bonds of a maturity is to be sold to the public) and the stated redemption price at maturity of such Bond constitutes original issue discount. Original issue discount accrues under a constant yield method, and original issue discount will accrue to a Beneficial Owner before receipt of cash attributable to such excludable income. The amount of original issue discount deemed received by a Beneficial Owner will increase the Beneficial Owner’s basis in the applicable Bond. The amount of original issue discount that accrues to the Beneficial Owner of the Bonds is excluded from the gross 59 income of such Beneficial Owner for federal income tax purposes, is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, and is exempt from State of California personal income tax. Bond Counsel’s opinion as to the exclusion from gross income for federal income tax purposes of interest on the Bonds (including any original issue discount) is based upon certain representations of fact and certifications made by the District, the Underwriter and others and is subject to the condition that the District complies with all requirements of the Internal Revenue Code of 1986, as amended (the “Code”) that must be satisfied subsequent to the issuance of the Bonds to assure that interest on the Bonds (including any original issue discount) will not become includable in gross income for federal income tax purposes. Failure to comply with such requirements of the Code might cause interest on the Bonds (including any original issue discount) to be included in gross income for federal income tax purposes retroactive to the date of issuance of the Bonds. The District will covenant to comply with all such requirements. The amount by which a Beneficial Owner’s original basis for determining loss on sale or exchange in the applicable Bond (generally, the purchase price) exceeds the amount payable on maturity (or on an earlier call date) constitutes amortizable bond premium, which must be amortized under Section 171 of the Code; such amortizable bond premium reduces the Beneficial Owner’s basis in the applicable Bond (and the amount of tax-exempt interest received), and is not deductible for federal income tax purposes. The basis reduction as a result of the amortization of bond premium may result in a Beneficial Owner realizing a taxable gain when a Bond is sold by the Beneficial Owner for an amount equal to or less (under certain circumstances) than the original cost of the Bond to the Beneficial Owner. Purchasers of the Bonds should consult their own tax advisors as to the treatment, computation and collateral consequences of amortizable bond premium. The Internal Revenue Service (the “IRS”) has initiated an expanded program for the auditing of tax- exempt bond issues, including both random and targeted audits. It is possible that the Bonds will be selected for audit by the IRS. It is also possible that the market value of the Bonds might be affected as a result of such an audit of the Bonds (or by an audit of similar bonds). No assurance can be given that in the course of an audit, as a result of an audit, or otherwise, Congress or the IRS might not change the Code (or interpretation thereof) subsequent to the issuance of the Bonds to the extent that it adversely affects the exclusion from gross income of interest (and original issue discount) on the Bonds or their market value. SUBSEQUENT TO THE ISSUANCE OF THE BONDS THERE MIGHT BE FEDERAL, STATE, OR LOCAL STATUTORY CHANGES (OR JUDICIAL OR REGULATORY CHANGES TO OR INTERPRETATIONS OF FEDERAL, STATE, OR LOCAL LAW) THAT AFFECT THE FEDERAL, STATE, OR LOCAL TAX TREATMENT OF THE BONDS INCLUDING THE IMPOSITION OF ADDITIONAL FEDERAL INCOME OR STATE TAXES ON OWNERS OF TAX-EXEMPT LOCAL OBLIGATIONS, SUCH AS THE BONDS. THESE CHANGES COULD ADVERSELY AFFECT THE MARKET VALUE OR LIQUIDITY OF THE BONDS. NO ASSURANCE CAN BE GIVEN THAT SUBSEQUENT TO THE ISSUANCE OF THE BONDS STATUTORY CHANGES WILL NOT BE INTRODUCED OR ENACTED OR JUDICIAL OR REGULATORY INTERPRETATIONS WILL NOT OCCUR HAVING THE EFFECTS DESCRIBED ABOVE. BEFORE PURCHASING ANY OF THE BONDS, ALL POTENTIAL PURCHASERS SHOULD CONSULT THEIR TAX ADVISORS REGARDING POSSIBLE STATUTORY CHANGES OR JUDICIAL OR REGULATORY CHANGES OR INTERPRETATIONS, AND THEIR COLLATERAL TAX CONSEQUENCES RELATING TO THE BONDS. Bond Counsel’s opinion may be affected by actions taken (or not taken) or events occurring (or not occurring) after the date hereof. Bond Counsel has not undertaken to determine, or to inform any person, whether any such actions or events are taken or do occur. The Indenture and the Tax Certificate relating to the Bonds permit certain actions to be taken or to be omitted if a favorable opinion of Bond Counsel is 60 provided with respect thereto. Bond Counsel expresses no opinion as to the effect on the exclusion from gross income for federal income tax purposes of interest (and original issue discount) on any Bond if any such action is taken or omitted based upon the advice of counsel other than Stradling Yocca Carlson & Rauth, a Professional Corporation. Although Bond Counsel will render an opinion that interest on the Bonds (including any original issue discount) is excluded from gross income for federal income tax purposes provided that the District continues to comply with certain requirements of the Code, the accrual or receipt of interest on the Bonds (including any original issue discount) may otherwise affect the tax liability of the recipient. Bond Counsel expresses no opinion regarding any such tax consequences. Accordingly, all potential purchasers should consult their tax advisors before purchasing any of the Bonds. A copy of the proposed form of opinion of Bond Counsel for the Bonds is attached in “APPENDIX E”. LEGAL MATTERS Enforceability of Remedies The remedies available to the Trustee and the Owners of the Bonds upon an event of default under the Indenture, the Installment Purchase Agreement or any other document described herein are in many respects dependent upon regulatory and judicial actions which are often subject to discretion and delay. Under existing law and judicial decisions, the remedies provided for under such documents may not be readily available or may be limited. The various legal opinions to be delivered concurrently with the delivery of the Bonds will be qualified to the extent that the enforceability of certain legal rights related to the Indenture and the Installment Purchase Agreement are subject to limitations imposed by bankruptcy, reorganization, insolvency or other similar laws affecting the rights of creditors generally and by equitable remedies and proceedings generally. Approval of Legal Proceedings The legality and enforceability of the Indenture and the Installment Purchase Agreement and certain other legal matters are subject to the approval of Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, acting as Bond Counsel. See “APPENDIX E” for the proposed form of Bond Counsel’s Opinion. The District has no knowledge of any fact or other information which would indicate that the Indenture and the Installment Purchase Agreement are not so enforceable against the Authority or the District except to the extent such enforcement is limited by principles of equity and by state and federal laws relating to bankruptcy, reorganization, moratorium or creditors’ rights generally. Certain legal matters will be passed on for the District and the Authority by Artiano Shinoff, San Diego, California, General Counsel to the District and the Authority, and by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, as Disclosure Counsel to the District. A portion of the fees payable to Bond Counsel and Disclosure Counsel are contingent upon the sale and delivery of the Bonds. Litigation At any given time, including the present, there are certain claims, disputes and litigation actions that arise in the normal course of the District’s activities. Such matters could, if determined adversely to the District, affect the expenditures of the District and in some cases its Revenues. The Authority and the District will furnish a certificate dated as of the date of delivery of the Bonds that there is not now known to be pending or threatened any litigation restraining or enjoining the execution or delivery of the 61 Indenture or the Installment Purchase Agreement, or the sale or delivery of the Bonds or in any manner questioning the proceedings and authority under which the Indenture or the Installment Purchase Agreement are to be executed or delivered or the Bonds are to be delivered or affecting the validity thereof or, in the case of the District, which if decided adversely to the District would have a material adverse effect on the District’s financial condition and its ability to pay the 2018 Installment Payments. Both the SJC Case (see “CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS - Proposition 218 - Judicial Interpretation of Articles XIIIC and XIIID”) and the recent drought have heightened public awareness of water usage and water rates in California. Numerous lawsuits have been filed statewide challenging the cost of service basis for tiered pricing. In July 2015, a District ratepayer filed a lawsuit against the District contending that the District’s water rates that were in effect from 2009 through 2017 violated Proposition 218. Specifically, it is alleged that the rates in certain tiers exceeded the reasonable cost of providing the service to customers in those tiers. The lawsuit does not challenge the District’s current rates that were approved in 2017 following a Proposition 218 process. The lawsuit seeks refunds on behalf of all ratepayers affected by the rates that are in dispute. The court has not yet ruled on whether the plaintiff may sue on behalf of all ratepayers. The District has the burden of proof in the case to demonstrate that its rates complied with Proposition 218. The District is asserting that the plaintiff is not entitled to sue on behalf of all ratepayers. If the court were to agree, any recovery would be limited to the amount of any refund owed to the plaintiff plus possible attorneys’ fees, if any, awarded to plaintiff. With this outcome, District’s financial exposure would be minimal. The District has estimated that if the court were to allow the plaintiff to represent all ratepayers as a class, and if the court were to determine that refunds are owed, the District’s maximum exposure for refunds plus possible attorneys’ fees, if any, would not have a material effect on the District’s financial condition or its ability to pay the 2018 Installment Payments when due. CONCLUDING INFORMATION Rating on the Bonds S&P Global Ratings has assigned its rating of “___” to the Bonds. Such rating reflects only the views of the rating agency and any desired explanation of the significance of such rating should be obtained from the rating agency. Generally, a rating agency bases its rating on the information and materials furnished to it and on investigations, studies and assumptions of its own. Except as otherwise required in the Continuing Disclosure Agreement, the District undertakes no responsibility either to bring to the attention of the owners of any Bonds any downward revision or withdrawal of any rating obtained or to oppose any such revision or withdrawal. There is no assurance such rating will continue for any given period of time or that such rating will not be revised downward or withdrawn entirely by the rating agency, if in the judgment of such rating agency, circumstances so warrant. Any such downward revision or withdrawal of such rating may have an adverse effect on the market price of the Bonds. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time. Underwriting The Bonds were sold to _______________ (the “Underwriter”) at competitive bid. The Underwriter is offering the Bonds at the initial offering prices set forth on the inside front cover page hereof. The initial offering prices may be changed from time to time and concessions from the offering prices may be allowed to dealers, banks and others. The Underwriter will purchase the Bonds at a price equal to $____________, which amount represents the principal amount of the Bonds, plus a net original issue 62 premium of $__________ and less an Underwriter’s discount of $__________. The Underwriter will pay certain of its expenses relating to the offering from the Underwriter’s discount. The Municipal Advisor The material contained in this Official Statement was prepared by the District with the assistance of the Municipal Advisor, who advised the District as to the financial structure and certain other financial matters relating to the Bonds. The information set forth herein received from sources other than the District is believed to be reliable, but such information is not guaranteed by the Authority, the District or the Municipal Advisor as to accuracy or completeness, nor has it been independently verified. A portion of the fees paid to the Municipal Advisor are contingent upon the sale and delivery of the Bonds. Continuing Disclosure The District will covenant to provide certain annual financial information by not later than March 31 in each year (the “Annual Reports”) and notices of the occurrence of certain listed events in accordance with Rule 15c2-12 of the Securities Exchange Act of 1934 as amended (the “Rule”). Harrell & Company Advisors, LLC will act as Dissemination Agent. The specific nature of the information to be contained in the Annual Reports or the notices of listed events and certain other terms of the continuing disclosure obligation are found in the form of the District’s Continuing Disclosure Agreement attached in “APPENDIX D - FORM OF CONTINUING DISCLOSURE AGREEMENT.” Within the last five years, the District believes it has not failed to comply in all material respects with any prior undertakings with regard to the Rule. Audited Financial Statements The District’s audited financial statements for Fiscal Year 2016-17 included in this Official Statement have been audited by Teaman, Ramirez & Smith, Inc. (the “Auditor”), independent auditors. Attention is called to the scope limitation described in the Auditor’s report accompanying the financial statements. The Auditor has not been requested to consent to the inclusion of its report in this Official Statement. The Auditor has not undertaken to update the audited financial statements for Fiscal Year 2016-17 or its report, and no opinion is expressed by the Auditor with respect to any event subsequent to its report dated October 18, 2017. See “APPENDIX B - DISTRICT AUDITED FINANCIAL STATEMENTS” herein. References Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the District and the purchasers or Owners of any of the Bonds. Execution The execution of this Official Statement has been duly authorized by the Otay Water District. OTAY WATER DISTRICT By: ___________________________ Chief Financial Officer A-1 APPENDIX A SUMMARY OF LEGAL DOCUMENTS [to be provided by Bond Counsel] B-1 APPENDIX B DISTRICT AUDITED FINANCIAL STATEMENTS B-2 APPENDIX C ECONOMIC PROFILE FOR THE COUNTY OF SAN DIEGO Introduction The County of San Diego (the “County”) is the southernmost major metropolitan area in the State of California. The County covers 4,255 square miles, extending 70 miles along the Pacific Coast from the Mexican border to Orange County, and inland 75 miles to Imperial County. Riverside and Orange Counties form the northern boundary. The County is approximately the size of the State of Connecticut. The County possesses a diverse economic base consisting of a significant manufacturing presence in the fields of electronics and shipbuilding, a large tourist industry attracted by the favorable climate of the region, and a considerable defense-related presence. The County is also growing as a major center for culture and education. A number of recognized art organizations, including the San Diego Opera, the Old Globe Theater productions, the La Jolla Chamber Orchestra, as well as museums and art galleries, are located in the County. Higher education is provided through five two-year colleges and six four-year colleges and universities. The San Diego Convention Center contains 361,000 square feet of exhibit space and over 100,000 square feet of meeting/banquet rooms. The Convention Center can accommodate events for 30,000-40,000 people. B-3 Population The following table shows the January 1 State of California Department of Finance estimates of total population in the County of San Diego and the State of California for each year since 2009, and the increase from the previous year. TABLE NO. C-1 COUNTY OF SAN DIEGO AND STATE OF CALIFORNIA POPULATION COUNTY OF SAN DIEGO STATE OF CALIFORNIA January 1 Percentage Percentage Year Population Change Population Change 2009 3,064,436 36,966,713 2010 3,091,579 0.9% 37,223,900 0.7% 2011 3,119,963 0.9% 37,529,913 0.8% 2012 3,153,521 1.1% 37,874,977 0.9% 2013 3,193,688 1.3% 38,234,391 0.9% 2014 3,230,269 1.1% 38,568,628 0.9% 2015 3,264,449 1.1% 38,912,464 0.9% 2016 3,284,477 0.6% 39,179,627 0.7% 2017 3,309,509 0.8% 39,500,973 0.8% 2018 3,337,456 0.8% 39,809,693 0.8% % Increase Between 2009 – 2018 8.9% 7.7% _______________________________________ Source: State of California, Department of Finance, “E-4 Population Estimates for Cities, Counties, and the State, 2001-2010, with 2000 & 2010 Census Counts” Sacramento, California, November 2012 and “E-4 Population Estimates for Cities, Counties and the State, 2011-2018, with 2010 Census Benchmark” Sacramento, California, May 2018. B-4 Per Capita Personal Income Per capita personal income information for San Diego County, the State of California and the United States are summarized in the following table. TABLE NO. C-2 PER CAPITA PERSONAL INCOME (1) SAN DIEGO COUNTY, STATE OF CALIFORNIA AND UNITED STATES 2012 – 2016 Year San Diego County State of California United States 2012 $48,004 $48,369 $44,282 2013 49,017 48,570 44,493 2014 51,439 51,344 46,494 2015 53,963 54,718 48,451 2016 55,168 56,374 49,246 ____________________________________ (1) For San Diego County, State of California and United States, per capita personal income was computed using Census Bureau midyear population estimates. Estimates for 2010-2016 reflect county population estimates available as of March 2017. Note: All dollar estimates are in current dollars (not adjusted for inflation). Last updated: November 16, 2017 - new estimates for 2016; revised estimates for 2010-2015. Source: U.S. Department of Commerce, Bureau of Economic Analysis. B-5 The District is located in the San Diego-Carlsbad Metropolitan Statistical Area (MSA). The June 2018 unemployment rate in the San Diego-Carlsbad MSA was 3.7%. The State of California June 2018 unemployment rate (unadjusted) was 4.5%. TABLE NO. C-3 SAN DIEGO-CARLSBAD MSA WAGE AND SALARY WORKERS BY INDUSTRY (1) (in $ thousands) Industry 2014 2015 2016 2017 2018 Government 237.7 238.8 245.4 252.4 255.9 Other Services 52.2 53.5 54.7 55.9 57.5 Leisure and Hospitality 180.9 187.2 194.3 201.7 197.3 Educational and Health Services 185.4 191.4 198.0 204.9 208.2 Professional and Business Services 219.9 226.0 230.0 231.8 242.1 Financial Activities 69.3 71.0 72.7 74.0 73.0 Information 24.8 24.2 23.9 24.5 24.7 Transportation, Warehousing and Utilities 27.1 28.2 29.4 31.8 31.4 Service Producing Retail Trade 142.2 145.1 145.1 146.7 147.5 Wholesale Trade 46.4 46.3 46.9 47.8 49.1 Manufacturing Nondurable Goods 25.1 26.4 27.2 28 27.9 Durable Goods 76.9 79.7 80.8 80.8 85.8 Goods Producing Construction 63.3 69.6 75.9 80.1 82.4 Mining and Logging 0.4 0.3 0.3 0.3 0.4 Total Nonfarm 1,351.6 1,387.7 1,424.6 1,460.7 1,483.2 Farm 9.7 9.2 9.5 8.7 9.1 Total (all industries) 1,361.3 1,396.9 1,434.1 1,469.4 1,492.3 ____________________________________ (1) Annually, as of June. Note: The unemployment rate is calculated using unrounded data. Data may not add due to rounding. Source: State of California Employment Development Department, Labor Market Information Division, “Industry Employment & Labor Force - by month March 2017 Benchmark.” B-6 Major Employers The major employers operating within the County as of June 30, 2017 are shown in Table No. C-4. TABLE NO. C-4 COUNTY OF SAN DIEGO MAJOR EMPLOYERS Employer Number of Employees Percent of Total Employment University of California, San Diego 32,524 2.17% Sharp Healthcare 17,962 1.20% County of San Diego 17,396 1.16% Scripps Health 15,238 1.02% Qualcomm Inc. 12,600 0.84% City of San Diego 11,544 0.77% Kaiser Permanente San Diego Medical Center 8,965 0.60% UC San Diego Health 8,923 0.60% San Diego Community College District 6,817 0.46% San Diego State University 5,921 0.40% 137,890 9.22% ____________________________________ Source: County of San Diego Comprehensive Annual Financial Report. Transportation Interstate 5 parallels the coast of San Diego County, starting at the border with Mexico and traveling to the Los Angeles area and points north. Interstate 15 runs inland through the County, leading to Riverside- San Bernardino, Las Vegas and Salt Lake City. Interstate 8 runs eastward providing access to the southern United States. San Diego’s International Airport (Lindbergh Field) is located approximately one mile west of the downtown San Diego at the edge of the San Diego Bay. The facilities are owned and maintained by the San Diego Unified Port District and are leased to commercial airlines and other tenants. The airport is the third most active commercial airport in California, served by __ major airlines. In addition to San Diego International Airport, there are two naval air stations and seven general aviation airports located in the County. San Diego is the terminus of the Santa Fe Railway’s main line from Los Angeles. Amtrak passenger service is available at San Diego with stops at Del Mar and Oceanside in the north county. San Diego’s harbor is one of the world’s largest natural harbors. The harbor, a busy commercial port, also serves cruise ships. The Port of San Diego is administered by the San Diego Unified Port District, which includes the cities of San Diego, National City, Chula Vista, Imperial Beach and Coronado. D-1 APPENDIX D FORM OF CONTINUING DISCLOSURE AGREEMENT [to be provided by Disclosure Counsel] E-1 APPENDIX E PROPOSED FORM OF LEGAL OPINION OF BOND COUNSEL E-2 ________, 2018 Otay Water District Public Financing Authority Otay, CA 93550 Re: $__________ Otay Water District Financing Authority Water Revenue Bonds, Series 2018A Members of the Board of Directors: We have acted as Bond Counsel to the Otay Water District Public Financing Authority (the “Authority”) in connection with the issuance of $_________ aggregate principal amount of the Otay Water District Public Financing Authority Water Revenue Bonds, Series 2018A (the “Bonds”). The Bonds have been issued by the Authority pursuant to the terms of the Indenture of Trust, dated as of October 1, 2018 (the “Indenture”), by and between the Authority and MUFG Union Bank, N.A., as trustee (the “Trustee”). The Bonds are limited obligations of the Authority payable solely from Pledged Revenues (as such term is defined in the Indenture), consisting of payments (the “2018 Installment Payments”) to be made by the Otay Water District (the “District”) to the Authority pursuant to an Installment Purchase Agreement, dated as of October 1, 2018 (the “Installment Purchase Agreement”), by and between the District and the Authority, and certain other amounts held under the Indenture. In rendering the opinions set forth below, we have examined certified copies of the proceedings of the Authority and the District, and other information submitted to us relative to the issuance and sale by the Authority of the Bonds. We have examined originals, or copies identified to our satisfaction as being true copies, of the Indenture, the Installment Purchase Agreement, the Tax Certificate relating to the Bonds (the “Tax Certificate”), the resolutions of the Authority and the District adopted on September 5, 2018 with respect to the Bonds, opinions of counsel to the Authority and the District, certificates of the Authority, the District and others, and such other documents, agreements, opinions and matters as we have considered necessary or appropriate under the circumstances to render the opinions set forth herein. We have assumed the genuineness of all documents and signatures presented to us, the authenticity of documents submitted as originals and the conformity to originals of documents submitted as copies. We have not undertaken to verify independently, and have assumed, the accuracy of the factual matters represented, warranted or certified in the documents, and of the legal conclusions contained in the opinions referred to in the preceding paragraph. Furthermore, we have assumed compliance with all covenants and agreements contained in the Indenture, the Installment Purchase Agreement and the Tax Certificate, including (without limitation) covenants and agreements compliance with which is necessary to assure that future actions, omissions or events will not cause the interest on the Bonds to be included in gross income for federal income tax purposes. We call attention to the fact that the rights and obligations under the Bonds, the Indenture, the Installment Purchase Agreement and the Tax Certificate may be limited by bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors’ rights, by the application of equitable principles and the exercise of judicial Otay Water District Public Financing Authority ________, 2018 Page 2 E-3 discretion in appropriate cases and by the limitations on legal remedies against public agencies in the State of California. We express no opinion herein with respect to any indemnification, contribution, choice of law, choice of forum, penalty or waiver provisions contained in the Bonds, the Indenture or the Installment Purchase Agreement. Based upon the foregoing and after examination of such questions of law as we have deemed relevant in the circumstances, we are of the opinion that: 1. The proceedings of the Authority show lawful authority for the issuance and sale by the Authority of the Bonds under the laws of the State of California now in force, and the Indenture has been duly authorized, executed and delivered by the Authority, and, assuming due authorization, execution and delivery of the Indenture by the Trustee, the Bonds and the Indenture are valid and binding obligations of the Authority enforceable against the Authority in accordance with their respective terms. 2. The obligation of the Authority to make the payments of principal and interest on the Bonds from Pledged Revenues (as such term is defined in the Indenture) is an enforceable obligation of the Authority and does not constitute an indebtedness of the Authority in contravention of any constitutional or statutory debt limit or restriction. 3. The obligation of the District to make the 2018A Installment Payments from Taxes and Net Revenues (as such terms are defined in the Installment Purchase Agreement) is an enforceable obligation of the District and does not constitute a debt of the District, or of the State of California or of any political subdivision thereof in contravention of any constitutional or statutory debt limit or restriction, and does not constitute an obligation for which the District is obligated to levy or pledge any form of taxation or for which the District has levied or pledged any form of taxation other than the Taxes. 4. Under existing statutes, regulations, rulings and judicial decisions, and assuming the accuracy of certain representations and compliance with certain covenants and requirements described in the Indenture and the Installment Purchase Agreement, interest (and original issue discount) on the Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals. 5. Interest on the Bonds is exempt from State of California personal income tax. 6. The difference between the issue price of a Bond (the first price at which a substantial amount of the Bonds of the same series and maturity are to be sold to the public) and the stated redemption price at maturity with respect to such Bond constitutes original issue discount. Original issue discount accrues under a constant yield method, and original issue discount will accrue to a Bond Owner before receipt of cash attributable to such excludable income. The amount of original issue discount deemed received by a Bond Owner will increase the Bond Owner’s basis in the applicable Bond. Original issue discount that accrues for the Bond Owner is excluded from the gross Otay Water District Public Financing Authority ________, 2018 Page 3 E-4 income of such owner for federal income tax purposes, is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals and is exempt from State of California personal income tax. 7. The amount by which a Bond Owner’s original basis for determining loss on sale or exchange in the applicable Bond (generally, the purchase price) exceeds the amount payable on maturity (or on an earlier call date) constitutes amortizable Bond premium, which must be amortized under Section 171 of the Internal Revenue Code of 1986, as amended (the “Code”); such amortizable Bond premium reduces the Bond Owner’s basis in the applicable Bond (and the amount of tax- exempt interest received), and is not deductible for federal income tax purposes. The basis reduction as a result of the amortization of Bond premium may result in a Bond Owner realizing a taxable gain when a Bond is sold by the Owner for an amount equal to or less (under certain circumstances) than the original cost of the Bond to the Owner. Purchasers of the Bonds should consult their own tax advisors as to the treatment, computation and collateral consequences of amortizable bond premium. The opinions expressed in paragraphs (4) and (6) above as to the exclusion from gross income for federal income tax purposes of interest (and original issue discount) on the Bonds are based upon certain representations of fact and certifications made by the Authority, the District and others and are subject to the condition that the Authority and the District comply with all requirements of the Code that must be satisfied subsequent to issuance of the Bonds to assure that interest (and original issue discount) will not become includable in gross income for federal income tax purposes. Failure to comply with such requirements of the Code might cause interest (and original issue discount) on the Bonds to be included in gross income for federal income tax purposes retroactive to the date of issuance of the Bonds. The Authority and the District have covenanted to comply with all such requirements. The opinions expressed herein may be affected by actions taken (or not taken) or events occurring (or not occurring) after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions or events are taken or do occur. The Indenture and the Tax Certificate relating to the Bonds permit certain actions to be taken or to be omitted if a favorable opinion of Bond Counsel is provided with respect thereto. No opinion is expressed herein as to the effect on the exclusion from gross income for federal income tax purposes of interest (and original issue discount) with respect to the Bonds if any such action is taken or omitted based upon the opinion or advice of counsel other than Stradling Yocca Carlson & Rauth, a Professional Corporation. Other than expressly stated herein, we express no other opinion regarding tax consequences with respect to the Bonds. The opinions expressed herein are based upon our analysis and interpretation of existing laws, regulations, rulings and judicial decisions and cover certain matters not directly addressed by such authorities. Such opinions may be affected by actions taken or omitted or events occurring after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions are taken or omitted or events do occur, and we disclaim any obligation to update this opinion. Our engagement as Bond Counsel terminates upon the issuance of the Bonds. Otay Water District Public Financing Authority ________, 2018 Page 4 E-5 Our opinion is limited to maters governed by the laws of the State of California and federal law. We assume no responsibility with respect to the applicability or the effect of the laws of any other jurisdiction. We express no opinion herein as to the accuracy, completeness or sufficiency of the Official Statement relating to the Bonds or other offering material relating to the Bonds and expressly disclaim any duty to advise the owners of the Bonds with respect to matters contained in the Official Statement. Respectfully submitted, F-1 APPENDIX F THE BOOK-ENTRY SYSTEM The following description of the Depository Trust Company (“DTC”), the procedures and record keeping with respect to beneficial ownership interests in the Bonds, payment of principal, interest and other payments on the Bonds to DTC Participants or Beneficial Owners, confirmation and transfer of beneficial ownership interest in the Bonds and other related transactions by and between DTC, the DTC Participants and the Beneficial Owners is based solely on information provided by DTC. Accordingly, no representations can be made concerning these matters and neither the DTC Participants nor the Beneficial Owners should rely on the foregoing information with respect to such matters, but should instead confirm the same with DTC or the DTC Participants, as the case may be. Neither the issuer of the Bonds (the “Issuer”) nor the trustee, fiscal agent or paying agent appointed with respect to the Bonds (the “Agent”) take any responsibility for the information contained in this Appendix. No assurances can be given that DTC, DTC Participants or Indirect Participants will distribute to the Beneficial Owners (a) payments of interest, principal or premium, if any, with respect to the Bonds, (b) certificates representing ownership interest in or other confirmation or ownership interest in the Bonds, or (c) redemption or other notices sent to DTC or Cede & Co., its nominee, as the registered owner of the Bonds, or that they will so do on a timely basis, or that DTC, DTC Participants or DTC Indirect Participants will act in the manner described in this Appendix. The current “Rules” applicable to DTC are on file with the Securities and Exchange Commission and the current “Procedures” of DTC to be followed in dealing with DTC Participants are on file with DTC. 1. The Depository Trust Company (“DTC”), New York, NY, will act as securities depository for the Bonds (the “Securities”). The Securities will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Security certificate will be issued for each issue of the Securities, each in the aggregate principal amount of such issue, and will be deposited with DTC. If, however, the aggregate principal amount of any issue exceeds $500 million, one certificate will be issued with respect to each $500 million of principal amount, and an additional certificate will be issued with respect to any remaining principal amount of such issue. 2. DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book- entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect F-2 Participants”). DTC has a Standard & Poor’s rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com. The information contained on such Internet site is not incorporated herein by reference. 3. Purchases of Securities under the DTC system must be made by or through Direct Participants, which will receive a credit for the Securities on DTC’s records. The ownership interest of each actual purchaser of each Security (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Securities are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Securities, except in the event that use of the book-entry system for the Securities is discontinued. 4. To facilitate subsequent transfers, all Securities deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Securities with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Securities; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Securities are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. 5. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Securities may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Securities, such as redemptions, tenders, defaults, and proposed amendments to the Security documents. For example, Beneficial Owners of Securities may wish to ascertain that the nominee holding the Securities for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them. 6. Redemption notices shall be sent to DTC. If less than all of the Securities within an issue are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. 7. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Securities unless authorized by a Direct Participant in accordance with DTC’s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to Issuer as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts Securities are credited on the record date (identified in a listing attached to the Omnibus Proxy). 8. Redemption proceeds and distributions on the Securities will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from Issuer or Agent, on payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or F-3 registered in “street name,” and will be the responsibility of such Participant and not of DTC, Agent, or Issuer, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of Issuer or Agent, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. 9. DTC may discontinue providing its services as depository with respect to the Securities at any time by giving reasonable notice to Issuer or Agent. Under such circumstances, in the event that a successor depository is not obtained, Security certificates are required to be printed and delivered. 10. Issuer may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Security certificates will be printed and delivered to DTC. 11. The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that Issuer believes to be reliable, but Issuer takes no responsibility for the accuracy thereof. 1 OFFICIAL NOTICE OF SALE $28,300,000* OTAY WATER DISTRICT FINANCING AUTHORITY WATER REVENUE BONDS, SERIES 2018A NOTICE IS HEREBY GIVEN that electronic bids only will be received by representatives of the Otay Water District Financing Authority (the “Authority”) for the purchase of $28,300,000* approximate aggregate principal amount of Water Revenue Bonds, Series 2018A (the “Bonds”), more particularly described below. DATE AND TIME: Tuesday, October 2, 2018, at 9:30 A.M. (Pacific Daylight Saving Time). SUBMISSION OF BIDS: Bids may be submitted (for receipt not later than the time set forth above) electronically only through the Ipreo BiDCOMP/PARITY© system. See “FORM OF BID; MAXIMUM DISCOUNT” herein. Bidders should be aware that the par amount of the Bonds may be increased or reduced to fit the Authority’s requirements for funding the construction of storage and distribution facilities of the Otay Water District (the “District”) and achieve certain debt service levels. See “ADJUSTMENT OF PRINCIPAL AMOUNTS AND OF MATURITIES” below. TERMS OF BONDS; PRELIMINARY OFFICIAL STATEMENT: The terms of issuance, payment of the principal of and the interest on the Bonds, redemption, security, tax exemption and all other information regarding the Bonds and the District are given in the Preliminary Official Statement for the Bonds, dated __________, 2018 (the “Preliminary Official Statement”), which each bidder must have obtained and reviewed prior to bidding for the Bonds. This Official Notice of Sale contains certain information for quick reference only, is not a summary of the issue and governs only the terms of the sale of, bidding for and closing procedures with respect to the Bonds. Bidders must read the entire Preliminary Official Statement to obtain information essential to the making of an informed investment decision. Capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Preliminary Official Statement. ISSUE; BOOK-ENTRY: The Bonds will be dated as of their date of delivery and will be issued in fully registered form, without coupons, in the denomination of $5,000 each or any integral multiple thereof, pursuant to the Indenture of Trust, dated as of October 1, 2018 (the “Indenture”), by and between the Authority and MUFG Union Bank, N.A., as trustee (the “Trustee”), as approved by a resolution of the Authority, adopted on September 5, 2018. The Bonds will be issued in a book-entry‐only system with no physical distribution of the Bonds made to the public. The Depository Trust Company, New York, New York (“DTC”), will act as depository for the Bonds which will be immobilized in its custody. The Bonds will be registered in the name of Cede & Co., as nominee for DTC, on behalf of the participants in the DTC system and the subsequent beneficial owners of the Bonds. Reference is made to the Indenture for further details regarding the terms and provisions of the Bonds. Copies of the Indenture will be furnished to any interested bidder upon request. MATURITIES: The Bonds will mature, or be subject to mandatory sinking account redemption, on September 1, in the years and in the amounts, as set forth in the following table. Each bidder is required to specify in its bid whether, for any particular year, the Bonds will mature or, alternately, be subject to mandatory sinking fund redemption in such year: __________________________ * Preliminary, subject to change.  2 Maturity Date Principal Maturity Date Principal (September 1) Amount* (September 1) Amount* 2019 2032 2020 2033 2021 2034 2022 2035 2023 2036 2024 2037 2025 2038 2026 2039 2027 2040 2028 2041 2029 2042 2030 2043 2031 2044 ADJUSTMENT OF PRINCIPAL AMOUNTS AND OF MATURITIES: The maturity amounts set forth in this Official Notice of Sale reflect certain estimates of the Authority and its Municipal Advisor with respect to the likely interest rates of a winning bid and the premium/discount likely to be specified in such a winning bid. The maturity amounts set forth above for the Bonds may be adjusted either upward or downward in order to provide sufficient funds and achieve certain debt service levels, after award of the Bonds has been made to the successful bidder. The successful bidder will be notified of the actual principal amounts and maturity schedule relating to the Bonds within 4 hours after the expiration of the time prescribed for the receipt of proposals. Any increase or decrease will be in $5,000 increments of principal amounts. In the event of any such adjustment, no re‐bidding or recalculation of the bids submitted will be required or permitted and the successful bid may not be withdrawn. No such adjustment of principal amounts and maturities will alter the determination of the winning bid. The successful bidder will not be permitted to change the interest rates in its bid as a result of any such adjustment of principal maturities. INTEREST: Interest on the Bonds, calculated on a 30 day month/360 day year basis, at a rate for each maturity to be fixed upon the sale thereof will be payable semiannually on each March 1 and September 1, commencing March 1, 2019. PAYMENT: Principal of the Bonds upon maturity and interest on the Bonds will be payable by wire of the Trustee to DTC which will in turn remit such interest and principal to DTC Participants (as defined in the Preliminary Official Statement), which will in turn remit such interest and principal to Beneficial Owners (as defined in the Preliminary Official Statement) of the Bonds. OPTIONAL REDEMPTION: The Bonds maturing on or before September 1, 2028, are not subject to optional redemption prior to their respective stated maturities. The Bonds maturing on after September 1, 2029 shall be subject to optional redemption, in whole or in part, on any date on or after September 1, 2028, from prepayments of Installment Payments (as defined below) pursuant to the Installment Purchase Agreement (as defined below), from any available source of funds of the District, at a redemption price equal to the principal amount of the Bonds to be redeemed, together with accrued interest thereon to the date fixed for redemption, without premium. __________________________ * Subject to adjustment as described herein. 3 SINKING ACCOUNT REDEMPTION: Any bidder may, at its option, specify that one or more maturities of the Bonds will consist of term Bonds which are subject to mandatory sinking account redemption in consecutive years immediately preceding the maturity thereof, as designated in the bid of such bidder. In the event that the bid of the successful bidder specifies that any maturity of Bonds will be term Bonds, such term Bonds will be subject to mandatory sinking fund redemption on September 1 in each year so designated in the bid, in the respective amounts for such years as set forth above under the heading “MATURITIES,” subject to adjustment as described above, at a redemption price equal to the principal amount thereof to be redeemed together with accrued interest thereon to the redemption date, without premium. PURPOSE: The proceeds of the Bonds will provide a portion of the funds to construct storage and distribution facilities and to pay costs incurred in connection with issuance of the Bonds, as further described in the Preliminary Official Statement. SECURITY: The Bonds are being issued pursuant to the Indenture. The Bonds will be payable from installment payments (the “Installment Payments”) to be made by the District to the Authority as payment for certain improvements, as more fully described in the Preliminary Official Statement, pursuant to an Installment Purchase Agreement dated as of October 1, 2018, between the Authority and the District and certain funds held under the Indenture and investment earnings thereon, all as more fully described in the Preliminary Official Statement. The Authority has assigned to the Trustee, for the benefit of the Owners of the Bonds, the right of the Authority to receive and collect the Installment Payments due from the District under the Installment Purchase Agreement and certain other rights of the Authority under the Installment Purchase Agreement. In general, Installment Payments will be sufficient in both time and amount to pay, when due, the principal and interest payable on the Bonds all as more fully described in the Preliminary Official Statement. The Installment Payments are secured by a pledge and lien on Taxes and Revenues of the Water System and are payable from Taxes and Net Revenues, all as more fully described in the Preliminary Official Statement. The obligation of the District to pay Installment Payments does not constitute an obligation for which the District is obligated to levy or pledge any form of taxation or for which the District has levied or pledged any form of taxation. The obligation of the District to pay Installment Payments does not constitute a debt or liability of the State of California or of any political subdivision thereof within the meaning of any constitutional or statutory debt limitation or restriction. Bidders are referred to the Preliminary Official Statement for further particulars. RATING: S&P Global Ratings has assigned a rating of “__” to the Bonds. The cost of obtaining such rating will be borne entirely by the Authority and not by the successful bidder. Any additional ratings desired by the purchaser of the Bonds, as well as the fees associated with such ratings, will be the sole responsibility of the purchaser. TERMS OF SALE BID SPECIFICATIONS & INTEREST RATES: All bids must be unconditional. By submitting a bid, the bidder is representing that it has an established industry reputation for underwriting new issuances of municipal bonds. Bidders must specify interest rates with respect to the Bonds in accordance with the following conditions: (i) each interest rate specified must be in a multiple of 1/20 or 1/8 of 1%; (ii) the maximum interest rate specified for any maturity may not exceed 5%; (iii) a zero rate of interest cannot be specified; 4 (iv) all Bonds of the same maturity date shall bear interest to the stated maturity date at the interest rate specified in the bid; and (v) no bid will be accepted which provides for the cancellation and surrender of any interest payment or for the waiver of interest or other concession by the bidder as a substitute for payment in full of the purchase price of the Bonds. Bids that do not conform to these terms will be rejected. FORM OF BID; MAXIMUM DISCOUNT: All bids must be for all of the Bonds hereby offered for sale and must provide for a purchase price of not less than 99% of the aggregate par amount thereof. ELECTRONIC BIDS: To the extent any instructions or directions set forth in Ipreo BiDCOMP/PARITY© conflict with this Official Notice of Sale, the terms of this Official Notice of Sale shall control. For further information about Ipreo BiDCOMP/PARITY©, bidders may contact Harrell & Company Advisors, LLC (the “Municipal Advisor”) at (714) 939‐1464 or Ipreo BiDCOMP/PARITY© at (212) 849-5021. The Authority retains absolute discretion to determine whether any bid is timely, legible and complete. None of the Authority, the Municipal Advisor, or Bond Counsel takes any responsibility for informing any bidder prior to the time for receiving bids that its bid is incomplete, illegible or not received. Each bidder submitting an electronic bid understands and agrees by doing so that it is solely responsible for all arrangements with Ipreo BiDCOMP/PARITY© and that Ipreo BiDCOMP/PARITY© is not acting as an agent of the Authority. Instructions and forms for submitting electronic bids must be obtained from Ipreo BiDCOMP/PARITY© and the Authority assumes no responsibility for ensuring or verifying bidder compliance with the procedures of Ipreo BiDCOMP/PARITY©. The Authority shall assume that any bid received through Ipreo BiDCOMP/PARITY© has been made by a duly authorized agent of the bidder. The Authority will make its best efforts to accommodate electronic bids; however the Authority, the Municipal Advisor and Bond Counsel assume no responsibility for any error contained in any bid submitted electronically, or for failure of any bid to be transmitted, received or accepted at the official time for receipt of bids. The official time for receipt of bids will be determined by the Authority, and the Authority shall not be required to accept the time kept by Ipreo BiDCOMP/PARITY© as the official time. BEST BID: The Bonds will be awarded to the responsible bidder or bidders offering to purchase the Bonds at the lowest true interest cost to the Authority. The true interest cost of each bid will be determined on the basis of the present value of the aggregate future semiannual payments resulting from the interest rates specified by the bidder. The present value will be calculated to the dated date of the Bonds (assumed to be October 25, 2018) and will be based on the proposed bid amount (par value less any discount or plus any premium). For the purpose of making such determination, it shall be assumed that any Bond designated as term Bonds by the bidder shall be deemed to be payable on the dates and in the amounts as shown under the section entitled “MATURITIES” herein. Each bidder is requested, but not required, to state in such bidder’s bid the percentage true interest cost to the Authority, which shall be considered as informative only and shall not be binding on either the bidder or the Authority. The determination by the Municipal Advisor of the bid with the lowest true interest cost to the Authority shall be binding and conclusive on all bidders. RIGHT OF CANCELLATION OF SALE BY AUTHORITY: The Authority reserves the right, in its sole discretion, at any time to cancel the public sale of the Bonds. In such event, the Authority shall cause notice of cancellation of this invitation for bids and the public sale of the Bonds to be communicated through the Bond Buyer Wire or TM3 as promptly as practicable. However, no failure to publish such notice or any defect or omission therein shall affect the cancellation of the public sale of the Bonds. 5 RIGHT TO MODIFY OR AMEND: The Authority reserves the right, in its sole discretion, to modify or amend this Official Notice of Sale including, but not limited to, the right to adjust and change the principal amount and principal amortization schedule of the Bonds being offered, however, such modifications or amendments shall be made not later than 9:00 A.M., Pacific Daylight Saving Time, on the business day prior to the bid opening and communicated through the Bond Buyer Wire or TM3. RIGHT OF POSTPONEMENT BY AUTHORITY: The Authority reserves the right, in its sole discretion, to postpone, from time to time, the date established for the receipt of bids. Any such postponement will be communicated through the Bond Buyer Wire or TM3 not later than 9:00 A.M., Pacific Daylight Saving Time on the date for receipt of bids. If any date is postponed, an alternative sale date will be announced through the Bond Buyer Wire or TM3 at least 24 hours prior to such alternative sale date. On any such alternative sale date, any bidder may submit a bid for the purchase of the Bonds in conformity in all respects with the provisions of this Official Notice of Sale, except for the date of sale and except for the changes announced by through the Bond Buyer Wire or TM3 at the time the sale date and time are announced. RIGHT OF REJECTION OR WAIVER: The Authority reserves the right, in its sole discretion, to reject any and all bids or to waive any irregularity or informality in any bid except that no bids will be accepted later than 9:30 A.M. (Pacific Daylight Saving Time) on the date set for receipt of bids. PROMPT AWARD: Pursuant to authority granted by the Authority Board of Directors, the Authority will take action awarding the Bonds or rejecting all bids not later than 24 hours after the expiration of the time herein prescribed for the receipt of proposals; provided, that the award may be made after the expiration of the specified time if the bidder shall not have given to the Authority notice in writing of the withdrawal of such proposal. PLACE OF DELIVERY; CANCELLATION FOR LATE DELIVERY: It is expected that said Bonds will be delivered through the facilities of DTC for the account of the successful bidder within 30 days from the date of sale thereof. The successful bidder shall have the right, at its option, to cancel its obligation to purchase the Bonds if the Bonds are not tendered for delivery within 60 days from the date of the sale thereof. Payment of the purchase price by the purchaser must be made by no later than 9:00 am Pacific Daylight Saving Time on the date of delivery by wire transfer in immediately available funds to an account designated by the Authority. NO GOOD FAITH DEPOSIT: No good faith deposit is required. CHANGE IN TAX EXEMPT STATUS: At any time before the Bonds are tendered for delivery, the successful bidder may disaffirm and withdraw such bidder’s proposal if the interest received by private holders from bonds of the same type and character as the Bonds shall be declared to be taxable income under present federal income tax laws, either by a ruling of the Internal Revenue Service or by a decision of any federal court, or shall be declared taxable, or be required to be taken into account in computing federal income taxes by any federal income tax law enacted subsequent to the date of this Official Notice of Sale. CLOSING PAPERS: Each proposal will be understood to be conditioned upon the Authority furnishing to the purchaser, without charge, concurrently with payment for and delivery of the Bonds, the following closing papers, each dated the date of delivery: (a) The opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, Bond Counsel to the Authority, substantially in the form attached in Appendix E to the Preliminary Official Statement, with respect to the exclusion from gross income of interest on the Bonds for federal tax purposes and the exemption of interest on the Bonds from income taxation by the State of California. 6 (b) A certificate of the Authority certifying that on the basis of the facts, estimates and circumstances in existence on the date of issue, it is not expected that the proceeds of the Bonds will be used in a manner that would cause the Bonds to be arbitrage bonds; (c) A certificate of the Trustee certifying that the officers and representatives have authenticated the Bonds, and that they were respectively duly authorized to authenticate the same; (d) The receipt of the Authority evidencing the receipt of the purchase price of the Bonds; and (e) A certificate of the Authority certifying that there is no known litigation threatened or pending affecting the validity of the Bonds. DISCLOSURE COUNSEL LETTER: Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach,, California will act as Disclosure Counsel in connection with the issuance of the Bonds. Such firm will provide a letter to the Authority and the original purchaser of the Bonds to the effect that based on their participation in the preparation of the Official Statement, nothing has come to their attention to lead them to believe that the Official Statement (except for certain financial statements, statistical data and other information) contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. CUSIP NUMBERS: It is anticipated that CUSIP numbers will be printed on the Bonds, but neither the failure to print such numbers on any Bond nor error with respect thereto shall constitute cause for a failure or refusal by the purchaser thereof to accept delivery of and pay for the Bonds in accordance with the terms of the purchase contract. All expenses of printing CUSIP numbers on the Bonds and the CUSIP Service Bureau charge for the assignment of said numbers shall be paid by the successful bidder. The Municipal Advisor shall be responsible for obtaining the CUSIP numbers and providing them to the Authority and the successful bidder. QUALIFICATION FOR SALE; BLUE SKY: Compliance with blue sky laws shall be the sole responsibility of the purchaser. The Authority will furnish such information and take such action not inconsistent with law as the purchaser may request and the Authority shall deem necessary or appropriate to qualify the Bonds for offer and sale under the blue sky or other securities laws and regulations of such states and other jurisdictions of the United States of America as may be designated by the purchaser; provided, however, that the Authority shall not execute a general or special consent to service of process or qualify to do business in connection with such qualification or determination in any jurisdiction and shall not be responsible for any fees or other costs related to such filing or qualification. The purchaser will not offer to sell or solicit any offer to buy the Bonds in any jurisdiction where it is unlawful for such purchaser to make such offer, solicitation or sale, and the purchaser shall comply with the blue sky and other securities laws and regulations of the states and jurisdictions in which the purchaser sells the Bonds. ESTABLISHMENT OF ISSUE PRICE FOR THE BONDS: In the event the Authority receives at least three (3) bona fide bids for the Bonds, then the Issue Price for the Bonds shall be established based on the reasonably expected initial offering prices of the Bonds as of the Sale Date (the “Expected Offering Prices”). The Expected Offering Prices shall consist of the prices for each maturity of the Bonds used by the winning bidder in formulating its bid to purchase the Bonds. The winning bidder shall be required to deliver on the Delivery Date a certificate to such effect, and provide to the Authority, in writing, the Expected Offering Prices as of the Sale Date. In the event the Authority receives fewer than three (3) bona fide bids for the Bonds, then the Issue Price for the Bonds shall be established based on the first price at which at least 10% of each maturity of the Bonds was sold to the Public (as defined below). The winning bidder shall be required to deliver on the Delivery Date a certificate to such effect, and provide to the Authority, in writing, evidence satisfactory to Bond Counsel to the Authority of such sales prices for each maturity of the Bonds. In the event that the 7 winning bidder has not sold at least 10% of each maturity of the Bonds to the Public as of the Delivery Date (each, an “Unsold Maturity”), the winning bidder shall (i) provide to the Authority, in writing, on the Delivery Date, the Expected Offering Prices for each Unsold Maturity and a certificate regarding same and (ii) have a continuing obligation to provide to the Authority, in writing, evidence satisfactory to Bond Counsel to the Authority of the first price at which at least 10% of each Unsold Maturity is sold to the Public, contemporaneous with each such sale, until at least 10% of all such Unsold Maturities have been sold to the Public. As used herein, the term “Public” means any person (including an individual, trust, estate, partnership, association, company, or corporation) other than an Underwriter (as defined herein) or a related party to an Underwriter. The term “related party” generally means any two or more persons who have greater than 50 percent common ownership, directly or indirectly. As used herein, the term “Underwriter” means (i) any person that agrees pursuant to a written contract with the Authority (or with the lead underwriter to form an underwriting syndicate) to participate in the initial sale of the Bonds to the Public, and (ii) any person that agrees pursuant to a written contract directly or indirectly with a person described in clause (i) of this paragraph to participate in the initial sale of the Bonds to the Public (including a member of a selling group or a party to a retail distribution agreement participating in the initial sale of the Bonds to the Public). CALIFORNIA DEBT AND INVESTMENT ADVISORY COMMISSION: The successful bidder will be required, pursuant to California law, to pay any fees to the California Debt and Investment Advisory Commission when due. DTC FEES: All fees due DTC with respect to the Bonds shall be paid by the successful bidder. OFFICIAL STATEMENT: The Authority and the District have caused to be prepared the Preliminary Official Statement in a form deemed final, as of its date, by the Authority and the District within the meaning of Rule 15c2‐12 of the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, (“Rule 15c2‐12”) except for certain information which is permitted under said Rule 15c2‐12 to be omitted from the Preliminary Official Statement, but is subject to revision, amendment and completion in a final Official Statement. A copy of the Preliminary Official Statement will be furnished upon request to Harrell & Company Advisors, LLC, 333 City Boulevard West, Suite 1215, Orange, California 92868, telephone (714) 939-1464. Upon the sale of the Bonds, the Authority will publish the final Official Statement in substantially the same form as the Preliminary Official Statement, subject to any additions, deletions, and revisions as required to make an Official Statement accurate in all material respects as of its date. The Authority will furnish to the successful bidder within seven business days following the date of award, at no charge, any number of electronic copies and not in excess of 100 printed copies of the Official Statement for use in connection with any resale of the Bonds. The purchaser agrees to supply the Authority all pricing information necessary to complete the Official Statement within 24 hours after the award of the Bonds. Additional printed copies of the final Official Statement may be obtained at additional cost. By making a bid for the Bonds, the purchaser agrees to (1) disseminate to all members of the underwriting syndicate copies of the final Official Statement, including any supplements prepared by the Authority, (2) promptly file a copy of the final Official Statement, including any supplements prepared by the Authority, with the Municipal Securities Rulemaking Board, and (3) take any and all other actions necessary to comply with applicable Securities and Exchange Commission rules and Municipal Securities Rulemaking Board rules governing the offerings sale and delivery of the Bonds and the Official Statement to ultimate purchasers. Prospective bidders must review the Preliminary Official Statement before submitting a bid, including the form of opinion of Bond Counsel set forth in Appendix E to the Preliminary Official Statement. 8 DISCLOSURE CERTIFICATE: The Authority and the District will deliver to the purchaser of the Bonds a certificate dated the date of Bond delivery, stating that as of the date thereof, except for information relating to DTC and CUSIP Numbers as to which no view is expressed, the Official Statement does not contain an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. CONTINUING DISCLOSURE: In order to assist bidders in complying with Rule 15c2‐12, the District will undertake, pursuant to a Continuing Disclosure Agreement, to provide annual reports and notices of certain events. A description of this undertaking is set forth in the Preliminary Official Statement and will also be set forth in the final Official Statement. Dated: __________, 2018 FIRST SUPPLEMENTAL INDENTURE OF TRUST Dated as of September 15, 2018 By and between MUFG UNION BANK, N.A., as Trustee and the OTAY WATER DISTRICT Relating to $7,735,000 OTAY WATER DISTRICT 2013 WATER REVENUE REFUNDING BONDS Attachment G 1 FIRST SUPPLEMENTAL INDENTURE OF TRUST This FIRST SUPPLEMENTAL INDENTURE OF TRUST (this “First Supplement”) made and entered into as of September 15, 2018, by and among MUFG Union Bank, N.A., a national banking association organized under the laws of the United States, as trustee (the “Trustee”) and the Otay Water District, a water district duly organized and existing under the Constitution and laws of the State of California (the “District”) amends, in part, the Indenture of Trust dated as of June 1, 2013 (the “Original Indenture of Trust,” and together with this First Supplemental Indenture of Trust, the “Indenture of Trust”); W I T N E S S E T H: WHEREAS, the District has previously authorized the issuance of the Otay Water District 2013 Water Revenue Refunding Bonds (the “2013 Bonds”) pursuant to the Original Indenture of Trust; and WHEREAS, the District has requested that the Trustee enter into this First Supplement to amend Section 6.20 of the Original Indenture of Trust to correct an inconsistency and defective provision therein; and WHEREAS, the Board of Directors of the District has authorized the execution and delivery of this First Supplement; and WHEREAS, the District has determined that it is necessary and desirable to amend the Original Indenture of Trust as set forth herein in order to correct an inconsistent and defective provision in Section 6.20 of the Original Indenture of Trust, and that the amendment does not materially adversely affect the interests of the Owners of the 2013 Bonds; and WHEREAS, in accordance with Section 9.01(b) and (d) of the Original Indenture of Trust, the Trustee has received an opinion of Bond Counsel as required by such provisions; NOW, THEREFORE, in consideration of the promises and mutual agreements herein contained, the parties hereto do hereby agree as follows: Section 1. Amendment to Section 6.20 of the Original Indenture of Trust. In accordance with the provisions of Section 9.01(b)(2) of the Original Indenture of Trust, in order to correct an inconsistent and defective provision in Section 6.20 of the Original Indenture of Trust, Section 6.20 of the Original Indenture of Trust is deleted in its entirety and amended to read as follows: Section 6.20 Amount of Rates and Charges. To the fullest extent permitted by law, the District shall fix and prescribe, at the commencement of each Fiscal Year, rates and charges for the Water System which are reasonably expected to be at least sufficient to yield during each Fiscal Year Taxes and Net Revenues equal to one hundred twenty-five percent (125%) of the Debt Service for such Fiscal Year (including for purposes of such calculation the obligation of the District to repay costs related to any surety bond, reserve credit facility or other reserve fund funding instrument). The District may make adjustments from time to time in such rates and charges and may make such classification thereof as it deems necessary, but shall not reduce the rates and charges then in effect unless the Taxes and Net 2 Revenues from such reduced rates and charges will at all times be sufficient to meet the requirements of this Section. When the 1996 Certificates are no longer Outstanding, then the Interest Subsidy Payments will be deducted from Net Revenues for purposes of the coverage calculations of this Section. Section 2. Defined Terms. All capitalized terms not defined herein shall have the meaning set forth in the Original Indenture of Trust. Section 3. Execution in Counterparts. This First Supplement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. Section 4. Governing Law. This First Supplement shall be construed and governed in accordance with the laws of the State of California. Section 5. No Other Amendments. Except as amended by Section 1 above, all other provisions of the Indenture of Trust shall remain in full force and effect. 3 IN WITNESS WHEREOF, the parties have executed this First Supplement as of the date and year first above written. MUFG UNION BANK, N.A., as Trustee By: Its: Authorized Officer OTAY WATER DISTRICT By: Its: General Manager ATTEST: __________________________________ Secretary of the Board of Directors FIRST SUPPLEMENTAL INDENTURE OF TRUST Dated as of September 15, 2018 By and between MUFG UNION BANK, N.A., as Trustee and the OTAY WATER DISTRICT Relating to $33,385,000 OTAY WATER DISTRICT 2016 WATER REVENUE REFUNDING BONDS Attachment H 1 FIRST SUPPLEMENTAL INDENTURE OF TRUST This FIRST SUPPLEMENTAL INDENTURE OF TRUST (this “First Supplement”) made and entered into as of September 15, 2018, by and among MUFG Union Bank, N.A., a national banking association organized under the laws of the United States, as trustee (the “Trustee”) and the Otay Water District, a water district duly organized and existing under the Constitution and laws of the State of California (the “District”) amends, in part, the Indenture of Trust dated as of May 1, 2016 (the “Original Indenture of Trust,” and together with this First Supplemental Indenture of Trust, the “Indenture of Trust”); W I T N E S S E T H: WHEREAS, the District has previously authorized the issuance of the Otay Water District 2016 Water Revenue Refunding Bonds (the “2016 Bonds”) pursuant to the Original Indenture of Trust; and WHEREAS, the District has requested that the Trustee enter into this First Supplement to amend Section 6.20 of the Original Indenture of Trust to correct an inconsistency and defective provision therein; and WHEREAS, the Board of Directors of the District has authorized the execution and delivery of this First Supplement; and WHEREAS, the District has determined that it is necessary and desirable to amend the Original Indenture of Trust as set forth herein in order to correct an inconsistent and defective provision in Section 6.20 of the Original Indenture of Trust, and that the amendment does not materially adversely affect the interests of the Owners of the 2016 Bonds; and WHEREAS, in accordance with Section 9.01(b) and (d) of the Original Indenture of Trust, the Trustee has received an opinion of Bond Counsel as required by such provisions; NOW, THEREFORE, in consideration of the promises and mutual agreements herein contained, the parties hereto do hereby agree as follows: Section 1. Amendment to Section 6.20 of the Original Indenture of Trust. In accordance with the provisions of Section 9.01(b)(2) of the Original Indenture of Trust, in order to correct an inconsistent and defective provision in Section 6.20 of the Original Indenture of Trust, Section 6.20 of the Original Indenture of Trust is deleted in its entirety and amended to read as follows: Section 6.20 Amount of Rates and Charges. To the fullest extent permitted by law, the District shall fix and prescribe, at the commencement of each Fiscal Year, rates and charges for the Water System which are reasonably expected to be at least sufficient to yield during each Fiscal Year Taxes and Net Revenues equal to one hundred twenty-five percent (125%) of the Debt Service for such Fiscal Year (including for purposes of such calculation the obligation of the District to repay costs related to any surety bond, reserve credit facility or other reserve fund funding instrument). The District may make adjustments from time to time in such rates and charges and may make such classification thereof as it deems necessary, but shall not reduce the rates and charges then in effect unless the Taxes and Net 2 Revenues from such reduced rates and charges will at all times be sufficient to meet the requirements of this Section. When the 1996 Certificates are no longer Outstanding, then the Interest Subsidy Payments will be deducted from Net Revenues for purposes of the coverage calculations of this Section. Section 2. Defined Terms. All capitalized terms not defined herein shall have the meaning set forth in the Original Indenture of Trust. Section 3. Execution in Counterparts. This First Supplement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. Section 4. Governing Law. This First Supplement shall be construed and governed in accordance with the laws of the State of California. Section 5. No Other Amendments. Except as amended by Section 1 above, all other provisions of the Indenture of Trust shall remain in full force and effect. 3 IN WITNESS WHEREOF, the parties have executed this First Supplement as of the date and year first above written. MUFG UNION BANK, N.A., as Trustee By: Its: Authorized Officer OTAY WATER DISTRICT By: Its: General Manager ATTEST: __________________________________ Secretary of the Board of Directors STAFF REPORT TYPE MEETING: Regular Board Meeting of the Otay Water District Financing Authority MEETING DATE: September 5, 2018 SUBMITTED BY: Kevin Koeppen, Assistant Chief of Finance W.O./G.F. NO: DIV. NO. All APPROVED BY: Joseph R. Beachem, Chief Financial Officer Mark Watton, General Manager SUBJECT: Otay Water District Financing Authority Adoption of Resolution No. 2018-02 Authorizing the Issuance Not to Exceed $29,000,000 of its Water Revenue Bonds, Series 2018A, Approving the Execution of Certain Documents and Authorizing Certain Acts in Connection Therewith GENERAL MANAGER’S RECOMMENDATION: That the Board of Directors of the Otay Water District Financing Authority (“Authority Board”) adopt Resolution No. 2018-02 authorizing the issuance not to exceed $29,000,000 of its Water Revenue Bonds, Series 2018A, approving the execution of certain documents and authorizing certain acts in connection therewith. COMMITTEE ACTION: See Attachment A. PURPOSE: To obtain the Authority Board’s authorization to issue up to $29,000,000 of Otay Water District Financing Authority Water Revenue Bonds to fund the District’s three-year CIP Program and authorize the Authority President, Executive Director, Secretary, and Treasurer to execute and deliver related documents and take other related actions necessary for the issuance of the 2018 Water Revenue Bonds. ANALYSIS: The Authority was formed in 2010 to assist the District with financing capital improvements. Staff is recommending that the Authority issue Water Revenue Bonds and secure the bonds with Installment Payments payable by the District to the Authority. The debt issuance will be used to fund $28.0 million in Capital Improvement Program (CIP) expenditures, which will result in the District maintaining targeted reserve levels in accordance with the District’s Reserve Policy. Staff estimates that the actual amount of the bonds will be $28.3 million to fund $28.0 million of CIP projects and approximately $300,000 of debt issuance costs. Staff will not issue more debt than is needed for these purposes. As part of the FY 2019 Budget presented to the Board in May of 2018, staff recommended the issuance of bonds to fund $30 million of CIP and to maintain reserves at target levels. Due to the FY 2018 actual surplus exceeding the forecast by $1.2 million and actual healthcare increases for 2019 being less than budgeted, staff has reduced the recommended funding of CIP through the debt issuance to $28.0 million. The debt proceeds will be used to fund the following CIP project expenditures over the next three fiscal years. It should be noted that general unrestricted reserves will be designated to fund the additional expenditures, above the $28 million debt proceeds, that are necessary to fund the entire $30.3 CIP project listing. Project Title Total 3-year Expenditures ($000's) PS - 870-2 Pump Station Replacement $12,646 PL - 12-Inch Pipeline Replacement, 978 Zone, Pence Dr/Vista Sierra Dr $2,480 Res - 711-3 Reservoir Cover/Liner Replacement $2,130 PS - Temporary Lower Otay Pump Station Redundancy $1,700 PL - 12-Inch Pipeline Replacement, 978 Zone, Vista Vereda $1,660 PS - 1090-1 Pump Station Replacement (400 gpm) $1,450 PL - 12-inch, 978 Zone, Hidden Mesa Road $1,410 PL - 12-Inch Pipeline Replacement, 803 PZ, Vista Grande $1,180 Quarry Road Bridge Replacement and Utility Relocation $595 PL - 12-inch, 711 Zone, Pas de Luz/Telegraph Canyon Rd $485 PL - 8-inch, 1004 Zone, Eucalyptus St, Coronado/Date/La Mesa $480 SR-11 Utility Relocations $450 Heritage Road Bridge Replacement and Utility Relocation $450 RWCWRF Filtered Water Storage Tank Improvements $450 PL - 8-inch, 850 Zone, Coronado Ave, Chestnut/Apple $450 Vista Diego Hydropneumatic Tank Replacement $390 RecPL - 20-Inch, 680 Zone, Village 2 - Heritage/La Media $364 458/340 PRS Replacement, 1505 Oleander Ave $325 458/340 PRS Replacement, 1571 Melrose Ave $323 Rancho Jamul Hydropneumatic Tank Replacement $290 RecPRS - 927/680 PRS Improvements, Otay Lakes Road $195 Res - 1655-1 Reservoir 0.5 MG $165 Padre Dam - Otay Interconnection Dehesa Valley $70 PL - 624/340 PRS, Paseo Ranchero and Otay Valley Road $60 PS - 711-2 (PS 711-1 Replacement and Expansion) - 14,000 gpm $50 RecPL - 14-Inch, 927 Zone, Force Main Improvements $46 Total Proposed Debt Financed Projects $30,294 A tentative timeline of events related to the debt issuance is shown below. Finance Committee Approval August 22, 2018 Board Approval September 5, 2018 Rating Agency Call September 13, 2018 Notice of Bond Sale September 25, 2018 Award Sale of Bonds October 2, 2018 Closing Document Signing October 22, 2018 Closing October 25, 2018 Evaluating the Issuance of Debt During the preparation of each annual budget, staff prepares a six- year forecast evaluating the District’s debt coverage and reserve levels in conjunction with the District’s respective target levels and operational and CIP needs. Based on the status of each of these items, staff recommends rate adjustments and, if necessary, debt issuances that are aimed at balancing the financial impacts of anticipated changes in both operating and CIP expenditures on the District’s rate payers. The goal of this process is to manage the District’s finances in a manner that ensures the District is able to meet its financial obligations including its operational requirements, CIP and debt covenants. In addition, the rate recommendations are also aimed at achieving targeted reserve levels as established by the District’s comprehensive Reserve Policy, which is also reviewed as part of the budget process. As part of this evaluation, staff compares the potential need and impact of issuing debt versus the impact of solely cash funding to achieve its financial targets. Based on the analysis, staff will make rate and debt recommendations aimed at the safe, effective, and efficient operation of the District in a manner that meets the District’s mission, values and strategic objectives. There are several benefits to a public agency utilizing debt to fund its CIP needs and it is considered an appropriate action by public agencies. Following is a discussion of the benefits and their impact to the District relative to this request:  The use of debt is an essential component of creating generational equity. Generational equity ensures that the individuals using and benefiting from system are the ones paying for it. The projects being financed under this proposal have useful lives of 30 years or more. The debt has a maturity of 25 years. By debt financing these projects a more equitable balance will be struck between those who will use the facilities and those who will pay for them.  Debt is an appropriate method for managing rates and avoiding rate spikes and fluctuations. These spikes and fluctuations go hand-in-hand with the cash requirements of a fluctuating CIP program. While unknown circumstances could potentially still arise causing rate fluctuations, using debt is an appropriate method to manage rates. If the District were to change its funding strategy and cash fund the CIP, the District’s reserves would be drawn below policy minimums by $17,000,000, adversely impacting the District’s liquidity position. The District could bring reserves back to target by 2022 with a 15.0% rate increase in FY 2020. This increase would be followed by no rate increases through FY 2024. This strategy would not provide rate stability for customers. This would also compromise the financial integrity of the District during 2019 and a portion of 2020. The following is a table comparing the FY 2019 rate model projections under debt funding and cash funding scenarios. 2019 2020 2021 2022 2023 2024 Rate Increase with Issue Debt (FY2019 Budget) 3.2% 3.2% 3.2% 3.2% 3.2% 3.2% Rate Increase without Debt (Cash Fund by 2022) 3.2% 15.0% 0.0% 0.0% 0.0% 0.0% By issuing debt the District is able to maintain low and level rate increases.  Debt is an acceptable method for managing reserve levels, which ensures that the District has adequate cash levels to fund the District’s operations and CIP projects in an efficient and effective manner. Utilizing this method, the District will use the debt proceeds to fund its CIP program for the next three years, and ensures the District’s reserves are maintained at target levels during the six-year budget period. There are some risks associated with debt financing. The following is a discussion of the risks and their impact to the District:  Creating a Fixed Obligation - Issuing debt creates a financial obligation that needs to be met regardless of external factors impacting the District, such as reduced water sales due to drought or wet years. On May 31, 2018, Governor Brown signed two bills building on the efforts to make water conservation a way of life in California and to establish an indoor water use standard of 55 gallons per capita per day (GPCD). Based on 2018 actual water usage in the most recent wet months, staff estimates the current indoor GPCD is 65. This would require a 15% reduction in indoor water usage by 2022. In this reduced water sales scenario, the District’s debt coverage ratios and cash reserves would remain at targeted levels, with an additional 0.3% annual rate increase, above the proposed 3.2% rate increases.  Utilizing District’s Debt Capacity – By utilizing the District’s debt capacity at this time, the amount of additional debt that can be issued is reduced. Based on the current rate model, the District does not need to issue additional debt for the water system CIP during the next six-year period. However, staff did evaluate the financial impact of issuing an additional $30.0 million of debt in the second half of the six-year budget. The debt coverage ratios would remain above target levels with no need for additional rate increases.  Incurring Interest Expense – Debt funding requires interest expense which would not be incurred under a cash funding scenario. While interest expense would be incurred, interest rates remain at relatively low levels and, if not at this time, the District would likely need to issue debt in the future at higher interest rates. In total, over the twenty-five year maturity this debt issuance will incur net interest costs of $12.9 million. Debt service will average approximately $1.8 million annually until FY 2036 and then decline each year until final maturity in FY 2044. The amounts are within the FY 2019 budgeted estimates, and are incorporated into the proposed rates and projected debt coverage levels. The current effective interest rate is estimated to be 3.5%. Interest rates can increase before the District brings the bonds to market in early October. Current Debt Coverage Ratios and Outstanding Debts At this time, the District’s estimated debt coverage ratios for FY 2019 are 318% including growth revenues, and 200% excluding growth revenues. This level of debt coverage is strong enough to support utilizing the proposed debt issuance to bring reserves to targeted levels. As of August 31, 2018, the District has approximately $91.0 million of outstanding debt, which is scheduled to mature over the next 22 years. Following is a schedule of the outstanding debt issuances, the years to maturity and call options. Debt Issuance Amount  Outstanding as of  June 30, 2018 Final Year of   Maturity  Years to Full  Maturity  Call Options  General Obligation Bonds  $               3,390,000 2022 4 Not Callable 1996 Certificates of Participation 7,600,000                 2026 8 Anytime 2010 Water Revenue Bonds Series A 7,880,000                2024 6   March 1, 2020 2010 Water Revenue Bonds Series B 36,355,000              2040 22 Anytime* 2013 Water Revenue Refunding Bonds 4,560,000                2023 5 Not Callable 2016 Water Revenue Refunding Bonds 31,170,000              2036 18   September 1, 2026 Total Current Outstanding Debt 90,955,000              19.02 Weighted Ave Years Proposed 2019 Water Revenue Bonds 28,500,000              2038 25 Total Proposed Outstanding Debt 119,455,000$          20.94 Weighted Ave Years *  The 2010 Series B issuance carries a make whole provision, which requires the District to make the debt holders whole on interest they would have  earned through maturity. The District currently maintains a split AA/AA- credit rating, which is comprised of a ‘AA’ rating from Standard & Poor’s (S&P) and a ‘AA-’ rating from Fitch Ratings (Fitch). The last credit rating update the District received from either credit agency was in 2016. A credit rating is an overall rating that considers many factors, with debt coverage being one of the main financial factors. These ratings are all related to the District’s water side of the business as no credit rating is issued for the District’s sewer system at this time. In September 2008, the District received a rating upgrade from S&P to ‘AA’, from ‘AA-’, as part of their global rating recalibration for municipal agencies. In March 2012, Fitch lowered their credit rating for the District from ‘AA’ to ‘AA-’, based on lower-than-budgeted water revenues and a corresponding lower debt coverage ratio. This debt issuance is not anticipated to adversely impact the District’s credit rating; however, the District’s current liquidity is projected to be lower than during past rating reviews. Liquidity and reserves comprise 40% of S&P’s financial risk profile assessment, and as noted in the Financial Advisor’s report to the Board in May 2018, while the District expects liquidity to remain above $20 million, there is a slight concern that the District could end with a lower factor in the S&P analysis of liquidity, but that is not likely to move the rating out of the Very Strong category on its own. Even if there is no downgrade in credit rating, there is always the possibility that as a result of the lower reserves, the rating agencies may put the District on a “rating watch” until the District’s reserves are replenished over the next few years. Documents to be Approved The Bonds will be issued by the Authority and secured by Installment Payments payable by the District to the Authority. This debt structure has been used by the District in prior borrowings in 2010. The following financing documents are approved in form by the resolution:  Indenture of Trust, by and between the Authority and the Trustee;  Installment Purchase Agreement, by and between the Authority and the District;  Preliminary Official Statement; and  Notice of Sale for the Bonds. The draft documents are included with this report for review by the Board. Conclusion That the Board of Directors of the Otay Water District Financing Authority adopt Resolution No. 2018-02 authorizing the issuance not to exceed $29,000,000 of its Water Revenue Bonds, Series 2018A, approving the execution of certain documents and authorizing certain acts in connection therewith. The District Board has separately been presented with a resolution approving documents and its actions relating to the Bonds. FISCAL IMPACT: Joe Beachem, Chief Financial Officer The $28.0 million debt funding of the CIP will ensure the District maintains its reserves at targeted levels. The cost of the principal, plus interest payments will be $41.2 million over the twenty-five year period, which equates to an average annual debt service of $1.8 million. The current estimate of the cost to issue the Bonds is $300,000. This includes $170,000 for the services of bond counsel, disclosure counsel, financial advisor, rating fees, and other costs necessary to issue the bonds. The remaining $130,000 of costs is the expected underwriting discount to be paid to the underwriter selected to purchase the bonds through a competitive bid process. The costs will be paid from bond proceeds. STRATEGIC GOAL: The District ensures its continued financial health through long-term financial planning and debt planning. LEGAL IMPACT: None. General Manager Attachments: A) Committee Action B) Authority Resolution No. 2018-02 C) Installment Purchase Agreement D) Indenture of Trust 2018A Bonds E) Preliminary Official Statement F) Notice of Sale for the Bonds ATTACHMENT A SUBJECT/PROJECT: Otay Water District Financing Authority Adoption of Resolution No. 2018-02 Authorizing the Issuance Not to Exceed $29,000,000 of its Water Revenue Bonds, Series 2018A, Approving the Execution of Certain Documents and Authorizing Certain Acts in Connection Therewith COMMITTEE ACTION: That the Finance, Administration and Communications Committee recommend that the Board of Directors of the Otay Water District Financing Authority (“Authority Board”) adopt Resolution No. 2018-02 authorizing the issuance not to exceed $29,000,000 of its Water Revenue Bonds, Series 2018A, approving the execution of certain documents and authorizing certain acts in connection therewith. NOTE: The “Committee Action” is written in anticipation of the Committee moving the item forward for board approval. This report will be sent to the Board as a committee approved item, or modified to reflect any discussion or changes as directed from the committee prior to presentation to the full board. RESOLUTION NO. 2018-02 RESOLUTION OF THE OTAY WATER DISTRICT FINANCING AUTHORITY AUTHORIZING THE ISSUANCE OF NOT TO EXCEED $29,000,000 OF ITS WATER REVENUE BONDS, SERIES 2018A, APPROVING THE EXECUTION OF CERTAIN DOCUMENTS AND AUTHORIZING CERTAIN ACTS IN CONNECTION THEREWITH WHEREAS, the Otay Water District Financing Authority is a joint exercise of powers authority duly organized and existing under the laws of the State of California (the “Authority”) which has the authority to assist in financing the acquisition, construction, installation and equipping of capital improvements on behalf of the Otay Water District (the “District”); WHEREAS, the District has requested that the Authority assist the District in financing certain capital improvements to the District’s Water System (the “2018 Project”), as described in the form of the Installment Purchase Agreement, dated as of October 1, 2018 by and between the Authority and the District on file with the Secretary of the Board; and WHEREAS, the Authority desires to assist the District with the financing of the 2018 Project through the issuance of the Otay Water District Financing Authority Water Revenue Bonds, Series 2018A and desires to approve certain documents in connection therewith; WHEREAS, the bonds will be issued pursuant to the Marks-Roos Local Bond Pooling Act of 1985, commencing with Section 6584 of the California Government Code (the “Act”) and an Indenture of Trust by and between the Authority and MUFG Union Bank, N.A., as Trustee; WHEREAS, in accordance with the requirements of Government Code Section 5852.1, there has been presented to the Authority and disclosed at the meeting at which this resolution is being adopted the information required by Government Code Section 5852(a)(1) which is attached hereto as Exhibit A; NOW, THEREFORE, BE IT RESOLVED by the Board of Directors of the Otay Water District Financing Authority as follows: Section 1. The issuance of the Otay Water District Financing Authority Water Revenue Bonds, Series 2018A (the “Bonds”) in the principal amount not to exceed $29,000,000 in order to finance the 2018 Project, and to pay the cost of issuance for the Bonds, is hereby approved; provided, however, that the Bonds shall be issued only in accordance with the parameters set forth in Section 5 below. Section 2. The Installment Purchase Agreement by and between the District and the Authority, in substantially the form on file with the Authority, is hereby approved. Each of the Executive Director, Treasurer/Auditor and Secretary of the Authority, and their written designees (collectively, the “Authorized Officers”), acting alone, is hereby authorized and directed to execute and deliver the Installment Purchase Agreement with such changes, insertions and omissions as may be approved by the person executing the same, said execution being conclusive evidence of such approval. Attachment B 2 Section 3. The Indenture of Trust by and between the Authority and MUFG Union Bank, N.A., as trustee (the “Trustee”), in substantially the form on file with the Authority, is hereby approved. Each of the Authorized Officers, acting alone, is hereby authorized and directed to execute and deliver the Indenture of Trust with such changes, insertions and omissions as may be approved by the person executing the same, said execution being conclusive evidence of such approval. Section 4. The form of notice of sale for the Bonds (the “Notice of Sale”), substantially in the form on file with the Board, is hereby approved and each of the Authorized Officers, acting alone, is hereby authorized to direct the sale of the Bonds on a competitive basis in accordance with the terms hereof and the Notice of Sale in substantially said form, with such changes as the Authorized Officer executing the same may require or approve to reflect the final terms of the sale. A summary of the Notice of Sale shall be published by Harrell & Company Advisors, LLC (the “Municipal Advisor”) on behalf of the Authority in accordance with any notice requirements imposed by law. The Bonds shall be sold for such purposes and in such principal amount as are described above and in the Preliminary Official Statement described in Section 5 below, provided that (i) the purchase price for the Bonds shall not be less than 99% of the aggregate amount of principal thereof, (ii) the true interest cost of the Bonds as calculated by the Municipal Advisor shall not exceed 5.0%, and (iii) the sale shall be approved by an Authorized Officer as evidenced by a written acceptance of such winning bid. However, Authority may reject all bids should an Authorized Officer determine that none of the bids would serve the best interests of the Authority and the District. Section 5. The preparation and distribution of the Preliminary Official Statement, in substantially the form on file with the Secretary of the Board, is hereby approved, subject to final approval as to form by the District’s legal counsel and the law firm of Stradling Yocca Carlson & Rauth, a Professional Corporation (“Bond Counsel”). Each of the Authorized Officers, acting alone, is hereby authorized to sign a certificate pursuant to Rule 15c2-12 promulgated under the Securities Exchange Act of 1934 relating to the Preliminary Official Statement, and each of the Authorized Officers, acting alone, is hereby authorized and directed to execute, approve and deliver the final Official Statement in the form of the Preliminary Official Statement with such changes, insertions and omissions as may be approved by the person executing the same, said execution being conclusive evidence of such approval. The Municipal Advisor is hereby authorized to distribute copies of the Preliminary Official Statement to persons who may be interested in the initial purchase of the Bonds and is directed to deliver copies of the final Official Statement to the winning bidder for the Bonds. Section 6. Each of the Authorized Officers and any other proper officer of the Authority is hereby authorized and directed to execute and deliver any and all documents and instruments and to do and cause to be done any and all acts and things necessary or proper for carrying out the transactions contemplated by the Indenture of Trust, the Installment Purchase Agreement, the Notice of Sale, the Preliminary Official Statement and this Resolution. The Bonds may be executed by the manual or facsimile signatures of the President and Secretary of the Board. Section 7. MUFG Union Bank, N.A. is hereby appointed to act as trustee under the Indenture of Trust. Section 8. Unless otherwise defined herein, all terms used herein and not otherwise defined shall have the meanings given such terms in the Indenture unless the context otherwise clearly requires. Section 9. This Resolution shall take effect immediately upon passage. 3 PASSED, APPROVED AND ADOPTED this 5th day of September, 2018. ________________________________________ President Otay Water District Financing Authority Attest: __________________________________ Secretary to the Otay Water District Financing Authority 4 STATE OF CALIFORNIA ) ) ss COUNTY OF SAN DIEGO ) I, Susan Cruz, Secretary to the Board of Directors of the Otay Water District Financing Authority, do hereby certify that the foregoing Resolution No. 2018-02 was duly adopted by the Board of Directors of the Otay Water District Financing Authority at a regular meeting thereof held on the 5th day of September, 2018 by the following vote: Ayes: Noes: Abstain: Absent: I further certify that the foregoing is a full, true and correct copy of Resolution No. 2018-02, and that the same has not been modified, amended or repealed. DATE: _____________, 2018 __________________________________ Susan Cruz, Secretary to the Otay Water District Financing Authority A-1 EXHIBIT A GOOD FAITH ESTIMATES The good faith estimates set forth herein are provided with respect to the Bonds in accordance with California Government Code Section 5852.1. Such good faith estimates have been provided to the Authority by the Municipal Advisor. Principal Amount. Based on the Authority’s financing plan and current market conditions, its good faith estimate of the aggregate principal amount of the Bonds to be sold is $28,300,000 (the “Estimated Principal Amount”). Assuming that the Estimated Principal Amount is sold and based on market interest rates prevailing at the time of preparation of these good faith estimates by the Municipal Advisor, the following good faith estimates are provided: (a) True Interest Cost of the Bonds. The true interest cost of the Bonds, which means the rate necessary to discount the amounts payable on the respective principal and interest payment dates to the purchase price received for the Bonds, is 3.5%. (b) Finance Charge of the Bonds. The finance charge of the Bonds, which means the sum of all fees and charges paid to third parties, consists of $300,000 to be paid from proceeds of the Bonds, of which $170,000 is for costs of issuance and $130,000 is discount to be paid to the purchaser of the Bonds, and an estimated $175,000 of fees paid to third parties over the life of the Bonds from funds other than Bond proceeds as further described in (d) below. (c) Amount of Proceeds to be Received. The amount of proceeds expected to be received by the Authority for sale of the Bonds, less the finance charge of the Bonds paid from Bond proceeds described in (b) above, is estimated to be $28,000,000. (d) Total Payment Amount. The total payment amount, which means the sum total of all payments the Authority will make to pay debt service on the Bonds, plus the finance charge for the Bonds as described in (b) above not paid with the proceeds of the Bonds, calculated to the final maturity of the Bonds, is $41,375,000, consisting of $41,200,000 principal and interest, $100,000 of Trustee fees, and $75,000 for continuing disclosure, CDIAC compliance, rebate compliance and other costs to administer the Bonds. The foregoing estimates constitute good faith estimates only. The actual principal amount of the Bonds issued and sold, the true interest cost thereof, the finance charges thereof, the amount of proceeds received therefrom and total payment amount with respect thereto may differ from such good faith estimates due to (a) the actual date of the sale of the Bonds being different than the date assumed for purposes of such estimates, (b) the actual principal amount of Bonds sold being different from the Estimated Principal Amount, (c) the actual amortization of the Bonds being different than the amortization assumed for purposes of such estimates, (d) the actual market interest rates at the time of sale of the Bonds being different than those estimated for purposes of such estimates, (e) other market conditions, or (f) alterations in the Authority’s financing plan, or a combination of such factors. The actual date of sale of the Bonds and the actual principal amount of Bonds sold will be determined by the Authority based on the timing of the need for proceeds of the Bonds and other factors. The actual interest rates borne by the Bonds will depend on market interest rates at the time of sale thereof. The actual amortization of the Bonds A-2 will also depend, in part, on market interest rates at the time of sale thereof. Market interest rates are affected by economic and other factors beyond the control of the Authority. INSTALLMENT PURCHASE AGREEMENT by and between OTAY WATER DISTRICT, as Purchaser and OTAY WATER DISTRICT FINANCING AUTHORITY, as Seller Dated as of October 1, 2018 Relating to $[AMOUNT] OTAY WATER DISTRICT FINANCING AUTHORITY WATER REVENUE BONDS, SERIES 2018A Attachment C TABLE OF CONTENTS Page i ARTICLE I DEFINITIONS Section 1.01 Definitions ................................................................................................................. 2 ARTICLE II REPRESENTATIONS AND WARRANTIES Section 2.01 Representations by the District .................................................................................. 7 Section 2.02 Representations and Warranties by the Authority ..................................................... 8 ARTICLE III ACQUISITION, CONSTRUCTION AND PURCHASE OF 2018 PROJECT; 2018 PROJECT FUND Section 3.01 Sale and Purchase of the 2018 Project; District as Agent .......................................... 8 Section 3.02 Construction of 2018 Project ..................................................................................... 8 Section 3.03 Title ............................................................................................................................ 9 Section 3.04 2018 Project Fund ...................................................................................................... 9 ARTICLE IV 2018 INSTALLMENT PAYMENTS Section 4.01 Purchase Price .......................................................................................................... 10 Section 4.02 Payment of 2018 Installment Payments .................................................................. 10 Section 4.03 Payment of 2018 Installment Payments to Trustee ................................................. 10 Section 4.04 Reimbursement for Costs ........................................................................................ 11 Section 4.05 Payment to Trustee .................................................................................................. 11 ARTICLE V SECURITY Section 5.01 Pledge of Taxes and Revenues ................................................................................ 11 Section 5.02 Allocation of Taxes and Revenues .......................................................................... 11 Section 5.03 Additional Contracts and Parity Bonds ................................................................... 12 Section 5.04 Investments .............................................................................................................. 13 ARTICLE VI COVENANTS OF THE DISTRICT Section 6.01 Compliance with Installment Purchase Agreement and Indenture .......................... 13 Section 6.02 Against Encumbrances ............................................................................................ 14 Section 6.03 Against Sale or Other Disposition of Property ........................................................ 14 Section 6.04 Against Competitive Facilities ................................................................................ 14 Section 6.05 Tax Covenants ......................................................................................................... 14 Section 6.06 Maintenance and Operation of the Water System ................................................... 14 Section 6.07 Payment of Claims ................................................................................................... 15 Section 6.08 Compliance with Contracts ...................................................................................... 15 Section 6.09 Insurance .................................................................................................................. 15 Section 6.10 Accounting Records; Financial Statements and Other Reports ............................... 15 Section 6.11 Protection of Security and Rights of the Authority ................................................. 16 TABLE OF CONTENTS (continued) Page ii Section 6.12 Payment of Taxes and Compliance with Governmental Regulations ..................... 16 Section 6.13 Amount of Rates and Charges ................................................................................. 16 Section 6.14 Collection of Rates and Charges .............................................................................. 16 Section 6.15 Eminent Domain Proceeds ...................................................................................... 16 Section 6.16 Further Assurances .................................................................................................. 17 Section 6.17 Continuing Disclosure ............................................................................................. 17 ARTICLE VII PREPAYMENT OF 2018 INSTALLMENT PAYMENTS Section 7.01 Prepayment .............................................................................................................. 17 Section 7.02 Method of Prepayment ............................................................................................ 18 ARTICLE VIII EVENTS OF DEFAULT AND REMEDIES OF THE AUTHORITY Section 8.01 Events of Default and Acceleration of Maturities ................................................... 18 Section 8.02 Application of Funds Upon Acceleration ................................................................ 19 Section 8.03 Other Remedies of the Authority ............................................................................. 19 Section 8.04 Non-Waiver ............................................................................................................. 19 Section 8.05 Remedies Not Exclusive .......................................................................................... 20 ARTICLE IX DISCHARGE OF OBLIGATIONS Section 9.01 Discharge of Obligations ......................................................................................... 20 ARTICLE X MISCELLANEOUS Section 10.01 Liability Limited of the District ............................................................................... 21 Section 10.02 Benefits of Installment Purchase Agreement Limited to Parties ............................. 21 Section 10.03 Successor Is Deemed Included in all References to Predecessor ............................ 21 Section 10.04 Waiver of Personal Liability .................................................................................... 21 Section 10.05 Article and Section Headings, Gender and References ........................................... 21 Section 10.06 Partial Invalidity ...................................................................................................... 22 Section 10.07 Assignment .............................................................................................................. 22 Section 10.08 Net Contract ............................................................................................................. 22 Section 10.09 California Law ......................................................................................................... 22 Section 10.10 Notices ..................................................................................................................... 22 Section 10.11 Effective Date .......................................................................................................... 22 Section 10.12 Execution in Counterparts ....................................................................................... 22 Section 10.13 Indemnification of Authority ................................................................................... 23 Section 10.14 Amendments Permitted ........................................................................................... 23 Section 10.15 Notice to Rating Agencies ....................................................................................... 23 EXHIBIT A DESCRIPTION OF 2018 PROJECT .................................................................... A-1 EXHIBIT B PURCHASE PRICE .............................................................................................. B-1 INSTALLMENT PURCHASE AGREEMENT This INSTALLMENT PURCHASE AGREEMENT is made and entered into as of October 1, 2018, by and between OTAY WATER DISTRICT, a municipal water district duly formed and existing under and by virtue of the laws of the State of California (the “District”), and OTAY WATER DISTRICT FINANCING AUTHORITY, a joint exercise of powers authority, operating and acting pursuant to the laws of the State of California (the “Authority”). WITNESSETH: WHEREAS, the District has determined that the acquisition and construction of improvements, betterments, renovations, and expansions of certain facilities within its water system, as more particularly described in Exhibit A attached hereto (the “2018 Project”) is in the best interests of the District; and WHEREAS, the Authority has agreed to assist the District in financing the acquisition and construction of the 2018 Project; and WHEREAS, the District is authorized by Chapter 4 of Part 5, Division 20 of the Water Code of the State of California, to acquire property for its water system and to construct, improve, expand or repair its water system; and WHEREAS, the Authority has determined to acquire and construct the 2018 Project for, and sell the 2018 Project to, the District upon the terms and conditions set forth herein; and WHEREAS, the District has determined to make installment purchase payments to the Authority for the payment of the Costs of the 2018 Project; and WHEREAS, the District has determined that the purchase of the 2018 Project is necessary and proper for District uses and purposes; and WHEREAS, the District and the Authority have duly authorized the execution and delivery of this Installment Purchase Agreement; and WHEREAS, all acts, conditions and things required by law to exist, to have happened and to have been performed precedent to and in connection with the execution and delivery of this Installment Purchase Agreement do exist, have happened and have been performed in regular and due time, form and manner as required by law, and the parties hereto are now duly authorized to execute and enter into this Installment Purchase Agreement; NOW, THEREFORE, IN CONSIDERATION OF THESE PREMISES AND OF THE MUTUAL AGREEMENTS AND COVENANTS CONTAINED HEREIN AND FOR OTHER VALUABLE CONSIDERATION, THE PARTIES HERETO DO HEREBY AGREE AS FOLLOWS: 2 ARTICLE I DEFINITIONS Section 1.01 Definitions. Unless the context otherwise requires, the terms defined in this section shall for all purposes hereof and of any amendment hereof or supplement hereto and of any report or other document mentioned herein or therein have the meanings defined herein, the following definitions to be equally applicable to both the singular and plural forms of any of the terms defined herein. All capitalized terms used herein and not defined herein shall have the meanings ascribed thereto in the Indenture. Authority. The term “Authority” means the Otay Water District Financing Authority, a joint exercise of powers authority, organized under the laws of the State of California. Business Day. The term “Business Day” means a day which is not (a) a Saturday or Sunday or any other day bank institutions located in New York, New York, or the city or cities in which the principal or other designated corporate office of the Trustee is located are required or authorized to close, or (b) a day on which the New York Stock Exchange is closed. Contracts. The term “Contracts” means this Installment Purchase Agreement and all contracts of the District authorized and executed by the District, the Installment Payments or payments under which are on a parity with the 2018 Installment Payments and which are secured by a pledge of and lien on the Taxes and Revenues, including the 1996 Installment Sale Agreement and the 2010 Installment Purchase Agreement. Corporation. The term “Corporation” means the Otay Service Corporation, a non-profit public benefit corporation duly organized and existing under and by virtue of the laws of the State of California. Debt Service. The term “Debt Service” means, for any Fiscal Year, the sum of: (1) the interest accruing during such Fiscal Year on all outstanding Parity Bonds, assuming that all outstanding serial Parity Bonds are retired as scheduled and that all outstanding term Parity Bonds are redeemed or paid from sinking fund payments as scheduled (except to the extent that such interest is capitalized); (2) that portion of the principal amount of all outstanding serial Parity Bonds maturing in such Fiscal Year or maturing in the next succeeding Fiscal Year accruing during such Fiscal Year in each case computed as if such principal amounts were deemed to accrue daily during such Fiscal Year in equal amounts; (3) that portion of the principal amount of all outstanding term Parity Bonds required to be redeemed or paid in such Fiscal Year or during the next succeeding Fiscal Year in each case computed as if such principal amounts were deemed to accrue daily during such Fiscal Year in equal amounts; and (4) that portion of the Installment Payments required to be made during such Fiscal Year or during the next succeeding Fiscal Year in each case computed as if such Installment Payments were deemed to accrue daily during such Fiscal Year in equal amounts (except to the extent that the 3 interest portion of such Installment Payments is capitalized); less the earnings derived from investment of moneys on deposit in any debt service reserve fund, and any construction fund created with respect to any Contracts or Parity Bonds to the extent such earnings are deposited in a debt service fund, including the Bond Payment Fund; provided that, as to any such Parity Bonds or Installment Payments bearing or comprising interest at other than a fixed rate, the rate of interest used to calculate Debt Service shall be one hundred ten percent (110%) of the greater of: (i) the then current variable interest rate borne by such Parity Bonds or Contracts plus 2%, and (ii) the highest variable rate borne over the preceding 12 months by outstanding variable rate debt issued by the District or, if no such variable rate debt is at the time outstanding, by variable rate debt of which the interest rate is computed by reference to an index comparable to that to be utilized in determining the interest rate for the debt then proposed to be issued; provided further that if any series or issue of such Parity Bonds or Installment Payments have twenty- five percent (25%) or more of the aggregate principal amount of such series or issue due in any one year, Debt Service shall be determined for the Fiscal Year of determination as if the principal of and interest on such series or issue of such Parity Bonds or Installment Payments were being paid from the date of incurrence thereof in substantially equal annual amounts over a period of thirty (30) years from the date of calculation; and provided further that the amount on deposit in a debt service reserve fund on any date of calculation of Debt Service shall be deducted from the amount of principal due at the final maturity of the Parity Bonds and Contracts for which such debt service reserve fund was established and in each preceding year until such amount is exhausted; provided further that Debt Service shall be reduced by the amount of investment earnings credited to any debt service fund created with respect to Contracts or Parity Bonds; provided further that if the Parity Bonds or Contracts constitute Paired Obligations, the interest rate on such Parity Bonds or Contracts shall be the resulting linked rate or the effective fixed interest rate to be paid by the District with respect to such Paired Obligations; and provided further that effective when the 1996 Certificates are no longer Outstanding, the calculation of Debt Service payable by the District on Parity Bonds or Contracts shall be reduced by the amount of Interest Subsidy Payments the District is entitled to receive during such twelve-month period. District. The term “District” means the Otay Water District, a municipal water district duly formed and existing under and by virtue of the laws of the State of California. Event of Default. The term “Event of Default” means an event described in Section 8.01. Fiscal Year. The term “Fiscal Year” means the period beginning on July 1 of each year and ending on June 30 of the next calendar year, or any other twelve-month period selected and designated as the official Fiscal Year of the District. 4 Indenture. The term “Indenture” means the Indenture of Trust, dated as of October 1, 2018, by and between the Authority and the Trustee, as originally executed and as it may from time to time be amended or supplemented in accordance with its terms. Independent Certified Public Accountant. The term “Independent Certified Public Accountant” means any firm of certified public accountants appointed by the District, and each of whom is independent pursuant to the Statement on Auditing Standards No. 1 of the American Institute of Certified Public Accountants. Independent Financial Consultant. The term “Independent Financial Consultant” means a financial consultant or firm of such consultants appointed by the District, and who, or each of whom: (1) is in fact independent and not under domination of the District; (2) does not have any substantial interest, direct or indirect, with the District; and (3) is not connected with the District as an officer or employee of the District, but who may be regularly retained to make reports to the District. Installment Payment Date; 2018 Installment Payment Date. The term “Installment Payment Date” means any date on which Installment Payments are scheduled to be paid by the District under and pursuant to any Contract. The term “2018 Installment Payment Date” means four (4) Business Days prior to September 1 and March 1 of each year, commencing on March 1, 2019. Installment Payments; 2018 Installment Payments. The term “Installment Payments” means the installment payments of interest and principal scheduled to be paid by the District under and pursuant to the Contracts. The term “2018 Installment Payments” means the Installment Payments scheduled to be paid by the District under and pursuant hereto. Installment Purchase Agreement. The term “Installment Purchase Agreement” means this Installment Purchase Agreement, by and between the District and the Authority, dated as of October 1, 2018, as originally executed and as it may from time to time be amended or supplemented in accordance herewith. Interest Subsidy Payments. The term “Interest Subsidy Payments” means cash subsidy payments entitled to be received by the District from the United States Treasury with respect to the 2010B Bonds and any Parity Bonds issued and Contracts executed by the District, including but not limited to “Build America Bonds” issued as contemplated by the American Recovery and Reinvestment Act of 2009. Law. The term “Law” means the sections of the Water Code of the State of California applicable to municipal water districts, including the sections commencing with Section 71000, and all laws amendatory thereof or supplemental thereto. Net Proceeds. The term “Net Proceeds” means, when used with respect to any casualty insurance or condemnation award, the proceeds from such insurance or condemnation award remaining after payment of all expenses (including attorneys’ fees) incurred in the collection of such proceeds. 5 Net Revenues. The term “Net Revenues” means, for any Fiscal Year or other twelve-month period, the Revenues for such Fiscal Year or other twelve-month period less the Operation and Maintenance Costs for such Fiscal Year or other twelve-month period. 1996 Certificates. The term “1996 Certificates” means the Otay Water District $15,400,000 Variable Rate Demand Certificates of Participation (1996 Capital Projects) executed and delivered pursuant to the 1996 Installment Sale Agreement. 1996 Installment Payments. The term “1996 Installment Payments” means the Installment Payments to be made by the District pursuant to the 1996 Installment Sale Agreement. 1996 Installment Sale Agreement. The term “1996 Installment Sale Agreement” means the Installment Sale Agreement, dated as of June 1, 1996, as amended by the First Amendment to Installment Sale Agreement, dated as of August 1, 2004, and by the Second Amendment to Installment Sale Agreement, dated as of July 1, 2011 each by and between the District and the Corporation. Operation and Maintenance Costs. The term “Operation and Maintenance Costs” means (i) costs spent or incurred for maintenance and operation of the Water System calculated in accordance with generally accepted accounting principles, including (among other things) the reasonable expenses of management and repair and other expenses necessary to maintain and preserve the Water System in good repair and working order, and including administrative costs of the District that are charged directly or apportioned to the Water System, including but not limited to salaries and wages of employees, payments to the Public Employees Retirement System, overhead, insurance, taxes (if any), fees of auditors, accountants, attorneys or engineers and insurance premiums, and including all other reasonable and necessary costs of the District or charges (other than Debt Service payments) required to be paid by it to comply with the terms of this Installment Purchase Agreement or any Contract or of any resolution or indenture authorizing the issuance of any Parity Bonds or of such Parity Bonds; and (ii) costs spent or incurred in the purchase of water for the Water System; but excluding in all cases depreciation, replacement and obsolescence charges or reserves therefor and amortization of intangibles or other bookkeeping entries of a similar nature and all capital charges. Paired Obligations. The term “Paired Obligations” means any Parity Bond or Contract (or portion thereof) designated as paired obligations in the resolution, indenture or other document authorizing the issuance or execution and delivery thereof, which are simultaneously issued or executed and delivered (i) the principal of which is of equal amount maturing and to be redeemed or prepaid (or cancelled after acquisition thereof) on the same dates and in the same amounts, and (ii) the interest rates which, taken together, result in an irrevocably substantially fixed interest rate obligation of the District for the term of such Parity Bond or Contract. Parity Bonds. The term “Parity Bonds” means all revenue bonds or notes of the District authorized, executed, issued and delivered by the District, the payments of which are on a parity with the 2018 Installment Payments and which are secured by a pledge of and lien on the Taxes and Revenues, including the 2013 Bonds and the 2016 Bonds. Project; 2018 Project. The term “Project” means any additions, betterments, extensions or improvements to the Water System or other District facilities designated by the Board of Directors of the District as a Project, the acquisition or construction of which is to be paid for by the proceeds of any Contracts or Parity Bonds. The term “2018 Project” means the acquisitions, repairs, additions, 6 betterments, extensions and improvements to the Water System, including real property and buildings, if any, described in Exhibit A hereto and as modified in conformance with Section 3.01 hereof. Purchase Price. The term “Purchase Price” means the principal amount plus interest thereon owed by the District to the Authority under the terms hereof as provided in Section 4.01. Revenue Fund. The term “Revenue Fund” means the fund previously established under Section 3.01 of the 1996 Installment Sale Agreement and continued by the terms of the 2010 Installment Purchase Agreement, the 2013 Bonds, the 2016 Bonds and Section 5.02 hereof. Revenues. The term “Revenues” means (i) all water availability charges imposed pursuant to Chapter 2 of Part 5 of the Law not exceeding $10 per acre per year; and (ii) all income, rents, rates, fees, charges and other moneys derived by the District from the ownership or operation of the Water System, or any portion thereof, including without limiting the generality of the foregoing (a) all income, rents, rates, fees, charges or other moneys derived from the sale, furnishing, and supplying of water and other services, facilities and commodities sold, furnished or supplied through the facilities of the Water System, including connection fees, (b) the earnings on and income derived from the investment of such income, rents, rates, fees and charges or other moneys, (c) the proceeds derived by the District directly or indirectly from the sale, lease or other disposition of a part of the Water System as permitted hereunder and (d) any Interest Subsidy Payments; provided that the term “Revenues” shall not include customers’ deposits or any other deposits subject to refund until such deposits have become the property of the District. Taxes. The term “Taxes” means all taxes, including ad valorem taxes of the District, other than taxes imposed pursuant to Chapter 1 of Part 9 of the Law to secure general obligation bonds of the District or any improvement district thereof. Tax Fund. The term “Tax Fund” means the fund previously established under Section 3.01(1) of the 1996 Installment Sale Agreement and continued by the 2010 Installment Purchase Agreement, the 2013 Bonds, the 2016 Bonds and Section 5.02 hereof. Trustee. The term “Trustee” means MUFG Union Bank, N.A., acting in its capacity as Trustee under and pursuant to the Indenture, and its successors and assigns. 2010 Installment Purchase Agreement. The term “2010 Installment Purchase Agreement” means the Installment Purchase Agreement, dated as of March 1, 2010 by and between the District and the Authority. 2010A Bonds. The term “2010A Bonds” means the Otay Water District Financing Authority Water Revenue Bonds, Series 2010A (Non-AMT Tax-Exempt Bonds) issued under the Trust Agreement, dated as of March 1, 2010, by and between the Authority and Union Bank, N.A., as trustee (now known as MUFG Union Bank, N.A.). 2010B Bonds. The term “2010B Bonds” means the Otay Water District Financing Authority Water Revenue Bonds, Series 2010B (Taxable Build America Bonds) issued under the Trust Agreement, dated as of March 1, 2010, by and between the Authority and Union Bank, N.A., as trustee (now known as MUFG Union Bank, N.A.). 7 2013 Bonds. The term “2013 Bonds” means the Otay Water District 2013 Water Revenue Refunding Bonds issued under the Indenture of Trust, dated as of June 1, 2013, by and between the District and MUFG Union Bank, N.A., as trustee. 2016 Bonds. The term “2016 Bonds” means the Otay Water District 2016 Water Revenue Refunding Bonds, issued under the Indenture of Trust, dated as of May 1, 2016, by and between the District and MUFG Union Bank, N.A., as trustee. 2018 Bonds. The term “2018 Bonds” means the Otay Water District Financing Authority Water Revenue Bonds, Series 2018A issued under the Indenture. 2018 Project Fund. The term “2018 Project Fund” means the fund by that name established pursuant to Section 3.04 of this Installment Purchase Agreement. Water Service. The term “Water Service” means the water distribution service made available or provided by the Water System. Water System. The term “Water System” means the entire potable and reclaimed water supply, treatment, storage and distribution system of the District, including but not limited to all facilities, properties and improvements at any time owned, controlled or operated by the District for the supply, treatment and storage of potable or reclaimed water to customers of the District, and any necessary lands, rights, entitlements and other property useful in connection therewith, together with all extensions thereof and improvements thereto at any time acquired, constructed or installed by the District. ARTICLE II REPRESENTATIONS AND WARRANTIES Section 2.01 Representations by the District. The District makes the following representations: (a) The District is a municipal water district duly organized and existing under and pursuant to the laws of the State of California. (b) The District has full legal right, power and authority to enter into this Installment Purchase Agreement and carry out its obligations hereunder, to carry out and consummate all other transactions contemplated by this Installment Purchase Agreement, and the District has complied with the provisions of the Law in all matters relating to such transactions. (c) By proper action, the District has duly authorized the execution, delivery and due performance of this Installment Purchase Agreement. (d) The District has determined that it is necessary and proper for District uses and purposes within the terms of the Law that the District finance the 2018 Project in the manner provided for in this Installment Purchase Agreement, in order to provide essential services and facilities to persons residing in the District. 8 Section 2.02 Representations and Warranties by the Authority. The Authority makes the following representations and warranties: (a) The Authority is a joint exercise of powers authority, operating and acting pursuant to the laws of the State of California, has full legal right, power and authority to enter into this Installment Purchase Agreement and to carry out and consummate all transactions contemplated by this Installment Purchase Agreement and by proper action has duly authorized the execution and delivery and due performance of this Installment Purchase Agreement. (b) The execution and delivery of this Installment Purchase Agreement and the consummation of the transactions herein contemplated will not violate any provision of law, any order of any court or other agency of government, or any indenture, material agreement or other instrument to which the Authority is now a party or by which it or any of its properties or assets is bound, or be in conflict with, result in a breach of or constitute a default (with due notice or the passage of time or both) under any such indenture, agreement or other instrument, or result in the creation or imposition of any prohibited lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of the Authority. ARTICLE III ACQUISITION, CONSTRUCTION AND PURCHASE OF 2018 PROJECT; 2018 PROJECT FUND Section 3.01 Sale and Purchase of the 2018 Project; District as Agent. (a) In consideration for the 2018 Installment Payments, the Authority hereby agrees to acquire, construct and install the 2018 Project and agrees to sell and hereby sells, to the District, and the District agrees to simultaneously purchase and hereby purchases, from the Authority, the 2018 Project at the Purchase Price (payable in installments) as specified in Article IV hereof and otherwise in the manner and in accordance with the provisions of this Installment Purchase Agreement. The Authority hereby transfers and assigns to the District all of the Authority’s right, title and interest to the 2018 Project; provided, that, title to the 2018 Project shall pass as provided in Section 3.03 hereof. (b) The Authority hereby appoints the District as its agent for the purposes of acquisition, construction and installation of the 2018 Project, and the District hereby agrees to enter into such engineering, design and construction contracts and purchase order as may be necessary, to provide for the complete acquisition, construction and installation of the 2018 Project. Notwithstanding the foregoing, it is hereby expressly understood and agreed that the Authority shall be under no liability of any kind or character whatsoever for the payment of any costs or expenses incurred by the District for the acquisition, construction and installation of the 2018 Project and that all such costs and expenses shall be paid by the District, regardless of whether the funds deposited in the 2018 Project Fund (established in Section 3.04 hereof) are sufficient to cover all such costs. Section 3.02 Construction of 2018 Project. From the moneys on deposit in the 2018 Project Fund (established in Section 3.04 hereof) and other moneys available therefor in the Revenue Fund, the District will acquire and construct the 2018 Project with all practicable dispatch, and such acquisition and construction will be made in an expeditious manner and in conformity with the law so as to complete the same as soon as possible. 9 (a) Time for Completion. The District expects that the 2018 Project will be completed on or before three years from the date of issuance of the 2018 Bonds. (b) Payment of Claims. The District will pay and discharge any and all lawful claims for labor, materials or supplies which, if unpaid, might become a lien or charge upon the 2018 Project Fund or the Revenue Fund or any part thereof, or upon any funds held by the Trustee, or which might impair the security of the Installment Payments; provided, that nothing herein contained shall require the District to make any such payments so long as the District in good faith shall contest the validity of any such claims and such nonpayment will not materially adversely affect the District’s ability to perform its obligations hereunder. (c) Changes to 2018 Project. The District may substitute other improvements for those listed as components of the 2018 Project in Exhibit A if the facilities being constructed in lieu of the ones listed in Exhibit A are determined by the District to be in its best interests to the proper functioning of the Water System at the time of said determination, or may add additional Projects or improvements determined by the District to be necessary for the operation of the Water System; provided that the District shall file a Written Order of the District with the Trustee informing the Trustee of the District’s determination. Section 3.03 Title. All right, title and interest in each element and component of the 2018 Project shall vest in the District immediately upon execution and delivery of this Installment Purchase Agreement or, if later, upon the acquisition of any rights with respect to such element or component. Such vesting shall be automatic and shall require no further action by the District or the Authority, but the Authority agrees to execute and deliver, from time to time, any documents the District deems necessary or desirable to evidence such vesting. Section 3.04 2018 Project Fund. The District shall establish, maintain and hold a fund separate from any other fund established and maintained by the District designated as the “2018 Project Fund” (the “2018 Project Fund”). The District hereby agrees to maintain the 2018 Project Fund until the 2018 Project has been acquired and constructed by the District or until all amounts therein are expended towards acquisition and construction. On the Closing Date, the Authority shall cause a portion of the proceeds of the 2018 Bonds to be transferred by the Trustee to, or at the direction of the District, as provided in Section 3.02(b)(ii) of the Indenture, for deposit in the 2018 Project Fund. Moneys in the 2018 Project Fund shall be expended by or at the direction of the District for Costs of the 2018 Project in accordance with this Section. (a) There shall be credited to the 2018 Project Fund the following amounts: (1) the proceeds of sale of the 2018 Bonds transferred by the Trustee to the District; and (2) any other funds from time to time deposited in the 2018 Project Fund to pay Costs of the 2018 Project, including interest earnings on investments. (b) Interest earned on amounts on deposit in the 2018 Project Fund shall be used by or at the direction of the District for Costs of the 2018 Project. 10 Upon a determination by the District that the work on the 2018 Project has been completed, any amounts remaining in the 2018 Project Fund and not otherwise committed for payment of Costs related to the 2018 Project shall be withdrawn from the 2018 Project Fund and transferred to the Trustee for deposit into the Bond Payment Fund established under the Indenture and the 2018 Project Fund shall be closed. ARTICLE IV 2018 INSTALLMENT PAYMENTS Section 4.01 Purchase Price. (a) The Purchase Price to be paid by the District hereunder to the Authority is the sum of the principal amount of the District’s obligations hereunder plus the interest to accrue on the unpaid balance of such principal amount from the effective date hereof over the term hereof, subject to prepayment as provided in Article VII. (b) The principal amount of the Purchase Price to be paid by the District hereunder is set forth in Exhibit B hereto. (c) The interest to accrue on the unpaid balance of the principal amount of the Purchase Price is as specified in Section 4.02 and Exhibit B hereto, and shall be paid by the District as and constitute interest paid on the principal amount of the District’s Purchase Price obligations hereunder. Interest shall be computed on the basis of a 360-day year consisting of twelve 30-day months. Section 4.02 Payment of 2018 Installment Payments. The District shall, subject to its rights of prepayment provided in Article VII, pay the Trustee as assignee of the Authority the Purchase Price in installment payments of interest and principal in the amounts and on the 2018 Installment Payment Dates as set forth in Exhibit B hereto. Section 4.03 Payment of 2018 Installment Payments to Trustee. Each 2018 Installment Payment shall be paid to the Authority in lawful money of the United States of America. In the event the District fails to make any of the payments required to be made by it under this section, such payment shall continue as an obligation of the District until such amount shall have been fully paid and the District agrees to pay the same with interest accruing thereon at the rate or rates of interest then applicable to the remaining unpaid principal balance of the 2018 Installment Payments if paid in accordance with their terms. The obligation of the District to make the 2018 Installment Payments is, subject to Section 10.01, absolute and unconditional, and until such time as the Purchase Price shall have been paid in full (or provision for the payment thereof shall have been made pursuant to Article IX), the District will not discontinue or suspend any 2018 Installment Payment required to be made by it under this section when due, whether or not the Water System or any part thereof is operating or operable or its use is suspended, interfered with, reduced or curtailed or terminated in whole or in part, and such payments shall not be subject to reduction whether by offset or otherwise and shall not be conditional upon the performance or nonperformance by any party of any agreement for any cause whatsoever. 11 Section 4.04 Reimbursement for Costs. The District shall reimburse the Authority for any costs incurred by the Authority in connection with the issuance of the 2018 Bonds including costs incurred by the Authority pursuant to Article VIII of the Indenture. Section 4.05 Payment to Trustee. The District shall pay or cause to be paid to the Trustee all amounts due and payable to the Trustee pursuant to Section 8.03 of the Indenture. ARTICLE V SECURITY Section 5.01 Pledge of Taxes and Revenues. All Taxes and Revenues and all amounts on deposit in the Revenue Fund and the Tax Fund are hereby irrevocably pledged to the payment of the 2018 Installment Payments as provided herein and the Taxes and Revenues shall not be used for any other purpose while any of the 2018 Installment Payments remain unpaid; provided that out of the Taxes and Revenues and amounts on deposit in the Tax Fund and the Revenue Fund there may be apportioned such sums for such purposes as are expressly permitted herein. This pledge shall constitute a first and exclusive lien on Taxes and Revenues and all amounts on deposit in the Tax Fund and the Revenue Fund on a parity with the pledge under any Contracts or Parity Bonds; subject to application of amounts on deposit therein as permitted herein, the Revenue Fund, the Tax Fund and the other funds and accounts created hereunder are pledged for the payment of the 2018 Installment Payments in accordance with the terms hereof and of the Indenture. Such lien on the Taxes and Revenues shall attach, be perfected and be valid and binding from and after the Delivery Date, without any physical delivery of the Revenues and Taxes or further act and shall be valid and binding against all parties having claims of any kind in tort, contract or otherwise against the District, irrespective of whether such parties have notice hereof. Section 5.02 Allocation of Taxes and Revenues. In order to carry out and effectuate the pledge and lien contained herein, the District agrees and covenants that all Taxes and Revenues shall be received by the District in trust hereunder and shall be deposited when and as received in separate special funds designated as the “Revenue Fund” and the “Tax Fund,” respectively, which funds were previously established under the Contracts and are hereby continued by the terms of this Section 5.02, and which funds the District agrees and covenants to maintain and to hold separate and apart from other funds so long as any Installment Payments, Contracts or Parity Bonds remain unpaid. Moneys in the Revenue Fund and Tax Fund shall be used and applied by the District as provided in this Installment Purchase Agreement and as provided in the Contracts. The District shall, from the moneys in the Revenue Fund, pay all Operation and Maintenance Costs (including amounts reasonably required to be set aside in contingency reserves for Operation and Maintenance Costs, the payment of which is not then immediately required) as they become due and payable. All moneys in the Tax Fund, and, to the extent such moneys are insufficient, all remaining moneys in the Revenue Fund, shall be set aside by the District at the following times in the following respective special funds in the following order of priority and all moneys in each of such funds shall be held in trust and shall be applied, used and withdrawn only for the purposes hereinafter authorized in this Section: (a) Bond Payment Fund and Other Debt Service Payments. On or before each 2018 Installment Payment Date, the District shall, from the moneys in the Tax Fund and, to the extent needed, the Revenue Fund, transfer to the Trustee for deposit in the Bond Payment Fund, the 2018 12 Installment Payment due and payable on that 2018 Installment Payment Date. The District shall also, from the moneys in the Tax Fund and, to the extent needed, the Revenue Fund, transfer to the applicable trustee or payee for deposit in the applicable payment fund, without preference or priority, and in the event of any insufficiency of such moneys ratably without any discrimination or preference, any other Debt Service in accordance with the provisions of any other Contract or Parity Bond or resolution or indenture relating thereto. No deposit need be made in the Bond Payment Fund as 2018 Installment Payments if the amount in the Bond Payment Fund is at least equal to the amount of the 2018 Installment Payment due and payable on the next succeeding 2018 Installment Payment Date. All money in the Bond Payment Fund shall be used and withdrawn by the Trustee in accordance with the Indenture. (b) Reserve Funds for Parity Bonds and Contracts. On or before each Installment Payment Date or other date on which Debt Service is due on any Parity Bonds, the District shall, from the remaining moneys in the Tax Fund and, to the extent needed, the Revenue Fund, thereafter, without preference or priority, and in the event of any insufficiency of such moneys ratably without any discrimination or preference, transfer to the applicable trustee for the reserve funds and/or accounts, if any, as may have been established in connection with any Parity Bonds or Contracts, that sum, if any, necessary to restore such funds or accounts to an amount equal to the reserve requirement with respect thereto and to transfer to any insurer any amounts due pursuant to any agreement related to the repayment of draws under any reserve policy or other credit instrument funding a reserve requirement for any Parity Bonds or Contracts. (c) Surplus. Moneys on deposit in the Tax Fund or Revenue Fund not necessary to make any of the payments required above or as required by any other Contract or Parity Bond may be expended by the District at any time for any purpose permitted by law. Section 5.03 Additional Contracts and Parity Bonds. The District may, at any time, execute any Contract or issue any Parity Bonds, as the case may be, in accordance herewith, provided an Independent Financial Consultant or an Independent Certified Public Accountant shall render to and file with the District and the Trustee a written report certifying that Taxes and Net Revenues for any twelve (12) consecutive calendar months in the eighteen (18) calendar months immediately preceding the issuance of the additional Contracts or Parity Bonds adjusted as set forth below are at least equal to 125% of Debt Service (including for purposes of such calculation the obligation of the District to repay costs related to any surety bond, reserve credit facility or other reserve fund funding instrument), assuming such additional Contracts had been executed or additional Parity Bonds had been issued at the beginning of such twelve-month period. When the 1996 Certificates are no longer Outstanding, then the Interest Subsidy Payments will be deducted from Net Revenues for purposes of the coverage calculations of this Section. For purposes of calculating Net Revenues as set forth in the preceding paragraph, adjustments to the computations of Net Revenues may be made for the following: (1) any change in service charges which has been adopted subsequent to the commencement of the twelve-month period but prior to the date of issuance or execution of the additional Parity Bonds or Contracts; 13 (2) customers added to the Water System subsequent to the commencement of the twelve-month period but prior to the date of issuance or execution of the additional Parity Bonds or Contracts; (3) the estimated change in Net Revenues which will result from the connection of existing residences or businesses to the Water System within one year following completion of any project to be funded or system to be acquired from the proceeds of such additional Parity Bonds or Contracts; and (4) the estimated change in Net Revenues which will result from services provided under any long-term, guaranteed contract that extends for the life of the additional Parity Bonds or Contracts if entered into subsequent to the commencement of the twelve-month period but prior to the date of issuance or execution of the additional Parity Bonds or Contracts. Notwithstanding the foregoing, Parity Bonds issued or Contracts executed to refund Parity Bonds or Contracts may be delivered without satisfying the conditions set forth above if Debt Service in each Fiscal Year after the Fiscal Year in which such Parity Bonds are issued or Contracts executed is not greater than Debt Service would have been in each such Fiscal Year prior to the issuance of such Parity Bonds or execution of such Contracts. In addition to the foregoing, in the event any amounts owed to any insurer are past due and owing, such insurer must provide written consent to the issuance of any Parity Bonds or the execution of any additional Contracts. Section 5.04 Investments. All moneys held by the District in the Tax Fund and Revenue Fund shall be invested in the manner authorized by the District’s financial policies or as otherwise permitted by law. Investment earnings thereon shall remain on deposit in such fund, except as otherwise provided herein. ARTICLE VI COVENANTS OF THE DISTRICT Section 6.01 Compliance with Installment Purchase Agreement and Indenture. The District will punctually pay the 2018 Installment Payments in strict conformity with the terms hereof, and will faithfully observe and perform all the agreements, conditions, covenants and terms contained herein required to be observed and performed by it, and will not terminate the Installment Purchase Agreement for any cause including, without limiting the generality of the foregoing, any acts or circumstances that may constitute failure of consideration, destruction of or damage to the 2018 Project, commercial frustration of purpose, any change in the tax or other laws of the United States of America or of the State of California or any political subdivision of either or any failure of the Authority to observe or perform any agreement, condition, covenant or term contained herein required to be observed and performed by it, whether express or implied, or any duty, liability or obligation arising out of or connected herewith or the insolvency, or deemed insolvency, or bankruptcy or liquidation of the Authority or any force majeure, including acts of God, tempest, storm, earthquake, war, rebellion, riot, civil disorder, acts of public enemies, blockade or embargo, strikes, industrial disputes, lock outs, lack of transportation facilities, fire, explosion, or acts or regulations of governmental authorities. 14 The District will faithfully observe and perform all the agreements, conditions, covenants and terms contained in the Indenture required to be observed and performed by it, and it is expressly understood and agreed by and among the parties to this Installment Purchase Agreement and the Indenture that, subject to Section 10.06 hereunder, each of the agreements, conditions, covenants and terms contained in each such agreement is an essential and material term of the by obligation of the District to pay the Purchase Price pursuant to, and in accordance with, and as authorized under the Law and this Installment Purchase Agreement. The District will faithfully observe and perform all the agreements, conditions, covenants and terms required to be observed and performed by it pursuant to all outstanding Contracts and Parity Bonds as such may from time to time be executed or issued, as the case may be. Section 6.02 Against Encumbrances. The District will not make any pledge of or place any lien on Revenues or the moneys in the Revenue Fund or Taxes or moneys in the Tax Fund except as provided herein and in the Contracts and Parity Bonds. The District may at any time, or from time to time, issue evidences of indebtedness or incur other obligations for any lawful purpose which are payable from and secured by a pledge of and lien on Revenues or any moneys in the Revenue Fund or Taxes or moneys in the Tax Fund as may from time to time be deposited therein (as provided in Section 5.02) provided that (i) any such pledge and lien, which shall be on a parity with the pledge of and lien thereon provided herein, shall satisfy the requirements of Section 5.03 hereof; or (ii) such pledge and lien shall be subordinate in all respects to, the pledge of and lien thereon provided herein. Section 6.03 Against Sale or Other Disposition of Property. The District will not enter into any agreement or lease which impairs the operation of the Water System or any part thereof necessary to secure adequate Revenues for the payment of the 2018 Installment Payments, or which would otherwise impair the rights of the Authority hereunder or the operation of the Water System. Any real or personal property which has become nonoperative or which is not needed for the efficient and proper operation of the Water System, or any material or equipment which has become worn out, may be sold if such sale will not impair the ability of the District to pay the 2018 Installment Payments and if the proceeds of such sale are deposited in the Revenue Fund. Nothing herein shall restrict the ability of the District to sell any portion of the Water System if such portion is immediately repurchased by the District and if such arrangement cannot by its terms result in the purchaser of such portion of the Water System exercising any remedy which would deprive the District of or otherwise interfere with its right to own and operate such portion of the Water System. Section 6.04 Against Competitive Facilities. The District will not, to the extent permitted by law, acquire, construct, maintain or operate and will not, to the extent permitted by law and within the scope of its powers, permit any other public or private agency, corporation, district or political subdivision or any person whomsoever to acquire, construct, maintain or operate within the District any water system competitive with the Water System. Section 6.05 Tax Covenants. The District shall comply with the tax covenants set forth in Section 6.02 the Indenture and the Tax Certificate. Section 6.06 Maintenance and Operation of the Water System. The District will maintain and preserve the Water System in good repair and working order at all times and will operate the Water System in an efficient and economical manner and will pay all Operation and Maintenance Costs as they become due and payable. 15 Section 6.07 Payment of Claims. The District will pay and discharge any and all lawful claims for labor, materials or supplies which, if unpaid, might become a lien on the Revenues, Taxes or the funds or accounts created hereunder or under the Indenture or on any funds in the hands of the District pledged to pay the 2018 Installment Payments or to the Owners prior or superior to the lien of the 2018 Installment Payments or which might impair the security of the 2018 Installment Payments. Section 6.08 Compliance with Contracts. The District will comply with, keep, observe and perform all agreements, conditions, covenants and terms, express or implied, required to be performed by it contained in all contracts for the use of the Water System and all other contracts affecting or involving the Water System, to the extent that the District is a party thereto. Section 6.09 Insurance. (a) The District will procure and maintain such other insurance which it shall deem advisable or necessary to protect its interests and the interests of the Authority, which insurance shall afford protection in such amounts and against such risks (including damage to or destruction of the Water System) as are usually covered in connection with facilities similar to the Water System so long as such insurance is available from reputable insurance companies. In the event of any damage to or destruction of the Water System caused by the perils covered by such insurance, the Net Proceeds thereof shall be applied to the reconstruction, repair or replacement of the damaged or destroyed portion of the Water System. The District shall begin such reconstruction, repair or replacement promptly after such damage or destruction shall occur, and shall continue and properly complete such reconstruction, repair or replacement as expeditiously as possible, and shall pay out of such Net Proceeds all costs and expenses in connection with such reconstruction, repair or replacement so that the same shall be completed and the Water System shall be free and clear of all claims and liens. If such Net Proceeds exceed the costs of such reconstruction, repair or replacement portion of the Water System, and/or the cost of the construction of additions, betterments, extensions or improvements to the Water System, then the excess Net Proceeds shall be deposited in the Revenue Fund. If such Net Proceeds are sufficient to enable the District to retire all of the 2018 Bonds as well as all Parity Bonds and Contracts then remaining unpaid prior to their final respective due dates, the District may elect not to reconstruct, repair or replace the damaged or destroyed portion of the Water System, and/or not to construct other additions, betterments, extensions or improvements to the Water System; and thereupon Net Proceeds in an amount sufficient to retire all of the 2018 Bonds shall be transferred to the Trustee and deposited to the Bond Payment Fund. (b) The District will procure and maintain such other insurance as it shall deem advisable or necessary to protect its interests and the interests of the 2018 Bond Owners, which insurance shall afford protection in such amounts and against such risks as are usually covered in connection with municipal water systems similar to the Water System. (c) Any insurance required to be maintained by paragraph (a) above and, if the District determines to procure and maintain insurance pursuant to paragraph (b) above, such insurance, may be maintained under a self-insurance program so long as such self-insurance is maintained in the amounts and manner usually maintained in connection with water systems similar to the Water System and is, in the opinion of an accredited actuary, actuarially sound. Section 6.10 Accounting Records; Financial Statements and Other Reports. The District will keep appropriate accounting records in which complete and correct entries shall be made 16 of all transactions relating to the Water System, which records shall be available for inspection by the Authority and the Trustee at reasonable hours and under reasonable conditions. Section 6.11 Protection of Security and Rights of the Authority. The District will preserve and protect the security hereof and the rights of the Authority to the 2018 Installment Payments hereunder and will warrant and defend such rights against all claims and demands of all persons. Section 6.12 Payment of Taxes and Compliance with Governmental Regulations. The District will pay and discharge all taxes, assessments and other governmental charges which may hereafter be lawfully imposed upon the Water System, or any part thereof or upon the Revenues when the same shall become due. The District will duly observe and conform with all valid regulations and requirements of any governmental authority relative to the operation of the Water System, or any part thereof, but the District shall not be required to comply with any regulations or requirements so long as the validity or application thereof shall be contested in good faith. Section 6.13 Amount of Rates and Charges. To the fullest extent permitted by law, the District shall fix and prescribe, at the commencement of each Fiscal Year, rates and charges for the Water Service which will be at least sufficient to yield during each Fiscal Year Taxes and Net Revenues equal to one hundred twenty-five percent (125%) of the Debt Service (including for purposes of such calculation the obligation of the District to repay costs related to any surety bond, reserve credit facility or other reserve fund funding instrument) for such Fiscal Year. The District may make adjustments from time to time in such rates and charges and may make such classification thereof as it deems necessary, but shall not reduce the rates and charges then in effect unless the Taxes and Net Revenues from such reduced rates and charges will at all times be sufficient to meet the requirements of this section. When the 1996 Certificates are no longer Outstanding, then the Interest Subsidy Payments will be deducted from Net Revenues for purposes of the coverage calculations of this Section. Section 6.14 Collection of Rates and Charges. The District will have in effect at all times by-laws, rules and regulations requiring each customer to pay the rates and charges applicable to the Water Service to such land and providing for the billing thereof and for a due date and a delinquency date for each bill. In each case where such bill remains unpaid in whole or in part after it becomes delinquent, the District may discontinue such service from the Water System, and such service shall not thereafter be recommenced except in accordance with the District laws or rules and regulations governing such situations of delinquency. Section 6.15 Eminent Domain Proceeds. If all or any part of the Water System shall be taken by eminent domain proceedings, the Net Proceeds thereof shall be applied as follows: (a) If: (1) the District files with the Trustee a certificate showing: (i) the estimated loss of annual Net Revenues, if any, suffered or to be suffered by the District by reason of such eminent domain proceedings; (ii) a general description of the additions, betterments, extensions or improvements to the Water System proposed to be acquired and constructed by the District from such Net Proceeds; and (iii) an estimate of the additional annual Net Revenues to be derived from such additions, betterments, extensions or improvements; and (2) the District, on the basis of such certificate filed with the Trustee, determines that the estimated additional annual Net Revenues will sufficiently offset the estimated loss of annual Net Revenues resulting from such eminent domain proceedings so that the ability of the District to meet its obligations hereunder will not be substantially impaired (which determination shall be final and conclusive), then the District shall promptly proceed with the 17 acquisition and construction of such additions, betterments, extensions or improvements substantially in accordance with such certificate and such Net Proceeds shall be applied for the payment of the costs of such acquisition and construction, and any balance of such Net Proceeds not required by the District for such purpose shall be deposited in the Revenue Fund. (b) If the foregoing conditions are not met, then such Net Proceeds shall be applied by the District, in part, to the payment of the 2018 Installment Payments due hereunder in the same proportion which the aggregate unpaid principal balance of 2018 Bonds then bears to the aggregate unpaid principal amount of such 2018 Bonds and all Parity Bonds and Contracts. Section 6.16 Further Assurances. The District will adopt, deliver, execute and make any and all further assurances, instruments and resolutions as may be reasonably necessary or proper to carry out the intention or to facilitate the performance hereof and for the better assuring and confirming unto the Authority of the rights and benefits provided to it herein. Section 6.17 Continuing Disclosure. The District covenants and agrees that it will comply with and carry out all of the provisions of the Continuing Disclosure Agreement. Notwithstanding any other provision of this Installment Purchase Agreement, failure of the District to comply with the Continuing Disclosure Agreement shall not be considered an Event of Default; provided however, the Authority may (and, at the request of any participating underwriter or the Owners of at least 25% aggregate principal amount of Outstanding 2018 Bonds, shall, after receiving indemnification to its satisfaction) or any Owner may take such actions as may be necessary and appropriate, including seeking mandamus or specific performance by court order, to cause the District to comply with its obligations under this Section. ARTICLE VII PREPAYMENT OF 2018 INSTALLMENT PAYMENTS Section 7.01 Prepayment. The District shall have the right at any time to prepay the 2018 Installment Payments corresponding to principal of and interest on the 2018 Bonds and at any time and from time to time from any available funds on any date on or after ____________ 1, 20__; provided that any prepayment of a principal component of the 2018 Installment Payments to be applied to the redemption or defeasance of 2018 Bonds shall be in an amount sufficient to provide for such redemption or defeasance of 2018 Bonds in integral multiples of five thousand dollars ($5,000) and otherwise in accordance with the provisions of the Indenture and Section 9.01 hereof. The Authority shall accept such prepayments when the same are tendered by the District. With respect to prepayments of 2018 Installment Payments pursuant to this Section, the District may determine, by written direction to the Authority and the Trustee, which 2018 Installment Payments are to be prepaid, including the principal component of the 2018 Installment Payment due on each 2018 Installment Payment Date to be prepaid, plus accrued interest to the date of prepayment, and, subject to the provisions of this Section, the date on which each such prepayment is to be made; provided, however, the remaining 2018 Installment Payments shall be sufficient to make the scheduled Debt Service payments on the 2018 Bonds. Notwithstanding any such prepayment, the District shall not be relieved of its obligations hereunder, including its obligations under Article IV, until the Purchase Price shall have been fully paid (or provision for payment thereof shall have been provided to the written satisfaction of the Authority). 18 Section 7.02 Method of Prepayment. Before making any prepayment pursuant to Section 7.01, the District shall give written notice to the Authority and the Trustee specifying the date on which the prepayment will be paid, which date shall be not less than forty-five (45) nor more than sixty (60) days from the date such notice is given. ARTICLE VIII EVENTS OF DEFAULT AND REMEDIES OF THE AUTHORITY Section 8.01 Events of Default and Acceleration of Maturities. Each of the following shall constitute an Event of Default hereunder: (1) the District shall default in the due and punctual payment of any 2018 Installment Payment or any Contract or Parity Bond when and as the same shall become due and payable; (2) the District shall default in the performance of any of the other agreements or covenants required herein to be performed by it, and such default shall have continued for a period of sixty (60) days after the District shall have been given notice in writing of such default by the Authority or the Trustee; (3) the District shall file a petition or answer seeking arrangement or reorganization under the federal bankruptcy laws or any other applicable law of the United States of America or any state therein, or if a court of competent jurisdiction shall approve a petition filed with or without the consent of the District seeking arrangement or reorganization under the federal bankruptcy laws or any other applicable law of the United States of America or any state therein, or if under the provisions of any other law for the relief or aid of debtors any court of competent jurisdiction shall assume custody or control of the District or of the whole or any substantial part of its property; or (4) an occurrence and continuance of any event of default under and as defined in any Contract or Parity Bond; then and in each and every such case during the continuance of an Event of Default, the Trustee as assignee of the Authority, shall have the right at its option and without any further demand or notice, but subject in all respects to the provisions of Article VII of the Indenture to declare the entire principal amount of the unpaid 2018 Installment Payments and the accrued interest thereon to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable, anything contained herein to the contrary notwithstanding. This Section, however, is subject to the condition that if at any time after the entire principal amount of the unpaid 2018 Installment Payments and the accrued interest thereon shall have been so declared due and payable and before any judgment or decree for the payment of the moneys due shall have been obtained or entered the District shall deposit with the Authority a sum sufficient to pay the unpaid principal amount of the 2018 Installment Payments or the unpaid payment of any other Contract or Parity Bond referred to in clause (1) above due prior to such declaration and the accrued interest thereon, with interest on such overdue installments, at the rate or rates applicable to the remaining unpaid principal balance of the 2018 Installment Payments or such Contract or Parity Bond if paid in accordance with their terms, and the reasonable expenses of the Authority, and any and all other defaults known to the Authority (other than in the payment of the entire principal amount of the unpaid 2018 Installment Payments and the accrued 19 interest thereon due and payable solely by reason of such declaration) shall have been made good or cured to the satisfaction of the Authority or provision deemed by the Authority to be adequate shall have been made therefor, then by written notice to the District, or the Authority may rescind and annul such declaration and its consequences; but no such rescission and annulment shall extend to or shall affect any subsequent default or shall impair or exhaust any right or power consequent thereon. Section 8.02 Application of Funds Upon Acceleration. Upon the date of the declaration of acceleration as provided in Section 8.01, all Taxes and Revenues thereafter received by the District shall be applied in the following order -- First, to the payment, without preference or priority, and in the event of any insufficiency of such Revenues or Taxes ratably without any discrimination or preference, of the fees, costs and expenses of the Authority and Trustee, if any, in carrying out the provisions of this article, including reasonable compensation to their respective accountants and counsel; Second, other than Taxes, to the payment of the Operation and Maintenance Costs; and Third, to the payment of the entire principal amount of the unpaid 2018 Installment Payments and the unpaid principal amount of all Parity Bonds and Contracts and the accrued interest thereon, with interest on the overdue installments at the rate or rates of interest applicable to the 2018 Installment Payments and such Parity Bonds and Contracts if paid in accordance with their respective terms. Section 8.03 Other Remedies of the Authority. The Authority shall have the right: (a) by mandamus or other action or proceeding or suit at law or in equity to enforce its rights against the District or any director, officer or employee thereof, and to compel the District or any such director, officer or employee to perform and carry out its or his duties under the Law and the agreements and covenants required to be performed by it or him contained herein; (b) by suit in equity to enjoin any acts or things which are unlawful or violate the rights of the Authority; or (c) by suit in equity upon the happening of an Event of Default to require the District and its directors, officers and employees to account as the trustee of an express trust. Notwithstanding anything contained herein, the Authority shall have no security interest in or mortgage on the 2018 Project, the Water System or other assets of the District and no default hereunder shall result in the loss of the 2018 Project, the Water System, or other assets of the District. Section 8.04 Non-Waiver. Nothing in this article or in any other provision hereof shall affect or impair the obligation of the District, which is absolute and unconditional, to pay the 2018 Installment Payments to the Authority at the respective due dates or upon prepayment from the Net Revenues, the Revenue Fund, the Tax Fund and the other funds herein pledged for such payment, or shall affect or impair the right of the Authority, which is also absolute and unconditional, to institute suit to enforce such payment by virtue of the contract embodied herein. A waiver of any default or breach of duty or contract by the Authority shall not affect any subsequent default or breach of duty or contract or impair any rights or remedies on any such subsequent default or breach of duty or contract. No delay or omission by the Authority to exercise 20 any right or remedy accruing upon any default or breach of duty or contract shall impair any such right or remedy or shall be construed to be a waiver of any such default or breach of duty or contract or an acquiescence therein, and every right or remedy conferred upon the Authority by the Law or by this article may be enforced and exercised from time to time and as often as shall be deemed expedient by the Authority. If any action, proceeding or suit to enforce any right or exercise any remedy is abandoned or determined adversely to the Authority, the District and the Authority shall be restored to their former positions, rights and remedies as if such action, proceeding or suit had not been brought or taken. Section 8.05 Remedies Not Exclusive. No remedy herein conferred upon or reserved to the Authority is intended to be exclusive of any other remedy, and each such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing in law or in equity or by statute or otherwise and may be exercised without exhausting and without regard to any other remedy conferred by the Law or any other law. ARTICLE IX DISCHARGE OF OBLIGATIONS Section 9.01 Discharge of Obligations. When (a) all or any portion of the 2018 Installment Payments shall have become due and payable in accordance herewith or a written notice of the District to prepay all or any portion of the 2018 Installment Payments shall have been filed with the Trustee; and (b) there shall have been deposited with the Trustee at or prior to the 2018 Installment Payment Dates or date (or dates) specified for prepayment, in trust for the benefit of the Authority, or its assigns, and irrevocably appropriated and set aside to the payment of all or any portion of the 2018 Installment Payments, sufficient moneys and Defeasance Obligations, the principal of and interest on which when due will provide money sufficient to pay all principal, prepayment premium, if any, and interest of such 2018 Installment Payments to their respective 2018 Installment Payment Dates or prepayment date or dates as the case may be; and (c) provision shall have been made for paying all fees and expenses of the Trustee, then and in that event, if an opinion of Bond Counsel acceptable to the Trustee is filed with the Trustee to the effect that the actions authorized by and taken pursuant to this Article IX shall not adversely affect the exclusion from gross income for federal income tax purposes of interest on the 2018 Bonds, the right, title and interest of the Authority herein and the obligations of the District hereunder shall, with respect to all or such portion of the 2018 Installment Payments as have been so provided for, thereupon cease, terminate, become void and be completely discharged and satisfied (except for the right of the Trustee and the obligation of the District to have such moneys and such Defeasance Obligations applied to the payment of such 2018 Installment Payments). In such event, upon request of the District the Trustee shall cause an accounting for such period or periods as may be requested by the District to be prepared and filed with the District and shall execute and deliver to the District all such instruments as may be necessary or desirable to evidence such total or partial discharge and satisfaction, as the case may be, and, in the event of a total discharge and satisfaction, the Trustee shall pay over to the District, after payment of all amounts due the Trustee 21 pursuant to the Indenture, as an overpayment of 2018 Installment Payments, all such moneys or such Defeasance Obligations held by it pursuant hereto other than such moneys and such Defeasance Obligations, as are required for the payment or prepayment of the 2018 Installment Payments, which moneys and Defeasance Obligations shall continue to be held by the Trustee in trust for the payment of the 2018 Installment Payments and shall be applied by the Trustee to the payment of the 2018 Installment Payments of the District. ARTICLE X MISCELLANEOUS Section 10.01 Liability Limited of the District. Notwithstanding anything contained herein, the District shall not be required to advance any moneys derived from any source of income other than the Revenues, Taxes, the Revenue Fund, the Tax Fund and the other funds provided herein for the payment of amounts due hereunder or for the performance of any agreements or covenants required to be performed by it contained herein. The District may, however, advance moneys for any such purpose so long as such moneys are derived from a source legally available for such purpose and may be legally used by the District for such purpose. The obligation of the District to make the 2018 Installment Payments is a special obligation of the District payable solely from the Taxes, Net Revenues and amounts on deposit in the Revenue Fund and the Tax Fund and does not constitute a debt of the District or of the State of California or of any political subdivision thereof in contravention of any constitutional or statutory debt limitation or restriction. Section 10.02 Benefits of Installment Purchase Agreement Limited to Parties. Except as set forth in Section 10.07 below, nothing contained herein, expressed or implied, is intended to give to any person other than the District or the Authority any right, remedy or claim under or pursuant hereto, and any agreement or covenant required herein to be performed by or on behalf of the District or the Authority shall be for the sole and exclusive benefit of the other party. Section 10.03 Successor Is Deemed Included in all References to Predecessor. Whenever either the District or the Authority is named or referred to herein, such reference shall be deemed to include the successor to the powers, duties and functions that are presently vested in the District or the Authority, and all agreements and covenants required hereby to be performed by or on behalf of the District or the Authority shall bind and inure to the benefit of the respective successors thereof whether so expressed or not. Section 10.04 Waiver of Personal Liability. No Board member, officer or employee of the District shall be individually or personally liable for the payment of the 2018 Installment Payments, but nothing contained herein shall relieve any director, officer or employee of the District from the performance of any official duty provided by any applicable provisions of law or hereby. Section 10.05 Article and Section Headings, Gender and References. The headings or titles of the several articles and sections hereof and the table of contents appended hereto shall be solely for convenience of reference and shall not affect the meaning, construction or effect hereof, and words of any gender shall be deemed and construed to include all genders. All references herein to “Articles,” “Sections” and other subdivisions or clauses are to the corresponding articles, sections, subdivisions or clauses hereof and the words “hereby,” “herein,” “hereof,” “hereto,” “herewith” and other words of 22 similar import refer to the Installment Purchase Agreement as a whole and not to any particular article, section, subdivision or clause hereof. Section 10.06 Partial Invalidity. If any one or more of the agreements or covenants or portions thereof required hereby to be performed by or on the part of the District or the Authority shall be contrary to law, then such agreement or agreements, such covenant or covenants or such portions thereof shall be null and void and shall be deemed separable from the remaining agreements and covenants or portions thereof and shall in no way affect the validity hereof. The District and the Authority hereby declare that they would have executed the Installment Purchase Agreement, and each and every other article, section, paragraph, subdivision, sentence, clause and phrase hereof irrespective of the fact that any one or more articles, sections, paragraphs, subdivisions, sentences, clauses or phrases hereof or the application thereof to any person or circumstance may be held to be unconstitutional, unenforceable or invalid. Section 10.07 Assignment. The Installment Purchase Agreement and the Authority’s rights hereunder (except the rights of the Authority set forth in Section 10.13 hereof) shall be assigned by the Authority, to the Trustee as provided in the Indenture, to which assignment the District hereby acknowledges and consents. Section 10.08 Net Contract. The Installment Purchase Agreement shall be deemed and construed to be a net contract, and the District shall pay absolutely net during the term hereof the 2018 Installment Payments and all other payments required hereunder, free of any deductions and without abatement, diminution or set-off whatsoever. Section 10.09 California Law. This Installment Purchase Agreement shall be construed and governed in accordance with the laws of the State of California. Section 10.10 Notices. All written notices to be given hereunder shall be given by mail to the party entitled thereto at its address set forth below, or at such other address as such party may provide to the other party in writing from time to time, namely: If to the District: Otay Water District 2554 Sweetwater Springs Boulevard Spring Valley, CA 91978 Attention: General Manager If to the Authority: Otay Water District Financing Authority 2554 Sweetwater Springs Boulevard Spring Valley, CA 91978 Attention: Executive Director Section 10.11 Effective Date. The Installment Purchase Agreement shall become effective upon its execution and delivery, and shall terminate when the Purchase Price shall have been fully paid (or provision for the payment thereof shall have been made to the written satisfaction of the Authority). Section 10.12 Execution in Counterparts. The Installment Purchase Agreement may be executed in several counterparts, each of which shall be deemed an original, and all of which shall constitute but one and the same instrument. 23 Section 10.13 Indemnification of Authority. The District hereby agrees to indemnify and hold harmless the Authority and its assignee to the extent permitted by law, from and against all claims, advances, damages and losses, including legal fees and expenses, arising out of or in connection with the acceptance or the performance of its duties hereunder and under the Indenture provided that no indemnification will be made to the Authority, or its assignee, as applicable for its willful misconduct, negligence or breach of an obligation hereunder or under the Indenture. Section 10.14 Amendments Permitted. (a) This Installment Purchase Agreement and the rights and obligations of the Authority and the District and of the Owners of the 2018 Bonds and of the Trustee may be modified or amended at any time by an amendment hereto which shall become binding when the written consents of the Owners of a majority in aggregate principal amount of the 2018 Bonds then Outstanding, exclusive of 2018 Bonds disqualified as provided in Section 9.02 of the Indenture. No such modification or amendment shall (1) extend the stated maturities of the 2018 Bonds, or reduce the rate of interest represented thereby, or extend the time of payment of interest, or reduce the amount of principal represented thereby, or reduce any premium payable on the prepayment thereof, without the consent of the Owner of each Bond so affected, or (2) reduce the aforesaid percentage of Owners of 2018 Bonds whose consent is required for the execution of any amendment or modification of this Installment Purchase Agreement, or (3) modify any of the rights or obligations of the Trustee or the Authority without its written consent thereto. (b) This Installment Purchase Agreement and the rights and obligations of the Authority and the District and of the Owners of the 2018 Bonds may also be modified or amended at any time by an amendment hereto which shall become binding upon adoption, without the consent of the Owners of any 2018 Bonds, but only to the extent permitted by law and only for any one or more of the following purposes-- (1) to add to the covenants and agreements of the Authority or the District contained in this Installment Purchase Agreement other covenants and agreements thereafter to be observed or to surrender any right or power herein reserved to or conferred upon the Authority or the District, and which shall not adversely affect the interests of the Owners of the 2018 Bonds; (2) to cure, correct or supplement any ambiguous or defective provision contained in this Installment Purchase Agreement or in regard to questions arising under this Installment Purchase Agreement, as the Authority or the District may deem necessary or desirable and which shall not adversely affect the interests of the Owners of the 2018 Bonds; and (3) to make such other amendments or modifications as may be in the best interests of the Owners of the 2018 Bonds. No amendment without consent of the Owners may modify any of the rights or obligations of the Trustee without the written consent thereto. Section 10.15 Notice to Rating Agencies. Copies of all amendments to this Installment Purchase Agreement to be made pursuant to Section 10.14(a) shall be mailed by first class mail to the Rating Agencies with published ratings that were requested by the District at least 15 days prior to the effective date of such amendment. 24 25 IN WITNESS WHEREOF, the parties hereto have executed and attested this Installment Purchase Agreement by their officers thereunto duly authorized as of the day and year first written above. OTAY WATER DISTRICT By: Its: General Manager ATTEST: District Secretary OTAY WATER DISTRICT FINANCING AUTHORITY By: Its: Treasurer/Auditor ATTEST: Authority Secretary A-1 EXHIBIT A DESCRIPTION OF 2018 PROJECT The 2018 Project comprises all or a portion of the costs relating to the following capital improvements to the District’s Water System: PS - 870-2 Pump Station Replacement SR-11 Utility Relocations RecPL - 20-Inch, 680 Zone, Village 2 - Heritage/La Media Res - 1655-1 Reservoir 0.5 MG Heritage Road Bridge Replacement and Utility Relocation RecPL - 14-Inch, 927 Zone, Force Main Improvements RWCWRF Filtered Water Storage Tank Improvements PS - 1090-1 Pump Station Replacement (400 gpm) PL - 624/340 PRS, Paseo Ranchero and Otay Valley Road PL - 12-Inch Pipeline Replacement, 978 Zone, Vista Vereda RecPRS - 927/680 PRS Improvements, Otay Lakes Road 458/340 PRS Replacement, 1571 Melrose Ave PL - 8-inch, 850 Zone, Coronado Ave, Chestnut/Apple PL - 8-inch, 1004 Zone, Eucalyptus St, Coronado/Date/La Mesa Quarry Road Bridge Replacement and Utility Relocation PL - 12-inch, 711 Zone, Pas de Luz/Telegraph Canyon Rd PL - 12-Inch Pipeline Replacement, 803 PZ, Vista Grande PL - 12-Inch Pipeline Replacement, 978 Zone, Pence Dr/Vista Sierra Dr PS - Temporary Lower Otay Pump Station Redundancy Padre Dam - Otay Interconnection Dehesa Valley PL - 12-inch, 978 Zone, Hidden Mesa Road 458/340 PRS Replacement, 1505 Oleander Ave PS - 711-2 (PS 711-1 Replacement and Expansion) - 14,000 gpm Vista Diego Hydropneumatic Tank Replacement Res - 711-3 Reservoir Cover/Liner Replacement Rancho Jamul Hydropneumatic Tank Replacement In addition to the projects listed above, the District intends to acquire as part of the 2018 Project other improvements for the Water System including certain facilities required in connection with some of the above listed projects, pipelines, potable water reservoirs and pump stations, all as hereafter determined by the District and certified to the Trustee in accordance with Section 3.02(c) of the Installment Purchase Agreement to which this Exhibit A is attached. B-1 EXHIBIT B PURCHASE PRICE 1. The principal amount of payments to be made by the District hereunder is $__________. 2. The 2018 Installment Payments to be applied to the payment of the principal and interest on the 2018 Bonds are payable in the amounts and on the 2018 Installment Payment Dates as follows: 2018 Installment Payment Date (4 Business Days Prior to) Principal Interest Debt Service INDENTURE OF TRUST by and between MUFG UNION BANK, N.A., as Trustee and OTAY WATER DISTRICT FINANCING AUTHORITY, as Authority Relating to [$AMOUNT] OTAY WATER DISTRICT FINANCING AUTHORITY WATER REVENUE BONDS, SERIES 2018A Dated as of October 1, 2018 Attachment D TABLE OF CONTENTS Page i ARTICLE I DEFINITIONS; EQUAL SECURITY Section 1.01 Definitions ................................................................................................................. 1 Section 1.02 Equal Security ............................................................................................................ 9 ARTICLE II CONDITIONS AND TERMS OF BONDS Section 2.01 Preparation of Bonds ................................................................................................. 9 Section 2.02 Denominations; Dating .............................................................................................. 9 Section 2.03 Payment of Principal and Interest with Respect to Bonds ......................................... 9 Section 2.04 Form of Bonds ......................................................................................................... 10 Section 2.05 Execution of Bonds .................................................................................................. 10 Section 2.06 Transfer of Bonds .................................................................................................... 11 Section 2.07 Exchange of Bonds .................................................................................................. 11 Section 2.08 Bond Registration Books ......................................................................................... 11 Section 2.09 Bonds Mutilated, Lost, Destroyed or Stolen ............................................................ 11 Section 2.10 Book-Entry System .................................................................................................. 12 ARTICLE III PROCEEDS OF BONDS Section 3.01 Delivery of Bonds .................................................................................................... 14 Section 3.02 Establishment of Funds and Accounts and Deposit and Use of Proceeds of Bonds ....................................................................................................................... 15 ARTICLE IV REDEMPTION OF BONDS Section 4.01 Redemption of Bonds .............................................................................................. 15 Section 4.02 Selection of Bonds To Be Redeemed ...................................................................... 17 Section 4.03 Notice of Redemption .............................................................................................. 17 Section 4.04 Partial Redemption of Bonds ................................................................................... 18 Section 4.05 Effect of Redemption of Bonds ............................................................................... 18 ARTICLE V ASSIGNMENT AND APPLICATION OF REVENUES Section 5.01 Assignment and Pledge of Pledged Revenues ......................................................... 18 Section 5.02 Deposit of Pledged Revenues .................................................................................. 18 Section 5.03 Rebate Fund ............................................................................................................. 19 ARTICLE VI COVENANTS Section 6.01 Compliance With Indenture and Installment Purchase Agreement ......................... 21 Section 6.02 Tax Covenants ......................................................................................................... 21 Section 6.03 Prosecution and Defense of Suits ............................................................................ 22 Section 6.04 Accounting Records and Statements ....................................................................... 22 Section 6.05 Further Assurances .................................................................................................. 22 TABLE OF CONTENTS (continued) Page ii ARTICLE VII DEFAULT AND LIMITATIONS OF LIABILITY Section 7.01 Events of Default ..................................................................................................... 22 Section 7.02 Remedies Upon Event of Default ............................................................................ 23 Section 7.03 Application of Pledged Revenues and Other Funds After Default .......................... 23 Section 7.04 Trustee to Represent Bond Owners ......................................................................... 24 Section 7.05 Bond Owners’ Direction of Proceedings ................................................................. 25 Section 7.06 Limitation on Bond Owners’ Right to Sue .............................................................. 25 Section 7.07 Absolute Obligation of Authority ............................................................................ 25 Section 7.08 Termination of Proceedings ..................................................................................... 26 Section 7.09 Right of Mandamus; Remedies Not Exclusive ........................................................ 26 Section 7.10 No Waiver of Default .............................................................................................. 26 ARTICLE VIII THE TRUSTEE Section 8.01 Employment and Duties of the Trustee ................................................................... 26 Section 8.02 Removal and Resignation of the Trustee ................................................................. 26 Section 8.03 Compensation and Indemnification of the Trustee .................................................. 27 Section 8.04 Protection of the Trustee .......................................................................................... 27 ARTICLE IX AMENDMENT OF OR SUPPLEMENT TO THE INDENTURE Section 9.01 Amendment or Supplement by Consent of Owners ................................................ 30 Section 9.02 Disqualified Bonds .................................................................................................. 31 Section 9.03 Endorsement or Replacement of Bonds After Amendment or Supplement ............ 32 Section 9.04 Amendment or Supplement by Mutual Consent ...................................................... 32 ARTICLE X DEFEASANCE Section 10.01 Discharge of Bonds and Indenture ........................................................................... 32 Section 10.02 Unclaimed Money .................................................................................................... 33 ARTICLE XI MISCELLANEOUS Section 11.01 Benefits of the Indenture Limited to Parties ............................................................ 34 Section 11.02 Successor Deemed Included in All References to Predecessor ............................... 34 Section 11.03 Execution of Documents by Owners ....................................................................... 34 Section 11.04 Waiver of Personal Liability .................................................................................... 34 Section 11.05 Content of Certificates ............................................................................................. 34 Section 11.06 Notice by Mail ......................................................................................................... 35 Section 11.07 Funds ........................................................................................................................ 35 Section 11.08 Destruction of Bonds ............................................................................................... 35 Section 11.09 Deposits and Investments ........................................................................................ 35 Section 11.10 Article and Section Headings, Gender and References ........................................... 36 Section 11.11 Partial Invalidity ...................................................................................................... 36 TABLE OF CONTENTS (continued) Page iii Section 11.12 California Law ......................................................................................................... 37 Section 11.13 Notices ..................................................................................................................... 37 Section 11.14 Execution in Counterparts ....................................................................................... 37 Section 11.15 Effective Date .......................................................................................................... 37 Signatures ............................................................................................................................... S-1 EXHIBIT A FORM OF BOND .................................................................................................. A-1 INDENTURE OF TRUST This INDENTURE OF TRUST (the “Indenture”), dated as of October 1, 2018, by and between MUFG UNION BANK, N.A., a national banking association duly organized and existing under and by virtue of the laws to the United States of America (the “Trustee”) and OTAY WATER DISTRICT FINANCING AUTHORITY, a joint powers authority duly organized and existing under the laws of the State of California (the “Authority”); W I T N E S S E T H WHEREAS, the Authority desires to assign without recourse all its rights to receive the Pledged Revenues (as hereinafter defined) scheduled to be paid by the Otay Water District (“the District”) to the Authority under and pursuant to the Installment Purchase Agreement (as hereinafter defined); and WHEREAS, in consideration of such assignment and the execution and entering into of this Indenture, the Trustee has agreed to authenticate and deliver bonds (the “Bonds”) in an aggregate principal amount equal to [$AMOUNT]; and WHEREAS, all acts, conditions and things required by law to exist, to have happened and to have been performed precedent to and in connection with the execution and entering into of this Indenture do exist, have happened and have been performed in regular and due time, form and manner as required by law, and the parties hereto are now duly authorized to execute and enter into this Indenture; NOW, THEREFORE, IN CONSIDERATION OF THE PREMISES AND OF THE MUTUAL AGREEMENTS AND COVENANTS CONTAINED HEREIN AND FOR OTHER VALUABLE CONSIDERATION, THE PARTIES HERETO DO HEREBY AGREE AS FOLLOWS: ARTICLE I DEFINITIONS; EQUAL SECURITY Section 1.01 Definitions. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings ascribed to such terms in the Installment Purchase Agreement. Unless the context otherwise requires, the terms defined in this Section shall for all purposes hereof and of any amendment hereof or supplement hereto and of the Bonds and of any certificate, opinion, request or other document mentioned herein or therein have the meanings defined herein, the following definitions to be equally applicable to both the singular and plural forms of any of the terms defined herein: Authority. The term “Authority” means the Otay Water District Financing Authority, a joint exercise of powers authority duly organized and existing under and by virtue of the laws of the State of California. Authorized Denominations. The term “Authorized Denominations” means $5,000 or any integral multiple thereof. 2 Authorized Officer of the Authority. The term “Authorized Officer of the Authority” means, with respect to the Authority, its Board President, Board Vice President, Executive Director, Treasurer/Auditor or any other person designated as an Authorized Representative of the Authority by a Certificate of the Authority signed by its Board President, Board Vice President, Executive Officer or Treasurer/Auditor and filed with the Trustee Authorized Officer of the District. The term “Authorized Officer of the District” means, with respect to the District, its Board President, Board Vice President, General Manager, Chief Financial Officer or any other person designated as an Authorized Representative of the District by a Certificate of the District signed by its Board President, Board Vice President, Board Treasurer, General Manager or Chief Financial Officer and filed with the Trustee. Bond Counsel. The term “Bond Counsel” means any attorney at law or firm of attorneys selected by the District, of nationally-recognized standing in matters pertaining to the federal tax exemption of interest with respect to obligations of states and political subdivisions. Bond Payment Fund. The term “Bond Payment Fund” means the fund by that name established pursuant to Section 3.02. Bond Year. The term “Bond Year” means each twelve month period extending from September 2 in one calendar year to September 1 of the succeeding calendar year, except in the case of the initial Bond Year which shall be the period from the Closing Date of the Bonds to September 1, 2019, both dates inclusive. Bonds. The term “Bonds” means the Otay Water District Financing Authority Water Revenue Bonds, Series 2018A in the aggregate principal amount of [$AMOUNT]. Book-Entry System. The term “Book-Entry System” means the system maintained by the Securities Depository and described in Section 2.10 hereof. Business Day. The term “Business Day” means any day other than: (i) a Saturday or Sunday; or (ii) a day on which banks located in the city in which the Corporate Trust Office of the Trustee is located are authorized or required to remain closed; or (iii) a day on which The New York Stock Exchange is closed. Certificate; Request. The term “Certificate” or “Request” means: (i) with respect to the District, an instrument in writing signed on behalf of the District by an Authorized Officer, or by any other officer of the District duly authorized by the District’s Board of Directors to sign documents on its behalf with respect to the matters referred to therein; and (ii) with respect to the Authority, by an Authorized Officer of the Authority, or by any other officer of the Authority duly authorized by the Board of Directors of the Authority to sign documents on its behalf with respect to the matters referred to therein. Code. The term “Code” means the Internal Revenue Code of 1986, as amended, and the United States Treasury Regulations in effect with respect thereto. Defeasance Securities. The term “Defeasance Securities” means: (1) cash, (2) non-callable direct obligations of the United States of America (“Treasuries”), (3) securities fully and unconditionally guaranteed as to the timely payment of principal and interest by the United States of 3 America, (4) evidences of ownership of proportionate interests in future interest and principal payments on Treasuries held by a bank or trust company as custodian, under which the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor and the underlying Treasuries are not available to any person claiming through the custodian or to whom the custodian may be obligated, (5) pre-refunded municipal obligations rated “AAA” and “Aaa” by S&P and Moody’s, respectively, and (6) other securities eligible for “AAA” defeasance under then existing criteria of S&P. Delivery Date. The term “Delivery Date” means the date of the delivery of the Bonds to the initial purchaser thereof. Depository. The term “Depository” means DTC or another recognized securities depository selected by the Authority which maintains a book-entry system for the Bonds. District. The term “District” means the Otay Water District. DTC. The term “DTC” means The Depository Trust Company, New York, New York, and its successors and assigns. Event of Default. The term “Event of Default” means an Event of Default as defined in Section 8.01 of the Installment Purchase Agreement. Executive Director. The term “Executive Director” means the Executive Director of the Authority. Favorable Opinion of Bond Counsel. The term “Favorable Opinion of Bond Counsel” means an opinion of Bond Counsel addressed to the District and the Trustee to the effect that an action proposed to be taken is not prohibited by the laws of the State or this Indenture and will not adversely affect the exclusion from gross income for federal income tax purposes of interest on the Bonds. Fitch. The term “Fitch” means Fitch Ratings, Inc., its successors and assigns. General Manager. The term “General Manager” means the General Manager of the District. Hazardous Substances. The term “Hazardous Substances” means any hazardous substances, wastes, pollutants or contaminants now or hereafter included in such (or any similar) term under any federal, state, or local statute, code, ordinance or regulation now in effect or hereafter enacted or amended. Independent Certified Public Accountant. The term “Independent Certified Public Accountant” means any form of certified public accountants appointed by the Authority which is independent pursuant to the Statement on Auditing Standards No. I of the American Institute of Certified Public Accountants. Indenture. The term “Indenture” means this Indenture of Trust executed and entered into as of October 1, 2018 by and between the Trustee and the Authority, as originally executed and entered into and as it may from time to time be amended or supplemented in accordance herewith. Information Services. The term “Information Services” means the Municipal Securities Rulemaking Board; or, in accordance with then-current guidelines of the Securities and Exchange 4 Commission, such other services providing information with respect to called bonds as the District may specify in a Certificate to the Trustee and as the Trustee may select. Installment Payment Date. The term “Installment Payment Date” means each date on which Installment Payments are scheduled to be paid by the District pursuant to the Installment Purchase Agreement. Installment Payments. The term “Installment Payments” means the installment payments payable by the District pursuant to the Installment Purchase Agreement and in the amounts and at the times set forth in the Installment Purchase Agreement. Installment Purchase Agreement. The term “Installment Purchase Agreement” means the Installment Purchase Agreement, dated as of October 1, 2018, by and between the District and the Authority, as originally executed or as it may from time to time be amended of supplemented in accordance with its terms. Interest Account. The term “Interest Account means the account by that name established pursuant to Section 3.02 hereof. Interest Payment Date. The term “Interest Payment Date” means March 1 and September 1 of each year, commencing March 1, 2019. Issuance Costs. The term “Issuance Costs” means all the costs of issuing and delivering the Bonds, including, but not limited to, all printing and document preparation expenses in connection with this Indenture, the Installment Purchase Agreement, the Bonds and any preliminary official statement and final official statement pertaining to the Bonds, rating agency fees, CUSIP Service Bureau charges, market study fees, legal fees and expenses of counsel with the issuance and delivery of the Bonds, the initial fees and expenses of the Trustee and its counsel and other fees and expenses incurred in connection with the issuance and delivery of the Bonds, to the extent such fees and expenses are approved by the District. Issuance Costs Fund. The term “Issuance Costs Fund” means the fund by that name established pursuant to Section 3.02 hereof. Letter of Representations. The term “Letter of Representations” means the letter of the District delivered to and accepted by the Depository on or prior to delivery of the Bonds as book-entry certificates setting forth the basis on which the Depository serves as depository for such book-entry certificates, as originally executed or as it may be supplemented or revised or replaced by a letter from the District delivered to and accepted by the Depository. Maturity Date. The term “Maturity Date” means September 1 of each year in which principal payments are due on the Bonds commencing in 20__ and ending in 20__. Moody’s. The term “Moody’s” means Moody’s Investors Service, Inc., its successors and assigns, and, if such corporation is dissolved or liquidated or no longer performs the functions of a securities rating agency, “Moody’s” will be deemed to refer to any other nationally recognized securities rating agency (other than S&P) designated by the Authority by written notice to the Trustee. Nominee. The term “Nominee” means the nominee of the Depository, which may be the Depository, as determined from time to time pursuant to Section 2.10 hereof. 5 Outstanding. The term “Outstanding,” when used as of any particular time with reference to Bonds, means (subject to the provisions of Section 9.02) all Bonds except: (i) Bonds canceled by the Trustee or delivered to the Trustee for cancellation; (ii) Bonds paid or deemed to have been paid within the meaning of Section 10.01; and (iii) Bonds in lieu of or in substitution for which other Bonds shall have been authenticated and delivered by the Trustee pursuant to this Indenture. Owner. The term “Owner” or “Bond Owner” or “Owner of Bonds” or any similar term, when used with respect to the Bonds, means any person who shall be the registered owner of any Outstanding Bond. Participant. The term “Participant” means, with respect to DTC or another Securities Depository, a member of or participant in DTC or such other Securities Depository, respectively. Person. The term “Person” means a natural person or any legal entity. Permitted Investments. The term “Permitted Investments” means any of the following, if and to the extent permitted by law and by any policy guidelines promulgated by the Authority (provided that the Trustee shall be entitled to rely upon any investment directions from the Authority or District as conclusive certification to the Trustee that the investments described therein comply with any policy guidelines promulgated by the Authority and are so authorized under the laws of the State of California). The following obligations may be used as Permitted Investments for all purposes, including defeasance investments in refunding escrow agreements. (a) Cash; and (b) Obligations of, or obligations guaranteed as to principal and interest by, the U.S. or any agency or instrumentality thereof, when such obligations are backed by the full faith and credit of the U.S. including: U.S. treasury obligations; All direct or fully guaranteed obligations; Farmers Home Administration; General Services Administration; Guaranteed Title XI financing; Government National Mortgage Association (GNMA); and State and Local Government Series. Any security used for defeasance must provide for the timely payment of principal and interest and cannot be callable or prepayable prior to maturity or earlier redemption of the rated debt (excluding securities that do not have a fixed par value and/or whose terms do not promise a fixed dollar amount at maturity or call date). The following obligations may be used as Permitted Investments for all purposes other than defeasance investments in refunding escrow accounts. (c) Obligations of any of the following federal agencies which obligations represent the full faith and credit of the United States of America, including: Export-Import Bank; Rural Economic Community Development Administration; Federal Farm Credit Bureau; U.S. Maritime Administration; Small Business Administration; U.S. Department of Housing & Urban Development (PHAs); and Federal Housing Administration and Federal Financing Bank; 6 (d) Direct obligations of any of the following federal agencies which obligations are not fully guaranteed by the full faith and credit of the United States of America: Senior debt obligations issued by the Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC); Obligations of the Resolution Funding Corporation (REFCORP); Senior debt obligations of the Federal Home Loan Bank System; and Senior debt obligations of other Government Sponsored Agencies; (e) U.S. dollar denominated deposit accounts, federal funds and bankers’ acceptances with domestic commercial banks which may include the Trustee and its affiliates which (i) have a rating on their short term certificates of deposit on the date of purchase of “P- 1” by Moody’s and “A-1” by S&P and maturing not more than 360 calendar days after the date of purchase; or (ii) are collateralized by Permitted Investments described in clause (b) above for amounts in excess of FDIC insurance. (Ratings on holding companies are not considered as the rating of the bank); (f) Commercial paper which is rated at the time of purchase in the single highest classification, “P-1” by Moody’s or “A-1” by S&P and which matures not more than 270 calendar days after the date of purchase; (g) Investments in a money market fund rated “AAm”, “AAAm” or “AAAm-G” or better by S&P, excluding funds with a floating net asset value but including such funds for which the Trustee, its affiliates or subsidiaries provide investment advisory or other management services or for which the Trustee or an affiliate of the Trustee serves as investment administrator, shareholder servicing agent, and/or custodian or subcustodian, notwithstanding that (i) the Trustee or an affiliate of the Trustee receives and retains a fee for services provided to the fund, (ii) the Trustee collects fees for services rendered pursuant to this Indenture, which fees are separate from the fees received from such funds, and (iii) services performed for such funds and pursuant to this Indenture may at times duplicate those provided to such funds by the Trustee or an affiliate of the Trustee; (h) Pre-refunded Municipal Obligations defined as follows: any bonds or other obligations of any state of the United States of America or of any agency, instrumentality or local governmental unit of any such state which are not callable at the option of the obligor prior to maturity or as to which irrevocable instructions have been given by the obligor to call on the date specified in the notice: (1) which are rated, based on an irrevocable escrow account or fund (the “escrow”), in the highest rating category of Moody’s or S&P or any successors thereto; or (2) (i) which are fully secured as to principal and interest and redemption premium, if any, by an escrow consisting only of cash or obligations described in paragraph (b) above, which escrow may be applied only to the payment of such principal and interest and redemption premium, if any, on such bonds or other obligations on the maturity date or dates thereof or the specified redemption date or dates pursuant to such irrevocable instructions, as appropriate, and (ii) which escrow is sufficient, as verified by a nationally recognized independent certified public accountant, to pay principal and interest and redemption 7 premium, if any, on the bonds or other obligations described in this paragraph on the maturity date or dates specified in the irrevocable instructions referred to above, as appropriate; (i) Municipal Obligations rated “Aaa/AAA” or general obligations of States with a rating of “A2/A” or higher by both Moody’s and S&P; (j) Investment Agreements (supported by appropriate opinions of counsel); (k) the Local Agency Investment Fund of the State, created pursuant to Section 16429.1 of the California Government Code, to the extent the Trustee is authorized to register such investment in its name; (l) Local Government Investment Pools (LGIP). Shares of beneficial interest issued by a joint powers authority organized pursuant to Government Code §6509.7. To be eligible for purchase, the pool must meet the requirements of CGC §53601(p); and (m) Certificates of deposit insured by the Federal Deposit Insurance Corporation. The value of the above investments shall be determined as follows: (a) For the purpose of determining the amount in any fund, all Permitted Investments credited to such fund shall be valued at fair market value; (b) As to certificates of deposit and bankers’ acceptances: the face amount thereof, plus. accrued interest thereon; and (c) As to any investment not specified above: the value thereof established by prior agreement among the Authority and the Trustee. Pledged Revenues. The term “Pledged Revenues” means amounts received by the Authority pursuant to or with respect to the Installment Purchase Agreement (other than payments related to the indemnification of the Authority) and all interest or gains derived from the investment of amounts in any of the funds or accounts established hereunder. Principal Account. The term “Principal Account” means the account by that name established pursuant to Section 3.02 hereof. Principal Corporate Trust Office. The term “Principal Corporate Trust Office” means the principal corporate trust office of the Trustee in Los Angeles, California, or such other office as the Trustee may from time to time designate in writing to the District, the Authority and the Owners, except that with respect to presentation of Bonds for payment or for registration of transfer and exchange such term shall mean the office or agency of the Trustee at which, at any particular time, its corporate trust agency business shall be conducted. Project. The term “Project” has the meaning given in the Installment Purchase Agreement. Rating Agencies. The term Rating Agencies means S&P or Moody’s, or both, as applicable, so long as such entity maintains a rating on the Bonds which was obtained at the request of the District. 8 Rebate Fund. The term “Rebate Fund” means the fund by that name established and held by the Trustee pursuant to Section 3.02 hereof. Record Date. The term “Record Date” means the fifteenth (15th) day of the month immediately preceding an Interest Payment Date whether or not such day is a Business Day. Redemption Account. The term “Redemption Account” means the account by that name established pursuant to Section 3.02. Redemption Price. The term “Redemption Price” means, with respect to any Bond (or portion thereof), the principal amount with respect to such Bond (or portion) plus the applicable premium, if any, payable upon redemption thereof pursuant to the provisions of such Bond and this Indenture. Securities Depository. The term “Securities Depository” means DTC or, if applicable, any successor securities depository appointed pursuant to Section 2.10 hereof. Sinking Account. The term “Sinking Account” means the account established pursuant to section 3.02 hereof. S&P. The term “S&P” means S&P Global Ratings, a Standard & Poor’s Financial Services, LLC business, its successors and assigns, and, if such corporation is dissolved or liquidated or no longer performs the functions of a securities rating agency, “S&P” will be deemed to refer to any other nationally recognized securities rating agency (other than Moody’s) designated by the Authority by written notice to the Trustee. State. The term “State” means the State of California. Statement of the Authority or the District. The term “Statement of the Authority or the District” means a statement signed by or on behalf of: (i) the Authority by an Authorized Officer; or (ii) the District by an Authorized Officer. Tax Certificate. The term “Tax Certificate” means the Tax Certificate dated the date of initial issuance of the Bonds, concerning certain matters pertaining to the use and investment of proceeds of the Bonds executed by and delivered to the District on the date of execution and delivery of the Bonds, including any and all exhibits attached thereto. Term Bonds. The term “Term Bonds” means the Bonds maturing on September 1, 20__ and and September 1, 20__ which are subject to mandatory sinking fund redemption. Trustee. The term “Trustee” means MUFG Union Bank, N.A., a national banking association, duly organized and existing under and by virtue of the laws of the United States, having a principal corporate trust office in Los Angeles, California, or its successor as Trustee hereunder. 2018 Project Fund. The term “2018 Project Fund” means the fund by that name established by the District in accordance with the Installment Purchase Agreement. Written Consent of the Authority or the District; Written Order of the Authority or the District; Written Request of the Authority or the District; Written Requisition of the Authority or the District. The terms “Written Consent of the Authority or the District,” “Written Order of the Authority or the District,” “Written Request of the Authority or the District,” and “Written Requisition of the Authority 9 or the District” mean, respectively, a written consent, order, request or requisition signed by or on behalf of: (i) the Authority by an Authorized Officer; or (ii) the District by an Authorized Officer. Section 1.02 Equal Security. In consideration of the acceptance of the Bonds by the Owners, the Indenture shall be deemed to be and shall constitute a contract between the Trustee and the Owners to secure the full and final payment of the interest and principal and redemption premiums, if any, on the Bonds, subject to the agreements, conditions, covenants and terms contained herein, including without limitation the terms included in Article VIII hereof; and all agreements, conditions, covenants and terms contained herein required to be observed or performed by or on behalf of the Trustee shall be for the equal and proportionate benefit, protection and security of all Owners without distinction, preference or priority as to benefit, protection or security of any Bonds over any other Bonds by reason of the number or date thereof or the time of sale, execution or delivery thereof or otherwise for any cause whatsoever, except as expressly provided herein or therein. ARTICLE II CONDITIONS AND TERMS OF BONDS Section 2.01 Preparation of Bonds. The Trustee is hereby authorized to authenticate and deliver the Bonds, to be denominated “Otay Water District Financing Authority Revenue Bonds, Series 2018A” in an aggregate principal amount of [$AMOUNT]. Section 2.02 Denominations; Dating. The Bonds shall be prepared in the form of fully registered Bonds in Authorized Denominations. The Bonds shall be dated the initial date of delivery thereof. Section 2.03 Payment of Principal and Interest with Respect to Bonds. (a) Bonds. Bonds shall become payable on September 1 of each of the years in the principal amounts, and shall bear interest at the rates, set forth below: Maturity Date (September 1) Principal Amount Interest Rate 10 (b) Amounts Due. The principal of each Bond shall be paid at its Maturity Date or earlier redemption date at its Redemption Price upon surrender of each Bond to be paid at the Principal Corporate Trust Office of the Trustee. (c) Payment of Interest. Interest on the Bonds shall be paid on each Interest Payment Date and redemption date and on the Maturity Date therefor. However, if, as shown by the records of the Trustee, interest on the Bonds is in default, Bonds issued in exchange for Bonds surrendered for registration of transfer or exchange shall bear interest from the date to which interest has been paid in full on the Bonds so surrendered or, if no interest has been paid on the Bonds, from the date thereof. (d) Interest Accrual. Interest on the Bonds shall accrue on the basis of a 360-day year based on twelve 30-day months. (e) Method and Place of Payment. The principal of and premium, if any, and interest on the Bonds shall be payable in lawful money of the United States of America. Such amounts shall be paid by the Trustee on the applicable payment dates to DTC in accordance with the provisions of Section 2.10(d) hereof. If the Bonds are no longer held in book-entry form then payments due on each Interest Payment Date shall be made by check mailed by the Trustee to the respective Owners thereof at their addresses as they appear as of the close of business on the applicable Record Date in the registration books kept by the Trustee, except that in the case of an Owner of $1,000,000 or more in aggregate principal amount of Bonds, upon the written request of such Owner to the Trustee at least two Business Days before the Record Date, specifying the account or accounts in the United States to which such payment shall be made, such payments shall be made by wire transfer of immediately available funds on the applicable payment date following such Record Date. Any request referred to in the preceding sentence shall remain in effect until revoked or revised by such Owner by an instrument in writing delivered to the Trustee. Principal and interest will be paid in money of the United States that at the time of payment is legal tender for payment of public and private debts or by checks or wire transfers payable in such money. Section 2.04 Form of Bonds. The Bonds and the form of assignment to appear thereon shall be in substantially the form set forth in Exhibit A hereto with necessary or appropriate variations, omissions and insertions as permitted or required by this Indenture. Section 2.05 Execution of Bonds. The Bonds shall be executed in the name and on behalf of the Authority with the manual or facsimile signature of its President, attested by the manual or facsimile signature of its Secretary. The Bonds shall then be delivered to the Trustee for authentication by it. In case any of the officers who shall have signed or attested any of the Bonds shall cease to be such officer or officers of the Authority before the Bonds so signed or attested shall have been authenticated or delivered by the Trustee, or issued by the Authority, such Bonds may nevertheless be authenticated, delivered and issued and, upon such authentication, delivery and issue, shall be as binding upon the Authority as though those who signed and attested the same had continued to be such officers of the Authority, and also any Bonds may be signed and attested on behalf of the Authority by such persons as at the actual date of execution of such Bonds shall be the proper officers of the Authority although at the nominal date of such Bonds any such person shall not have been such officer of the Authority. Only such of the Bonds as shall bear thereon a certificate of authentication substantially in the form set forth in Exhibit A hereto, manually executed by the Trustee, shall be valid or obligatory for 11 any purpose or entitled to the benefits of this Indenture, and such certificate of or on behalf of the Trustee shall be conclusive evidence that the Bonds so authenticated have been duly executed, authenticated and delivered hereunder and are entitled to the benefits of this Indenture. Section 2.06 Transfer of Bonds. In the event that the Bonds are no longer held in book- entry form, the following transfer and exchange provisions shall apply. Any Bond may, in accordance with its terms, be transferred, upon the books required to be kept pursuant to the provisions of Section 2.08, by the person in whose name it is registered, in person or by such person’s duly authorized attorney, upon surrender of such Bond for cancellation at the Principal Corporate Trust Office of the Trustee, accompanied by delivery of a duly executed written instrument of transfer in a form approved by the Trustee. Whenever any Bond or Bonds shall be surrendered for transfer, the Trustee shall authenticate and deliver a new Bond or Bonds of the same series and maturity, for a like aggregate principal amount and of authorized denomination or denominations. The Trustee may charge a sum for each new Bond authenticated and delivered upon any transfer. The Trustee may require the payment by any Bond Owner requesting any such transfer of any tax or other governmental charge required to be paid with respect to such transfer. Following any transfer of Bonds the Trustee shall cancel and destroy the Bonds it has received. Section 2.07 Exchange of Bonds. Bonds may be exchanged at the Principal Corporate Trust Office of the Trustee, for a like aggregate principal amount of Bonds of other authorized denominations of the same series and maturity. The Trustee may charge a sum for each new Bond authenticated and delivered upon any exchange except in the case of any exchange of temporary Bonds for definitive Bonds. The Trustee may 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. Following any exchange of Bonds, the Trustee shall cancel and destroy the Bonds it has received. The Trustee shall not be required to register the exchange or transfer pursuant to Section 2.06 hereof, of any Bond (i) within 15 days preceding selection of Bonds for redemption or (ii) selected for redemption. Section 2.08 Bond Registration Books. The Trustee will keep or cause to be kept, at the Principal Corporate Trust Office of the Trustee, sufficient books for the registration and transfer of the Bonds, which shall upon reasonable prior notice and at all reasonable times be open to inspection by the Authority or the District; and, upon presentation for such purpose, the Trustee shall, under such reasonable regulations as it may prescribe, register or transfer or cause to be registered or transferred, on said books, Bonds as hereinbefore provided. The person in whose name any Bond shall be registered shall be deemed the Owner thereof for all purposes hereof, and payment of or on account of the interest on and principal of and Redemption Price represented by such Bond shall be made only to or upon the order in writing of such registered Owner, which payments shall be valid and effectual to satisfy and discharge liability upon such Bond to the extent of the sum or sums so paid. Section 2.09 Bonds Mutilated, Lost, Destroyed or Stolen. If any Bond shall become mutilated, the Trustee shall authenticate and deliver a new Bond of like series, tenor, maturity and principal amount in exchange and substitution for the Bond so mutilated, but only upon surrender to the Trustee of the Bond so mutilated. 12 Every mutilated Bond so surrendered to the Trustee shall be canceled by it and destroyed. If any Bond shall be lost, destroyed or stolen, evidence of such loss, destruction or theft may be submitted to the Trustee, and, if such evidence is satisfactory to the Trustee and indemnity satisfactory to the Trustee shall be given indemnifying the Trustee, the Authority and the District, the Trustee, at the expense of the Bond Owner, shall authenticate and deliver a new Bond of like series, tenor and maturity, and numbered as the Trustee shall determine, in lieu of and in substitution for the Bond so lost, destroyed or stolen. The Trustee may require payment of a sum not exceeding the actual cost of preparing each new Bond executed under this Section and of the expenses which may be incurred by the Trustee under this Section. Any Bond executed and authenticated under the provisions of this Section in lieu of any Bond alleged to be lost, destroyed or stolen shall be equally and proportionately entitled to the benefits of this Indenture with all other Bonds secured by this Indenture. The Trustee shall not be required to treat both the original Bond and any replacement Bond as being Outstanding for the purpose of determining the principal amount of Bonds which may be executed hereunder or for the purpose of determining any percentage of Bonds Outstanding hereunder, but both the original and replacement Bond shall be treated as one and the same. Notwithstanding any other provision of this Section, in lieu of delivering a new Bond for a Bond which has been mutilated, lost, destroyed or stolen and which has matured or has been selected for redemption, the Trustee may make payment of such Bond upon receipt of indemnity satisfactory to the Trustee. Section 2.10 Book-Entry System. (a) Bonds shall be issued in fully registered form and shall be initially issued registered in the name of “Cede & Co.,” as nominee of The Depository Trust Company in accordance with this Section 2.10. The Bonds shall be evidenced by one bond maturing on each stated Maturity Date of Bonds. The Bonds may be assigned by the Trustee a distinctive number or letter and number, and a record of the same shall be maintained by the Trustee. Registered ownership of the Bonds, or any portion thereof, may not thereafter be transferred except as set forth in this Section 2.10. With respect to book-entry Bonds, the Authority and the Trustee shall have no responsibility or obligation to any Participant or to any person on behalf of which such a Participant holds an interest in such book-entry Bonds. Without limiting the immediately preceding sentence, the Authority and the Trustee shall have no responsibility or obligation with respect to: (i) the accuracy of the records of the Depository, the Nominee, or any Participant with respect to any ownership interest in book-entry Bonds; (ii) the delivery to any Participant or any other person, other than an Owner as shown in the Bond registration books, of any notice with respect to book-entry Bonds, including any notice of redemption; (iii) the selection by the Depository and its Participants of the beneficial interests in book-entry Bonds to be redeemed in the event the Authority redeems the Bonds in part; or (iv) the payment by the Depository or any Participant or any other person, of any amount with respect to principal, premium, if any, or interest with respect to book-entry Bonds. The Authority and the Trustee may treat and consider the person in whose name each book-entry Bond is registered in the Bond registration books as the absolute Owner of such book-entry Bond for the purpose of payment of principal, premium and interest on 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. The Trustee shall pay all principal, premium, if any, and interest on the Bonds only to or upon the order of the respective Owner, as shown in the Bond register, or his respective attorney duly authorized in writing, and all such payments shall be valid and effective to fully satisfy and discharge the Authority’s obligations with respect to payment of principal of, premium, if any, and interest evidenced and borne by the Bonds to the extent of the sum or sums so paid. No person other than an Owner, as shown in the Bond registration books, shall receive a Bond 13 evidencing the obligation to make payments of principal, premium, if any, and interest evidenced and borne by the Bonds. Upon delivery by the Depository to the Owner and the Trustee, of written notice to the effect that the Depository has determined to substitute a new nominee in place of the Nominee, and subject to the provisions herein with respect to Record Dates, the word Nominee in this Indenture shall refer to such nominee of the Depository. (b) Delivery of Letter of Representations. In order to qualify the book-entry Bonds for the Depository’s book-entry system, the Authority shall execute and deliver to the Depository, if required by the Depository, a Letter of Representations. The execution and delivery of a Letter of Representations shall not in any way impose upon the Authority or the Trustee any obligation whatsoever with respect to persons having interests in such book-entry Bonds other than the Owners, as shown on the Bond registration books. In addition to the execution and delivery of a Letter of Representations, the Authority and the Trustee shall take such other actions, not inconsistent with this Indenture, as are reasonably necessary to qualify Book-Entry Bonds for the Depository’s book-entry program. (c) Selection of Depository. In the event that: (i) the Depository determines not to continue to act as securities depository for book-entry Bonds; or (ii) the Authority determines that continuation of the book-entry system is not in the best interest of the beneficial owners of the Bonds or the Authority, then the Authority will discontinue the book-entry system with the Depository. If the Authority determines to replace the Depository with another qualified securities depository, the Authority shall prepare or direct the preparation of a new single, separate, fully registered Bond for each of the maturity dates of such book-entry Bonds, registered in the name of such successor or substitute qualified securities depository or its Nominee as provided in subsection (e) hereof. If the Authority fails to identify another qualified securities depository to replace the Depository, then the Bonds shall no longer be restricted to being registered in such Bond register in the name of the Nominee, but shall be registered in whatever name or names the Owners transferring or exchanging such Bonds shall designate, in accordance with the provisions of Sections 2.06 and 2.07 hereof. (d) Payments To Depository. Notwithstanding any other provision of this Indenture to the contrary, so long as all Outstanding Bonds are held in book-entry form and registered in the name of the Nominee, all payments with respect to principal, redemption premium, if any, and interest on such Bond and all notices with respect to such Bond shall be made and given, respectively to the Nominee, as provided in the Letter of Representations or as otherwise instructed by the Depository and agreed to by the Trustee notwithstanding any inconsistent provisions herein. (e) Transfer of Bonds to Substitute Depository. (i) The Bonds shall be initially authenticated and delivered as provided in Section 2.01 hereof. Registered ownership of such Bonds, or any portions thereof, may not thereafter be transferred except: (A) to any successor of DTC or its nominee, or of any substitute depository designated pursuant to clause (B) of subsection (i) of this subsection (“Substitute Depository”); provided that any successor of DTC or Substitute Depository shall be qualified under any applicable laws to provide the service proposed to be provided by it; (B) to any Substitute Depository, upon: (i) the resignation of DTC or its successor (or any Substitute Depository or its successor) from its functions as depository; or (ii) a 14 determination by the Authority that DTC (or its successor) is no longer able to carry out its functions as depository; provided that any such Substitute Depository shall be qualified under any applicable laws to provide the services proposed to be provided by it; or (C) to any person as provided below, upon: (i) the resignation of DTC or its successor (or any Substitute Depository or its successor) from its functions as depository, or; (ii) a determination by the Authority that DTC or its successor (or Substitute Depository or its successor) is no longer able to carry out its functions as depository. (ii) In the case of any transfer pursuant to clause (A) or clause (B) of subsection (i) of this subsection, upon receipt of all Outstanding Bonds by the Trustee, together with a written request of the Authority to the Trustee designating the Substitute Depository, a single new Bond, which the Authority shall prepare or cause to be prepared, shall be authenticated and delivered for each series and maturity of Bonds then Outstanding, registered in the name of such successor or such Substitute Depository or their Nominees, as the case may be, all as specified in such written request of the Authority. In the case of any transfer pursuant to clause (C) of subsection (i) of this subsection, upon receipt of all Outstanding Bonds by the Trustee, together with a written request of the Authority to the Trustee, new Bonds, which the Authority shall prepare or cause to be prepared, shall be authenticated and delivered in such denominations and registered in the names of such persons as are requested in such written request of the Authority, subject to the limitations of Section 2.01 hereof, provided that the Trustee shall not be required to deliver such new Bonds within a period of less than sixty (60) days from the date of receipt of such written request from the Authority. (iii) In the case of a partial redemption or an advance refunding of any Bonds evidencing a portion of the principal maturing in a particular year, DTC or its successor (or any Substitute Depository or its successor) shall make an appropriate notation on such Bonds indicating the date and amounts of such reduction in principal, all in accordance with the Letter of Representations. The Trustee shall not be liable for such Depository’s failure to make such notations or errors in making such notations. (iv) the Authority and the Trustee shall be entitled to treat the person in whose name any Bond is registered as the Owner thereof for all purposes of this Indenture and any applicable laws, notwithstanding any notice to the contrary received by the Trustee or the Authority; and the Authority and the Trustee shall not have responsibility for transmitting payments to, communicating with, notifying, or otherwise dealing with any beneficial owners of the Bonds. Neither the Authority nor the Trustee shall have any responsibility or obligation, legal or otherwise, to any such beneficial owners or to any other party, including DTC or its successor (or Substitute Depository or its successor), except to the Owner of any Bonds, and the Trustee may rely conclusively on its records as to the identity of the Owners of the Bonds. ARTICLE III PROCEEDS OF BONDS Section 3.01 Delivery of Bonds. The Trustee is hereby authorized to authenticate and deliver the Bonds to the purchaser thereof upon receipt of a Request of the Authority and upon receipt of the proceeds of sale thereof. 15 Section 3.02 Establishment of Funds and Accounts and Deposit and Use of Proceeds of Bonds. (a) There is hereby established with the Trustee the following funds and accounts for the Bonds: the Issuance Costs Fund and the Bond Payment Fund. Within the Bond Payment Fund there is hereby established with the Trustee an Interest Account, a Principal Account, a Sinking Account and, when required, a Redemption Account shall be established by the Trustee. The Rebate Fund shall be established by the Trustee when required. (b) Upon the receipt of payment for the Bonds to the Trustee in the amount of $__________ on the Delivery Date, the Authority will cause the Trustee to deposit the proceeds of sale thereof into a temporary account called the Proceeds Fund which the Trustee shall establish, maintain and hold in trust, and which shall be disbursed in full on the Delivery Date (whereupon said temporary account shall be closed) as follows: (i) Deposit into the Issuance Costs Fund, $_________ to pay Issuance Costs with respect to the Bonds; and (ii) Transfer $________ to the District for deposit to the 2018 Project Fund. (c) Issuance Costs shall be paid from amounts on deposit in the Issuance Costs Fund. The Trustee shall make such payments in the amounts, at the times, in the manner, and on the other terms and conditions set forth herein. No such payment shall be made until the Trustee shall have received a Written Requisition of the District or the Authority. Each such Written Requisition shall be sufficient evidence to the Trustee of the facts stated therein and the Trustee shall have no duty to confirm the accuracy of such facts. Upon the earlier of the receipt of a Certificate of the Authority to the effect that all Issuance Costs have been paid or the six month anniversary of the issuance of the Bonds, the Trustee shall transfer any remaining money in the Issuance Costs Fund to the Bond Payment Fund and the Issuance Costs Fund shall thereafter be closed. The Trustee may establish temporary funds or accounts to facilitate such transfers. ARTICLE IV REDEMPTION OF BONDS Section 4.01 Redemption of Bonds. (a) Optional Redemption. The Bonds maturing on and after September 1 20__ are subject to optional redemption, in whole or in part, on any date on and after September 1, 20__, from such maturities as are selected by the District in a Written Request of the District delivered to the Trustee at least 45 days (or such lesser number of days acceptable to the Trustee in its sole discretion) prior to such date, in integral multiples of $5,000, from any source of available funds provided to the Authority, at a Redemption Price equal to the principal amount of the Bonds to be redeemed, together with accrued interest to the date of redemption, without premium. (b) Mandatory Sinking Fund Redemption. (1) The Term Bonds maturing on September 1, 20__ (the “20__ Term Bonds”) shall be paid at maturity and are subject to mandatory sinking fund redemption, in part by lot, 16 from Sinking Account payments as set forth in the following schedule, at a redemption price equal to the principal amount thereof to be redeemed, together with interest accrued thereon to the date fixed for redemption, without premium; provided, however, that if some but not all of the 20__Term Bonds have been redeemed pursuant to the optional redemption provisions of this Indenture, the total amount of Sinking Account payments to be made subsequent to such redemption will be reduced in an amount equal to the principal amount of the 20__ Term Bonds so redeemed by reducing each such future Sinking Account payments on a pro rata basis (as nearly as practicable) in integral multiples of $5,000, as will be designated pursuant to written notice filed by the District with the Trustee: Redemption Date (September 1) Principal Amount * Final Maturity. (2) The Term Bonds maturing on September 1, 20__ (the “20__ Term Bonds”) shall be paid at maturity and are subject to mandatory sinking fund redemption, in part by lot, from Sinking Account payments as set forth in the following schedule, at a redemption price equal to the principal amount thereof to be redeemed, together with interest accrued thereon to the date fixed for redemption, without premium; provided, however, that if some but not all of the 20__Term Bonds have been redeemed pursuant to the optional redemption provisions of this Indenture, the total amount of Sinking Account payments to be made subsequent to such redemption will be reduced in an amount equal to the principal amount of the 20__ Term Bonds so redeemed by reducing each such future Sinking Account payments on a pro rata basis (as nearly as practicable) in integral multiples of $5,000, as will be designated pursuant to written notice filed by the District with the Trustee: Redemption Date (September 1) Principal Amount * Final Maturity. In lieu of such redemption, the Trustee may apply amounts in the Sinking Account to the purchase of Term Bonds at public or private sale for cancellation, as and when and at such prices (including brokerage and other charges, but excluding accrued interest, which is payable from the Interest Account) as may be directed by the District, except that the purchase price (exclusive of accrued interest) may not exceed the redemption price then applicable to the Term Bonds, as set forth in a Written Request of the District and subsequently cancelled or surrendered to the Trustee for 17 cancellation. If during the twelve-month period immediately preceding any August 15 on which a Sinking Account payment is due, the District has purchased Term Bonds and surrendered them to the Trustee for cancellation, the par amount of any Term Bonds so purchased will be credited towards and will reduce the principal amount of such Term Bonds required to be redeemed on the succeeding September 1. Section 4.02 Selection of Bonds To Be Redeemed. Whenever provision is made herein for the optional redemption of less than all of the Bonds, the Trustee will select the Bonds to be redeemed from all Bonds or such given portion of the Bonds not previously called for redemption, among maturities as directed by the District in a Written Request and within each maturity by lot. For purposes of such selection, the Trustee will treat each Bond as consisting of separate $5,000 portions and each such portion will be subject to redemption as if such portion were a separate Bond. Section 4.03 Notice of Redemption. The District shall notify the Trustee at least forty-five (45) days (or such lesser number of days acceptable to the Trustee in the sole discretion of the Trustee) prior to any optional redemption date for Bonds pursuant to Section 4.01. Notice of redemption shall be given by the Trustee, not less than thirty (30) nor more than sixty (60) days prior to the redemption date, (i) so long as the Bonds are held under the Book-Entry System to the Securities Depository electronically or by such method as is acceptable to the Securities Depository, (ii) if the Bonds are no longer held under the Book-Entry System, to the respective Owners of any Bonds designated for redemption at their addresses appearing on the bond registration books of the Trustee by first-class mail, and (iii) to the Information Services. Notice of redemption shall be given in the form and in accordance with the terms of this Indenture. Each such notice of redemption will state the date of notice, the redemption date, the place or places of redemption and the Redemption Price, will designate the maturities, CUSIP numbers, if any, and, in the case of Bonds to be redeemed in part only, the respective portions of the principal amount thereof to be redeemed, and, if the Bonds are no longer held in book-entry form and less than all of any such maturity is to be redeemed, the serial numbers of the Bonds of such maturity to be redeemed by giving the individual number of each Bond called for redemption or by stating that all Bonds between two stated numbers, both inclusive, have been called for redemption. Each such notice will also state that on said date there will become due and payable on each of said Bonds the Redemption Price thereof or of said specified portion of the principal thereof in the case of a Bond to be redeemed in part only, together with interest accrued with respect thereto to the redemption date, and that (provided that moneys for redemption have been deposited with the Trustee) from and after such redemption date interest thereon ceases to accrue, and will require that such Bond be then surrendered to the Trustee. Any failure to receive such notice or any defect in the notice or the delivery of such notice will not affect the validity of the redemption of any Bond. With respect to any notice of optional redemption of Bonds, such notice may state that such redemption shall be conditional upon the receipt by the Trustee on or prior to the date fixed for such redemption of moneys sufficient to pay the principal of, premium, if any, and interest on such Bonds to be redeemed and that, if such moneys shall not have been so received, said notice shall be of no force and effect and the Trustee shall not be required to redeem such Bonds. In the event that such notice of redemption contains such a condition and such 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 to whom, and in the manner in which the notice of redemption was given, that such moneys were not so received and that the redemption shall not take place. 18 Section 4.04 Partial Redemption of Bonds. Upon surrender of any Bond redeemed in part only, the Authority shall execute and the Trustee shall authenticate and deliver to the Owner thereof, at the expense of the District, a new Bond or Bonds of Authorized Denominations, and of the same maturity date and interest rate, equal in aggregate principal amount to the unredeemed portion of the Bond surrendered. Section 4.05 Effect of Redemption of Bonds. If notice of redemption having been duly given pursuant to Section 4.03 hereof, and moneys for payment of the Redemption Price of, together with interest accrued to the redemption date on, the Bonds (or portions thereof) so called for redemption is held by the Trustee, on the redemption date designated in such notice, the Bonds (or portions thereof) so called for redemption shall become due and payable at the Redemption Price specified in such notice together with interest accrued thereon to the date fixed for redemption, interest on the Bonds so called for redemption shall cease to accrue, such Bonds (or portions thereof) shall cease to be entitled to any benefit or security under the Indenture, and the Owners of such Bonds shall have no rights in respect thereof except to receive payment of the Redemption Price and accrued interest. Neither the failure to receive any notice nor any defect therein shall not affect the sufficiency of the proceedings of redemption. All Bonds redeemed pursuant to the provisions hereof shall be cancelled upon surrender thereof and destroyed. ARTICLE V ASSIGNMENT AND APPLICATION OF REVENUES Section 5.01 Assignment and Pledge of Pledged Revenues. The Authority, for good and valuable consideration, does hereby unconditionally grant, transfer, assign and irrevocably pledge to the Trustee, without recourse, the Pledged Revenues, amounts on deposit in the Bond Payment Fund and all its rights under the Installment Purchase Agreement (other than its right to indemnification pursuant to Section 10.13 thereof) to receive the Installment Payments and enforce the Installment Purchase Agreement upon an event of default thereunder for the benefit of the Owners of the Bonds, for the purpose of securing: (a) the payment of all sums due and owing to the Owners of the Bonds under the terms of the Indenture; and (b) the observance, performance and discharge of each agreement, condition, covenant and term of the District contained in the Installment Purchase Agreement, and the Trustee hereby accepts such assignment. All Installment Payments shall be paid directly by the District to the Trustee, and all Installment Payments received by the Trustee shall be held in trust by the Trustee under the terms hereof for the benefit of the District until deposited in the funds provided in Section 5.02, whereupon such money shall be held in trust in such funds by the Trustee for the benefit of the Owners. Section 5.02 Deposit of Pledged Revenues. The Trustee shall deposit all Pledged Revenues paid to it into the Bond Payment Fund and shall transfer such funds to the Interest Account, Principal Account, Sinking Account and the Redemption Account in the manner and at the times hereinafter provided. The Bond Payment Fund (and all accounts contained therein) shall be maintained so long as any Bonds are Outstanding. All moneys in the Bond Payment Fund (and the accounts contained therein) shall be disbursed only for the purposes and uses hereinafter authorized; provided. 19 (a) Interest Account. On or prior to each Interest Payment Date, the Trustee shall transfer to the Interest Account that amount of money necessary, together with other amounts on deposit therein, to pay the interest becoming due and payable on such Interest Payment Date. All money in the Interest Account shall be used and withdrawn by the Trustee solely for the purpose of paying the interest on the Bonds on their respective Interest Payment Dates. (b) Principal Account. On or prior to each maturity date (commencing on September 1, 20__), the Trustee shall transfer to the Principal Account that amount of money necessary, together with other amounts on deposit therein, to pay the principal becoming due and payable on such maturity date. All money in the Principal Account shall be used and withdrawn by the Trustee solely for the purpose of paying the principal on the Bonds on their respective maturities. Notwithstanding the foregoing, no principal payments shall be made on the Term Bonds from the Principal Account. (c) Sinking Account. On or prior to each date on which the Term Bonds are subject to mandatory sinking fund redemption, the Trustee shall transfer to the Sinking Account that amount of money representing the portion of the Pledged Revenues constituting the principal becoming due and payable on such date. All money in the Sinking Account shall be used and withdrawn by the Trustee solely for the purpose of paying the mandatory sinking fund redemption of the Term Bonds as they become due and payable. (d) Redemption Account. Any prepayments of 2018 Installment Payments paid to the Trustee pursuant to the Installment Purchase Agreement shall immediately be transferred to the Redemption Account. All money in the Redemption Account shall be used and withdrawn by the Trustee solely for the purpose of paying the interest and principal and redemption premiums, if any, on the Bonds to be redeemed on their respective optional or mandatory redemption dates. Section 5.03 Rebate Fund. (a) Establishment. The Trustee shall establish, when required, a separate fund designated the “Rebate Fund.” Absent an opinion of Bond Counsel that the exclusion from gross income for federal income tax purposes of interest on the Bonds will not be adversely affected, the Authority shall cause to be deposited in the Rebate Fund such amounts as are required to be deposited therein pursuant to this Section and the Tax Certificate. All money at any time deposited in the Rebate Fund shall be held by the Trustee in trust for payment to the United States Treasury. All amounts on deposit in the Rebate Fund shall be governed by this Section and the Tax Certificate for the Bonds, unless and to the extent that the Authority delivers to the Trustee an opinion of Bond Counsel that the exclusion from gross income for federal income tax purposes of interest on the Bonds will not be adversely affected if such requirements are not satisfied. (i) Computation. Within 55 days of the end of each Bond Year (as such term is defined in the Tax Certificate), the Authority shall calculate or cause to be calculated the amount of rebatable arbitrage, in accordance with Section 148(f)(2) of the Code and Section 1.148-3 of the Treasury Regulations (taking into account any applicable exceptions with respect to the computation of the rebatable arbitrage, described, if applicable, in the Tax Certificate (e.g., the temporary investments exception of Section 148(f)(4)(B) and the construction expenditure exception of Section 148(f)(4)(C) of the Code or Section 1.148-7(d) of the Treasury Regulations), and taking into account whether the election pursuant to Section 148(f)(4)(C)(vii) of the Code (the “1½% Penalty”) has been made), for this purpose treating the last day of the applicable Bond Year as a computation 20 date, within the meaning of Section 1.148-1(b) of the Treasury Regulations (the “Rebatable Arbitrage”). The Authority shall obtain expert advice as to the amount of the Rebatable Arbitrage to comply with this Section. (ii) Transfer. Within 55 days of the end of the fifth Bond Year, upon the written request of the Authority, an amount shall be deposited to the Rebate Fund by the Trustee from any Pledged Revenues legally available for such purpose (as specified by the Authority in the aforesaid written Request), if and to the extent required so that the balance in the Rebate Fund shall equal the amount of Rebatable Arbitrage so calculated in accordance with (i) of this Subsection (a). In the event that immediately following the transfer required by the previous sentence, the amount then on deposit to the credit of the Rebate Fund exceeds the amount required to be on deposit therein, upon written Request of the Authority, the Trustee shall withdraw the excess from the Rebate Fund and then credit the excess to the Bond Payment Fund. (iii) Payment to the Treasury. The Trustee shall pay, as directed by Request of the Authority, to the United States Treasury, out of amounts in the Rebate Fund, (A) not later than 60 days after the end of (X) the fifth Bond Year, and (Y) each applicable fifth Bond Year thereafter, an amount that, together with all previous rebate payments, is equal to at least 90% of the Rebatable Arbitrage calculated as of the end of such Bond Year; and (B) not later than 60 days after the payment of all the Bonds, an amount equal to 100% of the Rebatable Arbitrage calculated as of the date of such payment and any income attributable to the Rebatable Arbitrage determined to be due and payable, computed in accordance with Section 1.148-3 of the Treasury Regulations. In the event that, prior to the time of any payment required to be made from the Rebate Fund, the amount in the Rebate Fund is not sufficient to make such payment when such payment is due, the Authority shall calculate or cause to be calculated the amount of such deficiency and deposit an amount received from any legally available source equal to such deficiency prior to the time such payment is due. Each payment required to be made pursuant to this Subsection (a) shall be made to the Internal Revenue Service Center, Ogden, Utah 84201 on or before the date on which such payment is due, and shall be accompanied by an Internal Revenue Service Form 8038-T prepared by the Authority, or shall be made in such other manner as provided under the Code. (b) Disposition of Unexpended Funds. Any funds remaining in the Rebate Fund after redemption and payment in full of the Bonds and the payments described in Subsection (a)(iii) above being made may be withdrawn by the Authority upon written direction of the Authority to the Trustee and utilized in any manner by the Authority. (c) Survival of Defeasance. Notwithstanding anything in this Section to the contrary, the obligation to comply with the requirements of this Section shall survive the defeasance or payment in full of the Bonds. (d) Recordkeeping. The Authority shall retain records of all determinations made hereunder until six years after the complete retirement of the Bonds. 21 The Trustee shall not be responsible for calculating rebate amounts or for the adequacy or correctness or any rebate report or rebate calculations. The Trustee shall be deemed conclusively to have complied with the provisions of this Indenture and the Tax Certificate regarding calculation and payment of rebate if it follows the directions of the Authority and it shall have no independent duty to review or such calculations or enforce compliance with such rebate requirements. ARTICLE VI COVENANTS Section 6.01 Compliance With Indenture and Installment Purchase Agreement. The Authority will not execute and the Trustee will not authenticate or deliver any Bonds in any manner other than in accordance with the provisions hereof; and the Authority will not suffer or permit any default by it to occur hereunder, but will faithfully observe and perform all the agreements, conditions, covenants and terms contained herein required to be observed and performed by it. The Authority will faithfully observe and perform all the agreements, conditions, covenants and terms contained in the Installment Purchase Agreement required to be observed and performed by the Authority, and will enforce such agreements against the other party thereto in accordance with their terms. Section 6.02 Tax Covenants. Notwithstanding any other provision of this Indenture, absent an opinion of Bond Counsel that the exclusion from gross income of interest on Bonds will not be adversely affected for federal income tax purposes, the Authority covenants to comply with all applicable requirements of the Code necessary to preserve such exclusion from gross income and specifically covenants, without limiting the generality of the foregoing, as follows: (a) Private Activity. The Authority will take no action or refrain from taking any action or make any use of the proceeds of the Bonds or of any other moneys or property which would cause the Bonds to be “private activity bonds” within the meaning of Section 141 of the Code; (b) Arbitrage. The Authority will make no use of the proceeds of the Bonds or of any other amounts or property, regardless of the source, or take any action or refrain from taking any action which will cause the Bonds to be “arbitrage bonds” within the meaning of Section 148 of the Code; (c) Federal Guaranty. The Authority will make no use of the proceeds of the Bonds or take or omit to take any action that would cause the Bonds to be “federally guaranteed” within the meaning of Section 149(b) of the Code; (d) Information Reporting. The Authority will take or cause to be taken all necessary action to comply with the informational reporting requirement of Section 149(e) of the Code; (e) Hedge Bonds. The Authority will make no use of the proceeds of the Bonds or any other amounts or property, regardless of the source, or take any action or refrain from taking any action that would cause either the Bonds to be considered “hedge bonds” within the meaning of Section 149(g) of the Code unless the Authority takes all necessary action to assure compliance with the requirements of Section 149(g) of the Code to maintain the exclusion from gross income of interest on the Bonds for federal income tax purposes; and 22 (f) Miscellaneous. The Authority will take no action or refrain from taking any action inconsistent with its expectations stated in that certain Tax Certificate executed by the Authority in connection with each issuance of Bonds and will comply with the covenants and requirements stated therein and incorporated by reference herein. Section 6.03 Prosecution and Defense of Suits. The Authority will defend against every action, suit or other proceeding at any time brought against the Trustee, the Authority or any Owner upon any claim arising out of the receipt, deposit or disbursement of any of the Installment Payments or involving any rights or obligations of the Trustee, the Authority or any Owner hereunder; provided, that the Trustee, the Authority or any Owner at its, his or her election may appear in and defend any such action, suit or other proceeding. The Authority will indemnify and hold harmless the Trustee and the Owners against any and all liability claimed or asserted by any person arising out of any such receipt, deposit or disbursement, and will indemnify and hold harmless the Owners against any attorneys’ fees or other expenses which any of them may incur in connection with any litigation or otherwise in connection with the foregoing to which any of them may become a party in order to enforce their rights hereunder or under the Bonds; provided that such litigation shall be concluded favorably to such Owners’ contentions therein. Section 6.04 Accounting Records and Statements. The Trustee shall keep proper books of record and account in accordance with corporate trust industry standards in which complete and correct entries shall be made of all transactions made by the Trustee relating to the receipt, investment, disbursement, allocation and application of the Pledged Revenues and the proceeds of the Bonds. Such records shall be open to inspection by the Authority and by any Owner at any reasonable time during regular business hours on reasonable notice. Not later than the fifteenth (15th) day of each month, commencing on the first calendar month after the initial issuance of the Bonds, and continuing so long as any Bonds are Outstanding, the Trustee will furnish to the Authority and to the District a complete statement covering the receipts, deposits and disbursements of the funds held by the Trustee hereunder for the preceding month; provided that the Trustee shall not be obligated to provide an accounting for any fund or account that: (a) has a balance of $0.00; and (b) has not had any activity since the last reporting date. Section 6.05 Further Assurances. Whenever and so often as requested to do so by the Trustee or any Owner, the Authority will promptly execute and deliver, or cause to be executed and delivered, all such other and further assurances, documents or instruments and promptly do or cause to be done all such other and further things as may be necessary or reasonably required in order to further and more fully vest in the Trustee and the Owners the benefit, protection and security conferred, or intended to be conferred, upon them hereby. ARTICLE VII DEFAULT AND LIMITATIONS OF LIABILITY Section 7.01 Events of Default. The following events shall be Events of Default hereunder: (a) Default by the Authority in the due and punctual payment of the principal of any Bonds when and as the same shall become due and payable, whether at maturity as therein expressed, by proceedings for redemption, by acceleration, or otherwise. 23 (b) Default by the Authority in the due and punctual payment of any installment of interest on any Bonds when and as the same shall become due and payable. (c) Default by the Authority in the observance of any of the other covenants, agreements or conditions on its part in this Indenture or in the Bonds contained, if such default shall have continued for a period of thirty (30) days after written notice thereof, specifying such default and requiring the same to be remedied, shall have been given to the Authority by the Trustee or by the Owners of a majority in aggregate principal amount of Bonds Outstanding; provided, however, that if in the reasonable opinion of the Authority the default stated in the notice can be corrected, but not within such thirty (30) day period and corrective action is instituted by the Authority, within such thirty (30) day period and diligently pursued in good faith until the default is corrected such failure shall not become an Event of Default. (d) The Authority shall file a petition or answer seeking arrangement or reorganization under the federal bankruptcy laws or any other applicable law of the United States of America or any state therein, or if a court of competent jurisdiction shall approve a petition filed with or without the consent of the Authority seeking arrangement or reorganization under the federal bankruptcy laws or any other applicable law of the United States of America or any state therein, or if under the provisions of any other law for the relief or aid of debtors any court of competent jurisdiction shall assume custody or control of the Authority or of the whole or any substantial part of its property. (e) An event of default shall have occurred under the Installment Purchase Agreement. Section 7.02 Remedies Upon Event of Default. If any Event of Default shall occur, then, and in each and every such case during the continuance of such Event of Default, the Trustee may, and upon written direction of a majority of the Owners of the Bonds shall, declare the principal of all of the Bonds then Outstanding, and the interest accrued thereon, to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and payable, anything in this Indenture or in the Bonds contained to the contrary notwithstanding. Any such declaration is subject to the condition that if, at any time after such declaration and before any judgment or decree for the payment of the moneys due shall have been obtained or entered, the Authority shall deposit with the Trustee a sum sufficient to pay all the principal of and interest on the Bonds payment of which is overdue, with interest on such overdue principal at the rate borne by the respective Bonds to the extent permitted by law, and the reasonable charges and expenses of the Trustee, and any and all other Events of Default known to the Trustee (other than in the payment of principal of and interest on the Bonds due and payable solely by reason of such declaration) shall have been made good or cured to the satisfaction of the Trustee or provision deemed by the Trustee to be adequate shall have been made therefor, then, and in every such case the Trustee shall, on behalf of the Owners of all of the Bonds, rescind and annul such declaration and its consequences and waive such Event of Default; but no such rescission and annulment shall extend to or shall affect any subsequent Event of Default, or shall impair or exhaust any right or power consequent thereon. Section 7.03 Application of Pledged Revenues and Other Funds After Default. If an Event of Default shall occur and be continuing, all Pledged Revenues and any other funds then held or thereafter received by the Trustee under any of the provisions of this Indenture shall be applied by the Trustee as follows and in the following order: 24 (a) To the payment of any expenses necessary in the opinion of the Trustee to protect the interests of the Owners of the Bonds and payment of reasonable fees, charges and expenses of the Trustee (including reasonable fees and disbursements of its counsel) incurred in and about the performance of its powers and duties under this Indenture; (b) To the payment of the principal of and interest then due on the Bonds (upon presentation of the Bonds to be paid, and stamping or otherwise noting thereon of the payment if only partially paid, or surrender thereof if fully paid) in accordance with the provisions of this Indenture, in the following order of priority: First: To the payment to the persons entitled thereto of all interest then due in the order of the due date of such interest, and, if the amount available shall not be sufficient to pay in full any interest due on the same date, then to the payment thereof ratably, according to the amounts due thereon, to the persons entitled thereto, without any discrimination or preference; and Second: To the payment to the persons entitled thereto of the unpaid principal of any Bonds which shall have become due, whether at maturity or by acceleration or redemption, with interest on the overdue principal at the rate of two hundred (200) basis points above the interest rate per annum on such overdue principal, and, if the amount available shall not be sufficient to pay in full all the Bonds, together with such interest, then to the payment thereof ratably, according to the amounts of principal due on such date to the persons entitled thereto, without any discrimination or preference. After payment of reasonable expenses of the Trustee, the application of funds realized upon default shall be applied to the payment of expenses of the Authority or rebate only after the payment of past due and current debt service on the Bonds, any other amounts due and owing under the Installment Purchase Agreement. Section 7.04 Trustee to Represent Bond Owners. The Trustee is hereby irrevocably appointed (and the successive respective Owners of the Bonds, by taking and holding the same, shall be conclusively deemed to have so appointed the Trustee) as trustee and true and lawful attorney-in-fact of the Owners of the Bonds for the purpose of exercising and prosecuting on their behalf such rights and remedies as may be available to such Owners under the provisions of the Bonds or this Indenture and applicable provisions of any other law. Upon the occurrence and continuance of an Event of Default or other occasion giving rise to a right in the Trustee to represent the Bond Owners, the Trustee in its discretion may, and, subject to Section 7.11 hereof, upon the written request of the Owners of a majority in aggregate principal amount of the Bonds then Outstanding and upon being indemnified to its satisfaction therefor, shall proceed to protect or enforce its rights or the rights of such Owners by such appropriate action, suit, mandamus or other proceedings as it shall deem most effectual to protect and enforce any such right, at law or in equity, either for the specific performance of any covenant or agreement contained herein, or in aid of the execution of any power herein granted, or for the enforcement of any other appropriate legal or equitable right or remedy vested in the Trustee or in such Owners under the Bonds or this Indenture or any other law; and upon instituting such proceeding, the Trustee shall be entitled, as a matter of right, to the appointment of a receiver of the Pledged Revenues and other assets pledged under this Indenture, pending such proceedings. All rights of action under this Indenture or the Bonds or otherwise may be prosecuted and enforced by the Trustee without the possession of any of the Bonds or the production thereof in any proceeding relating thereto, and any such suit, action or proceeding instituted by the Trustee shall be brought in the name of the Trustee for the benefit and protection of all the Owners of such Bonds, subject to the provisions of this Indenture. 25 Notwithstanding anything contained herein, the Trustee shall have no security interest in or mortgage on the Project, any property of the District or other assets or property thereof and no default hereunder shall result in the loss of the Project, any property of the District or other assets or property thereof. Section 7.05 Bond Owners’ Direction of Proceedings. Subject to Section 7.11 hereof, anything in this Indenture to the contrary notwithstanding, the Owners of a majority in aggregate principal amount of the Bonds then Outstanding shall have the right, by an instrument or concurrent instruments in writing executed and delivered to the Trustee, and upon indemnification of the Trustee to its reasonable satisfaction, to direct the method of conduct in all remedial proceedings taken by the Trustee hereunder, provided that such direction shall not be otherwise than in accordance with law and the provisions of this Indenture, and that the Trustee shall have the right to decline to follow any such direction which in the opinion of the Trustee would be unjustly prejudicial to Bond Owners not parties to such direction. Section 7.06 Limitation on Bond Owners’ Right to Sue. No Owner of any Bonds shall have the right to institute any suit, action or proceeding at law or in equity, for the protection or enforcement of any right or remedy under this Indenture, the Installment Purchase Agreement or any other applicable law with respect to such Bonds, unless: (a) such Owners shall have given to the Trustee written notice of the occurrence of an Event of Default; (b) the Owners of a majority in aggregate principal amount of the Bonds then Outstanding shall have made written request upon the Trustee to exercise the powers hereinbefore granted or to institute such suit, action or proceeding in its own name; (c) such Owner or Owners shall have tendered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (d) the Trustee shall have failed to comply with such request for a period of sixty (60) days after such written request shall have been received by, and said tender of indemnity shall have been made to, the Trustee; (e) no direction inconsistent with such written request shall have been given to the Trustee during such sixty (60) day period by the Owners of a majority in aggregate principal amount of the Bonds then Outstanding; and (f) such suit, action or proceeding is instituted subject to this Indenture. Such notification, request, tender of indemnity and refusal or omission are hereby declared, in every case, to be conditions precedent to the exercise by any Owner of Bonds of any remedy hereunder or under law; it being understood and intended that no one or more Owners of Bonds shall have any right in any manner whatever by his or their action to affect, disturb or prejudice the security of this Indenture or the rights of any other Owners of Bonds, or to enforce any right under the Bonds, this Indenture, the Installment Purchase Agreement or other applicable law with respect to the Bonds, except in the manner herein provided, and that all proceedings at law or in equity to enforce any such right shall be instituted, had and maintained in the manner herein provided and for the benefit and protection of all Owners of the Outstanding Bonds, subject to the provisions of this Indenture. Section 7.07 Absolute Obligation of Authority. Nothing in Section 7.06 or in any other provision of this Indenture or in the Bonds contained shall affect or impair the obligation of the Authority, which is absolute and unconditional, to pay the principal of and interest on the Bonds to the respective Owners of the Bonds at their respective dates of maturity, or upon call for redemption, as herein provided, but only out of the Pledged Revenues and other assets herein pledged therefor, or affect or impair the right of such Owners, which is also absolute and unconditional, to enforce such payment by virtue of the contract embodied in the Bonds. 26 Section 7.08 Termination of Proceedings. In case any proceedings taken by the Trustee or any one or more Bond Owners on account of any Event of Default shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Trustee or the Bond Owners, then in every such case the Authority, the Trustee and the Bond Owners, subject to any determination in such proceedings, shall be restored to their former positions and rights hereunder, severally and respectively, and all rights, remedies, powers and duties of the Authority, the Trustee and the Bond Owners shall continue as though no such proceedings had been taken. Section 7.09 Right of Mandamus; Remedies Not Exclusive. Following an Event of Default, subject to Section 7.11 hereof, the Owners may, by mandamus or other suit or proceeding of law or in equity enforce any and all rights of the Owners hereunder. No remedy herein conferred upon or reserved to the Trustee or to the Owners of the Bonds is intended to be exclusive of any other remedy or remedies, and each and every such remedy, to the extent permitted by law, shall be cumulative and in addition to any other remedy given hereunder or now or hereafter existing at law or in equity or otherwise. Section 7.10 No Waiver of Default. No delay or omission of the Trustee or of any Owner of the Bonds to exercise any right or power arising upon the occurrence of any Event of Default shall impair any such right or power or shall be construed to be a waiver of any such Event of Default or an acquiescence therein; provided, however, that every power and remedy given by this Indenture to the Trustee or to the Owners of the Bonds may be exercised from time to time and as often as may be deemed expedient. ARTICLE VIII THE TRUSTEE Section 8.01 Employment and Duties of the Trustee. The Authority hereby appoints and employs the Trustee to receive, deposit and disburse the Pledged Revenues as provided herein, to prepare, authenticate, deliver, transfer, exchange and cancel the Bonds as provided herein, to pay the interest and principal and redemption premiums, if any, on the Bonds to the Owners thereof as provided herein, and to perform the other obligations contained herein; all in the manner provided herein and subject to the conditions and terms hereof. By executing and delivering the Indenture, the Trustee undertakes to perform such obligations (and only such obligations) as are specifically set forth herein, and no implied obligations shall be read herein against the Trustee. Section 8.02 Removal and Resignation of the Trustee. The Authority may at any time, as long as an Event of Default, or an event which with notice or passage of time or both would become an Event of Default, has not occurred and is continuing, and shall, after any breach by the Trustee hereunder, remove the Trustee initially a party hereto and any successor thereto by giving written notice of such removal to the Trustee, and by giving notice by mail in accordance with Section 11.06 of such removal to all Owners of Bonds, and the Trustee initially a party hereto and any successor thereto may at any time resign by giving written notice of such resignation to the Authority and the District and by giving notice by mail in accordance with Section 11.06 of such resignation to all Owners of Bonds. Upon giving any such notice of removal or upon receiving any such notice of resignation, the Authority shall promptly appoint a successor Trustee by an instrument in writing; provided, that in the event the Authority and the District do not appoint a successor Trustee within sixty (60) days following the giving of any such notice of removal or the receipt of any such notice of resignation, the removed or resigning Trustee may petition any appropriate court having jurisdiction 27 to appoint a successor Trustee. No removal, resignation or termination of the Trustee shall take effect until a successor trustee shall be appointed. Any successor Trustee shall be a bank, national banking association with trust powers or trust company doing business and having a principal corporate trust office in the United States of America, having (or if such bank, national banking association or trust company is a member of a bank holding company system, its bank holding company has) a combined capital, (exclusive of borrowed capital) and surplus of at least seventy-five million dollars ($75,000,000), unless the District consents to a lesser amount therefor, and shall be subject to supervision or examination by state or national authorities. If such bank, national banking association or trust company publishes a report of condition at least annually, pursuant to law or to the requirements of any supervising or examining authority above referred to, then for the purposes of this section the combined capital and surplus of such bank, national banking association or trust company shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. Any removal or resignation of a Trustee and appointment of a successor Trustee shall become effective only upon the acceptance of the appointment by the successor Trustee. Section 8.03 Compensation and Indemnification of the Trustee. The Authority shall from time to time, subject to any agreement then in effect with the Trustee, pay the Trustee reasonable compensation for its services and reimburse the Trustee for all its reasonable advances and expenditures hereunder, including, but not limited to, advances to and the reasonable fees and expenses of accountants, agents, appraisers, consultants, counsel or other experts employed by it in the observance and performance of its rights and obligations hereunder; provided, except as otherwise provided in Section 7.03 hereof, that the Trustee shall not have any lien for such compensation or reimbursement against any money held by it in any of the funds established hereunder, although the Trustee may take whatever legal actions are available to it directly against the Authority to recover such compensation or reimbursement. To the extent permitted by law, the Authority does hereby assume liability for, and agree to defend, indemnify, protect, save and keep harmless, the Trustee and its directors, officers and employees and its successors and assigns from and against any and all liabilities, obligations, losses, damages (including consequential damages incurred by others), taxes and impositions, penalties, fines, claims, actions, suits, costs and expenses and disbursements (including legal fees and expenses) of whatsoever kind and nature imposed in, asserted against or incurred or suffered by the Trustee or its directors, officers or employees or its successors and assigns in any way relating to or arising out of (i) the condition, management, maintenance or use of or from any work done in connection with the Water System by the District including, the use, storage, preserve, disposal or release of any Hazardous Substances in or about the Water System, (ii) any act of negligence of the District or of any of its agents, contractors, directors, employees, invitees, licensees or officers in connection with the Water System, (iii) the authorization of the payment to any costs or expenses of the acquisition and construction of the Project, or (iv) the exercise of any rights or obligations of the Trustee hereunder; provided, that no indemnification will be made for willful misconduct or negligence hereunder by the Trustee. The Trustee’s rights to immunities and protection from liability hereunder and its rights to payment of its fees and expenses shall survive its resignation or removal and the final payment or defeasance of the Bonds. Section 8.04 Protection of the Trustee. The Trustee shall be protected and indemnified as stated herein by the Authority and shall incur no liability in acting or proceeding in good faith upon any affidavit, bond, certificate, consent, notice, request, requisition, resolution, statement, telegram, electronic mail, facsimile, voucher, waiver or other paper or document which it shall in good faith believe to be genuine and to have been adopted, executed or delivered by the proper party or pursuant 28 to any of the provisions hereof, 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. The Trustee may consult with counsel, who may be counsel to the District, before being required to take any action under this Indenture with regard to legal questions arising hereunder, and the opinion of such counsel shall be full and complete authorization and protection in respect to any action taken or suffered by it hereunder in good faith in accordance therewith. The Trustee shall not be responsible for the sufficiency of the Installment Purchase Agreement or of the assignment made to it herein of all rights to receive the Pledged Revenues under the Installment Purchase Agreement, or of the title or value of the Project, and shall not be deemed to have knowledge of any Event of Default unless and until it shall have actual knowledge thereof or have received written notice thereof at its corporate trust office in Los Angeles, California. All recitals, warranties or representations contained therein are statements of the District, and the Trustee assumes no responsibility for their correctness, and the Trustee shall not be accountable for the use or application by the District, or any other party, of any funds which the Trustee properly releases to the District or which the District may otherwise receive from time to time. The Trustee makes no representation concerning, and has no responsibility for, the validity, genuineness, sufficiency, or performance by parties other than the Trustee of the Indenture, any Bond, or of any other paper or document, or for taking any action on them (except as specifically and expressly stated for the Trustee in the Indenture), or with respect to any obligation of the Authority or the District hereunder or for the sufficiency of any insurance on the Water System. Whenever in the observance or performance of its rights and obligations hereunder or under the Bonds, the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action hereunder, the Trustee may request a Certificate of the District and such matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a Certificate of the District, and such certificate shall be full warrant to the Trustee for any action taken or suffered under the provisions hereof upon the faith thereof, but in its discretion the Trustee may, in lieu thereof, accept other evidence of such matter or may require such additional evidence as to it may seem reasonable. The Trustee may 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 it were not a party hereto. The Trustee, either as principal or agent, may also engage in or be interested in any financial or other transaction with the Authority or the District, and may act as agent, depositary or trustee for any committee or body of Owners or of owners of obligations of the Authority or the District as freely as if it were not the Trustee hereunder. The Trustee shall not be answerable for the exercise of any of its rights hereunder or for the performance of any of its obligations hereunder or for anything whatsoever in connection with the funds established hereunder, except only for its own willful misconduct or negligence. No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that the repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. The Trustee shall, prior to an Event of Default, and after the curing or waiver of all Events of Default which may have occurred, perform such duties and only such duties as are specifically set forth 29 in the Indenture. The Trustee shall, during the existence of any Event of Default which has not been cured or waived, exercise such of the rights and powers vested in it by the Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. The Trustee shall not be responsible for monitoring the compliance of the District and the Authority with the covenants as set forth in Sections 5.03 and 6.02 hereof and Section 6.5 of the Installment Purchase Agreement and may conclusively rely on all written instructions and calculations of the District and the Authority with respect thereto; provided, the Trustee shall promptly comply with all such written instructions as provided in Sections 5.03 and 6.02. The Authority shall not be deemed to be an agent of the Trustee and the Trustee shall not be liable for the acts or omissions of the Authority in connection with the transactions contemplated hereby and by the Installment Purchase Agreement. The Trustee shall have no responsibility with respect to any information, statement or recital in any official statement, offering memorandum or any other disclosure material prepared or distributed with respect to the Bonds. Whenever in the administration of the trusts imposed upon it by this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a Certificate of the District, and such Certificate shall be full warrant to the Trustee for any action taken or suffered in good faith under the provisions of this Indenture in reliance upon such Certificate, but in its discretion the Trustee may, in lieu thereof, accept other evidence of such matter or may require such additional evidence as it may deem reasonable. The Trustee shall have the right to accept and act upon instructions, including funds transfer instructions (“Instructions”) given pursuant to this Indenture and delivered using Electronic Means (“Electronic Means” shall mean the following communications methods: e-mail, facsimile transmission, secure electronic transmission containing applicable authorization codes, passwords and/or authentication keys issued by the Trustee, or another method or system specified by the Trustee as available for use in connection with its services hereunder); provided, however, that the Authority and District shall provide to the Trustee an incumbency certificate listing officers with the authority to provide such Instructions (“Authorized Officers”) and containing specimen signatures of such Authorized Officers, which incumbency certificate shall be amended by the Authority and District whenever a person is to be added or deleted from the listing. If the Authority and District elect to give the Trustee Instructions using Electronic Means and the Trustee in its discretion elects to act upon such Instructions, the Trustee’s understanding of such Instructions shall be deemed controlling. The Authority and District understand and agrees that the Trustee cannot determine the identity of the actual sender of such Instructions and that the Trustee shall conclusively presume that directions that purport to have been sent by an Authorized Officer listed on the incumbency certificate provided to the Trustee have been sent by such Authorized Officer. The Authority and District shall be responsible for ensuring that only Authorized Officers transmit such Instructions to the Trustee and that the Authority and District and all Authorized Officers are solely responsible to safeguard the use and confidentiality of applicable user and authorization codes, passwords and/or authentication keys upon receipt by the Authority and District. The Trustee shall not be liable for any losses, costs or expenses arising directly or indirectly from the Trustee’s reliance upon and compliance with such Instructions notwithstanding 30 such directions conflict or are inconsistent with a subsequent written instruction. The Authority and District agree: (i) to assume all risks arising out of the use of Electronic Means to submit Instructions to the Trustee, including without limitation the risk of the Trustee acting on unauthorized Instructions, and the risk of interception and misuse by third parties; (ii) that it is fully informed of the protections and risks associated with the various methods of transmitting Instructions to the Trustee and that there may be more secure methods of transmitting Instructions than the method(s) selected by the Authority and District; (iii) that the security procedures (if any) to be followed in connection with its transmission of Instructions provide to it a commercially reasonable degree of protection in light of its particular needs and circumstances; and (iv) to notify the Trustee immediately upon learning of any compromise or unauthorized use of the security procedures. The Trustee may execute any of the trusts or powers hereof and perform the duties required of it hereunder by or through attorneys, agents, affiliates, or receivers, and shall be entitled to advice of counsel concerning all matters of trust and its duty hereunder. The Trustee shall not be liable to the parties hereto or deemed in breach or default hereunder if and to the extent its performance hereunder is prevented by reason of force majeure. The term “force majeure” means an occurrence that is beyond the control of the Trustee and could not have been avoided by exercising due care. Force majeure shall include, but not be limited to, acts of God, terrorism, war, riots, strikes, fire, floods, earthquakes, epidemics or other similar occurrences. The permissive right of the Trustee to do things enumerated in this Indenture shall not be construed as a duty and it shall not be answerable for other than its negligence or willful misconduct. The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Owners pursuant to the provisions of this Indenture unless such Owners shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby. Any company into which the Trustee may be merged or converted or with which it may be consolidated or any company resulting from any merger, conversion or consolidation to which it shall be a party or any company to which the Trustee may sell or transfer all or substantially all of its corporate trust business, shall be the successor to the Trustee without the execution or filing of any paper or further act, anything herein to the contrary notwithstanding. ARTICLE IX AMENDMENT OF OR SUPPLEMENT TO THE INDENTURE Section 9.01 Amendment or Supplement by Consent of Owners. The Indenture and the rights and obligations of the Authority, the District, Owners and the Trustee hereunder may be amended or supplemented at any time by an amendment hereof or supplement hereto which shall become binding when the written consents of the Owners of a majority in aggregate principal amount of the Bonds then Outstanding, exclusive of Bonds disqualified as provided in Section 9.02, are filed with the Trustee. No such amendment or supplement shall: (1) reduce the rate of interest on any Bond or extend the time of payment thereof or reduce the amount of principal or redemption premium, if any, of any Bond or extend the maturity thereof or otherwise alter or impair the obligation of the Authority to pay the interest and principal and redemption premium, if any, thereon at the time and place and at the rate and in the currency and from the funds provided therein without the prior written consent of 31 the Owner of the Bond so affected; or (2) modify any of the rights or obligations of the Trustee without its prior written consent thereto. The Indenture and the rights and obligations of the Authority, the District, the Owners and the Trustee hereunder may also be amended or supplemented at any time by an amendment hereof or supplement hereto which shall become binding upon execution without the written consents of any Owners, but only to the extent permitted by law and only if, in the opinion of the Trustee (which opinion may be based upon an Opinion of Bond Counsel or a Certificate of the District), such amendment or supplement is not materially adverse to the interests of the Owners, including, but not limited to, amendments or supplements amendments for any of the following purposes: (a) to add to the agreements, conditions, covenants and terms contained herein required to be observed or performed by the Authority or the District other agreements, conditions, covenants and terms thereafter to be observed or performed by the Authority or the District, or to surrender any right reserved herein to or conferred herein on the Authority or the District, and which in either case shall not adversely affect the interests of the Owners; (b) to modify, amend or supplement this Indenture in such manner as to preserve the exemption of the Bonds from the registration requirements of the Securities Act of 1933 or any similar federal statute hereafter in effect or to permit the qualification of this Indenture under the Trust Indenture Act of 1939 or any similar federal statute hereinafter in effect; (c) to make such provisions for the purpose of curing any ambiguity or of correcting, curing or supplementing any defective provision contained herein or in regard to questions arising hereunder which the Authority or the District may deem desirable or necessary, and which shall not adversely affect the interests of the Owners; and (d) to make any modifications or changes necessary or appropriate in the Opinion of Bond Counsel to preserve or protect the exclusion from gross income for federal income tax purposes of interest on the Bonds. The Authority shall give written notice of any amendment, or supplement to this Indenture, requiring the consent of the Owners under this Section 9.01 to the Rating Agencies not less than fifteen (15) days prior to the execution thereof. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modification thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and shall be fully protected in relying upon, an opinion of counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture and complies with the terms hereof. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Section 9.02 Disqualified Bonds. Bonds known to the Trustee to be held for the account of the Authority or the District (but excluding Bonds held in any pension or retirement fund of the Authority or the District) shall not be deemed Outstanding for the purpose of any consent or other action or any calculation of Outstanding Bonds provided herein, and shall not be entitled to consent to or take any other action provided herein, and the Trustee may adopt appropriate regulations to require each Owner, before his or her consent provided for herein shall be deemed effective, to reveal if the 32 Bonds as to which such consent is given are disqualified as provided in this Section. Upon request of the Trustee, the Authority shall specify in a Certificate of the Authority those Bonds disqualified pursuant to this Section 9.02 and the Trustee may conclusively rely on such Certificate. Section 9.03 Endorsement or Replacement of Bonds After Amendment or Supplement. After the effective date of any action taken as hereinabove provided, the Trustee may determine that the Bonds may bear a notation by endorsement in form approved by the Trustee as to such action, and in that case, upon demand of the Owner of any Outstanding Bond and presentation of the Bond for such purpose at the corporate trust office of the Trustee in Los Angeles, California, a suitable notation as to such action shall be made on such Bond. If the Trustee shall so determine, new Bonds so modified as in the opinion of the Trustee shall be necessary to conform to such action shall be prepared, and in that case upon demand of the Owner of any Outstanding Bonds such new Bonds shall be exchanged without cost to each Owner for Bonds then Outstanding at the corporate trust office of the Trustee in Los Angeles, California, upon surrender of such Outstanding Bonds. All Bonds surrendered to the Trustee pursuant to the provisions of this Section shall be canceled by the Trustee and shall not be redelivered. Section 9.04 Amendment or Supplement by Mutual Consent. The provisions of this article shall not prevent any Owner from accepting any amendment or supplement as to the particular Bonds owned by him or her; provided, that due notation thereof is made on such Bonds. ARTICLE X DEFEASANCE Section 10.01 Discharge of Bonds and Indenture. (a) Any or all of the Outstanding Bonds may be paid, in whole or in part, as set forth in this Section 10.01. If the Trustee shall pay or cause to be paid or there shall otherwise be paid to the Owners of any Outstanding Bonds the interest and principal and redemption premiums, if any, evidenced and represented thereby at the times and in the manner provided herein and therein, then all agreements and covenants of the Authority and the District to such Owners hereunder shall thereupon cease, terminate and become void and shall be completely discharged and satisfied except for the obligation of the Trustee to pay from the amounts described in Section 10.01(c) below the interest and principal and redemption premium, if any, on such Bonds and the covenant of the Authority to comply with Section 6.02 hereof. . (b) Any Outstanding Bonds shall on their maturities or redemption date or dates prior thereto, as applicable, be deemed to have been paid within the meaning of and with the effect expressed in subsection (a) of this Section if there shall be on deposit with the Trustee money held in trust for the benefit of the Owners of such Bonds which is sufficient to pay the interest and principal and redemption premiums, if any, on such Bonds payable on and prior to their maturities or their redemption date or dates, as applicable. (c) Any Outstanding Bonds shall prior to their maturities or their redemption date or dates prior thereto be deemed to have been paid within the meaning of and with the effect expressed in subsection (a) of this Section if: (1) in case any of such Bonds are to be redeemed within the next succeeding sixty (60) days, the Authority shall have given to the Trustee in form satisfactory to it irrevocable instructions to give notice of redemption in accordance with Section 4.03 to the Owners of 33 such Bonds of the redemption of such Bonds on such redemption date or dates; (2) there shall have been deposited with the Trustee, or an escrow agent selected by the Authority, Defeasance Securities, the interest on and principal of which when paid will provide money which, together with money, if any, deposited with the Trustee or the escrow agent at the same time, shall be sufficient (as evidenced by a report of an Independent Certified Public Accountant regarding such sufficiency) to pay when due the interest on such Bonds on and prior to the earlier of their maturities or their redemption date or dates, as the case may be, and the principal and redemption premiums, if any, on such Bonds; and (3) in the event such Bonds are not by their terms subject to redemption within the next succeeding sixty (60) days, the Authority shall have given the Trustee in form satisfactory to it irrevocable instructions to give notice in accordance with Section 11.06 to the Owners of such Bonds that the deposit required by clause (2) above has been made with the Trustee and that such Bonds are deemed to have been paid in accordance with this Section and stating their maturities or their redemption date or dates prior thereto upon which money is to be available for the payment of the interest and principal and redemption premiums, if any, on such Bonds. To accomplish a defeasance of all or a portion of the Bonds, the Authority shall cause to be delivered to the Trustee (i) a report of an independent firm of nationally recognized certified public accountants or such other accountant (the “Accountant”) verifying the sufficiency of the escrow established to pay the Bonds being defeased, in full, to their maturity or redemption date or dates (the “Verification”); (ii) an Escrow Deposit Agreement; (iii) an opinion of Bond Counsel to the effect that the Bonds are no longer “Outstanding” under this Indenture; and (iv) a certificate of discharge of the Trustee with respect to such Bonds. Each Verification and defeasance opinion shall be acceptable in form and substance, and addressed, to the Authority and the Trustee. Bonds shall be deemed “Outstanding” under this Indenture unless and until they are in fact paid and retired or the above criteria are met. (d) After the payment of all interest and principal and redemption premiums, if any, of all Outstanding Bonds as provided in subsections (a) or (b) of this Section, and the payment of all fees and expenses of the Trustee, upon receipt of a Request of the District, the Trustee shall cause an accounting for such period or periods as may be requested by the District to be prepared and filed with the Authority and the District and shall authenticate and deliver to the Authority and the District all such instruments as may be necessary or desirable to evidence such total discharge and satisfaction of the Indenture, and the Trustee shall pay over or deliver to the District all money or investments held by it pursuant hereto which are not required for the payment of the interest and principal and redemption premiums, if any, evidenced and represented by such Bonds, which money and investments shall be used by the District for any lawful purpose. Section 10.02 Unclaimed Money. Anything contained herein to the contrary notwithstanding, any money held by the Trustee in trust for the payment and discharge of the interest or principal or redemption premium, if any, on any Bonds which remains unclaimed for one (1) year after the date when the payments on such Bonds have become payable, if such money was held by the Trustee on such date, or for one (1) year after the date of deposit of such money if deposited with the Trustee after the date when the interest and principal and redemption premiums, if any, on such Bonds have become payable, shall be repaid by the Trustee to the Authority as its absolute property free from trust, and the Trustee shall thereupon be released and discharged with respect thereto and the Owners shall look only to the Authority for the payment of the interest and principal and redemption premiums, if any, on such Bonds; provided, that before being required to make any such payment to the Authority, the Trustee shall, at the expense of the Authority, give notice in accordance with Section 11.06 to 34 Owners of Bonds with respect to which moneys remain unclaimed that such money remains unclaimed and that after a date named in such notice, which date shall not be less than sixty (60) days after the date of giving such notice, the balance of such money then unclaimed will be returned to the Authority. ARTICLE XI MISCELLANEOUS Section 11.01 Benefits of the Indenture Limited to Parties. Nothing contained herein, expressed or implied, is intended to confer upon, or to give or grant to, any person or entity other than the Authority, the District, the Trustee and the Owners any claim, remedy or right under or pursuant hereto, and any agreement, condition, covenant or term contained herein required to be observed or performed by or on behalf of the Authority or the District shall be for the sole, exclusive benefit of the Trustee and the Owners. Section 11.02 Successor Deemed Included in All References to Predecessor. Whenever either the Authority, the District or the Trustee or any officer, director or employee thereof is named or referred to herein, such reference shall be deemed to include the successor to the powers, duties and functions that are presently vested in the Authority, the District or the Trustee or such officer, director or employee, and all agreements, conditions, covenants and terms contained herein required to be observed or performed by or on behalf of the Authority, the District or the Trustee or any officer, director or employee thereof shall bind and inure to the benefit of the respective successors thereof whether so expressed or not. Section 11.03 Execution of Documents by Owners. Any declaration, request or other instrument which is permitted or required herein to be executed by Owners may be in one or more instruments of similar tenor and may be executed by Owners in person or by their attorneys appointed in writing. The fact and date of the execution by any Owner or such Owner’s attorney of any declaration, request or other instrument or of any writing appointing such attorney may be proved by the certificate of any notary public or other officer authorized to take acknowledgments of deeds to be recorded in the state or territory in which he or she purports to act that the person signing such declaration, request or other instrument or writing acknowledged to him or her the execution thereof; or by an affidavit of a witness to such execution duly sworn to before such notary public or other officer, or by such other proof as the Trustee may accept which it may deem sufficient. Any declaration, acceptance, request or other instrument in writing of the Owner of any Bond shall bind all future Owners of such Bond with respect to anything done or suffered to be done by the Authority or the District or the Trustee in good faith and in accordance therewith. Section 11.04 Waiver of Personal Liability. No officer, director or employee of the District, the Authority or the Trustee shall be individually or personally liable for the payment of the interest or principal or redemption premiums, if any, on the Bonds, but nothing contained herein shall relieve any officer, director or employee of the Authority, the District or the Trustee from the performance of any official duty provided by any applicable provisions of law or by the Installment Purchase Agreement or hereby. Section 11.05 Content of Certificates. Every certificate with respect to compliance with any agreement, condition, covenant or term contained herein shall include: (a) a statement that the person or persons executing such certificate have read such agreement, condition, covenant or term and the 35 definitions herein relating thereto; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements contained in such certificate 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 agreement, condition, covenant or term has been complied with; and (d) a statement as to whether, in the opinion of the signers, such agreement, condition, covenant or term has been complied with. Any certificate may be based, insofar as it relates to legal matters, upon an Opinion of Bond Counsel unless the person or persons executing such certificate know that the Opinion of Bond Counsel with respect to the matters upon which his, her or their certificate may be based, as aforesaid, is erroneous, or in the exercise of reasonable care should have known that the same was erroneous. Any Opinion of Bond Counsel may be based, insofar as it relates to factual matters or information with respect to which is in the possession of the District, upon a representation by an officer or officers of the District unless the counsel executing such Opinion of Bond Counsel knows that the representation with respect to the matters upon which his or her opinion may be based, as aforesaid, is erroneous, or in the exercise of reasonable care should have known that the same was erroneous. Section 11.06 Notice by Mail. Any notice required to be given hereunder by mail to any Owners of Bonds shall be given by mailing a copy of such notice, first class postage redeemed, to the Owners of such Bonds at their addresses appearing in the books required to be kept by the Trustee pursuant to the provisions of Section 2.08 not less than the number of days specified in this Indentrue following the action or prior to the event concerning which notice thereof is required to be given; provided, that receipt of any such notice shall not be a condition precedent to the effect of such notice and neither failure to receive any such notice nor any immaterial defect contained therein shall affect the validity of the proceedings taken in connection with the action or the event concerning which such notice was given. Notwithstanding the foregoing, so long as the Bonds are held under the Book-Entry System, any notice required to be given hereunder by mail to any Owners may be given to the Securities Depository in a manner agreed to by the Securities Depository. Section 11.07 Funds. Any fund required to be established and maintained herein by the Trustee may be established and maintained in the accounting records of the Trustee either as an account or a fund, and may, for the purpose of such accounting records, any audits thereof and any reports or statements with respect thereto, be treated either as an account or a fund; but all such records with respect to all such funds shall at all times be maintained in accordance with sound accounting practice and with due regard for the protection of the security of the Bonds and the rights of the Owners. In addition to the funds and accounts required to be established hereunder, the Trustee may establish such other funds and accounts as it deems necessary or appropriate to perform its obligations. Section 11.08 Destruction of Bonds. All Bonds acquired by the Authority or the District shall be surrendered to the Trustee for cancellation. Whenever in this Indenture provision is made for the cancellation by the Trustee of any Bonds, the Trustee shall destroy such Bonds and deliver a certificate of such destruction to the Authority. Section 11.09 Deposits and Investments. (a) Any money held by the Trustee in any of the funds provided herein shall be invested in one or more Permitted Investments in accordance with a Written Request of the Authority or the District. In the absence of a Written Request of the Authority or the District funds shall be held uninvested. Any such money shall be invested by the Trustee as directed by the Authority or the 36 District pursuant to a Written Request of the Authority or the District in Permitted Investments which will, as nearly as practicable, mature on or before the dates on which such money is anticipated to be needed for disbursement hereunder. (b) The Trustee may act as principal or agent in the acquisition or disposition of any such deposit or investment and may, for the purpose of any such deposit or investment, commingle any of the money held by them hereunder, and the Trustee shall not be liable or responsible for any loss suffered in connection with any such deposit or investment made by them under the terms of and in accordance with this Section. The Trustee may present for redemption or sell any such deposit or investment whenever it shall be necessary in order to provide money to meet any payment of the money so deposited or invested, and the Trustee shall not be liable or responsible for any losses resulting from any such deposit or investment presented for redemption or sold. Any Permitted Investments that are registrable securities shall be registered in the name of the Trustee. The Trustee is hereby authorized, in making or disposing of any investment permitted by this Section, to deal with itself (in its individual capacity) or with any one or more of its affiliates, whether it or such affiliate is acting as an agent of the Trustee or for any third person or dealing as principal for its own account. The Authority (and the District by its execution of the Installment Purchase Agreement) acknowledges that to the extent regulations of the Comptroller of the Currency or other applicable regulatory entity grant the Authority the right to receive brokerage confirmations of security transactions as they occur, the Authority specifically waives receipt of such confirmations to the extent permitted by law. The Authority further understands that trade confirmations for securities transactions effected by the Trustee will be available upon request and at no additional cost and other trade confirmations may be obtained from the applicable broker. The Trustee will furnish periodic cash transaction statements to the Authority in accordance with Section 6.04 hereof which include detail for all investment transactions made by the Trustee hereunder. Upon the Authority’s election, such statements will be delivered via the Trustee’s online service and upon electing such service, paper statements will be provided only upon request. - (c) Interest earnings on the Issuance Costs Fund, the Rebate Fund and the Bond Payment Fund shall be deposited to the Bond Payment Fund for application in accordance with Section 5.02. Section 11.10 Article and Section Headings, Gender and References. The headings or titles of the several articles and sections hereof and the table of contents appended hereto shall be solely for convenience of reference and shall not affect the meaning, construction or effect hereof, and words of any gender shall be deemed and construed to include all genders. All references herein to “Articles,” “Sections” and other subdivisions or clauses are to the corresponding articles, sections, subdivisions or clauses hereof; and the words “hereby,” “hereof” “hereto,” “herewith,” “hereunder” and other words of similar import refer to the Indenture as a whole and not to any particular article, section, subdivision or clause thereof. Section 11.11 Partial Invalidity. If any one or more of the agreements, conditions, covenants or terms contained herein required to be observed or performed by or on the part of the Authority or the Trustee shall be contrary to law, then such agreement or agreements, such condition or conditions, such covenant or covenants or such term or terms shall be null and void and shall be deemed separable from the remaining agreements, conditions, covenants and terms hereof and shall in no way affect the validity hereof or of the Bonds, and the Owners shall retain all the benefit, protection and security afforded to them hereunder and under all provisions of applicable law. The Trustee and 37 the Authority hereby declare that they would have executed and entered into the Indenture and each and every other article, section, paragraph, subdivision, sentence, clause and phrase hereof and would have authorized the execution and delivery of the Bonds pursuant hereto irrespective of the fact that any one or more of the articles, sections, paragraphs, subdivisions, sentences, clauses or phrases hereof or the application thereof to any person or circumstance may be held to be unconstitutional, unenforceable or invalid. Section 11.12 California Law. THE INDENTURE SHALL BE CONSTRUED AND GOVERNED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. Section 11.13 Notices. All written notices to be given hereunder shall be given by first class mail, postage redeemed, to the party entitled thereto at its address set forth below, or at such other address as such party may provide to the other parties in writing from time to time, namely: If to the Trustee: MUFG Union Bank, N.A. 445 South Figueroa Street, Suite 401 Los Angeles, California 90071 Attention: Corporate Trust Department Email: CashControlGroup-LosAngeles @unionbank.com If to the Authority: Otay Water District Financing Authority 2554 Sweetwater Springs Boulevard Spring Valley, CA 91978 Attention: Executive Director If to the District: Otay Water District 2554 Sweetwater Springs Boulevard Spring Valley, CA 91978 Attention: General Manager If to the Rating Agencies: S&P Global Ratings 55 Water Street New York, NY 10041 Attention: The Trustee shall give notices to the Rating Agencies upon (i) redemption of all Outstanding Bonds, (ii) acceleration of amounts due with respect to the Bonds, (iii) amendments to the Indenture or the Installment Purchase Agreement, or (iv) any defeasance of the Bonds. Section 11.14 Execution in Counterparts. The Indenture may be executed and entered into in several counterparts, each of which shall be deemed an original, and all of which shall constitute but one and the same instrument. Section 11.15 Effective Date. The Indenture shall become effective upon its execution and delivery. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.] S-1 IN WITNESS WHEREOF, the parties hereto have executed and entered into the Indenture by their officers hereunto duly authorized as of the day and year first above written. MUFG UNION BANK, N.A., as Trustee By: Authorized Officer OTAY WATER DISTRICT FINANCING AUTHORITY By: Executive Director A-1 EXHIBIT A [FORM OF BOND] No. ___ $__________ UNLESS THIS BOND IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY TO THE TRUSTEE FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY BOND ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY AND ANY PAYMENT IS MADE TO CEDE & CO., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. UNITED STATES OF AMERICA STATE OF CALIFORNIA OTAY WATER DISTRICT FINANCING AUTHORITY WATER REVENUE BONDS, SERIES 2018A Interest Rate Maturity Date Dated Date CUSIP ____% September 1, 20__ __________, 2018 REGISTERED OWNER: CEDE & CO. PRINCIPAL AMOUNT: ___________________________________ DOLLARS The OTAY WATER DISTRICT FINANCING AUTHORITY, a joint exercise of powers agency duly organized and existing under the laws of the State of California (the “Authority”), for value received, hereby promises to pay to the Registered Owner specified above or registered assigns (the “Registered Owner”), on the Maturity Date specified above (subject to any right of prior redemption hereinafter provided for), the Principal Amount specified above, in lawful money of the United States of America, and to pay interest thereon in like lawful money from the Interest Payment Date next preceding the date of authentication of this Bond (unless (i) this Bond is authenticated after the fifteenth day of the calendar month preceding an Interest Payment Date (the “Record Date”) and on or before the following Interest Payment Date, in which event it shall bear interest from such Interest Payment Date, or (ii) this Bond is authenticated on or before February 15, 2019, in which event it shall bear interest from the Dated Date identified above; provided, however, that if as of the date of authentication of this Bond, interest is in default on this Bond, this Bond shall bear interest from the Interest Payment Date to which interest has previously been paid or made available for payment on this Bond), at the interest rate per annum specified above, payable on each Interest Payment Date as set forth in the Indenture of Trust, dated as of October 1, 2018 (the “Indenture”) relating to the Bonds, by and between the Authority and MUFG Union Bank, N.A., as trustee (the “Trustee”). Interest on this Bond shall be computed on the basis of a 360-day year consisting of twelve 30-day months. A-2 Principal hereof, premium, if any, upon early redemption hereof, and interest, are payable in lawful money of the United States of America. Principal and premium, if any, shall be paid upon presentation and surrender at the corporate trust office of the Trustee, in Los Angeles, California, or at such other or additional offices as may be specified in writing by the Trustee to the Authority and the registered owners (the “Principal Corporate Trust Office”). Interest hereon is payable to the Registered Owner hereof on the registration books of the Trustee as of the close of business on the Record Date immediately preceding each Interest Payment Date and shall be paid in the manner set forth in the Indenture. Capitalized terms used herein and not defined herein have the meaning assigned thereto in the Indenture. This Bond is not a debt of the members of the Authority, the State of California, or any of its political subdivisions, and neither the members of the Authority or the State, nor any of its political subdivisions, is liable hereon, nor in any event shall this Bond be payable out of any funds or properties of the Authority other than the Pledged Revenues and other amounts pledged therefor under the Indenture. The Bonds (as hereinafter defined) do not constitute an indebtedness in contravention of any constitutional or statutory debt limitation or restriction. The Bonds are authorized to be issued in the form of fully registered Bonds in Authorized Denominations; provided that no Bond shall have principal represented thereby maturing in more than one year. Subject to the limitations and conditions and upon payment of the taxes and governmental charges as provided in the Indenture, Bonds may be exchanged or transferred as provided in the Indenture at the Principal Corporate Trust Office of the Trustee. This Bond is one of a duly authorized issue of bonds of the Authority designated as the “Otay Water District Financing Authority Water Revenue Bonds, Series 2018A” (the “Bonds”), in an aggregate principal amount of [$AMOUNT], all of like tenor and date (except for such variation, if any, as may be required to designate varying numbers, maturities, or interest rates) and all issued pursuant to the laws of the State of California, including the Act, and pursuant to the Indenture and the resolution of the Board of Directors of the Authority authorizing the issuance of the Bonds. Reference is hereby made to the Indenture (copies of which are on file at the office of the Authority) and all supplements thereto for a description of the terms on which the Bonds are issued, the provisions with regard to the nature and extent of the Pledged Revenues, and the rights thereunder of the owners of the Bonds and the rights, duties and immunities of the Trustee and the rights and obligations of the Authority hereunder, to all of the provisions of which the Registered Owner of this Bond, by acceptance hereof, assents and agrees. The Bonds have been issued by the Authority to assist the District in financing the acquisition and construction of certain facilities which are a part of the District’s Water System. This Bond and the interest and premium, if any, hereon and all other Bonds and the interest and premium, if any, thereon (to the extent set forth in the Indenture) are special obligations of the Authority, and are payable from, and are secured by a pledge and a first and exclusive lien on the Pledged Revenues. As and to the extent set forth in the Indenture, all of the Pledged Revenues and any other amounts (including proceeds of the sale of the Bonds) held in any fund or account established pursuant to the Indenture (except the Rebate Fund) are exclusively and irrevocably pledged in accordance with the terms hereof and the provisions of the Indenture, to secure the payment of the principal of and interest and premium (if any) on the Bonds. A-3 The Bonds maturing on and after September 1 20__ are subject to optional redemption, in whole or in part, on any date on and after September 1, 20__, from such maturities as are selected by the District in a Written Request to the Trustee at least 45 days (or such lesser number of days acceptable to the Trustee in its sole discretion) prior to such date, in integral multiples of $5,000, from any source of available funds provided to the Authority by or at the discretion of the District, at a Redemption Price equal to the principal amount of the Bonds to be redeemed, together with accrued interest to the date of redemption, without premium. The Term Bonds maturing on September 1, 20__ shall be paid at maturity and are subject to mandatory sinking fund redemption, in part by lot, from Sinking Account payments as set forth in the following schedule commencing on September 1, 20__ and on each September 1 thereafter until maturity, at a redemption price equal to the principal amount thereof to be redeemed (without premium), together with interest accrued thereon to the date fixed for redemption; provided, however, that if some but not all of the Term Bonds have been redeemed pursuant to the optional redemption provisions of the Indenture, the total amount of Sinking Account payments to be made subsequent to such redemption will be reduced in an amount equal to the principal amount of the Term Bonds so redeemed by reducing each such future Sinking Account payments on a pro rata basis (as nearly as practicable) in integral multiples of $5,000, as will be designated pursuant to written notice filed by the District with the Trustee: Redemption Date (September 1) Principal Amount * Final Maturity. In lieu of such redemption, the Trustee may apply amounts in the Sinking Account to the purchase of Term Bonds at public or private sale for cancellation, as and when and at such prices (including brokerage and other charges, but excluding accrued interest, which is payable from the Interest Account) as may be directed by the District, except that the purchase price (exclusive of accrued interest) may not exceed the redemption price then applicable to the Term Bonds, as set forth in a Written Request of the District and subsequently cancelled or surrendered to the Trustee for cancellation. If during the twelve-month period immediately preceding any August 15 on which a Sinking Account payment is due, the District has purchased Term Bonds and surrendered them to the Trustee for cancellation, the par amount of any Term Bonds so purchased will be credited towards and will reduce the principal amount of such Term Bonds required to be redeemed on the succeeding September 1. Notice of redemption shall be given by the Trustee, not less than thirty (30) nor more than sixty (60) days prior to the redemption date in the manner set forth in the Indenture. With respect to any notice of optional redemption of Bonds, such notice may state that such redemption shall be conditional upon the receipt by the Trustee on or prior to the date fixed for such redemption of moneys sufficient to pay the principal of, premium, if any, and interest on such Bonds to be redeemed and that, if such moneys shall not have been so received, said notice shall be of no force and effect and the Trustee shall A-4 not be required to redeem such Bonds. In the event that such notice of redemption contains such a condition and such 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 to whom, and in the manner in which, the notice of redemption was given, that such moneys were not so received and that the redemption shall not take place. The Indenture and the rights and obligations of the Authority, the Owners and the Trustee thereunder may be amended or supplemented at any time by an amendment or supplement which shall become binding when the written consents of the Owners of a majority in aggregate principal amount of the Bonds then Outstanding, exclusive of Bonds disqualified as provided in the Indenture, are filed with the Trustee. No such amendment or supplement shall (1) reduce the rate of interest on any Bond or extend the time of payment thereof or reduce the amount of principal or redemption premium, if any, of any Bond or extend the maturity thereof or otherwise alter or impair the obligation of the Authority to pay the interest and principal and redemption premium, if any, thereon at the time and place and at the rate and in the currency and from the funds provided therein without the prior written consent of the Owner of the Bond so affected, or (2) modify any of the rights or obligations of the Trustee without its prior written consent thereto. The Indenture and the rights and obligations of the Authority and the District and the Owners and the Trustee thereunder may also be amended or supplemented at any time by an amendment or supplement which shall become binding upon execution without the written consents of any Owners, but only to the extent permitted by law and after receipt of an approving Favorable Opinion of Bond Counsel and only if, in the opinion of the Trustee (which opinion may be based upon a Favorable Opinion of Bond Counsel or a Certificate of the District), such amendment or supplement is not materially adverse to the interests of the Owners, including, but not limited to, amendments or supplements: (a) to add to the agreements, conditions, covenants and terms contained therein required to be observed or performed by the Authority or the District other agreements, conditions, covenants and terms thereafter to be observed or performed by the Authority or the District, or to surrender any right reserved therein to or conferred therein on the Authority or the District, and which in either case shall not adversely affect the interests of the Owners; (b) to modify, amend or supplement the Indenture in such manner as to preserve the exemption of the Bonds from the registration requirements of the Securities Act of 1933 or any similar federal statute hereafter in effect or to permit the qualification of the Indenture under the Trust Indenture Act of 1939 or any similar federal statute hereinafter in effect; (c) to make such provisions for the purpose of curing any ambiguity or of correcting, curing or supplementing any defective provision contained therein or in regard to questions arising thereunder which the Authority or the District may deem desirable or necessary, and which shall not adversely affect the interests of the Owners; and (d) to make any modifications or changes necessary or appropriate in a Favorable Opinion of Bond Counsel to preserve or protect the exclusion from gross income for federal income tax purposes of interest on the Bonds. A-5 The Trustee has no obligation or liability to the registered owners of the Bonds for the payment of interest, principal or redemption premium, if any, with respect to the Bonds out of the Trustee’s own funds; the Trustee’s sole obligations are those described in the Indenture. If an Event of Default, as defined in the Indenture, shall occur, the principal of all Bonds may be declared due and payable upon the conditions, in the manner and with the effect provided in the Indenture, but such declaration and its consequences may be rescinded and annulled as further provided in the Indenture. This Bond is transferable by the Registered Owner hereof, in person or by his or her duly authorized attorney, at the Office of the Trustee but only in the manner subject to the limitations and upon payment of the taxes and charges provided in the Indenture and upon surrender and cancellation of this Bond. Upon registration of such transfer, a new Bond or Bonds, of an Authorized Denomination or Authorized Denominations, for a like aggregate principal amount and of like maturity will be issued to the transferee in exchange therefor. Bonds may be exchanged at said office of the Trustee for a like aggregate principal amount of Bonds of other Authorized Denominations and of like maturity, but only in the manner, subject to the limitations and upon payment of the taxes and charges provided in the Indenture. The Trustee shall not be required to register the transfer of or exchange of any Bond during the period in which the Trustee is selecting Bonds for redemption and any Bond that has been selected for redemption. The Authority and the Trustee may treat the Registered Owner hereof as the absolute owner hereof for all purposes, and the Authority and the Trustee shall not be affected by any notice to the contrary. It is hereby certified that all of the things, conditions and acts required to exist, to have happened or to have been performed precedent to and in the issuance of this Bond do exist, have happened or have been performed in due and regular time, form and manner as required by the Act, the Indenture, and the Constitution and laws of the State of California, and that the amount of this Bond, together with all other indebtedness of the Authority, does not exceed any limit prescribed by the Constitution or any laws of the State of California, or by the Act. This Bond shall not be entitled to any benefit under the Indenture or become valid or obligatory for any purpose until the certificate of authentication hereon endorsed shall have been signed by the Trustee. A-6 IN WITNESS WHEREOF, the OTAY WATER DISTRICT FINANCING AUTHORITY has caused this Bond to be executed in its name and on its behalf with the facsimile signature of its President and attested to by the facsimile signature of its Secretary, all as of this __ day of October, 2018. OTAY WATER DISTRICT FINANCING AUTHORITY By: President ATTEST: By: Secretary [FORM OF TRUSTEE’S CERTIFICATE OF AUTHENTICATION] This is one of the Bonds described in the within-mentioned Indenture. Dated: _________, 2018 MUFG UNION BANK, N.A., as Trustee By: Authorized Officer A-7 [FORM OF LEGAL OPINION] The following is a true copy of the opinion rendered by Stradling Yocca Carlson & Rauth, a Professional Corporation, in connection with the issuance of, and dated as of the date of the original delivery of, the Bonds. A signed copy is on file in my office. Secretary of the Board of the Otay Water District Financing Authority A-8 [FORM OF ASSIGNMENT] For value received the undersigned hereby sells, assigns and transfers unto ______________ _________________________________________________________________________________ _________________________________________________________________________________ (Name, Address and Tax Identification or Social Security Number of Assignee) the within-registered Bond and hereby irrevocably constitute(s) and appoint(s) _________________ ________________________________________________, attorney, to transfer the same on the registration books of the Trustee with full power of substitution in the premises. Dated: ____________, 20__ Note: The signature(s) on this assignment must correspond with the name(s) as written on the face of the within Bond in every particular without alteration or enlargement or any change whatsoever. Signature Guaranteed: ______________________________________ Note: Signature(s) must be guaranteed by an eligible guarantor institution. PRELIMINARY OFFICIAL STATEMENT DATED AUGUST 15, 2018 NEW ISSUE RATING BOOK-ENTRY ONLY S&P: __ (See “CONCLUDING INFORMATION - Rating on the Bonds” herein) In the opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California (“Bond Counsel”), under existing statutes, regulations, rulings and judicial decisions, and assuming the accuracy of certain representations and compliance with certain covenants and requirements described herein, interest (and original issue discount) on the Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals. In the further opinion of Bond Counsel, interest (and original issue discount) on the Bonds is exempt from State of California personal income tax. See “TAX MATTERS” herein. $28,300,000* OTAY WATER DISTRICT FINANCING AUTHORITY WATER REVENUE BONDS, SERIES 2018A Dated: Date of Delivery Due: September 1, as shown on the inside front cover page. The cover page contains certain information for general reference only. It is not a summary of the issue. Potential investors are advised to read the entire Official Statement to obtain information essential to the making of an informed investment decision. See “RISK FACTORS” herein for a discussion of special risk factors that should be considered in evaluating the investment quality of the Bonds. The Otay Water District Financing Authority Water Revenue Bonds, Series 2018A (the “Bonds”) are payable from revenues pledged under the Indenture (defined below) consisting of Installment Payments to be made by the Otay Water District (the “District”) to the Otay Water District Financing Authority (the “Authority”) as payment for certain real property and improvements (the “2018 Project”) pursuant to an Installment Purchase Agreement, as described herein and from investment earnings on funds held under the Indenture of Trust (the “Pledged Revenues”). The Bonds will be issued pursuant to an Indenture of Trust, dated as of October 1, 2018 (the “Indenture”), by and between the Authority and MUFG Union Bank, N.A., as trustee (the “Trustee”). The Bonds are being issued to provide funds for construction of water storage, treatment and transmission facilities of the District. See “THE FINANCING PLAN” herein. The District is required under the Installment Purchase Agreement to make installment payments in each fiscal year from Taxes and Net Revenues of the District’s water system (the “Water System”) in an amount sufficient to pay the annual principal and interest due on the Bonds, as described herein. See “SOURCES OF PAYMENT FOR THE BONDS” and “RISK FACTORS” herein. Interest on the Bonds is payable on March 1, 2019, and semiannually thereafter on September 1 and March 1 of each year until maturity. The Bonds are subject to optional and sinking account redemption prior to maturity (see “THE BONDS - General Provisions” and “THE BONDS - Redemption” herein). The Bonds are limited obligations of the Authority and are payable solely from and secured solely by the Pledged Revenues and amounts on deposit in the Bond Payment Fund under the Indenture. The District’s obligation to make the Installment Payments is a limited obligation of the District payable solely from Taxes and Net Revenues of the Water System, and neither the full faith and credit nor the taxing power of the District, the State of California or any of its political subdivisions is pledged for the payment of the Bonds. Neither the Bonds nor the obligation of the District to make Installment Payments constitutes an indebtedness of the Authority, the District, the State of California or any political subdivision thereof within the meaning of any constitutional or statutory debt limitation or restriction. The Bonds are offered, when, as and if issued, subject to the approval as to their legality by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, Bond Counsel, and certain other conditions. Certain legal matters will be passed on for the District and the Authority by Artiano Shinoff, San Diego, California, as General Counsel to the District and the Authority, and by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, as Disclosure Counsel. It is anticipated that the Bonds, in book-entry form, will be available for delivery through the facilities of The Depository Trust Company on or about October 25, 2018 (see “THE BONDS - General Provisions - Book-Entry-Only System” herein). The date of the Official Statement is _________, 2018. __________________________ * Preliminary, subject to change. Th i s P r e l i m i n a r y O f f i c i a l S t a t e m e n t a n d t h e i n f o r m a t i o n c o n t a i n ed h e r e i n a r e s u b j e c t t o c o m p l e t i o n o r a m e n d m e n t . U n d e r n o c i r cu m s t a n c e s sh a l l t h i s P r e l i m i n a r y O f f i c i a l S t a t e m e n t c o n s t i t u t e a n o f f e r t o s e l l o r a s o l i c i t a t i o n o f a n o ff e r t o b u y n o r s h a l l t h e r e b e an y s a l e o f t h e s e s e c u r i t i e s in a n y j u r i s d i c t i o n i n w h i c h s u c h o f f e r , s o l i c i t a t i o n o r s a l e w ou l d b e u n l a w f u l u n d e r t h e s e c u r i t i e s l a w s o f s u c h j u r i s d i c t i o n . $28,300,000* OTAY WATER DISTRICT FINANCING AUTHORITY WATER REVENUE BONDS, SERIES 2018A MATURITY SCHEDULE (Base CUSIP®† 68881R) Maturity Date Principal Interest Reoffering Reoffering September 1 Amount Rate Yield Price CUSIP®† 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 __________________________ * Preliminary, subject to change. † CUSIP® is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, managed by S&P Capital IQ on behalf of the American Bankers Association. CUSIP numbers have been assigned by an independent company not affiliated with the Authority, the District, the Municipal Advisor or the Underwriter and are included solely for the convenience of the holders of the Bonds. None of the Authority, the District, the Municipal Advisor or the Underwriter is responsible for the selection or use of these CUSIP numbers, and no representation is made as to their correctness on the Bonds or as indicated above. The CUSIP number for a specific maturity is subject to being changed after the execution and delivery of the Bonds as a result of various subsequent actions including, but not limited to, a refunding in whole or in part of such maturity or as a result of the procurement of secondary market portfolio insurance or other similar enhancement by investors that is applicable to all or a portion of certain maturities of the Bonds. GENERAL INFORMATION ABOUT THIS OFFICIAL STATEMENT Use of Official Statement. This Official Statement is submitted in connection with the offer and sale of the Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose. This Official Statement is not to be construed as a contract with the purchasers of the Bonds. Effective Date. This Official Statement speaks only as of its date, and the information and expressions of opinion contained in this Official Statement are subject to change without notice. Neither the delivery of this Official Statement nor any sale of the Bonds will, under any circumstances, create any implication that there has been no change in the affairs of the District or any other parties described in this Official Statement. Estimates and Forecasts. When used in this Official Statement and in any continuing disclosure by the District, any press release and any oral statement made with the approval of an authorized officer of the District or any other entity described or referenced herein, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “forecast,” “expect,” “intend” and similar expressions identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Any forecast is subject to such uncertainties. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances may occur. Therefore, there are likely to be differences between forecasts and actual results, and those differences may be material. Limit of Offering. No dealer, broker, salesperson or other person has been authorized by the District to give any information or to make any representations in connection with the offer or sale of the Bonds other than those contained herein and if given or made, such other information or representation must not be relied upon as having been authorized by the District or the Municipal Advisor. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the Bonds by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale. Preparation of this Official Statement. The information contained in this Official Statement has been obtained from sources that are believed to be reliable, but this information is not guaranteed as to accuracy or completeness. The information and expressions of opinions herein are subject to change without notice and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the District since the date hereof. This Official Statement is submitted in connection with the sale of the Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose, unless authorized in writing by the District. All summaries of the Bonds, the Indenture or other documents, are made subject to the provisions of such documents and do not purport to be complete statements of any or all of such provisions. Reference is hereby made to such documents on file with the District Secretary for further information. See “INTRODUCTION - Summaries Not Definitive.” The Underwriter has provided the following sentence for inclusion in this Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. Bonds are Exempt from Securities Laws Registration. The issuance, sale and delivery of the Bonds has not been registered under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, in reliance upon exemptions for the execution, sale and delivery of municipal securities provided under Section 3(a)(2) of the Securities Act of 1933 and Section 3(a)(l2) of the Securities Exchange Act of 1934. Stabilization of Prices. In connection with this offering, the Underwriter may overallot or effect transactions which stabilize or maintain the market price of the Bonds at a level above that which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. The Underwriter may offer and sell the Bonds to certain dealers and others at prices lower than the public offering prices set forth on the inside cover page hereof and said public offering prices may be changed from time to time by the Underwriter. District Website. The District maintains a website. The information on such website is not part of this Official Statement and is not intended to be relied on by investors with respect to the Bonds unless specifically set forth or incorporated herein. OTAY WATER DISTRICT SAN DIEGO COUNTY, CALIFORNIA BOARD OF DIRECTORS Tim Smith, President - Division 1 Mitch Thompson, Vice President - Division 2 Mark Robak, Treasurer - Division 5 Gary D. Croucher, Division 3 Hector Gastelum, Division 4 ______________________________________________ MANAGEMENT TEAM Mark Watton, General Manager Adolfo Segura, Chief, Administrative Services Rod Posada, PE, PLS, CCM, Chief, Engineering Joseph R. Beachem, Chief Financial Officer Pedro Porras, PE, Chief, Water Operations Dan Martin, Assistant Chief of Engineering Kevin Koeppen, Assistant Chief of Finance Jose Martinez, Assistant Chief, Water Operations ________________________________________ PROFESSIONAL SERVICES Bond Counsel and Disclosure Counsel Stradling Yocca Carlson & Rauth, a Professional Corporation Newport Beach, California General Counsel to the District and the Authority Artiano Shinoff San Diego, California Municipal Advisor Harrell & Company Advisors, LLC Orange, California Trustee MUFG Union Bank, N.A. Los Angeles, California TABLE OF CONTENTS INTRODUCTION ...................................................... 1  The District ................................................................ 1  The Authority ............................................................. 1  Sources of Payment for the Bonds ............................. 2  No Reserve Fund ....................................................... 3  Legal Matters ............................................................. 3  Offering of the Bonds ................................................ 3  Summaries Not Definitive ......................................... 3  THE BONDS ............................................................... 3  General Provisions ..................................................... 3  Redemption ................................................................ 4  Scheduled Debt Service ............................................. 7  THE FINANCING PLAN .......................................... 9  Estimated Sources and Uses of Funds ....................... 9  OTAY WATER DISTRICT ...................................... 11  THE WATER SYSTEM ........................................... 12  Existing Facilities .................................................... 12  Water Storage ........................................................... 13  Water Supply ........................................................... 13  Capital Improvement Program ................................. 18  Water Service ........................................................... 20  Water Charges .......................................................... 21  Taxes ........................................................................ 24  Personnel ................................................................. 26  Retirement Program ................................................. 26  Other Post-Employment Benefits ............................ 31  Insurance .................................................................. 33  District Reserves and Investment Policy ................. 34  Outstanding Indebtedness of the District ................. 35  Historical Operating Results .................................... 36  Historical Debt Service Coverage ............................ 39  Projected Debt Service Coverage ............................ 41  SOURCES OF PAYMENT FOR THE BONDS ..... 45  General ..................................................................... 45  2018 Installment Payments ...................................... 45  Taxes and Net Revenues .......................................... 45  Allocation of Taxes and Net Revenues .................... 46  No Reserve Fund for the Bonds ............................... 47  Event of Default and Acceleration of Maturities ..... 47  Rate Covenant .......................................................... 48  Parity Debt ............................................................... 48  Property Insurance ................................................... 49  CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS ...................... 49  Article XIIIB Gann Limit ........................................ 49  Proposition 218 ........................................................ 50  Future Initiatives ...................................................... 52  RISK FACTORS ....................................................... 53  System Demand ....................................................... 53  Drought .................................................................... 53  Increased Operation and Maintenance Costs ........... 53  Rate Covenant Not a Guarantee; Failure to Meet Projections............................................................. 53  Additional Obligations Payable from Taxes and Net Revenues ........................................................ 54  Risks Relating to Water Supplies ............................. 54  California WaterFix Costs and Long Term Rate Impacts .................................................................. 54  Environmental Regulation ....................................... 55  Proposition 218 ........................................................ 55  Natural Hazards ....................................................... 56  Interest Subsidy Payment; Sequestration ................. 57  Acceleration; Limited Recourse on Default ............. 57  Bankruptcy Risks ..................................................... 57  No Obligation to Tax................................................ 57  Change in Law ......................................................... 58  Loss of Tax Exemption ............................................ 58  IRS Audit of Tax-Exempt Bond Issues .................... 58  Secondary Market Risk ............................................ 58  TAX MATTERS ........................................................ 58  LEGAL MATTERS .................................................. 60  Enforceability of Remedies ...................................... 60  Approval of Legal Proceedings ................................ 60  Litigation .................................................................. 60  CONCLUDING INFORMATION .......................... 61  Rating on the Bonds ................................................. 61  Underwriting ............................................................ 61  The Municipal Advisor ............................................ 62  Continuing Disclosure ............................................. 62  Audited Financial Statements .................................. 6 2   References ................................................................ 62  Execution ................................................................. 62  APPENDIX A - SUMMARY OF LEGAL DOCUMENTS APPENDIX B - DISTRICT AUDITED FINANCIAL STATEMENTS APPENDIX C - ECONOMIC PROFILE FOR THE COUNTY OF SAN DIEGO APPENDIX D - FORM OF CONTINUING DISCLOSURE AGREEMENT APPENDIX E - PROPOSED FORM OF LEGAL OPINION OF BOND COUNSEL APPENDIX F - THE BOOK-ENTRY SYSTEM OTAY WATER DISTRICT LOCATION MAP 1 OFFICIAL STATEMENT $28,300,000* OTAY WATER DISTRICT FINANCING AUTHORITY WATER REVENUE BONDS, SERIES 2018A This Official Statement which includes the cover page, the inside cover page and appendices (the “Official Statement”) is provided to furnish certain information concerning the sale of the Otay Water District Financing Authority Water Revenue Bonds, Series 2018A (the “Bonds”), in the aggregate principal amount of $28,300,000*. INTRODUCTION This Introduction contains only a brief description of this issue and does not purport to be complete. The Introduction is subject in all respects to more complete information in the entire Official Statement and the offering of the Bonds to potential investors is made only by means of the entire Official Statement and the documents summarized herein. Potential investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision (see “RISK FACTORS” herein). For definitions of certain capitalized terms used herein and not otherwise defined, and the terms relating to the Bonds, see the summary included in “APPENDIX A - SUMMARY OF LEGAL DOCUMENTS” herein. The District The Otay Water District (the “District”) was established in 1956. The District is a municipal water district organized and existing under and in accordance with Division 20 of the Water Code of the State of California, commencing with Section 71000, as amended (the “Law”). The District’s boundaries currently encompass an area of approximately 125 square miles in San Diego County, lying immediately east of the San Diego metropolitan area and running from the City of El Cajon south to the Mexican border, abutting the cities of El Cajon and La Mesa and encompassing most of the City of Chula Vista and a small portion of the City of San Diego. The District currently serves a population of approximately 223,000 and expects the service area to experience moderate growth in the next ten years (see “OTAY WATER DISTRICT” and “APPENDIX C - ECONOMIC PROFILE FOR THE COUNTY OF SAN DIEGO” herein). The District is administered by a Board of Directors consisting of five members who are elected to four- year alternating terms by the voters residing within the District’s boundaries. The District is divided into five divisions, with each Director representing a specific division within which he or she must reside. The positions of General Manager and General Counsel are filled by appointments of the Board. The District employs 137 full-time equivalent employees. The Authority The Otay Water District Financing Authority (the “Authority”) is a joint exercise of powers authority organized and existing under and by virtue of the Joint Exercise of Powers Act, constituting Articles 1 through 4 (commencing with Section 6500) of Chapter 5, Division 7, Title 1 of the Government Code of the State of California (the “Joint Powers Act”). The District and the California Municipal Finance Authority, a joint exercise of powers authority, formed the Authority by the execution of a joint exercise of powers agreement on March 3, 2010. The Authority functions as an independent entity and was formed to assist the District in the financing of public capital improvements. Pursuant to the Joint Powers __________________________ * Preliminary, subject to change. 2 Act, the Authority is authorized to issue revenue bonds to provide funds to acquire or construct public capital improvements, with such revenue bonds to be repaid from the installment payments for such improvements, such as the installment payments described herein. The Authority is governed by a five-member Board which consists of all members of the District’s Board of Directors. The Board President serves as the Chairman of the Authority. The General Manager acts as the Executive Director, the District Secretary acts as the Secretary, and the Chief Financial Officer acts as the Treasurer of the Authority. See “THE AUTHORITY” herein. Sources of Payment for the Bonds The Bonds. The Bonds are being issued pursuant to the Joint Powers Act and an Indenture of Trust, dated as of October 1, 2018 (the “Indenture”), by and between the Authority and MUFG Union Bank, N.A., Los Angeles, California, as trustee (the “Trustee”). The Bonds are being issued to provide funding for the 2018 Project, as defined below. The proceeds of the Bonds will be used by the District for the acquisition, construction and installation of the 2018 Project on behalf of the Authority. A portion of the proceeds will be used to pay costs of issuance. The Bonds are secured by Pledged Revenues (as defined in the Indenture), consisting of Installment Payments (the “2018 Installment Payments”) and other amounts (other than payments related to indemnification of the Authority) to be paid by the District to the Authority, pursuant to an Installment Purchase Agreement, dated as of October 1, 2018, by and between the Authority and the District (the “Installment Purchase Agreement”) and amounts held in the Bond Payment Fund established under the Indenture. The 2018 Installment Payments are scheduled to be sufficient to pay, when due, the annual principal and interest on the Bonds. Pursuant to the Indenture, the Authority will assign to the Trustee, for the benefit of the Owners of the Bonds, all of its rights, title and interest under the Installment Purchase Agreement except for its right to be indemnified by the District. For a summary of the Indenture and the Installment Purchase Agreement see “APPENDIX A - SUMMARY OF LEGAL DOCUMENTS” herein. The Installment Payments. The Installment Purchase Agreement is being executed and delivered to finance the construction of water storage, treatment and transmission projects, including but not limited to pump station replacements, utility relocations, pipeline replacement, force main improvements, storage tank improvements, tank replacements, new reservoir and/or reservoir cover/liner replacements (the “2018 Project”). See “THE FINANCING PLAN” and “THE WATER SYSTEM.” The 2018 Installment Payments are secured by a charge and lien on Taxes and Revenues of the Water System and are payable from Taxes and Net Revenues, on a parity with:  the payments required to be made by the District under an installment sale agreement dated as of June 1, 1996 (the “1996 Installment Sale Agreement”) securing the District’s outstanding Variable Rate Demand Certificates of Participation (1996 Capital Projects) (the “1996 Certificates”),  the payments required to be made by the District under an installment purchase agreement dated as of March 1, 2010 (the “2010 Installment Purchase Agreement”) securing the Otay Water District Financing Authority’s outstanding Water Revenue Bonds, Series 2010A and Water Revenue Bonds, Series 2010B (collectively, the “2010 Bonds”),  The debt service payments on the District’s 2013 Water Revenue Refunding Bonds (the “2013 Bonds”), and  The debt service payments on the District’s 2016 Water Revenue Refunding Bonds (the “2016 Bonds”). See “SOURCES OF PAYMENT FOR THE BONDS” herein. 3 Collectively, the 1996 Installment Sale Agreement, the 2010 Installment Purchase Agreement, the 2013 Bonds, the 2016 Bonds are referred to herein as the “Existing Parity Obligations.” See “THE WATER SYSTEM - Outstanding Indebtedness of the District” herein. The Bonds are limited obligations of the Authority and are payable solely from and secured solely by the Pledged Revenues and amounts deposited in the Bond Payment Fund established under the Indenture. The District’s obligation to make the 2018 Installment Payments is a limited obligation of the District payable solely from Taxes and Net Revenues of the Water System, and neither the full faith and credit nor the taxing power of the District, the State of California or any of its political subdivisions is pledged for the payment of the Bonds. Neither the Bonds nor the obligation of the District to make 2018 Installment Payments constitutes an indebtedness of the Authority, the District, the State of California or any political subdivision thereof within the meaning of any constitutional or statutory debt limitation or restriction. No Reserve Fund The Authority will not establish or fund a reserve fund for the Bonds. Legal Matters Certain legal matters relating to the issuance of the Bonds are subject to the approving opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, Bond Counsel. Certain legal matters will be passed on for the District and the Authority by Artiano Shinoff, as General Counsel for the District and the Authority, and by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, as Disclosure Counsel to the District. Offering of the Bonds Authority for Issuance and Delivery. The Bonds are to be issued pursuant to the Joint Powers Act, the Indenture and by Resolution No. ____ of the Authority adopted on _________, 2018. Offering and Delivery of the Bonds. The Bonds are offered, when, as and if issued, subject to the approval as to their legality by Bond Counsel. It is anticipated that the Bonds, in book-entry form, will be available for delivery on or about October 25, 2018 through the facilities of The Depository Trust Company. Summaries Not Definitive The summaries and references contained herein with respect to the Indenture, the Bonds and other statutes or documents do not purport to be comprehensive or definitive and are qualified by reference to each such document or statute, and references to the Bonds are qualified in their entirety by reference to the form thereof included in the Indenture. Copies of these documents may be obtained after delivery of the Bonds from the District at 2554 Sweetwater Springs Blvd., Spring Valley, California 91978. THE BONDS General Provisions Payment of the Bonds. The Bonds will be issued in the form of fully registered bonds in denominations of $5,000 or any integral multiple thereof. Interest on the Bonds is payable at the rates per annum set forth on the inside front cover page hereof, on March 1, 2019 and semiannually on September 1 and March 1 of each year to and including the date of maturity (each, an “Interest Payment Date”). Interest on the Bonds will be computed on the basis of a year consisting of 360 days and twelve 30-day months. 4 Principal with respect to the Bonds is payable on September 1 in each of the years and in the amounts set forth on the inside front cover page hereof. The Bonds shall bear interest from the Interest Payment Date next preceding the date of authentication thereof unless: (a) a Bond is authenticated after the 15th day of the calendar month prior to an Interest Payment Date (each, a “Record Date”) and on or before the following Interest Payment Date, in which event it shall bear interest from such Interest Payment Date; or (b) a Bond is authenticated on or before February 15, 2019, in which event it shall bear interest from the date of initial delivery; provided, however, that if, as of the date of authentication of any Bond, interest thereon is in default, such Bond shall bear interest from the Interest Payment Date to which interest has previously been paid or made available for payment thereon. Interest on the Bonds shall be payable on each Interest Payment Date to the person whose name appears on the Registration Books as the Owner thereof as of the Record Date immediately preceding each such Interest Payment Date. Both the principal of and interest on the Bonds shall be payable in lawful money of the United States of America. Book-Entry-Only System. The Depository Trust Company (“DTC”), New York, New York, will act as securities depository for the Bonds. The Bonds will be issued as fully registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. Interest and principal on the Bonds will be payable when due by wire transfer of the Trustee to DTC which will, in turn, remit such interest and principal to DTC Participants (as defined herein), which are obligated, in turn, to remit such interest and principal to Beneficial Owners (as defined herein) of the Bonds (see “APPENDIX F - THE BOOK-ENTRY SYSTEM” herein). As long as DTC is the registered owner of the Bonds and DTC’s book-entry method is used for the Bonds, the Trustee will send any notices to Bond Owners only to DTC and not the Beneficial Owners. Discontinuance of Book-Entry-Only System. DTC may discontinue providing its services as securities depository with respect to the Bonds at any time by giving reasonable notice to the Authority or the Trustee. Under such circumstances, in the event that a successor securities depository is not obtained, Bonds are required to be printed and delivered as described in the Indenture. The Authority may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, the Bonds will be printed and delivered as described in the Indenture. In the event that the Bonds are no longer held in book-entry form, any Bond may, in accordance with its terms, be transferred or exchanged, pursuant to the provisions of the Indenture, upon surrender of such Bond for cancellation at the principal corporate trust office of the Trustee. Whenever any Bond or Bonds shall be surrendered for transfer or exchange, the Trustee shall execute and deliver a new Bond or Bonds for an aggregate principal amount of Bonds of authorized denominations of the same maturity. The Trustee may require the payment by the Bond Owner requesting such transfer or exchange of any tax or other governmental charge required to be paid with respect to such transfer or exchange. Redemption Optional Redemption. The Bonds maturing on or before September 1, __, are not subject to optional redemption prior to their respective stated maturities. The Bonds maturing on or after September 1, ____ shall be subject to optional redemption, in whole or in part, on any date on or after September 1, ____, from such maturities as are selected by the District in a Written Request of the District delivered to the Trustee, from any source of available funds provided to the Authority, at a redemption price equal to the principal amount of the Bonds to be redeemed, plus accrued interest thereon to the date of redemption, without premium. Mandatory Sinking Fund Redemption. The Bonds maturing on September 1, ___ (the “___ Term Bonds”) shall be paid at maturity and are subject to mandatory sinking fund redemption, in part by lot, 5 from Sinking Account payments as set forth in the following schedule, at a redemption price equal to the principal amount thereof to be redeemed, together with interest accrued thereon to the date fixed for redemption, without premium; provided, however, that if some but not all of the ____Term Bonds have been redeemed pursuant to the optional redemption provisions of the Indenture, the total amount of Sinking Account payments to be made subsequent to such redemption will be reduced in an amount equal to the principal amount of the ____ Term Bonds so redeemed by reducing each such future Sinking Account payments on a pro rata basis (as nearly as practicable) in integral multiples of $5,000, as will be designated pursuant to written notice filed by the District with the Trustee: Redemption Date (September 1) Principal Amount ________________________ Final Maturity. In lieu of such redemption, the Trustee may apply amounts in the Sinking Account to the purchase of Term Bonds at public or private sale for cancellation, as and when and at such prices (including brokerage and other charges, but excluding accrued interest, which is payable from the Interest Account) as may be directed by the District, except that the purchase price (exclusive of accrued interest) may not exceed the redemption price then applicable to the Term Bonds, as set forth in a Written Request of the District and subsequently cancelled or surrendered to the Trustee for cancellation. If during the twelve-month period immediately preceding any August 15 on which a Sinking Account payment is due, the District has purchased Term Bonds and surrendered them to the Trustee for cancellation, the par amount of any Term Bonds so purchased will be credited towards and will reduce the principal amount of such Term Bonds required to be redeemed on the succeeding September 1. Notice of Redemption; Rescission. When redemption is authorized or required, notice of redemption shall be given by the Trustee, not less than 30 nor more than 60 days prior to the redemption date, (i) so long as the Bonds are held under the Book-Entry System by DTC electronically to DTC or by such method as is acceptable to DTC, (ii) if the Bonds are no longer held under the Book-Entry System, to the respective Owners of any Bonds designated for redemption at their addresses appearing on the bond registration books of the Trustee by first-class mail, and (iii) to the Information Services. Such notice shall state the date of the notice, the redemption date, the redemption place and the redemption price and shall designate the CUSIP numbers, if any, 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 will also state that on said date there will become due and payable on each of said Bonds the Redemption Price thereof or of said specified portion of the principal thereof in the case of a Bond to be redeemed in part only, together with interest accrued with respect thereto to the redemption date, and that (provided that moneys for redemption have been deposited with the Trustee) from and after such redemption date interest thereon ceases to accrue, and will require that such Bond be then surrendered to the Trustee. Any failure to receive such notice or any defect in the notice or the delivery of such notice will not affect the validity of the redemption of any Bond. With respect to any notice of any optional redemption of Bonds, such notice may state that such redemption shall be conditional upon the receipt by the Trustee on or prior to the date fixed for such redemption of moneys sufficient to pay the principal of, premium, if any, and interest on such Bonds to be redeemed and that, if such moneys shall not have been so received, said notice shall be of no force and effect and the Trustee shall not be required to redeem such Bonds. In the event that such notice of redemption contains such a condition and such 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 to whom, and, in 6 the manner in which the notice of redemption was given, that such moneys were not so received and that the redemption shall not take place. Selection of Bonds for Redemption. Whenever provision is made for the optional redemption of less than all of the Bonds, the Trustee shall select the Bonds to be redeemed from all Bonds or such given portion of the Bonds not previously called for redemption, among maturities as directed by the District in a Written Request and within each maturity by lot. For purposes of such selection, the Trustee will treat each Bond as consisting of separate $5,000 portions and each such portion will be subject to redemption as if such portion were a separate Bond. Partial Redemption of Bonds. Upon surrender of any Bonds redeemed in part only, the Authority shall execute and the Trustee shall authenticate and deliver to the Owner thereof, at the expense of the District, a new Bond a new Bond or Bonds of Authorized Denominations, and of the same maturity date and interest rate, equal in aggregate principal amount to the unredeemed portion of the Bond surrendered. Effect of Notice of Redemption. If notice of redemption having been duly given pursuant to the Indenture and moneys for payment of the redemption price of, together with interest accrued to the redemption date on, the Bonds (or portions thereof) so called for redemption is held by the Trustee, on the redemption date designated in such notice, the Bonds (or portions thereof) so called for redemption shall become due and payable at the redemption price specified in such notice together with interest accrued thereon to the date fixed for redemption, interest on the Bonds so called for redemption shall cease to accrue, such Bonds (or portions thereof) shall cease to be entitled to any benefit or security under the Indenture, and the Owners of such Bonds shall have no rights in respect thereof except to receive payment of the Redemption Price and accrued interest. Neither the failure to receive any notice nor any defect therein shall not affect the sufficiency of the proceedings of redemption. 7 Scheduled Debt Service The following presents the scheduled annual debt service on the Bonds, assuming no optional redemption prior to maturity. Fiscal Year Ending June 30 Principal Interest Total 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 Total 8 Annual 2018 Installment Payments related to the Bonds, along with the expected annual Installment Payments and debt service for the outstanding Existing Parity Obligations, are set forth in the following table. Otay Water District Aggregate Parity Obligations Fiscal 1996 2010 2013 Bonds 2016 Bonds 2018 Total Year Ending Installment Installment Debt Debt Installment Parity June 30 Payments (1) Payments Service Service Payments Obligations 2019 $1,011,300 $ 3,714,856 $ 853,700 $ 2,218,456 2020 980,500 3,709,981 855,700 2,219,831 2021 949,700 3,707,981 856,500 2,218,456 2022 1,015,600 3,708,356 856,100 2,219,206 2023 980,400 3,705,981 854,500 2,226,706 2024 1,041,900 3,705,731 851,700 2,225,831 2025 1,002,300 3,700,862 - 2,226,581 2026 1,059,400 3,693,345 - 2,228,706 2027 1,112,100 3,688,589 - 2,227,081 2028 - 3,688,093 - 2,229,931 2029 - 3,681,540 - 2,232,731 2030 - 3,678,609 - 2,232,731 2031 - 3,673,823 - 2,229,932 2032 - 3,669,728 - 2,268,394 2033 - 3,665,558 - 2,268,894 2034 - 3,662,508 - 2,266,860 2035 - 3,655,086 - 2,270,807 2036 - 3,652,634 - 2,266,888 2037 - 3,644,495 - 2,268,525 2038 - 3,640,010 - - 2039 - 3,633,357 - - 2040 - 3,628,716 - - 2041 - 3,620,262 - - 2042 - - - - 2043 - - - - 2044 - - - - 2045 - - - - Total $9,153,200 $84,530,101 $5,128,200 $42,546,547 ____________________________________ (1) Variable interest rate. Calculated using 4.40% 25 Year Revenue Bonds Index as of July 10, 2018 as the assumed variable rate interest. Actual amounts will vary. In the prior fiscal year actual rates ranged from 0.9% to 1.5%. 9 THE FINANCING PLAN Estimated Sources and Uses of Funds Under the provisions of the Indenture, the Trustee will receive the proceeds from the sale of the Bonds and other funds and will apply them as follows: Sources: Principal Amount of Bonds Net Original Issue Premium Total Sources Uses: 2018 Project Fund Underwriter’s Discount Costs of Issuance Fund (1) Total Uses ____________________________________ (1) Expenses include fees of Bond Counsel, the Municipal Advisor, Disclosure Counsel, the Trustee, rating fees, costs of printing the Official Statement, and other costs of delivery of the Bonds. Proceeds deposited in the 2018 Project Fund will be used to fund capital expenditures of the District for storage, treatment and transmission projects, including but not limited to pump station replacements, utility relocations, pipeline replacement, force main improvements, storage tank improvements, tank replacements, new reservoir and/or reservoir cover/liner replacements. ! ! ! ! ! !( !(!( !(!(!( !(!( !( !(!(!( !(!( !( !(!( !(!(!( !(!( !(!( !( !( !(!( !( !(!( !( !( !(!( !( !(!( !( !( !( !( !(!( !( !( !(!( !(!( !( !( !( !( !(!( !( !( !( !( !(!( !(!( !( !( !(!( !(!( !(!( !(!( !( "CD "CD PADRE DAM MUNICIPALWATER DISTRICT LOWER OTAYRESERVOIR UPPER OTAYRESERVOIR SWEETWATERRESERVOIR LAKEMURRAY LOVELANDRESERVOIR ^ LAKEJENNINGS EL CAPITANRESERVOIR ME X IC O RALPH W. CHAPMANWATER RECYCLINGFACILITY SOUTH BAY WATERRECLEMATION PLANT Otay Headquarters^ SEWER FACILITIES County Mains !(Lift Station Mains RECYCLED FACILITIES Mains !(Reservoir!(Pump Station POTABLE FACILITIES !(Reservoir!(Pump Station SDCWA MainsMains San Diego County Water Authority Connections! CITY OFSAN DIEGO SWEETWATER AUTHORITY HELIX WATERDISTRICT CITY OFSAN DIEGO OPEN SPACE OPEN SPACE CITY OFSAN DIEGO PADRE DAM MUNICIPALWATER DISTRICT PADRE DAM MUNICIPALWATER DISTRICT !(Hydropnuematic Pump Station 11 OTAY WATER DISTRICT The District was formed in January 1956 pursuant to Section 71000 et seq., of the California Water Code, and joined the San Diego County Water Authority (which is a member of the Metropolitan Water District of Southern California) in September 1956 to acquire the right to purchase and distribute imported water throughout its service area. The San Diego County Water Authority (“CWA” or the “Water Authority”) is an agency responsible for the wholesale supply of water to its 24 public agency members in San Diego County. The District’s boundaries currently encompass an area of approximately 125 square miles and is generally located within the south central portion of San Diego County. The District serves a wide spectrum of communities, including southern El Cajon, La Mesa, Rancho San Diego, Jamul, Spring Valley, Bonita, eastern Chula Vista, and a small portion of the City of San Diego on Otay Mesa (the “Service Area”). The southern boundary of the District is the international border with Mexico. The District is the sole provider of water in the Service Area. The District provides water service to about 72 percent of its projected ultimate population. Ultimately, the District is projected to serve 308,000 people by 2035, creating an average daily demand of 40.9 million gallons of potable water per day (“mgd”). The District currently meets its potable demands with imported treated water from the Water Authority. The potable water is delivered via the Second San Diego County Aqueduct, (“Pipeline No. 4”) which is owned and operated by the Water Authority. The water is treated at the Water Authority’s Twin Oaks Water Treatment Plant (“WTP”), the Metropolitan Skinner WTP located in Riverside County, and a private developer’s (Poseidon) desalinated seawater WTP in Carlsbad. Pipeline No. 4 is the District’s primary supply system. The Water Authority has multiple flow control facilities or connections to Pipeline No. 4 that feed into the District’s water system. In addition, the District entered into another agreement with the Water Authority, known as the East County Regional Treated Water Improvement Program (“ECRTWIP Agreement”). The ECRTWIP Agreement provides for transmission of raw water to the Helix Water District’s R. M. Levy Water Treatment Plant (“Levy WTP”) for treatment and delivery to the Northern Service area of the District. The ECRTWIP Agreement allows access to the region’s raw water supply system and also provides treatment at the local facility. The District receives an average of 8.4 mgd from the Levy WTP. This additional source provides the District with a more diversified water supply. Through a 1999 agreement with the City of San Diego, the District may obtain up to 10 mgd of supply from the City’s Otay Water Treatment Plant (“Otay WTP”). The Otay WTP was originally constructed in 1940, and has a current rated capacity of 34.4 mgd. Under the terms of the agreement, the City of San Diego’s obligation to supply treated water to the District is contingent upon its surplus treatment capacity, beyond what the City of San Diego needs for its own area system. The District owns and operates a recycled water distribution network. Recycled water is used to irrigate golf courses, landscaping at schools, public parks, public right of ways, and various other approved uses in eastern Chula Vista. The District has two sources of recycled water supply: Recycled water produced locally at the District’s Ralph W. Chapman Water Recycling Facility (“RWCWRF”) and a recycled water supply produced at the City of San Diego’s South Bay Water Reclamation Plant (“SBWRP”). The RWCWRF is located near the intersection of Campo Road/Highway 94 and Singer Lane within the Middle Sweetwater River basin. The RWCWRF was originally constructed in 1979 and upgraded in 2012. It has a rated design capacity to produce 1.2 mgd of recycled water. The SBWRP has a rated capacity of 15 mgd and is located at Monument and Dairy Mart Roads near the international border, adjacent to the Tijuana River. The agreement between the District and the City of San Diego for purchase of recycled water from the SBWRP was finalized on October 20, 2003. In accordance with the agreement, the City of San Diego will provide an annual amount of at least 6 mgd of recycled water to the District. The term of the agreement is 20 years from January 1, 2007. Using these resources to meet recycled water demands on the Water System has resulted in the District being able to allocate 12 approximately 4,300 acre-feet per year of potable water to other uses. The District has sued the City of San Diego with respect to the rates charged to the District for the recycled water. The District does not expect the litigation to disrupt the delivery of the recycled water to the District. The District also owns and operates a wastewater collection system, providing public sewer service to approximately 4,714 customer accounts within the Jamacha drainage basin, which is located in the northern section of the District. Revenues from the District’s wastewater collection system are not pledged to the payment of the Bonds. THE WATER SYSTEM The following information concerning the Water System was obtained from District officials except where otherwise indicated. The audited financial statements of the District for the Fiscal Year ended June 30, 2017 are attached hereto as “APPENDIX B” and should be read in their entirety. Existing Facilities The District is divided into two distinct systems; the North District and South District, and five geographic areas. These five areas contain five potable water systems and a recycled water distribution system with two sources of supply. The systems are called Hillsdale, Regulatory, La Presa, Central Area, and Otay Mesa. The Hillsdale, Regulatory, and La Presa systems are collectively referred to as the North District, while the Central Area and Otay Mesa systems are collectively referred to as the South District. Recycled water service is currently limited to the South District. There are multiple pressure zones within each system, except Otay Mesa. North District. The Hillsdale system serves the northernmost part of the North District. The Regulatory system serves the sparsely developed eastern portion of the North District. The La Presa system serves the western part of the North District near Sweetwater reservoir and is the southernmost system of the North District. Two 10 million gallon reservoirs are located within the La Presa system and provide storage for the treated water delivered through a 36 inch pipeline, which connects to the Helix Water District system. The reservoirs within the La Presa system provide operational and emergency storage for the entire North District. South District. The Central Area system is roughly bounded by Interstate 805 on the west, Otay River on the south, the Lower Otay Reservoir on the east, and the Regulatory System on the north. The Otay Mesa system includes the extreme south portion of the District Service Area and is generally located between the Otay River on the north and the international border with Mexico on the south. The South District is expected to experience the most growth in the District’s Service Area. Potable Water Facilities - The principal facilities of the existing potable water system consist of five water supply connections with CWA, six water supply connections with the City of San Diego, seven connections with Helix Water District and two connections with Sweetwater Authority, 21 pump stations, over 727 miles of pipelines, and 40 storage reservoirs. The District currently meets all of its potable demands with imported treated water from CWA. Forty percent of this water is in turn purchased from the region’s primary water importer, the Metropolitan Water District of Southern California (“MWD”). The District also has entered into an agreement with the CWA to have the neighboring Helix Water District treat imported water on behalf of the District at the Levy WTP. See “OTAY WATER DISTRICT.” This action brought regional water treatment closer to customers, which helps reduce dependence on water treatment facilities located outside of San Diego County. Recycled Water Facilities - The principal facilities of the existing recycled water system consist of 2 recycled water supply sources, 3 pump stations, 104 miles of pipelines, and 4 storage reservoirs. 13 The District currently produces recycled water at the RWCWRF, which is owned and operated by the District. Recycled water from the RWCWRF and purchased recycled water from the SBWRP are delivered into storage reservoirs that provide recycled water service to recycled water customers. See “OTAY WATER DISTRICT.” Only when treatment facilities are unavailable due to maintenance issues is potable water used to supplement the recycled water system. Water Storage The District currently operates 40 potable reservoirs and 4 recycled reservoirs as shown below with a total capacity of 262.3 million gallons. The District estimates that the reservoirs are 50 percent full on a typical day. System Reservoirs Capacity (million gallons) Hillsdale 6 13.9 Regulatory 14 58.8 La Presa 7 12.7 Central Area 11 85.5 Otay Mesa 2 47.7 Total Potable 40 218.6 Recycled 4 43.7 Total Storage 44 262.3 Water Supply Service Area Water Supply - Potable. The District does not have a local source of surface water. The District purchases all of its potable water from the CWA either directly or indirectly from Helix Water District. Under a contractual arrangement with the CWA, the District receives potable water from the Helix Water District’s Levy WTP, and also has an emergency agreement with the City of San Diego to receive treated water in the case of a shutdown of CWA treated water Pipeline 4. Service Area Water Supply - Recycled. The District produces approximately 1.2 mgd of recycled water at the RWCWRF. The District has contracted with the City of San Diego to purchase up to 6 mgd of recycled water produced by the SBWRP. Construction of the required pump station, reservoir, and the 6- mile delivery system allowing the District to connect to the City of San Diego’s recycled water pipeline was completed in 2007. CWA Water Supply. Historically, the principal source of supply for the CWA’s service area has been water purchased from MWD for sale to the CWA member agencies. For the Fiscal Year ended June 30, 2017, the CWA supplied the District 27,002 acre-feet of water, approximately 6.4 percent of total CWA water supplies. As an alternative to purchasing all of its imported water from MWD, CWA began to diversify its purchases through supply transfers and dry-year transfers. Since 2003, CWA has been receiving a portion of its imported water pursuant to the terms of the Quantification Settlement Agreement (“QSA”) among the State of California acting by and through the Department of Fish and Game, the Coachella Valley Water District (“CVWD”), the Imperial Irrigation District (“IID”) and CWA, executed on October 10, 2003, the Water Transfer Agreement (defined below) and other QSA related agreements. Water that CWA receives from IID is conveyed through the Colorado River Aqueduct pursuant to an exchange agreement with MWD. CWA began receiving transfer water from IID in December 2003. Starting with the initial delivery of 10,000 acre-feet, the amount of water to be delivered is increasing according to an agreed- 14 upon schedule until the maximum transfer yield of 200,000 acre-feet per year is achieved in 2021. In addition, CWA’s portfolio includes imported supplies from water conserved as a result of the lining of the All-American Canal and the Coachella Canal. CWA began receiving water from the Coachella Canal Lining Project in 2007 and from the All-American Canal Lining Project in 2009. In 2018, CWA received a total of approximately 80,000 acre-feet from the Coachella Canal Lining Project and the All-American Canal Lining Project transfers. In 2017, MWD purchases represented approximately 40 percent of total CWA water supplies. By 2020, MWD purchases are expected to represent about 21 percent of total CWA supplies. The CWA continues to pursue supply diversification efforts for itself and the region, including long-term planning, recycling of local surface water, groundwater, recycled water, local seawater desalination and conservation efforts. A significant milestone in local supply development was reached at the end of 2012, when the CWA board of directors approved a 30-year water purchase agreement (“Water Purchase Agreement”) with Poseidon Resources (Channelside) LP for the purchase of 48,000 to 56,000 acre-feet of desalinated seawater from the Carlsbad Desalination Project (the “Carlsbad Project”). The Carlsbad Project came online in December 2015. In 2017, the Carlsbad Project represented 9 percent of the region’s water demand and is a significant advance in CWA’s long-term strategy to diversify and improve the reliability of the region’s water supply portfolio. CWA made a number of improvements to its aqueduct system and a water treatment plant to integrate desalinated water into the CWA aqueduct system, which cost CWA $80 million. In addition, a substantial portion of the cost of financing the Carlsbad Project was made by CWA under various agreements, including the Water Purchase Agreement. CWA incorporated the payments required under these agreements into its charges for water to member agencies in future years. CWA estimates that the financial impact of the Carlsbad Project will increase the supply cost by $59.2 million and transportation cost by $7.4 million per year. These amounts were incorporated into the CWA calendar year 2019 rate and into the District’s budget. Under its rate structure, the District intends to pass any increase in CWA rates directly along to District customers. Water storage facilities are also critical to assuring consistent water availability notwithstanding fluctuation in available supply. CWA has entered into agreements to expand available storage capacity. In 2010, the CWA issued over $600 million in water bonds to finance its Capital Improvement Program. One of the purposes of the Capital Improvement Program was to interconnect a number of member agency storage facilities. Another purpose was to enhance the CWA’s own storage capacity. In June 2014, after five years of construction, the largest water storage project in San Diego County history was completed. The San Vicente Dam Raise added 152,000 acre-feet of water storage capacity to the reservoir, enough to serve more than 300,000 homes for one year. CWA faces various challenges in the continued supply of water to the District and other member agencies. A description of these challenges as well as a variety of other operating information with respect to the CWA is included in certain disclosure documents prepared by CWA. CWA has entered into certain continuing disclosure agreements pursuant to which CWA is contractually obligated, for the benefit of owners of certain of its outstanding obligations, to file certain annual reports, notices of certain material events as defined under Rule 15c2-12 of the Securities Exchange Act of 1934 (“Rule 15c2-12”) and annual audited financial statements (the “CWA Information”) with the Municipal Securities Rulemaking Board which are available online at www.emma.msrb.org. None of such information is incorporated by reference into this Official Statement. 15 CWA HAS NOT REVIEWED THIS OFFICIAL STATEMENT AND HAS MADE NO REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THE INFORMATION CONTAINED OR INCORPORATED HEREIN, INCLUDING INFORMATION WITH REGARD TO CWA. CWA IS NOT CONTRACTUALLY OBLIGATED, AND HAS NOT UNDERTAKEN, TO UPDATE SUCH CWA INFORMATION, FOR THE BENEFIT OF THE DISTRICT OR THE OWNERS OF THE BONDS UNDER RULE 15c2-12. MWD Water Supply. MWD obtains its water supply from two primary sources: the Colorado River, via MWD’s Colorado River Aqueduct, and the State of California Department of Water Resources’ State Water Project (“SWP”), via the Edmund G. Brown California Aqueduct. CWA purchased approximately 25.0 percent of MWD’s supplies in Fiscal Year 2016-17, and has preferential rights to 18.27 percent of MWD’s supplies. MWD faces various challenges in the continued supply of imported water to CWA and other member agencies. A description of these challenges as well as a variety of other operating information with respect to MWD is included in certain disclosure documents prepared by MWD. MWD has entered into certain continuing disclosure agreements pursuant to which MWD is contractually obligated, for the benefit of owners of certain of its outstanding obligations, to file certain annual reports, notices of certain material events as defined under Rule 15c2-12 and annual audited financial statements (the “MWD Information”) with the Municipal Securities Rulemaking Board which are available online at www.emma.msrb.org. None of such information is incorporated by reference into this Official Statement. MWD HAS NOT REVIEWED THIS OFFICIAL STATEMENT AND HAS MADE NO REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THE INFORMATION CONTAINED OR INCORPORATED HEREIN, INCLUDING INFORMATION WITH REGARD TO MWD. MWD IS NOT CONTRACTUALLY OBLIGATED, AND HAS NOT UNDERTAKEN, TO UPDATE SUCH MWD INFORMATION, FOR THE BENEFIT OF THE DISTRICT OR THE OWNERS OF THE BONDS UNDER RULE 15c2-12. Drought Conditions and Response. On January 17, 2014, the California Governor declared a drought state of emergency through Proclamation 1-17-2014 (the “Proclamation”) with immediate effect throughout the state. The Proclamation included the following orders, among others: (a) local urban water suppliers, including the District, were encouraged to implement their local water shortage contingency plans; (b) local urban water suppliers, including the District, were encouraged to update their urban water management plans to prepare for extended drought conditions; (c) The State Department of Water Resources (“DWR”) and the State Water Resources Control Board (the “SWRCB”) were directed to expedite the processing of water transfers; (d) the SWRCB was directed to put water rights holders on notice that they may be required to cease or reduce water diversions in the future; (e) the SWRCB was directed to consider modifying requirements for reservoir releases or diversion limitations; and (f) DWR was directed to take necessary actions to protect water quality and supply in the Sacramento-San Joaquin River Delta/San Francisco Bay Estuary (the “Delta”), including the installation of temporary barriers or temporary water supply connections, while minimizing impacts to aquatic species. In addition, on July 15, 2014, the SWRCB adopted emergency measures requiring water suppliers to implement mandatory Statewide water conservation actions. On March 17, 2015, the SWRCB adopted additional emergency regulations limiting outdoor irrigation to two days per week, extending certain measures set forth in the July 15, 2014 action for an additional 270 days, prohibiting outdoor irrigation for 48 hours following rain and prohibiting restaurants from serving water to customers unless requested. MWD also invoked its Water Supply Allocation Plan (the “WSAP”) in response to the March 17, 2015 regulations. The WSAP provided for the equitable distribution of available water supplies in case of extreme water shortage within MWD’s service area. On April 14, 2015, MWD approved implementation of WSAP Level 3 (Water Supply Allocation) effective July 1, 2015, which among other things imposed a surcharge of between $1,480 and $2,960 per acre foot 16 of water usage above MWD members’ water allocation. No surcharges were required to be imposed on CWA or the District. On April 1, 2015, the California Governor issued an Executive Order extending the measures set forth in the Proclamation and adopting the following additional orders, among others: (i) the SWRCB was directed to impose restrictions to reduce potable urban water usage, including usage by commercial, industrial and institutional properties and golf courses, by 25 percent from 2013 amounts through February 28, 2016; portions of a water supplier’s service area with higher per capita use must achieve proportionally greater reductions than areas with lower per capita use; (ii) DWR was directed to lead a Statewide initiative to replace 50 million square feet of lawns with drought tolerant landscaping; (iii) the California Energy Commission was directed to implement a rebate program for replacement of inefficient appliances; (iv) urban water suppliers were required to provide monthly water usage, conservation and enforcement information; (v) service providers were required to monitor groundwater basin levels in accordance with California Water Code § 10933; (vi) permitting agencies were required to prioritize approval of water infrastructure and supply projects; and (vii) DWR was required to plan salinity barriers in the Delta. On May 6, 2015, the SWRCB adopted regulations in response to the Governor’s executive order that required the District to effect a 20 percent reduction from 2013 water usage. On November 13, 2015, the Governor issued Executive Order B-36-15, which called for an extension of urban water use restrictions that remained in effect until November 25, 2017, when the emergency regulations expired. On May 31, 2018, the Governor signed two bills as part of the ongoing efforts to “make water conservation a California way of life.” SB 606 (Hertzberg) and AB 1668 (Friedman). The legislation calls for creation of new urban water use efficiency standards for indoor and outdoor use that the State Water Board will adopt by regulations no later than June 30, 2022. Each urban retail water agency will annually, beginning November 2023, calculate its own objective, based on the water needed in its service area for efficient indoor residential water use, outdoor residential water use, commercial, industrial and institutional (CII) irrigation with dedicated meters. At this time, the District does not have a water supply shortage. Based on availability of imported and local water supplies this year, CWA has sufficient supplies for 2018-19 and given statewide and regional storage reserves, it is unlikely that the San Diego region will see a water supply shortage, due to hydrology, in the near term. CWA has supplies for 97 percent of current demand. Historic and Projected Water Supply. At its peak in Fiscal Year 2006-07, the District purchased 41,909 acre-feet of potable water from CWA, which included 3,073 acre-feet of potable water that was needed to provide water to the customers of the District’s mandated recycled water system. The District developed additional sources of recycled water and no longer needs to purchase potable water to supplement the recycled system. This, along with economic factors, voluntary and mandated conservation efforts, additional rainfall in some years and cooler temperatures in some years has resulted in a reduction of purchased potable water from CWA from the high of 41,909 acre-feet in Fiscal Year 2006-07 to a low of 25,501 acre-feet in Fiscal Year 2015-16. The District purchased 29,638 acre-feet in Fiscal Year 2017-18. 17 Set forth below is a summary of the District’s sources of water supply for the last ten fiscal years. HISTORIC WATER SUPPLY IN ACRE-FEET PER YEAR Fiscal Year Ended June 30 Produced Recycled Water Purchased Recycled Water Purchased Potable Water Total 2009 844 3,658 34,971 39,473 2010 1,033 2,870 31,175 35,078 2011 1,058 2,969 29,861 33,888 2012 655 3,171 30,543 34,369 2013 1,117 3,250 31,884 36,251 2014 1,155 3,881 33,409 38,385 2015 1,017 3,326 30,299 34,642 2016 1,009 2,670 25,501 29,180 2017 557 (1) 3,183 27,002 30,742 2018 867 (1) 3,352 29,638 33,857 ____________________________________ (1) The RWCWRF was not in operation for planned maintenance, consistent with regulatory and operating permit requirements. Source: Otay Water District. For Fiscal Year 2017-18 the District’s potable and recycled sales unit volumes were 12.2 million and 1.8 million, respectively. This equates to a 16 percent increase in potable volumes and a 12 percent increase in recycled volumes compared to volumes experienced during the period of State drought mandates in 2016. The growth in water sales was supported by the cancellation of the drought mandates and District growth. During 2017-18 the District added approximately 400 new potable customer meters and estimates an additional 700 new potable customer meters will be installed in 2019. The District currently expects that demand for potable water may reach as high as 46,000 acre-feet per at buildout. The District currently obtains 100 percent of its potable water supply as imported water from CWA. CWA, in turn, obtains imported water from MWD and IID. The reliability of the District’s potable supply is currently dependent on these wholesale agencies. The District is committed to investing in alternative water sources, such as groundwater or desalination that would reduce its dependence on imported water. For example, a desalination project may be constructed in the Mexican State of Baja California but at present, the District is not part of this project. 18 Set forth below is a summary of the District’s projection of water sources for the current and five succeeding Fiscal Years. PROJECTED WATER SUPPLY IN ACRE-FEET PER YEAR Fiscal Year Ending June 30 Produced Recycled Water (1) Purchased Recycled Water (2) Purchased Potable Water (3) Total 2019 1,049 2,544 30,836 34,429 2020 1,057 2,563 31,144 34,764 2021 1,070 2,595 31,455 35,120 2022 1,087 2,635 31,826 35,548 2023 1,109 2,688 32,287 36,084 2024 1,137 2,757 32,758 36,652 ____________________________________ (1) Maximum capacity for the District’s treatment plant is 1,456 acre-feet. (2) Purchased from the City of San Diego’s South Bay Water Reclamation Plant. (3) Includes purchases from CWA, raw water treated to potable level by the City of San Diego and the Helix Water District, and assumes no desalinated water purchases. Source: Otay Water District. Capital Improvement Program The District currently serves a population of approximately 223,000. Ultimately, the District is projected to serve 308,000 people and it estimates an additional $318 million investment in capital assets will be required through ultimate buildout, over approximately 30 years. The District reviews and updates its six-year Capital Improvement Program (the “CIP”) annually based on an analysis of the potable and recycled water demands most recently projected by developers, demographics, and population estimates by the San Diego Association of Governments (“SANDAG”). In addition, the District has commissioned a study on the local economy to further refine its projections. In the latest annual updated report entitled “Economic Outlook Update for the Otay Water District”, prepared by the Expera Group (“Expera”) and dated March 2018 (the “Report”), Expera projected new residential construction for Fiscal Years 2018 - 2024. The average number of residential units (single- family homes, rental units and condominiums) identified in the Report for the next five years is 1,642 units per year. Growth projections by SANDAG for the Series 12 Planned Land Use Inventory identified the District as having 56.8 percent of the new industrial projected development in San Diego County and 20.1 percent of the new residential projected development with land use densities higher than 4 dwelling units per acre. The Water System capital improvements are categorized by operational area of the District, which includes potable and recycled water operations. The CIP is then further separated into improvement categories - Expansion, Betterment, Replacement and New Supply. 19 The table below summarizes the current six-year CIP for the Water System and the categories of work to be completed, updated as part of the 2018-19 budget. Fiscal Year Ending June 30 2019 2020 2021 2022 2023 2024 Total Expansion $ 78,000 $ 399,000 $ 192,000 $1,263,000 $ 2,448,000 $ 1,653,000 $ 6,033,000 Betterment 789,000 2,401,000 554,000 1,219,000 1,723,000 2,084,000 8,770,000 Replacement 18,886,000 14,143,000 11,257,000 7,222,000 7,362,000 7,903,000 66,773,000 New Supply 3,000 3,000 3,000 3,000 3,000 32,000 47,000 Total $19,756,000 $16,946,000 $12,006,000 $9,707,000 $11,536,000 $11,672,000 $81,623,000 _______________________________ Source: Otay Water District. The District has identified the timing and method of funding the capital improvements over the next six years. The above improvement categories are designed to be funded with operational net cashflow, proceeds of the Bonds, transfers between operational areas, other capital related charges, reserves or a combination of these sources, and currently, the District expects to fund $28,000,000 of these improvements with Bond proceeds, $47,590,000 with reserves and/or operating income, and $6,033,000 with capacity fees and other fees. The District does not expect that additional debt financing for the Water System will occur during the next six years. In order to implement the CIP, the District anticipates that it will need to increase its rates as described herein (see “Water Charges” herein). However, there is no guarantee that the District will implement such rate increases at the amount and at the time anticipated in its planning documents. See “CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS - Proposition 218.” 20 Water Service Historical Water Use. Table No. 1 shows the amount of water usage, connections and revenue generated from water and recycled water sales in the last five Fiscal Years. TABLE NO. 1 CONNECTIONS AND WATER SALES VOLUME AND REVENUE Fiscal Years 2013-14 through 2017-18 Estimated 2013-14 2014-15 2015-16 2016-17 2017-18 (5) Potable Residential - Volume in ccf (1) 8,050,828 7,248,930 5,832,549 6,266,299 6,987,742 - Volume in acre-feet 18,482 16,641 13,390 14,385 16,042 Residential - Connections 44,826 44,941 45,038 45,086 45,318 Residential - Sales Revenue (2) $ 26,984 $ 24,266 $ 19,287 $ 24,512 $ 29,507 All Others - Volume in ccf 5,669,291 5,495,495 4,642,741 4,984,032 5,682,216 - Volume in acre-feet 13,015 12,615 10,658 11,442 13,045 All Others – Connections 4,322 4,367 4,387 4,416 4,587 All Others - Sales Revenue (2) $ 19,872 $ 19,759 $ 17,957 $ 21,754 $ 24,707 Recycled (3) Recycled - Volume in ccf 2,068,330 1,841,956 1,591,677 1,625,768 1,661,454 - Volume in acre-feet 4,748 4,228 3,654 3,732 3,814 Recycled – Connections 702 705 708 721 720 Recycled - Sales Revenue (2) $ 9,245 $ 8,025 $ 7,637 $ 8,868 $ 9,177 Total Total Volume in ccf 15,788,449 14,586,381 12,066,967 12,876,099 14,331,412 Total Volume in acre-feet 36,245 33,484 27,702 29,559 32,900 Total Connections 49,850 50,013 50,133 50,223 50,625 Total Sales Revenue (2) $ 56,101 $ 52,050 $ 44,881 $ 55,134 $ 63,391 Fixed Charges (2) (4) $ 25,186 $ 27,085 $ 29,059 $ 28,586 $ 28,915 Total Revenue (2) $ 81,287 $ 79,135 $ 73,940 $ 83,720 $ 92,306 ____________________________________ (1) ccf refers to a measurement of 100 cubic feet (1 cubic foot = 7.48 gallons). (2) Dollars in thousands. (3) The District receives a credit of $185 per acre-foot and $200 per acre-foot from MWD and CWA, respectively for every acre-foot of recycled water sold. (4) Includes fixed charges, energy charges and delinquency collections on both potable and recycled water sales. (5) Includes fixed actual water sales value and revenue from June 1, 2018 to June 30, 2018, forecasted water sales volume and revenue from June 1, 2018 to June 30, 2018, and forecasted connections as of June 30, 2018. Source: Otay Water District. 21 Table No. 2 shows the 10 largest water users for Fiscal Year 2017-18. TABLE NO. 2 TEN LARGEST CUSTOMERS BY WATER SALES REVENUES (1) Year ended June 30, 2018 Customer Usage in CCF (2) % of Water System Consumption Water Sales Revenues % of Total Water Sales Revenues City of Chula Vista 658,655 4.7% $ 4,220,009 4.6% Eastlake III Community 217,434 1.5% 1,230,790 1.3% State of California 231,976 1.7% 1,127,462 1.2% County of San Diego 167,318 1.2% 981,647 1.1% Sweetwater Union High School District 137,010 1.0% 853,335 0.9% Chula Vista Elementary School District 117,774 0.8% 817,826 0.9% Eastlake Country Club 152,552 1.1% 569,602 0.6% Windingwalk Master Association 71,576 0.5% 438,215 0.5% Eastlake I HOA 66,871 0.5% 429,266 0.5% Elite Athlete Services, LLC 76,012 0.5% 400,748 0.4% Total 1,897,178 13.5% $11,068,900 12.0% ____________________________________ (1) Includes both potable and recycled water sales and excludes fixed charges. (2) Hundred cubic feet. Source: Otay Water District. Water Charges Water Service Rates. The District held a public hearing on October 4, 2017 and approved a five-year schedule of rates, which included authorization to raise rates by up to 10 percent per year during the five year period for costs other than CWA, City of San Diego and MWD rate increases. Authorization was also approved to pass through all CWA, City of San Diego and MWD increases without limitation during the five year period. There was no rate increase as of January 1, 2018. The adopted rate increase effective January 1, 2019 is 3.2% The Board of Directors is expected to continue to take action each year through 2022 to set rates in accordance with the October 4, 2017 rate action. However, there can be no assurance that rates will be increased as contemplated herein. All rate increases are subject to the procedural and substantive provisions of Proposition 218. See “CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS - Proposition 218” below. Based on its internal rate model updated in June 2018 and the need to fund the CIP, the District anticipates that it will need to increase its rates by approximately 3.2 percent in each of the next four years. The water rate structure uses both fixed and variable charges. All potable water customer classes are charged the two “monthly fixed charges” based on the meter size as shown in Table No. 3. Recycled customers do not receive water from MWD or CWA and therefore do not pay the pass-through charge. The commodity or consumption rates as outlined in Table No. 4 are variable in that they are charges per unit. The District also uses an inclining block rate structure for the commodity rate for residential uses. 22 TABLE NO. 3 MONTHLY FIXED CHARGES As of January 1, 2018 Meter Size Residential Multi- Residential Business/ Publicly Owned Irrigation/ Commercial Agriculture Recycled Irrigation Recycled Commercial MWD/CWA Passthrough (1) Fire Service 3/4” $17.38 $ 38.21 $ 35.99 $ 30.40 $ 31.11 $ 36.85 $ 15.45 1” 24.56 53.97 50.83 42.93 43.94 52.04 28.68 1 1/2” 42.49 93.37 87.95 74.28 76.04 90.06 64.85 2” 64.00 140.61 132.45 111.85 114.50 135.63 110.30 3” N/A 266.66 251.19 212.13 217.15 257.21 234.60 4” N/A 408.50 384.79 324.98 332.67 394.01 375.68 6” N/A 802.55 755.97 638.44 653.54 774.07 769.02 8” N/A 1,275.34 1,201.32 1,014.56 1,038.56 1,230.08 1,241.89 10” N/A 1,826.91 1,720.86 1,453.33 1,487.72 1,762.08 1,787.55 Fire Service: ≤ 3” $20.77 ≥ 4” 27.98 ____________________________________ (1) Potable only. Source: Otay Water District. TABLE NO. 4 COMMODITY RATES As of January 1, 2018 Units Residential Units Multi- Residential 1-10 $3.05 0-4 $2.85 11-22 5.44 5-9 5.17 23 + 7.03 10+ 6.35 Units Business/ Publicly Owned Irrigation/ Commercial Agriculture Recycled Irrigation Recycled Commercial All $3.61 $5.27 $4.26 $3.01 ____________________________________ Source: Otay Water District. 23 As previously noted, the District has projected that future rate increases will be necessary to implement the current six-year CIP. Additionally, the rates, charges and fees may be increased each year to pass- through additional actual cost increases imposed by the City of San Diego, CWA or MWD if such increases are greater than already factored in to the District’s rates. The average residential customer uses 13 units of water per month. One unit of water is equal to 100 cubic feet of water (one cubic foot of water equals 7.48 gallons). Customers outside the District and tanker trucks are charged two times the commodity rate. Table No. 5 compares average residential water rates charged by the District with surrounding cities and other water agencies in San Diego County. TABLE NO. 5 COMPARISON OF AVERAGE RESIDENTIAL WATER RATES As of July 1, 2018 City/Water Agency Average Rates (1) (2) (3) Lakeside $ 67.41 San Dieguito 76.01 Santa Fe 78.52 Otay Water District 84.25 Oceanside 85.54 Carlsbad 86.83 Poway 88.54 Sweetwater 89.88 Vallecitos 89.88 Helix 92.30 Olivenhain 92.92 San Diego 96.79 Del Mar 97.87 Vista 98.60 Escondido 105.17 Rincon 106.80 Valley Center 111.85 Yuima 113.06 Rainbow 114.76 Fallbrook 117.00 Ramona 119.56 Padre Dam 130.78 ____________________________________ (1) These amounts reflect the charges on the water bills of various agencies and cities. Availability fees and general obligation debt are not included in this total. (2) Average rates based on assumed 13 units (hcf) water use and 3/4” meter size. (3) Based on rates to be effective as of January 1, 2019. Source: Otay Water District. 24 Delinquencies. Accounts receivable that have not been paid in over 60 days represent less than 0.21 percent of the District’s annual water sales for the last two Fiscal Years. Accounts receivable between 30 to 60 days delinquent in payment have averaged 0.84 percent of the District’s annual water sales for the last two Fiscal Years. In the last three Fiscal Years, the District has written off less than $80,500 a year in uncollectible accounts. The collection process includes automatic dialers, making it possible to address collections of smaller balances. The District has improved the collection process related to properties in foreclosure by collecting deposits and locking all vacant properties. The District has also provided convenient payment options by introducing payments by telephone and via the Internet, electronic bill presentation, recurring payments via credit card, and the ability to make water payments at select retailers using the same electronic network used by the District’s bank. The District has increased the availability of account information by introducing 24/7 Interactive Voice Response. In addition, with the improvements in online banking systems, the turnaround time on payment processing is only 2 days. These improvements have all assisted the District in better managing its accounts receivable. The District continues to be focused on finding new ways to assist customers in managing their accounts. Recently, the District expanded its delinquent notification process to include an additional bill for closed accounts with outstanding balances and an email and auto dial notification for closed accounts one week prior to being sent to an outside collection agency. Other Charges. For all connections over a 450 foot elevation, the District charges an energy charge of $0.056 per 100 feet of elevation over 450 feet. Capacity Fees and Meter Fees. The District charges capacity fees to connect to the Water System. As of July 1, 2018, the capacity fees for a ¾-inch meter are $7,065 plus a new water supply charge of $825 for a single family residential connection, increased quarterly according to the Engineering News-Record index. The District also charges a meter fee for the materials and installation cost of a meter. The meter fees range from $235 for a single family residence to $11,841 for a 10” meter. Availability Fees. The District levies and collects annual standby availability charges. Current legislation provides that any availability charge in excess of $10 per acre shall be used only for the purpose of the improvement district for which it was assessed. Therefore, availability fees shown in “Availability/Annexation Fees” Table No. 13 include only the first $10 of availability fees. Annexation Fees. When service is requested outside the boundaries of the District, the land to be serviced is annexed and an annexation fee is charged by the District. Current annexation fees are $2,089 for single family residential connections and are adjusted quarterly according to the Engineering News- Record index. Taxes The County levies a 1% ad valorem tax on behalf of all taxing agencies in the County, including the District. For Fiscal Year 2017-18, the District’s share of such property tax was $3.8 million, representing an increase of approximately $350,000 from amounts received in Fiscal Year 2016-17. Such taxes are a source of payment for the Installment Payments due under the 1996 Installment Sale Agreement, the 2010 Installment Purchase Agreement and the 2018 Installment Purchase Agreement, and debt service on the 2013 Bonds and the 2016 Bonds. See “SOURCES OF PAYMENT FOR THE BONDS.” All property is assessed using full cash value as defined by Article XIIIA of the State Constitution. State law provides exemptions from ad valorem property taxation for certain classes of property such as churches, colleges, non-profit hospitals and charitable institutions. The taxes collected are allocated to taxing agencies within San Diego County, including the District, on the basis of a formula established by State law enacted in 1979 and modified from time to time. Under this formula, the County and all other taxing entities receive a base year allocation plus an allocation on the basis of “situs” growth in assessed value (due to new construction, change of ownership, or a 2% inflation allowance allowed under Article XIIIA of the State Constitution) prorated among the 25 jurisdictions which serve the tax rate area within which the growth occurs. Tax rate areas are groups of parcels which are taxed by the same taxing entities. Cities, counties, special districts and school districts share the growth of “base” revenues from each tax rate area. Assessed valuation growth is cumulative, i.e., each year’s growth in property value becomes part of each District’s allocation in the following year. Historical assessed valuations for the District may be found in the District’s Comprehensive Annual Financial Report, attached hereto as “APPENDIX B.” During the economic recession between 2008-09 and 2012-13, property values in the District declined by approximately 15 percent. The District’s assessed value has had moderate increases in recent years, with the Fiscal Year 2018-19 assessed value of $_______ billion slightly [higher] than the 2017-18 assessed value of $29.4 billion. A portion of the District’s tax base is within a redevelopment plan area. The availability of property tax revenue from growth in the tax base was affected by the establishment of redevelopment agencies which, under certain circumstances, were entitled to revenues resulting from the increase in certain property values. However, with the dissolution of redevelopment agencies Statewide as of February 1, 2012, the District receives additional property tax. In Fiscal Year 2017-18 the District received $26,568 in redevelopment related property tax. Litigation is pending against the County and certain taxing agencies relating to the calculation and distribution of redevelopment tax sharing amounts between school districts, college districts and other taxing agencies such as cities, the County and special districts. The District expects that any reallocation of the District’s share of redevelopment property tax sharing as a result of the litigation will not be material. California law exempts $7,000 of the assessed valuation of an owner-occupied dwelling but this exemption does not result in any loss of revenue to local agencies since an amount equivalent to the taxes which would have been payable on such exempt values is made up by the State. Under AB 454 (Statutes of 1987, Chapter 921), the State reports to each county auditor-controller only the county-wide unitary taxable value of State-assessed utility property, without an indication of the distribution of the value among tax rate areas. The provisions of AB 454 apply to all State-assessed property except railroads and non-unitary properties, and do not constitute an elimination of a revision of the method of assessing utilities by the State Board of Equalization. AB 454 allows generally valuation growth or decline of State-assessed unitary property to be shared by all jurisdictions within a county. From time to time, legislation has been considered as part of the State budget to shift the share of the 1% ad valorem property tax collected by counties from special districts to school districts or other governmental entities (the “ERAF Shift”). While legislation enacted in connection with the Fiscal Year 1992-93 State budget shifted approximately 35 percent of many special districts’ shares of the countywide 1% ad valorem tax, the share of the countywide 1% ad valorem tax pledged to debt service by special districts was exempted. None of the State budgets enacted since Fiscal Year 1992-93 have permanently reallocated additional portions of the special districts’ shares of the countywide 1% ad valorem tax, although there have been temporary shifts as well as deferrals. However, in 2009, the California legislature approved amendments to the 2009-10 Budget to close its anticipated $26.3 billion budget shortfall. The approved amendments included borrowing from local governments by withholding of the equivalent of 8 percent of Fiscal Year 2008-09 property related tax revenues from cities’, counties’ and special districts’ property tax collections under provisions of Proposition 1A (approved by the voters in 2004), which the State was required to repay with interest within three years. The first (and to date, only) shift occurred in Fiscal Year 2009-10. Fiscal Year 2012- 13 was the first year that another shift was allowable, but the State has not implemented another borrowing yet. There can be no assurance that the share of the 1% ad valorem property tax the District currently receives will not be reduced further or deferred or delayed pursuant to State legislation enacted in the future to 26 address future State budget deficits. See Table Nos. 12 and 13 for historic and projected receipts of Taxes. Personnel The District has 137 full-time positions budgeted for Fiscal Year 2018-19. The OWD Employee Association represents 100 of these full-time employees as a collective bargaining unit. The District has not experienced any strikes and continues to have positive labor relations, which includes a negotiated multi-year Collective Bargaining Agreement. This agreement, the Memorandum of Understanding (“MOU”), with amendments, is in effect from July 1, 2014 to June 30, 2019. Retirement Program This caption contains certain information relating to the California Public Employees Retirement System (“CalPERS”). The information is primarily derived from information produced by CalPERS, its independent accountants and its actuaries. The District has not independently verified the information provided by CalPERS and makes no representations nor expresses any opinion as to the accuracy of the information provided by CalPERS. The comprehensive annual financial reports of CalPERS are available on its Internet website at www.calpers.ca.gov. The CalPERS website also contains CalPERS’ most recent actuarial valuation reports and other information concerning benefits and other matters. The textual reference to such Internet website is provided for convenience only. None of the information on such Internet website is incorporated by reference herein. The District cannot guarantee the accuracy of such information. Actuarial assessments are “forward-looking” statements that reflect the judgment of the fiduciaries of the pension plans, and are based upon a variety of assumptions, one or more of which may not materialize or be changed in the future. Plan Description. The District provides retirement benefits, disability benefits, periodic cost-of-living adjustments, and death benefits to plan members and beneficiaries (the “Plan”). The Plan is part of the CalPERS, an agent multiple-employer plan administered by CalPERS, which acts as a common investment and administrative agent for participating public employers within the State. Benefit provisions are established by State statute and District Resolution. California Public Employees’ Pension Reform Act of 2013. On September 12, 2012, the Governor signed into law the California Public Employees’ Pension Reform Act of 2013 (the “Reform Act” or “PEPRA”), made changes to CalPERS Plans, most substantially affecting new employees hired after January 1, 2013 (the “Implementation Date”). For non-safety CalPERS participants hired after the Implementation Date, the Reform Act changes the normal retirement age by increasing the eligibility for the 2% age factor from age 55 to 62 and increases the eligibility requirement for the maximum age factor of 2.5% to age 67. The Reform Act also: (i) requires all new participants enrolled in CalPERS after the Implementation Date to contribute at least 50% of the total annual normal cost of their pension benefit each year as determined by an actuary to a maximum of 8% of salary, (ii) requires CalPERS to determine the final compensation amount for employees based upon the highest annual compensation earnable averaged over a consecutive 36-month period as the basis for calculating retirement benefits for new participants enrolled after the Implementation Date, and (iii) caps “pensionable compensation” for new participants enrolled after the Implementation Date at 100% of the federal Social Security contribution and benefit base for members participating in Social Security or 120% for members not participating in social security, while excluding previously allowed forms of compensation under the formula such as payments for unused vacation, annual leave, personal leave, sick leave, or compensatory time off. 27 Benefit Tiers. Due to PEPRA, the District has one benefit tier for employees hired prior to January 1, 2013 (“Tier 1”) and one for employees subject to PEPRA (“PEPRA Tier”). Ultimately, the Reform Act is expected to reduce the District’s long-term pension obligation as existing employees retire and new employees are hired to replace them. The Plans’ provisions and benefits in effect at June 30, 2018, are summarized as follows: Tier 1 PEPRA Tier Benefit Formula 2.7% at 55 2% at 62 Benefit Vesting Schedule 5 years service 5 years service Benefit Payments Monthly for life Monthly for life Retirement Age 50 - 55 52 - 67 Monthly Benefits, as a % of Eligible Compensation 2.0% to 2.7% 1.0% to 2.5% Required Employee Contribution Rates 8% 6.25% Required Employer Contribution Rates for 2018-19 (1) 11.150% 11.150% ____________________________________ (1) Normal cost only, excludes funding of the unfunded actuarial liability which is calculated as a fixed amount and no longer as a percent of payroll. See Table No. 7 below. Funding Policy. Active members in the Plan are required to contribute 8% of their annual covered salary and employees in the PEPRA Tier are required to contribute 6.25% of their annual covered salary. Actuarial Methods and Assumptions Used to Determine Total Pension Liability. The total pension liabilities in the June 30, 2017 actuarial valuation were determined using the following actuarial assumptions: Valuation Date June 30, 2016 Measurement Date June 30, 2017 Actuarial Cost Method Entry-Age Normal Cost Method Actuarial Assumptions: Discount Rate 7.25% Inflation 2.75% Payroll Growth 3.0% Projected Salary Increase 3.3% - 14.2% (1) Investment Rate of Return 7.5% (2) ____________________________________ (1) Depending on age, service and type of employment. (2) Net of pension plan investment expenses, including inflation. The underlying mortality assumptions and all other actuarial assumptions used in the June 30, 2017 valuation were based on the results of a January 2014 actuarial experience study for the period 1997 to 2011. Further details of the Experience Study can be found on the CalPERS website. Changes in Actuarial Assumptions. Changes in Actuarial Assumptions generally take two years to affect the District’s contribution rate due to the time required by CalPERS to calculate and implement the change. For example, a change made effective July 1, 2017 will be reflected in the District’s contribution rates (normal cost or unfunded liability) for Fiscal Year 2019-20. 28 On March 14, 2012, the CalPERS Board of Administration approved a change in the inflation assumption used in the actuarial assumptions used to determine employer contribution rates. This reduced the assumed investment return from 7.75% to 7.50%, reduced the long-term payroll growth assumption from 3.25% to 3.0%, and adjusted the inflation component of individual salary scales from 3% to 2.75%. On April 17, 2013, the CalPERS Board of Administration approved a plan: (i) to replace the current 15- year asset-smoothing policy with a 5-year direct-rate smoothing process; and (ii) to replace the current 30-year rolling amortization of unfunded liabilities with a 30-year fixed amortization period. CalPERS’ Chief Actuary stated that the revised approach provides a single measure of funded status and unfunded liabilities, less rate volatility in extreme years, a faster path to full funding and more transparency to employers about future contribution rates. These changes accelerate the repayment of unfunded liabilities (including CalPERS’ Fiscal Year 2009 market losses) of the District’s Plan in the near term. These changes are reflected beginning with the June 30, 2014 actuarial valuation, which affected contribution rates for Fiscal Year 2015-16 and thereafter. On February 19, 2014, the CalPERS Board of Administration approved changes to actuarial assumptions and methods based upon a recently completed experience study. These changes include: moving from using smoothing of the market value of assets to obtain the actuarial value of assets to direct smoothing of employer contribution rates; increased life expectancy; changes to retirement ages (earlier for some groups and later for others); lower rates of disability retirement; and other changes. On December 21, 2016, the CalPERS Board of Administration approved an incremental lowering of the discount rate from 7.5% to 7.0% over the following three Fiscal Years. For Fiscal Years 2017-18, 2018- 19 and 2019-20, the Board of Administration approved discount rates of 7.375%, 7.25% and 7.0%, respectively. While the full impact of the discount rate changes on the District is not yet reflected in the District’s contribution rates, CalPERS expected such changes to increase the District’s employer rates by approximately 2% of normal cost as a percent of payroll. CalPERS also expected the discount rate changes to result in increased unfunded accrued liability payments for employers, and estimated that the District will see such payments increase by 30% to 40%. Based on the revised discount rates, over the next seven years the District expected its annual payments to double compared to the amount paid in Fiscal Year 2017-18. The District paid $30,000,000 to CalPERS in August 2018 to reduce its unfunded liability and future contribution rate increases. The District expects that the CalPERS contribution rates will stabilize as a result of the contribution toward the unfunded liability. Contribution Rates. The contribution requirements of Plan members and the District are established by CalPERS. The District’s percentage of payroll for CalPERS payments for the Tier 1 employee Plan for Fiscal Years 2013-14 through 2016-17 are shown in the table below. These rates do not include the employees’ contribution rates. TABLE NO. 6 EMPLOYER RETIREMENT CONTRIBUTION RATES Normal Unfunded Actuarial Total Fiscal Year Cost Liability (UAL) Rate Rate 2013-14 10.250% 15.185% 25.435% 2014-15 9.715 19.437 29.152 2015-16 10.408 20.404 30.812 2016-17 10.748 21.883 32.631 ____________________________________ Source: California Public Employees’ Retirement System. 29 CalPERS modified the calculation of the contribution rates beginning in Fiscal Year 2017-18. They now represent only the employer’s normal cost as a percentage of payroll, and include a dollar amount for the amortization of the unfunded actuarial liability (“UAL”). Shown in Table No. 7 are the June 30, 2017 CalPERS projections of the normal cost and amortization of the UAL prior to the District’s early payment of $31.8 million in August 2018, and the District’s projected new estimated UAL payments following the payment. For comparison, the normal cost for 2016-17 was 10.748% of payroll. TABLE NO. 7 ACTUAL AND PROJECTED EMPLOYER RETIREMENT CONTRIBUTIONS Fiscal Year Normal Cost Original Amortization of UAL (1) Projected Amortization of UAL (2) 2017-18 10.692% $3,190,518 $3,190,518 2018-19 11.150 3,577,723 3,577,723 2019-20 11.545 4,005,195 1,092,000 2020-21 12.300 4,317,000 1,287,000 2021-22 12.300 4,691,000 1,430,000 2022-23 12.300 5,021,000 1,501,000 ____________________________________ (1) Projected by CalPERS based on various assumptions as of July 2018. (2) Projected by the District to reflect payment of $31.8 million to CalPERS in August 2018. Source: California Public Employees’ Retirement System. Annual Pension Costs. A five-year history of the District’s required annual pension costs is shown in the table below. The required contribution was determined as part of an annual actuarial valuation. The most recent actuarial assumptions are described above under the caption “Actuarial Methods and Assumptions Used to Determine Total Pension Liability.” TABLE NO. 8 FIVE-YEAR TREND INFORMATION FOR ANNUAL PENSION COSTS COMBINED EMPLOYER AND EMPLOYEE COSTS Fiscal Year Annual Pension Cost (APC) 2013-14 $3,294,341 2014-15 3,525,338 2015-16 3,870,544 2016-17 4,157,354 2017-18 4,310,436 30 Pension Liabilities. The District’s net pension liability for the Plan is measured as the total pension liability, less the pension plan’s fiduciary net position. The net pension liability of the Plan was measured as of June 30, 2017, using the annual actuarial valuation as of June 30, 2016 rolled forward to June 30, 2017 using standard update procedures. The District’s changes in net pension liability for the Plan between June 30, 2016 and 2017 was as follows: Increase (Decrease) Total Pension Liability Plan Fiduciary Net Position Net Pension Liability/(Asset) Balance at: 6/30/2016 $119,095,572 $73,846,128 $45,249,444 Changes Recognized for the Measurement Period: Service Cost 2,556,902 - 2,556,902 Interest on Total Pension Liability 8,836,284 - 8,836,284 Changes of Benefit Terms - - - Changes of Assumptions 7,308,486 - 7,308,486 Differences Between Actual and Expected Experience (1,208,593) - (1,208,593) Contribution – Employer - 4,105,810 (4,105,810) Contribution – Employee - 1,014,329 (1,014,329) Net Investment Income - 8,149,097 (8,149,097) Benefit Payments, Including Refunds of Employee Contributions (5,779,040) (5,779,040) - Administrative Expense - (109,029) 109,029 Net Changes during 2016-17 11,714,039 7,381,167 4,332,872 Balance at: 6/30/2017 $130,809,611 $81,227,295 $49,582,316 These figures do not reflect the $30 million payment by the District to CalPERS in August 2018. Sensitivity of the Net Pension Liability to Changes in the Discount Rate. The following presents the District’s net pension liability as of June 30, 2017, calculated by CalPERS using the discount rate of 7.25%, as well as what the District’s net pension liability would be if it were calculated using a discount rate of 6.0%, 7.0% and 8.0%. Discount Rate Unfunded Accrued Liability (UAL) 7.25% $47,725,131 6.0 68,916,533 7.0 51,277,763 8.0 36,636,951 See Note 6 of the District’s Comprehensive Annual Financial Report included in “APPENDIX B” for further information about the Plan. These figures also do not reflect the District’s $30 million payment towards the UAL in August 2018. 31 Other Post-Employment Benefits Plan Description. The District’s defined benefit post-employment healthcare plan (“DPHP”) provides medical benefits to eligible retired District employees and beneficiaries. DPHP is part of the Public Agency portion of the California Employers’ Retiree Benefit Trust Fund (“CERBT”), an agent multiple employer plan administered by CalPERS, which acts as a common investment and administrative agent for participating public employers within the State of California. CalPERS issues a separate Comprehensive Annual Financial Report. Copies of the CalPERS’ annual financial report may be obtained from the CalPERS Executive Office, 400 P Street, Sacramento, California 95814. Funding Policy. The contribution requirements of plan members and the District are established and may be amended by the Board of Directors. Effective January 1, 2013, represented employees hired prior to January 1, 2013 or hired on or after January 1, 2013 from another public agency that has reciprocity without having a break in service of more than six months, contribute .75% of covered salaries. In addition, unrepresented and represented employees hired on or after January 1, 2013, and do not have reciprocity from another public agency, contribute 1.75% and 2.5% of covered salaries, respectively. DPHP members receiving benefits contribute based on their selected plan options of EPO, HMO or PPO and whether they are outside the State of California. Contributions by plan members range from $0 to $165 per month for coverage to age 65, and from $0 to $202 per month, respectively, thereafter. Annual Other Post-Employment Benefits (OPEB) Cost and Net OPEB Obligation/Asset. The District’s annual OPEB cost (expense) is calculated based on the annual determined contribution (“ADC”) of the employer, an amount actuarially determined in accordance with the parameters of GASB Statement 45. The ADC represents a level of funding that, if paid on an ongoing basis, is projected to cover the normal annual cost. Any unfunded actuarial liability (or funding excess) is amortized over a period not to exceed thirty years. The current ADC rate of annual covered payroll is 8.9%. The following table shows the components of the District’s annual OPEB cost for the year ended June 30, 2017, the amount actually contributed to the plan, and changes in the District’s net OPEB obligation/asset: Annual Required Contribution (ADC) $ 1,245,000 Interest on Net OPEB (Asset) (907,667) Adjustment to ARC 911,000 Annual OPEB Cost 1,248,333 Contributions Made 2,284,420 Increase in Net OPEB (Asset) (1,036,087) Net OPEB (Asset) - Beginning of Year (12,519,549) Net OPEB (Asset) - End of Year $(13,555,636) In addition to the ADC, the District has contributed cash benefit payments outside the trust (healthcare premium payments for retirees to Special District Risk Management Authority (“SDRMA”), which are included in the contributions shown above. 32 The District’s annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation (asset) for the Fiscal Years ending June 30, 2017, 2016 and 2015 were as follows: TREND INFORMATION FOR CERBT Fiscal Year Annual OPEB Cost % of OPEB Cost Contributed Net OPEB (Asset) (1) 2016-17 $1,248,333 183% $(13,555,636) 2015-16 1,217,252 186 (12,519,549) 2014-15 1,373,063 179 (11,472,386) ____________________________________ (1) Represents funds on deposit with the CERBT administrator, CalPERS. Source: Otay Water District. Funded Status and Funding Progress. Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress presents information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for the benefits. Actuarial Valuation Date Actuarial Valuation of Assets Entry Age Actuarial Accrued Liability (AAL) Unfunded AAL (UAAL) Funded Ratio Covered Payroll UAAL as a Percent of Covered Payroll 6/30/2017 $21,739,035 $26,449,527 $4,710,492 82.20% $12,513,000 37.60% 6/30/2015 16,920,000 23,689,000 6,769,000 71.43 12,668,000 53.43 6/30/2013 11,831,000 22,891,000 11,060,000 51.68 11,969,000 92.41 6/30/2011 7,893,000 18,289,000 10,396,000 43.16 12,429,000 83.64 6/30/2009 6,273,000 10,070,000 3,797,000 62.29 11,878,000 31.97 ____________________________________ Source: Otay Water District. 33 Actuarial Methods and Assumptions. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial assets, consistent with the long-term perspective of the calculations. The following is a summary of the actuarial assumptions and methods: Valuation Date: June 30, 2017 Actuarial Cost Method: Entry Age Normal Cost Method Amortization Method: Level Percent of Payroll Remaining Amortization Period: 20 Years Fixed (Closed) Period as of the Valuation Date Asset Valuation Method: 5-Year Smoothed Market Actuarial Assumptions: Investment Rate of Return: 7.00% (Net of Administrative Expenses) Projected Salary Increase: 3.00% Inflation: 2.75% Individual Salary Growth: CalPERS 2007-2011 Experience Study Healthcare Cost Trend Rate: Medical: 10% per annum graded down in approximately one-half percent increments to an ultimate rate of 5%. Dental: 4% per annum. See Note 7 in the District’s Comprehensive Annual Financial Report included in “APPENDIX B” for further information about the DPHP. Insurance General Liability and Property Damage The District is exposed to various risks of loss related to torts, theft, damage and destruction of assets, errors and omissions, and natural disasters. Beginning in July 2003, the District began participation in a risk financing pool under California Government Code Section 6500 et seq., through SDRMA. Coverages through SDRMA are as follows: property coverage (excluding earthquake) - replacement cost to a combined total of $1 billion per occurrence for scheduled property; replacement cost to $100 million per occurrence for boiler and machinery; $500,000 per occurrence for personal liability coverage for board members; $1 million per loss for employee dishonesty coverage; $10 million per occurrence for each of the following types of coverage - auto liability, public officials errors and omissions, employment practices liability and general liability; and $2 million cyber security coverage. Separate financial statements for SDRMA may be obtained at: Special District Risk Management Authority, 1112 I Street, Suite 300, Sacramento, California 95814. Workers’ Compensation Through SDRMA, the District is insured up to the statutory limit per occurrence for Workers’ Compensation and $5 million in Employer’s Liability. Health Insurance The District provides health insurance through SDRMA covering all of its employees, retirees, and other dependents. SDRMA is a self-funded pooled medical program administered in conjunction with the California State Association of Counties. 34 District Reserves and Investment Policy As of June 30, 2018, the District had approximately $89.0 million in cash and investments, of which the Board had designated $24.5 million for capital projects and reserved $30 million for the payment toward the UAL. The District’s reserves are not pledged to and do not secure the District’s obligation to pay the 2018 Installment Payments. In accordance with State of California law, the District Board of Directors has approved an investment policy (the “Investment Policy”) which complies with Sections 53601 through 53630 of the Government Code of the State of California providing legal authorization for the investment or deposit of funds of local agencies. All investments of the District conform to the restrictions of those laws. The District’s investments by category and their respective market value and book value as of June 30, 2018 are set forth in Table 9 below. For additional information relating to the District’s investments, see “APPENDIX B - DISTRICT AUDITED FINANCIAL STATEMENTS,” Note 2. TABLE NO. 9 SUMMARY OF INVESTMENTS As of June 30, 2018 Investments Market Value Book Value % of Portfolio Federal Agency Issues – Callable $64,967,885 $65,624,952 73.70% Local Agency Investment Fund (LAIF) 11,204,070 11,225,096 12.61% San Diego County Pool 12,131,000 12,194,528 13.69% $88,302,955 $89,044,577 100.00% ____________________________________ Source: Otay Water District. The Investment Policy may be changed at any time at the discretion of the District (subject to the State law provisions relating to authorized investments) and as the California Government Code is amended. Any exception to the Investment Policy must, however, be formally approved by the Board of Directors of the District. There can be no assurance the State law or the Investment Policy will not be amended in the future to allow for investments which are currently not permitted under such State law or the Investment Policy, or that the objectives of the District with respect to investments will not change. 35 Outstanding Indebtedness of the District The District had outstanding indebtedness as of June 30, 2018 as shown in Table No. 10. The District has not issued any additional debt since June 30, 2018. TABLE NO. 10 OTAY WATER DISTRICT OUTSTANDING INDEBTEDNESS As of June 30, 2018 Original Amount Final Debt Issue Issue Outstanding Maturity (1) 1996 Certificates of Participation $15,400,000 $ 7,600,000 2026 (2) 2009 General Obligation Refunding Bonds 7,780,000 3,390,000 2023 (3) 2010 Water Revenue Bonds Series A 13,840,000 7,880,000 2025 (3) 2010 Water Revenue Bonds Series B 36,355,000 36,355,000 2041 (4) 2013 Water Revenue Refunding Bonds 7,735,000 4,560,000 2023 (4) 2016 Water Revenue Refunding Bonds 33,385,000 31,700,000 2036 _______________________________________ (1) The 1996 Certificates are payable from installment payments which are secured by a pledge of and lien on Net Revenues and Taxes on a parity with other Existing Parity Obligations and the 2018 Installment Purchase Agreement. Interest is payable at a variable rate of interest, and the interest rate at July 24, 2018 was 0.94% and was 0.90% at June 30, 2017. At an average rate of 1.5%, debt service is expected to be $800,000 each year for the next several years. (2) Voters within Improvement District No. 27 of the District authorized $100 million general obligation bonds in 1989. The District issued $11,500,000 general obligation bonds in 1992 and refinanced the bonds in 1998 and again in 2009. Annual debt service is approximately $764,000. The District also has approximately $29 million of issued general obligation bonds authorized between 1960 and 1978 for various Improvement Districts throughout the District, but unissued. The general obligation bonds are payable solely from ad valorem property tax revenues, which are not a part of Taxes which secure the installment payments relating to Existing Parity Obligations or the debt service on the 2018 Installment Purchase Agreement. The District has no current plans to issue any of the authorized but unissued general obligation bonds. (3) The 2010 Bonds were sold by the Otay Water District Financing Authority to provide funds for the construction of water storage and transmission facilities. The 2010 Bonds are payable from installment payments which are secured by a pledge of and lien on Net Revenues and Taxes on a parity with other Existing Parity Obligations and the 2018 Installment Purchase Agreement. (4) The District issued the 2013 Bonds and 2016 Bonds to refinance its previously issued 2004 Refunding Certificates of Participation and 2007 Certificates of Participation respectively. The 2013 Bonds and 2016 Bonds are payable from Net Revenues and Taxes on a parity with the other Existing Parity Obligations and the 2018 Installment Purchase Agreement. Source: Otay Water District. 36 Historical Operating Results The following table summarizes the Statement of Net Position included in the District’s audited financial statements for the last four fiscal years with estimated results for the Fiscal Year ended June 30, 2018. The audited financial statements of the District for the Fiscal Year ended June 30, 2017 are attached hereto as “APPENDIX B” and should be read in their entirety. The District accounts for moneys received and expenses paid in accordance with generally accepted accounting principles applicable to governmental agencies such as the District (“GAAP”). In certain cases, GAAP requires or permits moneys collected in one Fiscal Year to be recognized as revenue in a subsequent Fiscal Year and requires or permits expenses paid or incurred in one Fiscal Year to be recognized as expenses in a subsequent Fiscal Year. See “APPENDIX B.” Except as otherwise expressly noted herein, all financial information derived from the District’s audited financial statements reflects the application of GAAP. Reporting obligations under Governmental Accounting Standards Board Statement (“GASB”) No. 68 - Accounting and Financial Reporting for Pensions - an amendment of GASB Statement No. 27 (“GASB No. 68”), and GASB Statement No. 71 - Pension Transitions for Contributions Made Subsequent to the Measurement Date-an amendment of GASB No. 68, commenced with financial statements for Fiscal Year 2014-15. Under GASB No. 68, an employer reports the net pension liability, pension expense and deferred outflows/deferred inflows of related to pensions in its financial statements as part of its financial position. The result of the implementation of these standards was to decrease the net position at July 1, 2014 by $40.4 million which consists of net pension liability, deferred outflows of resources, deferred inflows of resources, and pension expense. The audited financial statements of the District for the Fiscal Year ended June 30, 2017 included in “APPENDIX B” contain additional information about the retirement liability and the application of GASB No. 68. 37 TABLE NO. 11 OTAY WATER DISTRICT STATEMENT OF NET POSITION For the Fiscal Years Ended June 30 Unaudited 2014 2015 2016 2017 2018 ASSETS Current Assets: Cash and Cash Equivalents $ 30,493,474 $ 23,168,511 $ 21,122,543 $ 17,427,875 Restricted Cash and Cash Equivalents 116,639 47,083 8,208 50,204 Investments 27,631,622 35,888,511 36,806,704 38,401,158 Board Designated Investments 21,605,368 22,395,347 23,876,678 24,743,895 Restricted Investments 4,564,972 4,532,725 4,394,093 4,256,520 Accounts Receivable, Net 12,879,121 9,987,050 11,116,393 12,372,840 Accrued Interest Receivable 83,679 97,291 157,620 216,011 Taxes and Availability Charges Receivable, Net 333,589 321,178 341,651 222,092 Restricted Taxes and Availability Charges Receivable, Net 41,091 31,848 32,173 34,375 Inventories 775,007 807,008 722,225 737,185 Prepaid Items and Other Receivables 1,047,708 988,882 1,309,335 962,019 Total Current Assets 99,572,270 98,265,434 99,887,623 99,424,174 Non-current Assets: Net OPEB Asset 10,385,336 11,472,386 12,519,549 13,555,636 Capital Assets: Land 13,714,963 13,714,963 14,085,251 14,389,187 Construction in Progress 11,642,506 15,106,336 12,541,701 14,201,511 Capital Assets, Net of Accumulated Depreciation 441,293,934 430,370,095 427,341,594 421,606,252 Total Capital Assets, Net of Depreciation 466,651,403 459,191,394 453,968,546 450,196,950 Total Non-Current Assets 477,036,739 470,663,780 466,488,095 463,752,586 Total Assets 576,609,009 568,929,214 566,375,718 563,176,760 DEFERRED OUTFLOWS OF RESOURCES Deferred Amount on Refunding 78,118 - 1,339,997 191,428 Deferred Actuarial Pension Costs - 3,575,595 7,001,426 10,681,129 Total Deferred Outflows of Resources $ 78,118 $ 3,575,595 $ 8,341,423 $ 10,872,557 Continued on next page. 38 TABLE NO. 11 OTAY WATER DISTRICT STATEMENT OF NET POSITION For the Fiscal Years Ended June 30 Continued from previous page. Unaudited 2014 2015 2016 2017 2018 LIABILITIES Current Liabilities: Current Maturities of Long-term Debt $ 3,495,000 $ 3,690,000 $ 3,920,000 $ 3,820,000 Accounts Payable 11,906,026 9,779,477 11,497,728 11,544,414 Accrued Payroll Liabilities 3,054,520 3,335,149 574,037 785,496 Other Accrued Liabilities 3,397,500 3,642,511 3,813,262 3,771,503 Customer and Developer Deposits 2,418,754 2,227,173 3,313,631 3,451,690 Accrued Interest 1,564,992 1,540,122 1,197,113 1,417,440 Unearned Revenues - - 421,800 305,560 Liabilities Payable From Restricted Assets: Restricted Accrued Interest 70,804 65,304 59,604 53,267 Total Current Liabilities 25,907,596 24,279,736 24,797,175 25,149,370 Non-current Liabilities: Long-term Debt: General Obligation Bonds 5,283,563 4,697,208 4,095,853 3,474,498 Certificates of Participation 44,980,314 43,355,103 8,191,803 7,592,548 Revenue Bonds 55,058,490 53,402,993 87,483,686 84,519,618 Net Pension Liability - 38,723,345 40,143,128 45,249,444 Other Non-current Liabilities 649,344 656,158 3,040,648 3,074,313 Total Non-Current Liabilities 105,971,711 140,834,807 142,955,118 143,910,421 Total Liabilities 131,879,307 165,114,543 167,752,293 169,059,791 DEFERRED INFLOWS OF RESOURCES Deferred Actuarial Pension Costs - 4,967,940 5,677,071 3,802,537 Total Deferred Inflows of Resources - 4,967,940 5,677,071 3,802,537 NET POSITION Net Investment in Capital Assets 357,912,154 354,046,090 351,617,201 350,981,714 Restricted for Debt Service 3,855,673 4,658,306 4,402,301 4,306,724 Unrestricted 83,039,993 43,717,930 (1) 45,268,275 45,898,551 Total Net Position $444,807,820 $402,422,326 (1) $401,287,777 $401,186,989 ____________________________________ (1) The District’s Net Position decreased in Fiscal Year 2014-15 primarily due to an adjustment as a result of the implementation of GASB No. 68, which required the District to record the net pension liability as described above. Source: Otay Water District Audited Financial Statements. 39 Historical Debt Service Coverage Table No. 12 on the following page sets forth historical Taxes and Net Revenues and Debt Service coverage ratio for the Fiscal Years 2013-14 through 2016-17 and the estimated amounts for the 2017-18 Fiscal Year. The historical debt service coverage set forth in Table No. 13 has been calculated in accordance with the Indenture. Such calculations, which are derived from definitions of Revenues, Operation and Maintenance Costs, Net Revenues set forth in Appendix A, are intended to reflect the District’s compliance with the rate covenant and additional debt covenants contained in the 2018 Installment Purchase Agreement and described under the caption “SOURCES OF PAYMENT FOR THE BONDS” and for no other purpose. Such calculations may reflect non-recurring or extraordinary accounting transactions permitted under the 2018 Installment Purchase Agreement and GAAP. In providing a rating on the Bonds, Standard & Poor’s may have performed independent calculations of coverage ratios using its own internal formulas and methodology which may not reflect the provisions of the Indenture. See the caption “CONCLUDING INFORMATION - Rating on the Bonds.” The District makes no representations as to any such calculations, and such calculations should not be construed as a representation by the District as to past or future compliance with any bond covenants, the availability of particular revenues for the payment of Debt Service or for any other purpose. 40 TABLE NO. 12 HISTORICAL TAXES AND NET REVENUES (in ‘000’s) AND DEBT SERVICE COVERAGE For the Fiscal Year Ended June 30 2014 2015 2016 2017 2018 Revenues: Water Sales $81,287 $79,135 $73,940 $83,720 $ 88,910 Meter Fees 2,494 2,120 2,243 3,653 1,742 Availability/Annexation Fees 686 641 544 638 629 Capacity Fees 1,245 2,344 3,010 1,054 7,568 Betterment Fees 742 567 491 511 461 BABS Subsidy (1) 768 752 791 773 775 Investment Earnings 832 959 1,045 744 880 Total Revenue $88,054 $86,518 $82,064 $91,093 $100,965 Operation and Maintenance Costs: Water Purchases $48,239 $46,198 $43,874 $48,406 $ 53,586 Utilities 2,663 2,895 2,570 2,781 2,956 Payroll 17,943 18,149 17,975 19,062 20,730 Administrative 5,313 5,596 6,342 7,395 6,975 Materials and Maintenance 1,418 1,483 1,357 1,419 1,570 Total Operation and Maintenance Costs $75,576 $74,321 $72,118 $79,063 $ 85,817 Net Revenues $12,478 $12,197 $ 9,946 $12,030 $ 15,148 Taxes $ 2,894 $ 3,129 $ 3,354 $ 3,458 $ 3,802 Taxes and Net Revenues $15,372 $15,326 $13,300 $15,488 $ 18,950 Debt Service: 1996 Installment Payments $ 683 $ 627 $ 719 $ 763 $ 785 2004 Installment Payments 57 - - - - 2007 Installment Payments 2,509 2,502 2,475 - - 2010 Installment Payments 3,725 3,720 3,712 3,707 3,709 2013 Bonds 857 864 855 850 849 2016 Bonds - - - 2,435 2,222 Total Debt Service $ 7,831 $ 7,713 $ 7,761 $ 7,755 $ 7,565 Coverage Ratio 196% 199% 171% 200% 250% ____________________________________ (1) Build America Bonds interest rate subsidy payable by federal government with respect to the 2010B Bonds. There is no assurance that the federal government will continue to pay the full amount of the subsidy in each year. See “RISK FACTORS - Interest Subsidy Payment; Sequestration.” Source: Otay Water District. 41 Projected Debt Service Coverage The projections of Revenues and the corresponding Taxes and Net Revenues shown in Table No. 13 are based on the assumptions shown below. The District believes the assumptions used for the projections are reasonable based on its own data and on projections from outside sources regarding expected growth in the District; however, some assumptions may not materialize and unanticipated events and circumstances may occur (see “RISK FACTORS”). To the extent that the assumptions are not actually realized the coverage levels shown in Table No. 13 will likely be reduced and, if substantial reductions in Net Revenues were to result, the District’s ability to timely pay the 2018 Installment Payments, which, in turn, pay debt service on the Bonds, may be adversely affected. Following is a discussion of assumptions used in the projection of Revenues, Net Revenues and Taxes: (a) Potable connections in equivalent dwelling units (“EDU”) are projected to increase as shown below, for an overall 5.4 percent increase during the next five year period. Recycled connections in EDUs are projected to increase by 4.9 percent during the next five year period as shown below. The District has based its projections for growth on information contained in the Expera Report (see “THE WATER SYSTEM - Capital Improvement Program” herein). Potable System Recycled System Number of Number of Additional EDUs % Increase Additional EDUs % Increase 2019 884 1.3% 41 0.9% 2020 888 1.3% 44 1.0% 2021 738 1.0% 44 1.0% 2022 708 1.0% 44 1.0% 2023 534 0.7% 44 1.0% ____________________________________ Note: EDUs do not reflect actual number of projected connections. An EDU is the approximate equivalent of 1 single-family home. (b) Water usage in the District in Fiscal Year 2018-19 is anticipated to be slightly higher than the 2017-18 level. The District expects some growth in water sales due to new customers as shown in (a) above. Water sales volume (in acre-feet) is projected as follows. Potable System Recycled System Total 2019 29,377 3,593 32,971 2020 29,671 3,629 33,300 2021 29,968 3,675 33,643 2022 30,321 3.732 34,053 2023 30,761 3,807 34,568 The District receives a credit of $185 per acre-foot and $200 per-acre foot from MWD and CWA, respectively, for each acre-foot of recycled water. These credits are included in water sales revenue. (c) Water rates to District customers are projected to increase based on the District’s most recently updated projections (see “Water Charges” herein). These projected rates reflect the District’s estimate of potential rate increases that would be passed through to the District’s customers as a result of rate increases by CWA and MWD. The District intends, but does not guarantee, to continue to pass-through any increases in water costs by CWA and MWD. 42 (d) Capacity and annexation fee rates are estimated to increase 3 percent in each year based on the projected Engineering News-Record index increases. Revenue from these fees will also increase as the number of connections increase as shown in (a) above. The District has based its projections for growth on information contained in the Expera Report (see “Capital Improvement Program” herein). (e) Water availability charges, included in Availability Fees, are limited to an amount not exceeding $10 per acre per year. To the extent the water availability charges exceeding $10 per acre and are authorized for operational purposes, such fees are included in Betterment Fees. (f) Taxes do not include ad valorem taxes levied for the purpose of paying debt service on the District’s 2009 General Obligation Refunding Bonds. Taxes are projected to increase by approximately 2 percent annually (see “Taxes” herein). (g) Non-operating income is excluded from the projection. Non-operating revenues within “Miscellaneous Revenues” shown in the District’s financial statements consists of property rental and golf course income. Golf course operations have ceased as of the end of Fiscal Year 2017-18. (h) Water Supply costs are projected to increase 3.6 percent in 2018-19 and are anticipated to increase annually as a result of increases in cost of purchased water and usage by new customers as follows: 2020 6.5% 2021 6.5% 2022 6.1% 2023 5.0% 2024 5.0% These projected increases in supply costs reflect supply cost increase by CWA resulting from the funding of the Carlsbad Project desalination plant by CWA (see “Water Supply - CWA Water Supply” herein.) (i) Operating costs shown in Fiscal Year 2018-19 are based on current year budget estimates. Costs for subsequent fiscal years include the annual average inflationary factors shown below. Utilities 3.5% Materials and Maintenance 4.0% Administrative Costs 3.0% Salaries 0.0% Medical Benefits 5.3% Workers Comp 5.0% Other Benefits (7.2)% Base operating costs are also increased based on the projected growth in District operations, similar to the growth rates shown for connections in (a) above. (j) The debt service on the 1996 Certificates is calculated based on the existing principal repayment schedule and the Bond Buyer 25 Year Revenue Bond Index as of July 26, 2018 of 4.40%. The current letter of credit expires in June 2020. The projections do not include the letter of credit fees of approximately $80,000 annually. 43 (k) The Interest Subsidy Payment reflects an estimated $118,600 reduction from the maximum 35% of interest on the 2010B Bonds as a result of sequestration, allocated proportionately between fiscal years. See “RISK FACTORS - Interest Subsidy Payment; Sequestration” herein. 44 TABLE NO. 13 PROJECTED TAXES AND NET REVENUES (in ‘000’s) AND DEBT SERVICE COVERAGE For the Fiscal Year ended June 30 (1) 2019 2020 2021 2022 2023 Revenues: Water Sales $ 96,360 $100,735 $104,917 $109,474 $114,549 Meter Fees 2,193 2,462 2,484 2,506 2,269 Availability/Annexation Fees 634 638 645 652 662 Capacity Fees 7,220 7,376 6,171 6,280 4,860 Betterment Fees 461 479 498 518 539 BABS Subsidy 712 712 712 712 712 Investment Earnings 1,133 1,239 1,407 1,623 1,840 Total Revenue $108,713 $113,641 $116,834 $121,765 $125,431 Operation and Maintenance Costs: Water Purchases $ 56,329 $ 60,239 $ 64,537 $ 69,073 $ 73,655 Utilities 3,016 3,153 3,297 3,455 3,632 Payroll 20,915 19,529 19,731 19,955 20,303 Administrative 5,869 6,013 6,211 6,415 6,625 Materials and Maintenance 2,574 2,677 2,784 2,895 3,011 Repairs and Replacement - - - - - Total Operation and Maintenance Costs $ 88,703 $ 91,611 $ 96,560 $101,793 $107,226 Net Revenues $ 20,010 $ 22,030 $ 20,274 $ 19,972 $ 18,205 Taxes $ 3,745 $ 3,820 $ 3,896 $ 3,974 $ 4,053 Taxes and Net Revenues $ 23,755 $ 25,850 $ 24,170 $ 23,946 $ 22,258 Debt Service 1996 Installment Payments $ 894 $ 877 $ 860 $ 939 $ 920 2010 Installment Payments 3,706 3,697 3,694 3,694 3,690 2013 Bonds 847 849 849 848 846 2016 Bonds 2,203 2,204 2,201 2,201 2,208 2018 Installment Payments 532 1,925 1,925 1,925 1,925 Total $ 8,182 $ 9,552 $ 9,529 $ 9,607 $ 9,589 Coverage Ratio 290% 271% 254% 249% 232% ____________________________________ (1) For the purpose of calculating the coverage ratio, when the 1996 Certificates are no longer outstanding, the BABs Subsidy payments will be deducted from Net Revenues and the calculation of Debt Service payable by the District on Parity Bonds or Contracts will be reduced by the amount of the Interest Subsidy Payments the District is entitled to receive during such twelve-month period. See “RISK FACTORS - Interest Subsidy Payment; Sequestration.” Source: Otay Water District. 45 The projected Revenues, Taxes and Operation and Maintenance Costs shown above are subject to several variables as described on the previous pages. The District provides no assurance that the projected Taxes and Net Revenues or Coverage Ratios will be achieved (see “RISK FACTORS” herein). SOURCES OF PAYMENT FOR THE BONDS General The Bonds are limited obligations of the Authority and are payable solely from the Pledged Revenues (as defined in the Indenture) and amounts on deposit in the Bond Payment Fund established under the Indenture. Pledged Revenues consist of the 2018 Installment Payments and other payments paid by the District and received by the Authority pursuant to the Installment Purchase Agreement (other than payments related to the indemnification of the Authority) and all interest or other income from any investment of any money in the Bond Payment Fund established pursuant to the Indenture. The Pledged Revenues, amounts on deposit in the Bond Payment Fund and all rights of the Authority under the Installment Purchase Agreement (other than its right to indemnify thereunder) will be assigned to the Trustee and irrevocably pledged to the payment of the interest and redemption premium, if any, on and principal of the Bonds as provided in the Indenture. The Pledged Revenues are not permitted to be used for any other purpose while any of the Bonds remain Outstanding. The 2018 Installment Payments are calculated to be sufficient to pay, when due, the principal and interest represented by the Bonds. 2018 Installment Payments The 2018 Installment Payments are payable from and secured by Taxes and Net Revenues held under the Installment Purchase Agreement, all as set forth in the Installment Purchase Agreement and in the manner described herein. The District’s obligation to pay the 2018 Installment Payments is a limited obligation of the District payable solely from Taxes and Net Revenues of the Water System, and neither the full faith and credit nor the taxing power of the District, the State of California or any if its political subdivisions is pledged for the payment of the 2018 Installment Payments. Taxes and Net Revenues The following definitions are from the Installment Purchase Agreement and the Indenture and capitalized terms used below have the meanings set forth in the Indenture, except for the term “Bonds” as defined in the Indenture which is referred to below as “Parity Bonds.” See “APPENDIX A - SUMMARY OF LEGAL DOCUMENTS.” The Taxes and Net Revenues securing the 2018 Installment Payments are payable on parity with installment payments securing the District’s 1996 Certificates and the 2010 Bonds and debt service on the 2013 Bonds and 2016 Bonds (the “Existing Parity Obligations”) and other Contracts and Parity Bonds issued in the future. “Taxes” means all taxes, including ad valorem taxes of the District, other than taxes imposed pursuant to Chapter 1 of Part 9 of the Law to secure general obligation bonds of the District or any improvement district thereof. “Revenues” means (i) all water availability charges imposed pursuant to Chapter 2 of Part 5 of the Law not exceeding $10 per acre per year; (ii) all income, rents, rates, fees, charges and other moneys derived by the District from the ownership or operation of the Water System, including, without limiting the 46 generality of the foregoing, (a) all income, rents, rates, fees, charges or other moneys derived from the sale, furnishing, and supplying of water and other services, facilities and commodities sold, furnished or supplied through the facilities of the Water System, including connection fees, (b) the earnings on and income derived from the investment of such income, rents, rates, fees and charges or other moneys, (c) the proceeds derived by the District directly or indirectly from the sale, lease or other disposition of a part of the Water System as permitted under the Installment Purchase Agreement, and (d) any Interest Subsidy Payments; provided that the term “Revenues” shall not include customers’ deposits or any other deposits subject to refund until such deposits have become the property of the District. “Operation and Maintenance Costs” means (i) costs spent or incurred for maintenance and operation of the Water System calculated in accordance with generally accepted accounting principles, including (among other things) the reasonable expenses of management and repair and other expenses necessary to maintain and preserve the Water System in good repair and working order, and including administrative costs of the District that are charged directly or apportioned to the Water System, including but not limited to salaries and wages of employees, payments to the Public Employees Retirement System, overhead, insurance, taxes (if any), fees of auditors, accountants, attorneys or engineers and insurance premiums, and including all other reasonable and necessary costs of the District or charges (other than Debt Service payments) required to be paid by it to comply with the terms of the Installment Purchase Agreement, or any Contract or of any resolution or indenture authorizing the issuance of any Parity Bonds or of such Parity Bonds; and (ii) costs spent or incurred in the purchase of water for the Water System; but excluding in all cases depreciation, replacement and obsolescence charges or reserves therefor and amortization of intangibles or other bookkeeping entries of a similar nature and all capital charges. “Net Revenues” means, for any Fiscal Year, the Revenues for such Fiscal Year or other 12-month period less the Operation and Maintenance Costs for such Fiscal Year. See “Rate Covenant” and “Parity Debt” herein. “Interest Subsidy Payments” means cash subsidy payments entitled to be received by the District from the United States Treasury with respect to the 2010B Bonds and any Parity Bonds issued and Contracts executed by the District, including but not limited to “Build America Bonds” issued as contemplated by the American Recovery and Reinvestment Act of 2009. The District will timely submit all required documentation to the United States Treasury and take any and all action necessary to receive and collect the Interest Subsidy Payments. Allocation of Taxes and Net Revenues In order to carry out and effectuate the pledge and lien contained in the Installment Purchase Agreement, the District has agreed and covenanted that all Revenues and Taxes shall be received by the District in trust and shall be deposited when and as received in special funds designated as the “Revenue Fund” and the “Tax Fund,” respectively, which funds were previously maintained by the District in accordance with the provisions of the Existing Parity Obligations, and are continued by the terms of the Installment Purchase Agreement, and which funds the District has agreed and covenanted to maintain and to hold separate and apart from other funds so long as any Contracts or Parity Bonds remain unpaid, including the Installment Purchase Agreement securing the Bonds. Moneys in the Revenue Fund and Tax Fund shall be used and applied by the District as provided in the Installment Purchase Agreement and in the other Contracts and Parity Bonds. All moneys in the Revenue Fund shall be held in trust and shall be applied, used and withdrawn for the purposes set forth in the Installment Purchase Agreement. The District shall, from the moneys in the Revenue Fund, pay all Operation and Maintenance Costs (including amounts reasonably required to be set aside in contingency reserves for Operation and Maintenance Costs, the payment of which is not then immediately required) as such Operation and Maintenance Costs become due and payable. All moneys in the Tax Fund, and, to the extent such moneys 47 are insufficient, all remaining moneys in the Revenue Fund shall be set aside by the District at the following times for the transfer to the following respective special funds in the following order of priority: (i) Bond Payment Fund and other Debt Service Payments. On or before each Installment Payment Date, the District shall, from the moneys in the Tax Fund and, to the extent needed, the Revenue Fund, transfer to the Trustee for deposit in the Bond Payment Fund, the 2018 Installment Payment due and payable on that Installment Payment Date. The District shall also, from the moneys in the Tax Fund and, to the extent needed, the Revenue Fund, transfer to the applicable trustee or payee for deposit in the applicable payment fund, without preference or priority, and in the event of any insufficiency of such moneys ratably without any discrimination or preference, Debt Service payments due in accordance with any other Contract or Parity Bond or resolution or Indenture relating thereto. No deposit need be made in the Bond Payment Fund as 2018 Installment Payments if the amount in the Bond Payment Fund is at least equal to the amount of the Installment Payment due and payable on the next succeeding Installment Payment Date. All money in the Bond Payment Fund shall be used and withdrawn by the Trustee in accordance with the Indenture. (ii) Reserve Funds for Parity Bonds and Contracts. On or before each Installment Payment Date or other date on which Debt Service is due on any Parity Bonds, the District shall, from the remaining moneys in the Tax Fund, and to the extent needed, the Revenue Fund, thereafter, without preference or priority and in the event of any insufficiency of such moneys ratably without any discrimination or preference, transfer to the applicable trustee for the reserve funds and/or accounts, if any, as may have been established in connection with any Parity Bonds or Contracts, that sum, if any, necessary to restore such funds or accounts to an amount equal to the reserve requirement with respect thereto and to transfer to any insurer any amounts due pursuant to any agreement related to the repayment of draws under any reserve policy or other credit instrument funding a reserve requirement for any Parity Bonds or Contracts. (iii) Surplus. Moneys on deposit in the Tax Fund or the Revenue Fund on any date when the Authority reasonably expects such moneys will not be needed for the purposes described above may be expended by the District at any time for any purpose permitted by law. No Reserve Fund for the Bonds There is no reserve fund established for the Bonds, the 2016 Bonds, 2013 Bonds or the 1996 Certificates. With respect to the reserve requirement attributable to the 2010 Bonds, the District deposited $3,738,105.85 in the 2010 Bonds reserve fund. None of the amounts deposited in the 2010 Bonds reserve fund are available for payment of the Bonds. Event of Default and Acceleration of Maturities The 2018 Installment Payments are not secured by, and the Owners of Bonds have no security interest in or mortgage on the property of the Water System, or of the District. Default by the District will not result in loss of any property to the District. Should the District default, the Trustee may declare the entire principal amount of the 2018 Installment Payments and the accrued interest thereon, to be due and payable immediately, whereupon the same shall become due and payable, and take whatever action at law or in equity may appear necessary or desirable to enforce performance and observance of any obligation, agreement or covenant of the District under the Installment Purchase Agreement. A default under the Installment Purchase Agreement is also an Event of Default under the Indenture which may result in an 48 acceleration of Bonds. See “APPENDIX A - SUMMAY OF LEGAL DOCUMENTS - Installment Purchase Agreement - Events of Default and Remedies of Authority” and “RISK FACTORS - Acceleration; Limited Recourse on Default.” Rate Covenant Pursuant to the Installment Purchase Agreement, to the fullest extent permitted by law, the District shall fix and prescribe, at the commencement of each Fiscal Year, rates and charges for the Water Service which are reasonably expected to be at least sufficient to yield during each Fiscal Year Taxes and Net Revenues equal to one hundred twenty-five percent (125%) of the Debt Service (including for purposes of such calculation the obligation of the District to repay costs related to any surety bond, reserve credit facility or other reserve fund funding instrument) for such Fiscal Year. The District may make adjustments from time to time in such rates and charges and may make such classification thereof as it deems necessary, but shall not reduce the rates and charges then in effect unless the Taxes and Net Revenues from such reduced rates and charges will at all times be sufficient to meet the requirements of this Section. When the 1996 Certificates are no longer Outstanding, then the Interest Subsidy Payments will be deducted from Net Revenues for purposes of the coverage calculations of this provision of the Installment Purchase Agreement. See “APPENDIX A - SUMMARY OF LEGAL DOCUMENTS.” Parity Debt Pursuant to the Existing Parity Obligations and the Installment Purchase Agreement, the District may at any time execute any contract or issue any bonds the payments under or of which are on a parity with the 2018 Installment Payments (“Contracts” or “Parity Bonds”), as the case may be, provided an Independent Financial Consultant or Independent Certified Public Accountant shall render to and file with the District and the Trustee a written report certifying that Taxes and Net Revenues for any 12 consecutive calendar months in the 18 calendar months immediately preceding the issuance of the additional Contracts or Parity Bonds adjusted as set forth below are at least equal to 125% of Debt Service (including for purposes of such calculation the obligation of the District to repay costs related to any surety bond, reserve credit facility or other reserve fund funding instrument), assuming such additional Contracts had been executed or Parity Bonds had been issued at the beginning of such twelve-month period. For purposes of calculating the ratio required for the issuance of additional Contracts or Parity Bonds, when the 1996 Certificates are no longer outstanding, the Interest Subsidy Payments will be deducted from Net Revenues and the calculation of Debt Service payable by the District on Parity Bonds or Contracts will be reduced by the amount of the Interest Subsidy Payments the District is entitled to receive during such twelve-month period. For purposes of calculating Net Revenues as set forth in the preceding paragraph, adjustments to the computations of Net Revenues may be made for the following: (1) any change in service charges which has been adopted subsequent to the commencement of the twelve-month period but prior to the date of issuance or execution of the additional Parity Bonds or Contracts; (2) customers added to the Water System subsequent to the commencement of the twelve-month period but prior to the date of issuance or execution of the additional Parity Bonds or Contracts; (3) the estimated change in Net Revenues which will result from the connection of existing residences or businesses to the Water System within one year following completion of any project to be funded or system to be acquired from the proceeds of such additional Parity Bonds or Contracts; and 49 (4) the estimated change in Net Revenues which will result from services provided under any long- term, guaranteed contract that extends for the life of the Parity Bonds or additional Contracts if entered into subsequent to the commencement of the twelve-month period but prior to the date of issuance or execution of the additional Parity Bonds or Contracts. Notwithstanding the foregoing, Parity Bonds issued or Contracts executed to refund Parity Bonds or Contracts (including refunding of the Existing Parity Obligations or the Bonds), may be delivered without satisfying the conditions set forth above if Debt Service in each Fiscal Year after the Fiscal Year in which such Parity Bonds are issued or Contracts executed is not greater than Debt Service would have been in each such Fiscal Year prior to the issuance of such Parity Bonds or execution of such additional Contracts. Further, for the purpose of calculating Debt Service for any Parity Bonds or Contracts which bear a variable interest rate, the rate of interest used to calculate Debt Service shall be 110% of the greater of (i) the then current variable interest rate borne by such Parity Bonds or additional Contracts (which includes outstanding 1996 Certificates) plus 2%, and (ii) the highest variable rate borne over the preceding 12 months by outstanding variable rate debt issued by the District or, if no such variable rate debt is at the time outstanding, by variable rate debt of which the interest rate is computed by reference to an index comparable to that to be utilized in determining the interest rate for the debt then proposed to be issued. See “APPENDIX A - SUMMARY OF LEGAL DOCUMENTS.” In addition to the foregoing, in the event any amounts are past due and owing to any insurer of Parity Bonds or with respect to any Contracts, such insurer must provide written consent to the issuance of any additional Parity Bonds or the execution of any Contracts. Property Insurance The Installment Purchase Agreement requires the District to maintain or cause to be maintained with respect to the properties of the Water System, insurance in such amounts and against such risks (including accident to or destruction of the Water System which are of an insurable nature) as are usually covered in connection with facilities similar to the Water System so long as such insurance is available from reputable insurance companies. All proceeds of insurance against property damage and all proceeds of condemnation awards shall be payable to the District alone, and the District shall retain and collect such proceeds. All claims under any such insurance policy or with respect to any condemnation proceeding relating to the Water System may be settled by the District without the consent of the Trustee. Such proceeds shall be applied by the District to the repair or rebuilding of the Water System or to repay the Bonds, other Contracts and Parity Bonds. See also “APPENDIX A - SUMMARY OF LEGAL DOCUMENTS - Particular Covenants - Insurance” herein. CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS Article XIIIB Gann Limit Article XIIIB of the California State Constitution limits the annual appropriations of the State and of any city, county, school district, authority or other political subdivision of the State to the level of appropriations of the particular governmental entity for the prior fiscal year, as adjusted for changes in the cost of living and population. The “base year” for establishing such appropriation limit is the 1978-79 fiscal year and the limit is to be adjusted annually to reflect changes in population and consumer prices. Adjustments in the appropriations limit of an entity may also be made if (i) the financial responsibility for a service is transferred to another public entity or to a private entity, (ii) the financial source for the provision of services is transferred from taxes to other revenues, or (iii) the voters of the entity approve a change in the limit for a period of time not to exceed four years. 50 Appropriations subject to Article XIIIB generally include the proceeds of taxes levied by the State or other entity of local government, exclusive of certain State subventions and refunds of taxes. “Proceeds of taxes” include, but are not limited to, all tax revenues and the proceeds to an entity of government from (i) regulatory licenses, user charges, and user fees (but only to the extent such proceeds exceed the cost of providing the service or regulation), and (ii) the investment of tax revenues. Article XIIIB includes a requirement that if an entity’s revenues in any year exceed the amounts permitted to be spent, the excess would have to be returned by revising tax rates or fee schedules over the subsequent two years. Certain expenditures are excluded from the appropriations limit including payments of indebtedness existing or legally authorized as of January 1, 1979, or of bonded indebtedness thereafter approved by the voters and payments required to comply with court or federal mandates which without discretion require an expenditure for additional services or which unavoidably make the providing of existing services more costly. The District is of the opinion that its charges with respect to Water Service do not exceed the costs that it reasonably bears in providing Water Service and are not subject to the limits of Article XIIIB. Proposition 218 General. On November 5, 1996, California voters approved Proposition 218, the so-called “Right to Vote on Taxes Act.” Proposition 218 added Articles XIIIC and XIIID to the State Constitution, which affect the ability of local governments to levy and collect both existing and future taxes, assessments, and property-related fees and charges. Proposition 218, which generally became effective on November 6, 1996, changed, among other things, the procedure for the imposition of any new or increased property- related “fee” or “charge,” which is defined as “any levy other than an ad valorem tax, a special tax or an assessment, imposed by a local government upon a parcel or upon a person as an incident of property ownership, including user fees or charges for a property related service” (and referred to in this section as a “property related fee or charge”). On November 2, 2010, California voters approved Proposition 26, the so-called “Supermajority Vote to Pass New Taxes and Fees Act.” Section 1 of Proposition 26 declares that Proposition 26 is intended to limit the ability of the State Legislature and local government to circumvent existing restrictions on increasing taxes by defining the new or expanded taxes as “fees.” Proposition 26 amended Articles XIIIA and XIIIC of the State Constitution. The amendments to Article XIIIA limit the ability of the State Legislature to impose higher taxes (as defined in Proposition 26) without a two-thirds vote of the Legislature. Proposition 26’s amendments to Article XIIIC broadly define “tax,” but specifically exclude, among other things:  A charge imposed for a specific benefit conferred or privilege granted directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of conferring the benefit or granting the privilege.  A charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of providing the service or product.  A charge imposed as a condition of property development.  Assessments and property-related fees imposed in accordance with the provisions of Article XIIID. Property-Related Fees and Charges. Under Article XIIID, before a municipality may impose or increase any property-related fee or charge, the entity must give written notice to the record owner of each parcel of land affected by that fee or charge. The municipality must then hold a hearing upon the proposed 51 imposition or increase at least 45 days after the written notice is mailed, and, if a majority of the property owners of the identified parcels present written protests against the proposal, the municipality may not impose or increase the property-related fee or charge. Further, under Article XIIID, revenues derived from a property-related fee or charge may not exceed the funds required to provide the “property-related service” and the entity may not use such fee or charge for any purpose other than that for which it imposed the fee or charge. The amount of a property-related fee or charge may not exceed the proportional cost of the service attributable to the parcel, and no property- related fee or charge may be imposed for a service unless that service is actually used by, or is immediately available to, the owner of the property in question. Initiative Power. In addition, Article XIIIC states that “the initiative power shall not be prohibited or otherwise limited in matters of reducing or repealing any local tax, assessment, fee or charge. The power of initiative to affect local taxes, assessments, fees and charges shall be applicable to all local governments and neither the Legislature nor any local government charter shall impose a signature requirement higher than that applicable to Statewide statutory initiatives.” Judicial Interpretation of Articles XIIIC and XIIID. After Proposition 218 was enacted in 1996, appellate court cases and an Attorney General’s opinion initially indicated that fees and charges levied for water and wastewater services would not be considered property-related fees and charges, and thus not subject to the requirements of Article XIIID regarding notice, hearing and protests in connection with any increase in the fees and charges being imposed. However, three cases have held that certain types of water and wastewater charges could be subject to the requirements of Article XIIID under certain circumstances. In Richmond v. Shasta Community Services District (2004) 32 Cal.4th 409, the California Supreme Court addressed the applicability of the notice, hearing and protest provisions of Article XIIID to certain charges related to water service. In Richmond, the Court held that capacity charges are not subject to Proposition 218. The Court also indicated in dictum that a fee for ongoing water service through an existing connection could, under certain circumstances, constitute a property-related fee and charge, with the result that a local government imposing such a fee and charge must comply with the notice, hearing and protest requirements of Article XIIID. In Howard Jarvis Taxpayers Association v. City of Fresno (2005) 127 Cal.App.4th 914, the California Court of Appeal, Fifth District, concluded that water, sewer and trash fees are property-related fees subject to Proposition 218, and a municipality must comply with Article XIIID before imposing or increasing such fees. The California Supreme Court denied the City of Fresno’s petition for review of the Court of Appeal’s decision on June 15, 2005. In July 2006, the California Supreme Court, in Bighorn-Desert View Water Agency v. Verjil (2006) 39 Cal.4th 205, addressed the validity of a local voter initiative measure that would have (a) reduced a water agency’s rates for water consumption (and other water charges), and (b) required the water agency to obtain voter approval before increasing any existing water rate, fee, or charge, or imposing any new water rate, fee, or charge. The court adopted the position indicated by its statement in Richmond that a public water agency’s charges for ongoing water delivery are “fees and charges” within the meaning of Article XIIID, and went on to hold that charges for ongoing water delivery are also “fees” within the meaning of Article XIIIC’s mandate that the initiative power of the electorate cannot be prohibited or limited in matters of reducing or repealing any local tax, assessment, fee or charge. Therefore, the court held, Article XIIIC authorizes local voters to adopt an initiative measure that would reduce or repeal a public agency’s water rates and other water delivery charges. (However, the court ultimately ruled in favor of the water agency and held that the entire initiative measure was invalid on the grounds that the second part of the initiative measure, which would have subjected future water rate increases to prior voter approval, was not supported by Article XIIIC and was therefore invalid.) 52 The court in Bighorn specifically noted that it was not holding that the initiative power is free of all limitations; the court stated that it was not determining whether the electorate’s initiative power is subject to the statutory provision requiring that water service charges be set at a level that will pay for operating expenses, provide for repairs and depreciation of works, provide a reasonable surplus for improvements, extensions, and enlargements, pay the interest on any bonded debt, and provide a sinking or other fund for the payment of the principal of such debt as it may become due. On April 20, 2015, the California Court of Appeal, Fourth District, issued an opinion in Capistrano Taxpayers Association, Inc. v. City of San Juan Capistrano, 235 Cal. App. 4th 1493 (2015) (the “SJC Case”) upholding tiered water rates under Proposition 218 provided that the tiers correspond to the actual cost of furnishing service at a given level of usage. The opinion was specific to the facts of the case, including a finding that the City of San Juan Capistrano did not attempt to calculate the actual costs of providing water at various tier levels. The District’s tiered water rates, are described under the caption “THE WATER SYSTEM - Water Charges.” District management believes that this case will not have any material impact on the District’s ability to make the 2018 Installment Payments or to meet its rate covenant. Conclusion. It is not possible to predict how the courts will further interpret Article XIIIC and Article XIIID in future judicial decisions and what, if any, further implementing legislation will be enacted. Under the Bighorn case, local voters could adopt an initiative measure that reduces or repeals water rates and charges, though it is not clear whether (and California courts have not decided whether) any such reduction or repeal by initiative would be enforceable in a situation in which such rates and charges are pledged to the repayment of bonds or other indebtedness, as is the case with respect to the Bonds. The District believes that its rates with respect to the Water Service comply with the requirements of Proposition 218 and expect that future fees and charges will comply with Proposition 218’s procedural and substantive requirements to the extent applicable thereto. The requirements of, or a voter initiative pursuant to, Proposition 218 could impact the ability of the District to set or raise service charges. There can be no assurance that the courts will not further interpret, or the voters will not amend, Article XIIIC and Article XIIID to limit the ability of local agencies to impose, levy, charge and collect increased fees and charges for water, or to call into question previously adopted water rate increases. Future Initiatives Articles XIIIB, XIIIC and XIIID were adopted as measures that qualified for the ballot pursuant to California’s initiative process. From time to time other initiatives could be proposed and adopted affecting the revenues of the District. 53 RISK FACTORS The following information should be considered by prospective investors in evaluating the Bonds. However, the following does not purport to be an exhaustive listing of risks and other considerations which may be relevant to investing in the Bonds. In addition, the order in which the following information is presented is not intended to reflect the relative importance of any such risks. System Demand There can be no assurance that the local demand for service provided by the Water System will be consistent with to levels described in this Official Statement under the heading “THE WATER SYSTEM.” Reduction in the level of new connections could require an increase in rates or charges in order to produce Taxes and Net Revenues sufficient to comply with the District’s rate covenant in the Installment Purchase Agreement. Such rate increases could increase the likelihood of nonpayment, and could also further decrease demand. Another factor that can impact demand is economic conditions, including associated impacts of economic recession such as job losses, income losses, housing foreclosure and vacancies. Furthermore, there can be no assurance that any other entity with regulatory authority over the Water System will not adopt further restrictions on the operation of the Water System. Drought Hydrological conditions in California can vary widely from year to year. The State recently announced the end of a period of extreme and prolonged drought after a season of heavy rainfall in the winter of 2017. The recent drought led to a number of executive orders mandating across the board reductions in water usage (see “THE WATER SYSTEM - Water Supply - Drought Conditions and Response.” Such executive orders, or additional actions or legislation could be implemented again when the next prolonged drought occurs. In addition, lower water usage by customers in response to new State laws regarding water conservation and consumption and drought measures imposed by the State or adopted by the District could result in reduced water consumption, and absent a corresponding increase in water rates, lower Net Revenues. Increased Operation and Maintenance Costs There can be no assurance that Operation and Maintenance Costs of the Water System will be consistent with the levels contemplated in this Official Statement. Changes in technology, increases in the cost of operation, increased water treatment requirements or other costs mandated by regulatory agencies, (see “THE WATER SYSTEM - Water Supply - Historic and Projected Water Supply”), pension costs or other expenses could require increases in rates or charges in order to comply with the rate covenant described herein and in the Installment Purchase Agreement, and could increase the possibility of nonpayment of the Bonds. Rate Covenant Not a Guarantee; Failure to Meet Projections The ability of the District to make the 2018 Installment Payments thereby providing the Trustee with sufficient Pledged Revenues to pay the Bonds, depends on the ability of the District to generate Taxes and Net Revenues in the levels required by the Installment Purchase Agreement. Although, as more particularly described herein, the District expects that sufficient revenues will be generated through the imposition and collection of water charges and fees for the Water Service, there is no assurance that such imposition of water charges and fees will result in the generation of Taxes and Net Revenues in the amounts required by the Installment Purchase Agreement. As a result, the District’s covenant does not 54 constitute a guarantee that sufficient Taxes and Net Revenues will be available to make the 2018 Installment Payments when due. The projected operating results included herein are based on certain assumptions and forecasts. Any forecast is subject to uncertainties. There will usually be differences between actual and forecast results because not all events and circumstances occur as expected, and those differences may be material. Accordingly, the projected operating results are not necessarily indicative of future performance, and the District does not assume any responsibility for the failure to meet such projections. In addition, certain assumptions with respect to future business and financing decisions of the District are subject to change. No representation is made or intended, nor should any representation be inferred, with respect to the likely existence of any particular future set of facts or circumstances, and prospective purchasers of the Bonds are cautioned not to place undue reliance upon the projected operating results. If actual results are less favorable than the results projected or if the assumptions used in preparing such projections prove to be incorrect, the amount of Net Revenues may be materially less than expected and consequently, the ability of the District to make timely payment of the 2018 Installment Payments may be materially adversely affected. Neither the District’s independent auditors, nor any other independent accountants have compiled, examined or performed any procedures with respect to the projected operating results, nor have they expressed any opinion or any form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, projected operating results, nor have they expressed any opinion or any form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, projected operating results. Additional Obligations Payable from Taxes and Net Revenues The District may issue additional Parity Bonds or enter into additional Contracts payable from Taxes and Net Revenues on a parity with its pledge of such Taxes and Net Revenues to the 2018 Installment Payments, and the debt service or the installment payments relating to the Existing Parity Obligations. The ability of the District to enter into such Parity Bonds and Contracts is subject to certain requirements set forth in the Installment Purchase Agreement. See “SOURCES OF PAYMENT FOR THE BONDS - Parity Debt.” The District may also enter into obligations payable from Taxes and Net Revenues which are subordinate to the Installment Purchase Agreement and Existing Parity Obligations. Risks Relating to Water Supplies The District’s current potable water supply primarily comes from purchases from CWA, which in turn currently purchases approximately __% of its water supply from MWD and IID. This source of water could become limited due to possible events that include prolonged droughts or similar changes in State- wide weather patterns, earthquakes or other natural disasters, contamination by environmental hazards, or acts of terrorism or civil unrest. There can be no assurance that currently available water supplies would be sufficient to meet demand under current conditions in the event of a prolonged drought or other interruption of the District’s source of water supply, or that the District would be able to secure alternate sources of water to meet its customer demand. See “THE WATER SYSTEM - Water Supply” herein for a discussions of the water supply in the region and the District’s sources of water in particular. California WaterFix Costs and Long Term Rate Impacts California WaterFix is a project that was approved by DWR in July 2017. Upon completion, it would provide new conveyance facilities for the transportation of State Water Project and Central Valley Project 55 water from the north Delta, principally from three new intakes through two 30-mile long tunnels running under the Delta, to the existing aqueduct systems in the south Delta. According to DWR, the California WaterFix is expected to improve the reliability of Southern California’s water delivery system by updating aging infrastructure. In addition to the more efficient and effective delivery of water supplies through the Delta, DWR has identified other benefits of the California WaterFix, including: allowing for more operational flexibility to deliver water through the Delta, and enabling a more natural flow of rivers in the Delta to protect sensitive fish species; providing greater opportunity to capture and convey water from storm flows in wet and above-normal hydrological weather years to the State Water Contractors to refill reservoirs and replenish groundwater basins; improving the quality of water for export; reducing climate change risk of increased salinity from rising sea levels; and reducing the risks from a catastrophic seismic event in the Delta. DWR estimates that it will take approximately 15 years to substantially complete the·California WaterFix after commencement of construction. Based upon DWR’s preliminary estimate, the capital costs of California WaterFix are estimated to be approximately $17 billion (in 2017 dollars). The preliminary cost estimate includes contingencies for construction costs and unknown expenses related to land acquisition. Given the scope of the project and the length of time it will take DWR to construct the project, this cost estimate may change based on numerous factors and the actual cost of construction of the project may differ materially. On April 10, 2018, MWD’s Board approved the funding of up to 64.6 percent (approximately $10.8 billion in 2017 dollars) of the overall capital cost of the California WaterFix necessary to allow for the construction of the full project. In its official statement dated June 5, 2018 relating to the issuance of its Subordinate Water Revenue Refunding Bonds, 2018 Series A and Subordinate Water Revenue Bonds, 2018 Series B, MWD stated that it has projected that the impact on overall water rates and charges of an investment of this magnitude, based on MWD’s 2017-18 revenue requirements and assuming financing over a 40-year term at an assumed annual interest cost of 4.0 percent, would be an incremental increase in overall water rates and charges of approximately 2.2 percent per year over the anticipated construction timeline, or an approximate cumulative 33 percent at the end of 15 years. It is not possible to calculate the precise water rate impacts on retail ratepayers because of the wide variation of costs and water sources for each retail agency, and the fact that each retail agency makes its own retail rate decisions based on various factors. However, there will be an impact on the cost of water that is purchased by CWA from MWD and the cost of water that the District purchases from CWA as a result of the California WaterFix project, if and when constructed. Environmental Regulation The kind and degree of water treatment effected through the water system is regulated, to a large extent, by the federal government and the State of California. Treatment standards set forth in federal and state law control the operations of the Water System and mandate the use of water treatment technology. If the federal government, acting through the Environmental Protection Agency, or the State of California, acting through the Department of Health Services, or additional federal or state agencies, should impose stricter water quality standards upon the Water System, the District’s expenses could increase accordingly and rates and charges would have to be increased to offset those expenses. It is not possible to predict the direction federal or state regulation will take with respect to water quality standards, although it is likely that, over time, both will impose more stringent standards with attendant higher costs. Proposition 218 On November 5, 1996, California voters approved Proposition 218-Voter Approval for Local Government Taxes-Limitation on Fees, Assessments, and Charges-Initiative Constitutional Amendment. Proposition 218 added Articles XIIIC and XIIID to the California Constitution, imposing certain vote requirements 56 and other limitations on the imposition of new or increased taxes, assessments and property-related fees and charges. See “CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS - Proposition 218” for a discussion of specific issues and risks raised by Proposition 218. The District’s current projections assume future rate increases which will be subject to the Proposition 218 notice process, will be needed during the time that the Bonds are Outstanding. Natural Hazards Any natural disaster or other physical calamity, including drought, wildfires, floods, landslides, high winds or earthquakes, may have the effect of reducing Revenues and Taxes through damage to the Water System and/or adversely affecting the economy of the surrounding area. The Installment Purchase Agreement requires the District to maintain insurance or self-insurance, but only if and to the extent available at a reasonable cost from reputable insurers, and the District is not expressly required to provide earthquake insurance. The District is located in a seismically active region and structures in the District could be impacted by a major earthquake originating from the numerous faults in the area. Seismic hazards encompass both potential surface rupture and ground shaking. In the event of total loss of the Water System, there can be no assurance that there will be any insurance coverage for the loss or that any insurance proceeds will be adequate to rebuild the Water System or to repay all Outstanding Bonds or that losses in excess of the insured amount will not occur. The District’s facilities are generally located in urbanized areas, and not likely to be significantly impacted by wildfire. Climate Change. The issue of climate change has become an important factor in water resources planning in the State, and it is being considered during planning for water supplies and systems. Many studies cite evidence that increasing concentrations of greenhouse gases have caused and will continue to cause a rise in temperatures around the world, which will result in a wide range of changes in climate patterns. Moreover, they cite evidence that a warming trend occurred during the latter part of the 20th century and will likely continue through the 21st century. These changes could have a direct effect on water resources in the State, and numerous studies on climate and water in the State have been conducted to determine the potential impacts. Based on these studies, global warming could result in the following types of water resources impacts in the State, including impacts on water supplies and systems:  Sea level rise and an increase in saltwater intrusion into groundwater,  Changes in the timing, intensity, and variability of precipitation, and an increased amount of precipitation falling as rain instead of as snow,  Reductions in the average annual snowpack due to a rise in the snowline and a shallower snowpack in the low- and medium-elevation zones, and a shift in snowmelt runoff to earlier in the year,  Long-term changes in watershed vegetation and increased incidence of wildfires that could affect water quality,  Increased water temperatures with accompanying adverse effects on some fisheries,  Increases in evaporation and concomitant increased irrigation need, and  Changes in urban and agricultural water demand. Other than the general trends listed above, there is no specific information on exactly how global warming will quantitatively affect water supplies with respect to the Water System. However, there can 57 be no assurance that climate change will not affect the District’s water sources, costs of operation and revenue coverage. Interest Subsidy Payment; Sequestration The 2010B Bonds were designated as “Build America Bonds,” and as such, qualified for the Interest Subsidy Payment from the United States Treasury equal to 35% of the interest payable with respect to the 2010B Bonds. From time to time, Congress has reduced the maximum Interest Subsidy Payment. For the federal government Fiscal Year ending September 30, 2018, the Interest Subsidy Payment was 32.7%. The District has included the Interest Subsidy Payment in its Revenues. In 2018-19, this amount is $712,000. The District cannot predict the amount of reduction in Interest Subsidy Payments due to any future sequestration by the federal government or the period of time that Interest Subsidy Payments will be reduced due to any future sequestration. The projected operating results set forth under the caption “THE WATER SYSTEM - Projected Debt Service Coverage” reflect announced reductions in Interest Subsidy Payments. Acceleration; Limited Recourse on Default If the District defaults on its obligation to pay the 2018 Installment Payments when due, the Trustee has the right to accelerate the total unpaid principal amount of the 2018 Installment Payments and/or the Bonds. However, in the event of a default and such acceleration there can be no assurance that the District will have sufficient Taxes and Net Revenues to pay the accelerated principal. Default by the District will not result in loss of the Water System or any other assets of the District. So long as the Bonds are in book-entry form, DTC (or its nominee) will be the sole registered owner of the Bonds, and the rights and remedies of the Bond Owners will be exercised through the procedures of DTC. Bankruptcy Risks The enforceability of the rights and remedies of the owners of the Bonds and the obligations of the District may become subject to the following: the federal bankruptcy code and applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or affecting the enforcement of creditors’ rights generally, now or hereafter in effect; usual equitable principles which may limit the specific enforcement under state law of certain remedies: the exercise by the United States of America of the powers delegated to it by the federal Constitution; and the reasonable and necessary exercise, in certain exceptional situations of the police power inherent in the sovereignty of the State of California and its governmental bodies in the interest of servicing a significant and legitimate public purpose. Bankruptcy proceedings, or the exercise of powers by the federal or state government, if initiated, could subject the owners of the Bonds to judicial discretion and interpretation of their rights in bankruptcy or otherwise and consequently may entail risks of delay, limitation, or modification of their rights. No Obligation to Tax The obligation of the District to pay the 2018 Installment Payments does not constitute an obligation of the District for which the District is obligated to levy or pledge any form of taxation or for which the District has levied or pledged any form of taxation, except the Taxes. The obligation of the District to pay the 2018 Installment Payments does not constitute a debt or indebtedness of the District, the State of California or any of its political subdivisions, within the meaning of any constitutional or statutory debt limitation or restriction. 58 Change in Law In addition to the other limitations described herein, the California electorate or Legislature could adopt a constitutional or legislative initiative with the effect of reducing revenues payable to or collected by the District. There is no assurance that the California electorate or Legislature will not at some future time approve additional limitations that could have the effect of reducing the Taxes and Net Revenues and adversely affecting the security of the Bonds. Loss of Tax Exemption In order to maintain the exclusion from gross income for federal income tax purposes of the interest on the Bonds, the Authority will covenant in the Indenture and the District will covenant in the Installment Purchase Agreement to comply with each applicable requirement of Section 103 and Sections 141 through 150 of the Internal Revenue Code. The interest on the Bonds could become includable in gross income for purposes of federal income taxation retroactive to the date of execution and delivery of the Bonds, as a result of acts or omissions of the Authority or the District in violation of this or other covenants in the Indenture or the Installment Purchase Agreement. Should such an event of taxability occur, the Bonds are not subject to prepayment or any increase in interest rates and will remain outstanding until maturity. See “- Acceleration; Limited Recourse on Default” and “TAX MATTERS” herein. IRS Audit of Tax-Exempt Bond Issues The Internal Revenue Service has initiated an expanded program for the auditing of tax-exempt bond issues, including both random and targeted audits. It is possible that the Bonds will be selected for audit by the Internal Revenue Service. It is also possible that the market value of the Bonds might be adversely affected as a result of such an audit of the Bonds (or by an audit of similar bonds). Secondary Market Risk There can be no assurance that there will be a secondary market for purchase or sale of the Bonds, and from time to time there may be no market for them, depending upon prevailing market conditions, the financial condition or market position of firms who may make the secondary market and the financial condition of the District. Secondary market prices for the Bonds could be more or less than the original issue price depending on market factors. TAX MATTERS In the opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California (“Bond Counsel”), under existing statutes, regulations, rulings and judicial decisions, and assuming the accuracy of certain representations and compliance with certain covenants and requirements described herein, interest (and original issue discount) on the Bonds is excluded from gross income for federal income tax purposes, and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals. In the further opinion of Bond Counsel, interest (and original issue discount) on the Bonds is exempt from State of California personal income tax. In the opinion of Bond Counsel, the difference between the issue price of a Bond (the first price at which a substantial amount of the Bonds of a maturity is to be sold to the public) and the stated redemption price at maturity of such Bond constitutes original issue discount. Original issue discount accrues under a constant yield method, and original issue discount will accrue to a Beneficial Owner before receipt of cash attributable to such excludable income. The amount of original issue discount deemed received by a Beneficial Owner will increase the Beneficial Owner’s basis in the applicable Bond. The amount of original issue discount that accrues to the Beneficial Owner of the Bonds is excluded from the gross 59 income of such Beneficial Owner for federal income tax purposes, is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, and is exempt from State of California personal income tax. Bond Counsel’s opinion as to the exclusion from gross income for federal income tax purposes of interest on the Bonds (including any original issue discount) is based upon certain representations of fact and certifications made by the District, the Underwriter and others and is subject to the condition that the District complies with all requirements of the Internal Revenue Code of 1986, as amended (the “Code”) that must be satisfied subsequent to the issuance of the Bonds to assure that interest on the Bonds (including any original issue discount) will not become includable in gross income for federal income tax purposes. Failure to comply with such requirements of the Code might cause interest on the Bonds (including any original issue discount) to be included in gross income for federal income tax purposes retroactive to the date of issuance of the Bonds. The District will covenant to comply with all such requirements. The amount by which a Beneficial Owner’s original basis for determining loss on sale or exchange in the applicable Bond (generally, the purchase price) exceeds the amount payable on maturity (or on an earlier call date) constitutes amortizable bond premium, which must be amortized under Section 171 of the Code; such amortizable bond premium reduces the Beneficial Owner’s basis in the applicable Bond (and the amount of tax-exempt interest received), and is not deductible for federal income tax purposes. The basis reduction as a result of the amortization of bond premium may result in a Beneficial Owner realizing a taxable gain when a Bond is sold by the Beneficial Owner for an amount equal to or less (under certain circumstances) than the original cost of the Bond to the Beneficial Owner. Purchasers of the Bonds should consult their own tax advisors as to the treatment, computation and collateral consequences of amortizable bond premium. The Internal Revenue Service (the “IRS”) has initiated an expanded program for the auditing of tax- exempt bond issues, including both random and targeted audits. It is possible that the Bonds will be selected for audit by the IRS. It is also possible that the market value of the Bonds might be affected as a result of such an audit of the Bonds (or by an audit of similar bonds). No assurance can be given that in the course of an audit, as a result of an audit, or otherwise, Congress or the IRS might not change the Code (or interpretation thereof) subsequent to the issuance of the Bonds to the extent that it adversely affects the exclusion from gross income of interest (and original issue discount) on the Bonds or their market value. SUBSEQUENT TO THE ISSUANCE OF THE BONDS THERE MIGHT BE FEDERAL, STATE, OR LOCAL STATUTORY CHANGES (OR JUDICIAL OR REGULATORY CHANGES TO OR INTERPRETATIONS OF FEDERAL, STATE, OR LOCAL LAW) THAT AFFECT THE FEDERAL, STATE, OR LOCAL TAX TREATMENT OF THE BONDS INCLUDING THE IMPOSITION OF ADDITIONAL FEDERAL INCOME OR STATE TAXES ON OWNERS OF TAX-EXEMPT LOCAL OBLIGATIONS, SUCH AS THE BONDS. THESE CHANGES COULD ADVERSELY AFFECT THE MARKET VALUE OR LIQUIDITY OF THE BONDS. NO ASSURANCE CAN BE GIVEN THAT SUBSEQUENT TO THE ISSUANCE OF THE BONDS STATUTORY CHANGES WILL NOT BE INTRODUCED OR ENACTED OR JUDICIAL OR REGULATORY INTERPRETATIONS WILL NOT OCCUR HAVING THE EFFECTS DESCRIBED ABOVE. BEFORE PURCHASING ANY OF THE BONDS, ALL POTENTIAL PURCHASERS SHOULD CONSULT THEIR TAX ADVISORS REGARDING POSSIBLE STATUTORY CHANGES OR JUDICIAL OR REGULATORY CHANGES OR INTERPRETATIONS, AND THEIR COLLATERAL TAX CONSEQUENCES RELATING TO THE BONDS. Bond Counsel’s opinion may be affected by actions taken (or not taken) or events occurring (or not occurring) after the date hereof. Bond Counsel has not undertaken to determine, or to inform any person, whether any such actions or events are taken or do occur. The Indenture and the Tax Certificate relating to the Bonds permit certain actions to be taken or to be omitted if a favorable opinion of Bond Counsel is 60 provided with respect thereto. Bond Counsel expresses no opinion as to the effect on the exclusion from gross income for federal income tax purposes of interest (and original issue discount) on any Bond if any such action is taken or omitted based upon the advice of counsel other than Stradling Yocca Carlson & Rauth, a Professional Corporation. Although Bond Counsel will render an opinion that interest on the Bonds (including any original issue discount) is excluded from gross income for federal income tax purposes provided that the District continues to comply with certain requirements of the Code, the accrual or receipt of interest on the Bonds (including any original issue discount) may otherwise affect the tax liability of the recipient. Bond Counsel expresses no opinion regarding any such tax consequences. Accordingly, all potential purchasers should consult their tax advisors before purchasing any of the Bonds. A copy of the proposed form of opinion of Bond Counsel for the Bonds is attached in “APPENDIX E”. LEGAL MATTERS Enforceability of Remedies The remedies available to the Trustee and the Owners of the Bonds upon an event of default under the Indenture, the Installment Purchase Agreement or any other document described herein are in many respects dependent upon regulatory and judicial actions which are often subject to discretion and delay. Under existing law and judicial decisions, the remedies provided for under such documents may not be readily available or may be limited. The various legal opinions to be delivered concurrently with the delivery of the Bonds will be qualified to the extent that the enforceability of certain legal rights related to the Indenture and the Installment Purchase Agreement are subject to limitations imposed by bankruptcy, reorganization, insolvency or other similar laws affecting the rights of creditors generally and by equitable remedies and proceedings generally. Approval of Legal Proceedings The legality and enforceability of the Indenture and the Installment Purchase Agreement and certain other legal matters are subject to the approval of Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, acting as Bond Counsel. See “APPENDIX E” for the proposed form of Bond Counsel’s Opinion. The District has no knowledge of any fact or other information which would indicate that the Indenture and the Installment Purchase Agreement are not so enforceable against the Authority or the District except to the extent such enforcement is limited by principles of equity and by state and federal laws relating to bankruptcy, reorganization, moratorium or creditors’ rights generally. Certain legal matters will be passed on for the District and the Authority by Artiano Shinoff, San Diego, California, General Counsel to the District and the Authority, and by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, as Disclosure Counsel to the District. A portion of the fees payable to Bond Counsel and Disclosure Counsel are contingent upon the sale and delivery of the Bonds. Litigation At any given time, including the present, there are certain claims, disputes and litigation actions that arise in the normal course of the District’s activities. Such matters could, if determined adversely to the District, affect the expenditures of the District and in some cases its Revenues. The Authority and the District will furnish a certificate dated as of the date of delivery of the Bonds that there is not now known to be pending or threatened any litigation restraining or enjoining the execution or delivery of the 61 Indenture or the Installment Purchase Agreement, or the sale or delivery of the Bonds or in any manner questioning the proceedings and authority under which the Indenture or the Installment Purchase Agreement are to be executed or delivered or the Bonds are to be delivered or affecting the validity thereof or, in the case of the District, which if decided adversely to the District would have a material adverse effect on the District’s financial condition and its ability to pay the 2018 Installment Payments. Both the SJC Case (see “CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS - Proposition 218 - Judicial Interpretation of Articles XIIIC and XIIID”) and the recent drought have heightened public awareness of water usage and water rates in California. Numerous lawsuits have been filed statewide challenging the cost of service basis for tiered pricing. In July 2015, a District ratepayer filed a lawsuit against the District contending that the District’s water rates that were in effect from 2009 through 2017 violated Proposition 218. Specifically, it is alleged that the rates in certain tiers exceeded the reasonable cost of providing the service to customers in those tiers. The lawsuit does not challenge the District’s current rates that were approved in 2017 following a Proposition 218 process. The lawsuit seeks refunds on behalf of all ratepayers affected by the rates that are in dispute. The court has not yet ruled on whether the plaintiff may sue on behalf of all ratepayers. The District has the burden of proof in the case to demonstrate that its rates complied with Proposition 218. The District is asserting that the plaintiff is not entitled to sue on behalf of all ratepayers. If the court were to agree, any recovery would be limited to the amount of any refund owed to the plaintiff plus possible attorneys’ fees, if any, awarded to plaintiff. With this outcome, District’s financial exposure would be minimal. The District has estimated that if the court were to allow the plaintiff to represent all ratepayers as a class, and if the court were to determine that refunds are owed, the District’s maximum exposure for refunds plus possible attorneys’ fees, if any, would not have a material effect on the District’s financial condition or its ability to pay the 2018 Installment Payments when due. CONCLUDING INFORMATION Rating on the Bonds S&P Global Ratings has assigned its rating of “___” to the Bonds. Such rating reflects only the views of the rating agency and any desired explanation of the significance of such rating should be obtained from the rating agency. Generally, a rating agency bases its rating on the information and materials furnished to it and on investigations, studies and assumptions of its own. Except as otherwise required in the Continuing Disclosure Agreement, the District undertakes no responsibility either to bring to the attention of the owners of any Bonds any downward revision or withdrawal of any rating obtained or to oppose any such revision or withdrawal. There is no assurance such rating will continue for any given period of time or that such rating will not be revised downward or withdrawn entirely by the rating agency, if in the judgment of such rating agency, circumstances so warrant. Any such downward revision or withdrawal of such rating may have an adverse effect on the market price of the Bonds. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time. Underwriting The Bonds were sold to _______________ (the “Underwriter”) at competitive bid. The Underwriter is offering the Bonds at the initial offering prices set forth on the inside front cover page hereof. The initial offering prices may be changed from time to time and concessions from the offering prices may be allowed to dealers, banks and others. The Underwriter will purchase the Bonds at a price equal to $____________, which amount represents the principal amount of the Bonds, plus a net original issue 62 premium of $__________ and less an Underwriter’s discount of $__________. The Underwriter will pay certain of its expenses relating to the offering from the Underwriter’s discount. The Municipal Advisor The material contained in this Official Statement was prepared by the District with the assistance of the Municipal Advisor, who advised the District as to the financial structure and certain other financial matters relating to the Bonds. The information set forth herein received from sources other than the District is believed to be reliable, but such information is not guaranteed by the Authority, the District or the Municipal Advisor as to accuracy or completeness, nor has it been independently verified. A portion of the fees paid to the Municipal Advisor are contingent upon the sale and delivery of the Bonds. Continuing Disclosure The District will covenant to provide certain annual financial information by not later than March 31 in each year (the “Annual Reports”) and notices of the occurrence of certain listed events in accordance with Rule 15c2-12 of the Securities Exchange Act of 1934 as amended (the “Rule”). Harrell & Company Advisors, LLC will act as Dissemination Agent. The specific nature of the information to be contained in the Annual Reports or the notices of listed events and certain other terms of the continuing disclosure obligation are found in the form of the District’s Continuing Disclosure Agreement attached in “APPENDIX D - FORM OF CONTINUING DISCLOSURE AGREEMENT.” Within the last five years, the District believes it has not failed to comply in all material respects with any prior undertakings with regard to the Rule. Audited Financial Statements The District’s audited financial statements for Fiscal Year 2016-17 included in this Official Statement have been audited by Teaman, Ramirez & Smith, Inc. (the “Auditor”), independent auditors. Attention is called to the scope limitation described in the Auditor’s report accompanying the financial statements. The Auditor has not been requested to consent to the inclusion of its report in this Official Statement. The Auditor has not undertaken to update the audited financial statements for Fiscal Year 2016-17 or its report, and no opinion is expressed by the Auditor with respect to any event subsequent to its report dated October 18, 2017. See “APPENDIX B - DISTRICT AUDITED FINANCIAL STATEMENTS” herein. References Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the District and the purchasers or Owners of any of the Bonds. Execution The execution of this Official Statement has been duly authorized by the Otay Water District. OTAY WATER DISTRICT By: ___________________________ Chief Financial Officer A-1 APPENDIX A SUMMARY OF LEGAL DOCUMENTS [to be provided by Bond Counsel] B-1 APPENDIX B DISTRICT AUDITED FINANCIAL STATEMENTS B-2 APPENDIX C ECONOMIC PROFILE FOR THE COUNTY OF SAN DIEGO Introduction The County of San Diego (the “County”) is the southernmost major metropolitan area in the State of California. The County covers 4,255 square miles, extending 70 miles along the Pacific Coast from the Mexican border to Orange County, and inland 75 miles to Imperial County. Riverside and Orange Counties form the northern boundary. The County is approximately the size of the State of Connecticut. The County possesses a diverse economic base consisting of a significant manufacturing presence in the fields of electronics and shipbuilding, a large tourist industry attracted by the favorable climate of the region, and a considerable defense-related presence. The County is also growing as a major center for culture and education. A number of recognized art organizations, including the San Diego Opera, the Old Globe Theater productions, the La Jolla Chamber Orchestra, as well as museums and art galleries, are located in the County. Higher education is provided through five two-year colleges and six four-year colleges and universities. The San Diego Convention Center contains 361,000 square feet of exhibit space and over 100,000 square feet of meeting/banquet rooms. The Convention Center can accommodate events for 30,000-40,000 people. B-3 Population The following table shows the January 1 State of California Department of Finance estimates of total population in the County of San Diego and the State of California for each year since 2009, and the increase from the previous year. TABLE NO. C-1 COUNTY OF SAN DIEGO AND STATE OF CALIFORNIA POPULATION COUNTY OF SAN DIEGO STATE OF CALIFORNIA January 1 Percentage Percentage Year Population Change Population Change 2009 3,064,436 36,966,713 2010 3,091,579 0.9% 37,223,900 0.7% 2011 3,119,963 0.9% 37,529,913 0.8% 2012 3,153,521 1.1% 37,874,977 0.9% 2013 3,193,688 1.3% 38,234,391 0.9% 2014 3,230,269 1.1% 38,568,628 0.9% 2015 3,264,449 1.1% 38,912,464 0.9% 2016 3,284,477 0.6% 39,179,627 0.7% 2017 3,309,509 0.8% 39,500,973 0.8% 2018 3,337,456 0.8% 39,809,693 0.8% % Increase Between 2009 – 2018 8.9% 7.7% _______________________________________ Source: State of California, Department of Finance, “E-4 Population Estimates for Cities, Counties, and the State, 2001-2010, with 2000 & 2010 Census Counts” Sacramento, California, November 2012 and “E-4 Population Estimates for Cities, Counties and the State, 2011-2018, with 2010 Census Benchmark” Sacramento, California, May 2018. B-4 Per Capita Personal Income Per capita personal income information for San Diego County, the State of California and the United States are summarized in the following table. TABLE NO. C-2 PER CAPITA PERSONAL INCOME (1) SAN DIEGO COUNTY, STATE OF CALIFORNIA AND UNITED STATES 2012 – 2016 Year San Diego County State of California United States 2012 $48,004 $48,369 $44,282 2013 49,017 48,570 44,493 2014 51,439 51,344 46,494 2015 53,963 54,718 48,451 2016 55,168 56,374 49,246 ____________________________________ (1) For San Diego County, State of California and United States, per capita personal income was computed using Census Bureau midyear population estimates. Estimates for 2010-2016 reflect county population estimates available as of March 2017. Note: All dollar estimates are in current dollars (not adjusted for inflation). Last updated: November 16, 2017 - new estimates for 2016; revised estimates for 2010-2015. Source: U.S. Department of Commerce, Bureau of Economic Analysis. B-5 The District is located in the San Diego-Carlsbad Metropolitan Statistical Area (MSA). The June 2018 unemployment rate in the San Diego-Carlsbad MSA was 3.7%. The State of California June 2018 unemployment rate (unadjusted) was 4.5%. TABLE NO. C-3 SAN DIEGO-CARLSBAD MSA WAGE AND SALARY WORKERS BY INDUSTRY (1) (in $ thousands) Industry 2014 2015 2016 2017 2018 Government 237.7 238.8 245.4 252.4 255.9 Other Services 52.2 53.5 54.7 55.9 57.5 Leisure and Hospitality 180.9 187.2 194.3 201.7 197.3 Educational and Health Services 185.4 191.4 198.0 204.9 208.2 Professional and Business Services 219.9 226.0 230.0 231.8 242.1 Financial Activities 69.3 71.0 72.7 74.0 73.0 Information 24.8 24.2 23.9 24.5 24.7 Transportation, Warehousing and Utilities 27.1 28.2 29.4 31.8 31.4 Service Producing Retail Trade 142.2 145.1 145.1 146.7 147.5 Wholesale Trade 46.4 46.3 46.9 47.8 49.1 Manufacturing Nondurable Goods 25.1 26.4 27.2 28 27.9 Durable Goods 76.9 79.7 80.8 80.8 85.8 Goods Producing Construction 63.3 69.6 75.9 80.1 82.4 Mining and Logging 0.4 0.3 0.3 0.3 0.4 Total Nonfarm 1,351.6 1,387.7 1,424.6 1,460.7 1,483.2 Farm 9.7 9.2 9.5 8.7 9.1 Total (all industries) 1,361.3 1,396.9 1,434.1 1,469.4 1,492.3 ____________________________________ (1) Annually, as of June. Note: The unemployment rate is calculated using unrounded data. Data may not add due to rounding. Source: State of California Employment Development Department, Labor Market Information Division, “Industry Employment & Labor Force - by month March 2017 Benchmark.” B-6 Major Employers The major employers operating within the County as of June 30, 2017 are shown in Table No. C-4. TABLE NO. C-4 COUNTY OF SAN DIEGO MAJOR EMPLOYERS Employer Number of Employees Percent of Total Employment University of California, San Diego 32,524 2.17% Sharp Healthcare 17,962 1.20% County of San Diego 17,396 1.16% Scripps Health 15,238 1.02% Qualcomm Inc. 12,600 0.84% City of San Diego 11,544 0.77% Kaiser Permanente San Diego Medical Center 8,965 0.60% UC San Diego Health 8,923 0.60% San Diego Community College District 6,817 0.46% San Diego State University 5,921 0.40% 137,890 9.22% ____________________________________ Source: County of San Diego Comprehensive Annual Financial Report. Transportation Interstate 5 parallels the coast of San Diego County, starting at the border with Mexico and traveling to the Los Angeles area and points north. Interstate 15 runs inland through the County, leading to Riverside- San Bernardino, Las Vegas and Salt Lake City. Interstate 8 runs eastward providing access to the southern United States. San Diego’s International Airport (Lindbergh Field) is located approximately one mile west of the downtown San Diego at the edge of the San Diego Bay. The facilities are owned and maintained by the San Diego Unified Port District and are leased to commercial airlines and other tenants. The airport is the third most active commercial airport in California, served by __ major airlines. In addition to San Diego International Airport, there are two naval air stations and seven general aviation airports located in the County. San Diego is the terminus of the Santa Fe Railway’s main line from Los Angeles. Amtrak passenger service is available at San Diego with stops at Del Mar and Oceanside in the north county. San Diego’s harbor is one of the world’s largest natural harbors. The harbor, a busy commercial port, also serves cruise ships. The Port of San Diego is administered by the San Diego Unified Port District, which includes the cities of San Diego, National City, Chula Vista, Imperial Beach and Coronado. D-1 APPENDIX D FORM OF CONTINUING DISCLOSURE AGREEMENT [to be provided by Disclosure Counsel] E-1 APPENDIX E PROPOSED FORM OF LEGAL OPINION OF BOND COUNSEL E-2 ________, 2018 Otay Water District Public Financing Authority Otay, CA 93550 Re: $__________ Otay Water District Financing Authority Water Revenue Bonds, Series 2018A Members of the Board of Directors: We have acted as Bond Counsel to the Otay Water District Public Financing Authority (the “Authority”) in connection with the issuance of $_________ aggregate principal amount of the Otay Water District Public Financing Authority Water Revenue Bonds, Series 2018A (the “Bonds”). The Bonds have been issued by the Authority pursuant to the terms of the Indenture of Trust, dated as of October 1, 2018 (the “Indenture”), by and between the Authority and MUFG Union Bank, N.A., as trustee (the “Trustee”). The Bonds are limited obligations of the Authority payable solely from Pledged Revenues (as such term is defined in the Indenture), consisting of payments (the “2018 Installment Payments”) to be made by the Otay Water District (the “District”) to the Authority pursuant to an Installment Purchase Agreement, dated as of October 1, 2018 (the “Installment Purchase Agreement”), by and between the District and the Authority, and certain other amounts held under the Indenture. In rendering the opinions set forth below, we have examined certified copies of the proceedings of the Authority and the District, and other information submitted to us relative to the issuance and sale by the Authority of the Bonds. We have examined originals, or copies identified to our satisfaction as being true copies, of the Indenture, the Installment Purchase Agreement, the Tax Certificate relating to the Bonds (the “Tax Certificate”), the resolutions of the Authority and the District adopted on September 5, 2018 with respect to the Bonds, opinions of counsel to the Authority and the District, certificates of the Authority, the District and others, and such other documents, agreements, opinions and matters as we have considered necessary or appropriate under the circumstances to render the opinions set forth herein. We have assumed the genuineness of all documents and signatures presented to us, the authenticity of documents submitted as originals and the conformity to originals of documents submitted as copies. We have not undertaken to verify independently, and have assumed, the accuracy of the factual matters represented, warranted or certified in the documents, and of the legal conclusions contained in the opinions referred to in the preceding paragraph. Furthermore, we have assumed compliance with all covenants and agreements contained in the Indenture, the Installment Purchase Agreement and the Tax Certificate, including (without limitation) covenants and agreements compliance with which is necessary to assure that future actions, omissions or events will not cause the interest on the Bonds to be included in gross income for federal income tax purposes. We call attention to the fact that the rights and obligations under the Bonds, the Indenture, the Installment Purchase Agreement and the Tax Certificate may be limited by bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors’ rights, by the application of equitable principles and the exercise of judicial Otay Water District Public Financing Authority ________, 2018 Page 2 E-3 discretion in appropriate cases and by the limitations on legal remedies against public agencies in the State of California. We express no opinion herein with respect to any indemnification, contribution, choice of law, choice of forum, penalty or waiver provisions contained in the Bonds, the Indenture or the Installment Purchase Agreement. Based upon the foregoing and after examination of such questions of law as we have deemed relevant in the circumstances, we are of the opinion that: 1. The proceedings of the Authority show lawful authority for the issuance and sale by the Authority of the Bonds under the laws of the State of California now in force, and the Indenture has been duly authorized, executed and delivered by the Authority, and, assuming due authorization, execution and delivery of the Indenture by the Trustee, the Bonds and the Indenture are valid and binding obligations of the Authority enforceable against the Authority in accordance with their respective terms. 2. The obligation of the Authority to make the payments of principal and interest on the Bonds from Pledged Revenues (as such term is defined in the Indenture) is an enforceable obligation of the Authority and does not constitute an indebtedness of the Authority in contravention of any constitutional or statutory debt limit or restriction. 3. The obligation of the District to make the 2018A Installment Payments from Taxes and Net Revenues (as such terms are defined in the Installment Purchase Agreement) is an enforceable obligation of the District and does not constitute a debt of the District, or of the State of California or of any political subdivision thereof in contravention of any constitutional or statutory debt limit or restriction, and does not constitute an obligation for which the District is obligated to levy or pledge any form of taxation or for which the District has levied or pledged any form of taxation other than the Taxes. 4. Under existing statutes, regulations, rulings and judicial decisions, and assuming the accuracy of certain representations and compliance with certain covenants and requirements described in the Indenture and the Installment Purchase Agreement, interest (and original issue discount) on the Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals. 5. Interest on the Bonds is exempt from State of California personal income tax. 6. The difference between the issue price of a Bond (the first price at which a substantial amount of the Bonds of the same series and maturity are to be sold to the public) and the stated redemption price at maturity with respect to such Bond constitutes original issue discount. Original issue discount accrues under a constant yield method, and original issue discount will accrue to a Bond Owner before receipt of cash attributable to such excludable income. The amount of original issue discount deemed received by a Bond Owner will increase the Bond Owner’s basis in the applicable Bond. Original issue discount that accrues for the Bond Owner is excluded from the gross Otay Water District Public Financing Authority ________, 2018 Page 3 E-4 income of such owner for federal income tax purposes, is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals and is exempt from State of California personal income tax. 7. The amount by which a Bond Owner’s original basis for determining loss on sale or exchange in the applicable Bond (generally, the purchase price) exceeds the amount payable on maturity (or on an earlier call date) constitutes amortizable Bond premium, which must be amortized under Section 171 of the Internal Revenue Code of 1986, as amended (the “Code”); such amortizable Bond premium reduces the Bond Owner’s basis in the applicable Bond (and the amount of tax- exempt interest received), and is not deductible for federal income tax purposes. The basis reduction as a result of the amortization of Bond premium may result in a Bond Owner realizing a taxable gain when a Bond is sold by the Owner for an amount equal to or less (under certain circumstances) than the original cost of the Bond to the Owner. Purchasers of the Bonds should consult their own tax advisors as to the treatment, computation and collateral consequences of amortizable bond premium. The opinions expressed in paragraphs (4) and (6) above as to the exclusion from gross income for federal income tax purposes of interest (and original issue discount) on the Bonds are based upon certain representations of fact and certifications made by the Authority, the District and others and are subject to the condition that the Authority and the District comply with all requirements of the Code that must be satisfied subsequent to issuance of the Bonds to assure that interest (and original issue discount) will not become includable in gross income for federal income tax purposes. Failure to comply with such requirements of the Code might cause interest (and original issue discount) on the Bonds to be included in gross income for federal income tax purposes retroactive to the date of issuance of the Bonds. The Authority and the District have covenanted to comply with all such requirements. The opinions expressed herein may be affected by actions taken (or not taken) or events occurring (or not occurring) after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions or events are taken or do occur. The Indenture and the Tax Certificate relating to the Bonds permit certain actions to be taken or to be omitted if a favorable opinion of Bond Counsel is provided with respect thereto. No opinion is expressed herein as to the effect on the exclusion from gross income for federal income tax purposes of interest (and original issue discount) with respect to the Bonds if any such action is taken or omitted based upon the opinion or advice of counsel other than Stradling Yocca Carlson & Rauth, a Professional Corporation. Other than expressly stated herein, we express no other opinion regarding tax consequences with respect to the Bonds. The opinions expressed herein are based upon our analysis and interpretation of existing laws, regulations, rulings and judicial decisions and cover certain matters not directly addressed by such authorities. Such opinions may be affected by actions taken or omitted or events occurring after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions are taken or omitted or events do occur, and we disclaim any obligation to update this opinion. Our engagement as Bond Counsel terminates upon the issuance of the Bonds. Otay Water District Public Financing Authority ________, 2018 Page 4 E-5 Our opinion is limited to maters governed by the laws of the State of California and federal law. We assume no responsibility with respect to the applicability or the effect of the laws of any other jurisdiction. We express no opinion herein as to the accuracy, completeness or sufficiency of the Official Statement relating to the Bonds or other offering material relating to the Bonds and expressly disclaim any duty to advise the owners of the Bonds with respect to matters contained in the Official Statement. Respectfully submitted, F-1 APPENDIX F THE BOOK-ENTRY SYSTEM The following description of the Depository Trust Company (“DTC”), the procedures and record keeping with respect to beneficial ownership interests in the Bonds, payment of principal, interest and other payments on the Bonds to DTC Participants or Beneficial Owners, confirmation and transfer of beneficial ownership interest in the Bonds and other related transactions by and between DTC, the DTC Participants and the Beneficial Owners is based solely on information provided by DTC. Accordingly, no representations can be made concerning these matters and neither the DTC Participants nor the Beneficial Owners should rely on the foregoing information with respect to such matters, but should instead confirm the same with DTC or the DTC Participants, as the case may be. Neither the issuer of the Bonds (the “Issuer”) nor the trustee, fiscal agent or paying agent appointed with respect to the Bonds (the “Agent”) take any responsibility for the information contained in this Appendix. No assurances can be given that DTC, DTC Participants or Indirect Participants will distribute to the Beneficial Owners (a) payments of interest, principal or premium, if any, with respect to the Bonds, (b) certificates representing ownership interest in or other confirmation or ownership interest in the Bonds, or (c) redemption or other notices sent to DTC or Cede & Co., its nominee, as the registered owner of the Bonds, or that they will so do on a timely basis, or that DTC, DTC Participants or DTC Indirect Participants will act in the manner described in this Appendix. The current “Rules” applicable to DTC are on file with the Securities and Exchange Commission and the current “Procedures” of DTC to be followed in dealing with DTC Participants are on file with DTC. 1. The Depository Trust Company (“DTC”), New York, NY, will act as securities depository for the Bonds (the “Securities”). The Securities will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Security certificate will be issued for each issue of the Securities, each in the aggregate principal amount of such issue, and will be deposited with DTC. If, however, the aggregate principal amount of any issue exceeds $500 million, one certificate will be issued with respect to each $500 million of principal amount, and an additional certificate will be issued with respect to any remaining principal amount of such issue. 2. DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book- entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect F-2 Participants”). DTC has a Standard & Poor’s rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com. The information contained on such Internet site is not incorporated herein by reference. 3. Purchases of Securities under the DTC system must be made by or through Direct Participants, which will receive a credit for the Securities on DTC’s records. The ownership interest of each actual purchaser of each Security (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Securities are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Securities, except in the event that use of the book-entry system for the Securities is discontinued. 4. To facilitate subsequent transfers, all Securities deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Securities with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Securities; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Securities are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. 5. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Securities may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Securities, such as redemptions, tenders, defaults, and proposed amendments to the Security documents. For example, Beneficial Owners of Securities may wish to ascertain that the nominee holding the Securities for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them. 6. Redemption notices shall be sent to DTC. If less than all of the Securities within an issue are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. 7. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Securities unless authorized by a Direct Participant in accordance with DTC’s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to Issuer as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts Securities are credited on the record date (identified in a listing attached to the Omnibus Proxy). 8. Redemption proceeds and distributions on the Securities will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from Issuer or Agent, on payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or F-3 registered in “street name,” and will be the responsibility of such Participant and not of DTC, Agent, or Issuer, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of Issuer or Agent, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. 9. DTC may discontinue providing its services as depository with respect to the Securities at any time by giving reasonable notice to Issuer or Agent. Under such circumstances, in the event that a successor depository is not obtained, Security certificates are required to be printed and delivered. 10. Issuer may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Security certificates will be printed and delivered to DTC. 11. The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that Issuer believes to be reliable, but Issuer takes no responsibility for the accuracy thereof. 1 OFFICIAL NOTICE OF SALE $28,300,000* OTAY WATER DISTRICT FINANCING AUTHORITY WATER REVENUE BONDS, SERIES 2018A NOTICE IS HEREBY GIVEN that electronic bids only will be received by representatives of the Otay Water District Financing Authority (the “Authority”) for the purchase of $28,300,000* approximate aggregate principal amount of Water Revenue Bonds, Series 2018A (the “Bonds”), more particularly described below. DATE AND TIME: Tuesday, October 2, 2018, at 9:30 A.M. (Pacific Daylight Saving Time). SUBMISSION OF BIDS: Bids may be submitted (for receipt not later than the time set forth above) electronically only through the Ipreo BiDCOMP/PARITY© system. See “FORM OF BID; MAXIMUM DISCOUNT” herein. Bidders should be aware that the par amount of the Bonds may be increased or reduced to fit the Authority’s requirements for funding the construction of storage and distribution facilities of the Otay Water District (the “District”) and achieve certain debt service levels. See “ADJUSTMENT OF PRINCIPAL AMOUNTS AND OF MATURITIES” below. TERMS OF BONDS; PRELIMINARY OFFICIAL STATEMENT: The terms of issuance, payment of the principal of and the interest on the Bonds, redemption, security, tax exemption and all other information regarding the Bonds and the District are given in the Preliminary Official Statement for the Bonds, dated __________, 2018 (the “Preliminary Official Statement”), which each bidder must have obtained and reviewed prior to bidding for the Bonds. This Official Notice of Sale contains certain information for quick reference only, is not a summary of the issue and governs only the terms of the sale of, bidding for and closing procedures with respect to the Bonds. Bidders must read the entire Preliminary Official Statement to obtain information essential to the making of an informed investment decision. Capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Preliminary Official Statement. ISSUE; BOOK-ENTRY: The Bonds will be dated as of their date of delivery and will be issued in fully registered form, without coupons, in the denomination of $5,000 each or any integral multiple thereof, pursuant to the Indenture of Trust, dated as of October 1, 2018 (the “Indenture”), by and between the Authority and MUFG Union Bank, N.A., as trustee (the “Trustee”), as approved by a resolution of the Authority, adopted on September 5, 2018. The Bonds will be issued in a book-entry‐only system with no physical distribution of the Bonds made to the public. The Depository Trust Company, New York, New York (“DTC”), will act as depository for the Bonds which will be immobilized in its custody. The Bonds will be registered in the name of Cede & Co., as nominee for DTC, on behalf of the participants in the DTC system and the subsequent beneficial owners of the Bonds. Reference is made to the Indenture for further details regarding the terms and provisions of the Bonds. Copies of the Indenture will be furnished to any interested bidder upon request. MATURITIES: The Bonds will mature, or be subject to mandatory sinking account redemption, on September 1, in the years and in the amounts, as set forth in the following table. Each bidder is required to specify in its bid whether, for any particular year, the Bonds will mature or, alternately, be subject to mandatory sinking fund redemption in such year: __________________________ * Preliminary, subject to change.  2 Maturity Date Principal Maturity Date Principal (September 1) Amount* (September 1) Amount* 2019 2032 2020 2033 2021 2034 2022 2035 2023 2036 2024 2037 2025 2038 2026 2039 2027 2040 2028 2041 2029 2042 2030 2043 2031 2044 ADJUSTMENT OF PRINCIPAL AMOUNTS AND OF MATURITIES: The maturity amounts set forth in this Official Notice of Sale reflect certain estimates of the Authority and its Municipal Advisor with respect to the likely interest rates of a winning bid and the premium/discount likely to be specified in such a winning bid. The maturity amounts set forth above for the Bonds may be adjusted either upward or downward in order to provide sufficient funds and achieve certain debt service levels, after award of the Bonds has been made to the successful bidder. The successful bidder will be notified of the actual principal amounts and maturity schedule relating to the Bonds within 4 hours after the expiration of the time prescribed for the receipt of proposals. Any increase or decrease will be in $5,000 increments of principal amounts. In the event of any such adjustment, no re‐bidding or recalculation of the bids submitted will be required or permitted and the successful bid may not be withdrawn. No such adjustment of principal amounts and maturities will alter the determination of the winning bid. The successful bidder will not be permitted to change the interest rates in its bid as a result of any such adjustment of principal maturities. INTEREST: Interest on the Bonds, calculated on a 30 day month/360 day year basis, at a rate for each maturity to be fixed upon the sale thereof will be payable semiannually on each March 1 and September 1, commencing March 1, 2019. PAYMENT: Principal of the Bonds upon maturity and interest on the Bonds will be payable by wire of the Trustee to DTC which will in turn remit such interest and principal to DTC Participants (as defined in the Preliminary Official Statement), which will in turn remit such interest and principal to Beneficial Owners (as defined in the Preliminary Official Statement) of the Bonds. OPTIONAL REDEMPTION: The Bonds maturing on or before September 1, 2028, are not subject to optional redemption prior to their respective stated maturities. The Bonds maturing on after September 1, 2029 shall be subject to optional redemption, in whole or in part, on any date on or after September 1, 2028, from prepayments of Installment Payments (as defined below) pursuant to the Installment Purchase Agreement (as defined below), from any available source of funds of the District, at a redemption price equal to the principal amount of the Bonds to be redeemed, together with accrued interest thereon to the date fixed for redemption, without premium. __________________________ * Subject to adjustment as described herein. 3 SINKING ACCOUNT REDEMPTION: Any bidder may, at its option, specify that one or more maturities of the Bonds will consist of term Bonds which are subject to mandatory sinking account redemption in consecutive years immediately preceding the maturity thereof, as designated in the bid of such bidder. In the event that the bid of the successful bidder specifies that any maturity of Bonds will be term Bonds, such term Bonds will be subject to mandatory sinking fund redemption on September 1 in each year so designated in the bid, in the respective amounts for such years as set forth above under the heading “MATURITIES,” subject to adjustment as described above, at a redemption price equal to the principal amount thereof to be redeemed together with accrued interest thereon to the redemption date, without premium. PURPOSE: The proceeds of the Bonds will provide a portion of the funds to construct storage and distribution facilities and to pay costs incurred in connection with issuance of the Bonds, as further described in the Preliminary Official Statement. SECURITY: The Bonds are being issued pursuant to the Indenture. The Bonds will be payable from installment payments (the “Installment Payments”) to be made by the District to the Authority as payment for certain improvements, as more fully described in the Preliminary Official Statement, pursuant to an Installment Purchase Agreement dated as of October 1, 2018, between the Authority and the District and certain funds held under the Indenture and investment earnings thereon, all as more fully described in the Preliminary Official Statement. The Authority has assigned to the Trustee, for the benefit of the Owners of the Bonds, the right of the Authority to receive and collect the Installment Payments due from the District under the Installment Purchase Agreement and certain other rights of the Authority under the Installment Purchase Agreement. In general, Installment Payments will be sufficient in both time and amount to pay, when due, the principal and interest payable on the Bonds all as more fully described in the Preliminary Official Statement. The Installment Payments are secured by a pledge and lien on Taxes and Revenues of the Water System and are payable from Taxes and Net Revenues, all as more fully described in the Preliminary Official Statement. The obligation of the District to pay Installment Payments does not constitute an obligation for which the District is obligated to levy or pledge any form of taxation or for which the District has levied or pledged any form of taxation. The obligation of the District to pay Installment Payments does not constitute a debt or liability of the State of California or of any political subdivision thereof within the meaning of any constitutional or statutory debt limitation or restriction. Bidders are referred to the Preliminary Official Statement for further particulars. RATING: S&P Global Ratings has assigned a rating of “__” to the Bonds. The cost of obtaining such rating will be borne entirely by the Authority and not by the successful bidder. Any additional ratings desired by the purchaser of the Bonds, as well as the fees associated with such ratings, will be the sole responsibility of the purchaser. TERMS OF SALE BID SPECIFICATIONS & INTEREST RATES: All bids must be unconditional. By submitting a bid, the bidder is representing that it has an established industry reputation for underwriting new issuances of municipal bonds. Bidders must specify interest rates with respect to the Bonds in accordance with the following conditions: (i) each interest rate specified must be in a multiple of 1/20 or 1/8 of 1%; (ii) the maximum interest rate specified for any maturity may not exceed 5%; (iii) a zero rate of interest cannot be specified; 4 (iv) all Bonds of the same maturity date shall bear interest to the stated maturity date at the interest rate specified in the bid; and (v) no bid will be accepted which provides for the cancellation and surrender of any interest payment or for the waiver of interest or other concession by the bidder as a substitute for payment in full of the purchase price of the Bonds. Bids that do not conform to these terms will be rejected. FORM OF BID; MAXIMUM DISCOUNT: All bids must be for all of the Bonds hereby offered for sale and must provide for a purchase price of not less than 99% of the aggregate par amount thereof. ELECTRONIC BIDS: To the extent any instructions or directions set forth in Ipreo BiDCOMP/PARITY© conflict with this Official Notice of Sale, the terms of this Official Notice of Sale shall control. For further information about Ipreo BiDCOMP/PARITY©, bidders may contact Harrell & Company Advisors, LLC (the “Municipal Advisor”) at (714) 939‐1464 or Ipreo BiDCOMP/PARITY© at (212) 849-5021. The Authority retains absolute discretion to determine whether any bid is timely, legible and complete. None of the Authority, the Municipal Advisor, or Bond Counsel takes any responsibility for informing any bidder prior to the time for receiving bids that its bid is incomplete, illegible or not received. Each bidder submitting an electronic bid understands and agrees by doing so that it is solely responsible for all arrangements with Ipreo BiDCOMP/PARITY© and that Ipreo BiDCOMP/PARITY© is not acting as an agent of the Authority. Instructions and forms for submitting electronic bids must be obtained from Ipreo BiDCOMP/PARITY© and the Authority assumes no responsibility for ensuring or verifying bidder compliance with the procedures of Ipreo BiDCOMP/PARITY©. The Authority shall assume that any bid received through Ipreo BiDCOMP/PARITY© has been made by a duly authorized agent of the bidder. The Authority will make its best efforts to accommodate electronic bids; however the Authority, the Municipal Advisor and Bond Counsel assume no responsibility for any error contained in any bid submitted electronically, or for failure of any bid to be transmitted, received or accepted at the official time for receipt of bids. The official time for receipt of bids will be determined by the Authority, and the Authority shall not be required to accept the time kept by Ipreo BiDCOMP/PARITY© as the official time. BEST BID: The Bonds will be awarded to the responsible bidder or bidders offering to purchase the Bonds at the lowest true interest cost to the Authority. The true interest cost of each bid will be determined on the basis of the present value of the aggregate future semiannual payments resulting from the interest rates specified by the bidder. The present value will be calculated to the dated date of the Bonds (assumed to be October 25, 2018) and will be based on the proposed bid amount (par value less any discount or plus any premium). For the purpose of making such determination, it shall be assumed that any Bond designated as term Bonds by the bidder shall be deemed to be payable on the dates and in the amounts as shown under the section entitled “MATURITIES” herein. Each bidder is requested, but not required, to state in such bidder’s bid the percentage true interest cost to the Authority, which shall be considered as informative only and shall not be binding on either the bidder or the Authority. The determination by the Municipal Advisor of the bid with the lowest true interest cost to the Authority shall be binding and conclusive on all bidders. RIGHT OF CANCELLATION OF SALE BY AUTHORITY: The Authority reserves the right, in its sole discretion, at any time to cancel the public sale of the Bonds. In such event, the Authority shall cause notice of cancellation of this invitation for bids and the public sale of the Bonds to be communicated through the Bond Buyer Wire or TM3 as promptly as practicable. However, no failure to publish such notice or any defect or omission therein shall affect the cancellation of the public sale of the Bonds. 5 RIGHT TO MODIFY OR AMEND: The Authority reserves the right, in its sole discretion, to modify or amend this Official Notice of Sale including, but not limited to, the right to adjust and change the principal amount and principal amortization schedule of the Bonds being offered, however, such modifications or amendments shall be made not later than 9:00 A.M., Pacific Daylight Saving Time, on the business day prior to the bid opening and communicated through the Bond Buyer Wire or TM3. RIGHT OF POSTPONEMENT BY AUTHORITY: The Authority reserves the right, in its sole discretion, to postpone, from time to time, the date established for the receipt of bids. Any such postponement will be communicated through the Bond Buyer Wire or TM3 not later than 9:00 A.M., Pacific Daylight Saving Time on the date for receipt of bids. If any date is postponed, an alternative sale date will be announced through the Bond Buyer Wire or TM3 at least 24 hours prior to such alternative sale date. On any such alternative sale date, any bidder may submit a bid for the purchase of the Bonds in conformity in all respects with the provisions of this Official Notice of Sale, except for the date of sale and except for the changes announced by through the Bond Buyer Wire or TM3 at the time the sale date and time are announced. RIGHT OF REJECTION OR WAIVER: The Authority reserves the right, in its sole discretion, to reject any and all bids or to waive any irregularity or informality in any bid except that no bids will be accepted later than 9:30 A.M. (Pacific Daylight Saving Time) on the date set for receipt of bids. PROMPT AWARD: Pursuant to authority granted by the Authority Board of Directors, the Authority will take action awarding the Bonds or rejecting all bids not later than 24 hours after the expiration of the time herein prescribed for the receipt of proposals; provided, that the award may be made after the expiration of the specified time if the bidder shall not have given to the Authority notice in writing of the withdrawal of such proposal. PLACE OF DELIVERY; CANCELLATION FOR LATE DELIVERY: It is expected that said Bonds will be delivered through the facilities of DTC for the account of the successful bidder within 30 days from the date of sale thereof. The successful bidder shall have the right, at its option, to cancel its obligation to purchase the Bonds if the Bonds are not tendered for delivery within 60 days from the date of the sale thereof. Payment of the purchase price by the purchaser must be made by no later than 9:00 am Pacific Daylight Saving Time on the date of delivery by wire transfer in immediately available funds to an account designated by the Authority. NO GOOD FAITH DEPOSIT: No good faith deposit is required. CHANGE IN TAX EXEMPT STATUS: At any time before the Bonds are tendered for delivery, the successful bidder may disaffirm and withdraw such bidder’s proposal if the interest received by private holders from bonds of the same type and character as the Bonds shall be declared to be taxable income under present federal income tax laws, either by a ruling of the Internal Revenue Service or by a decision of any federal court, or shall be declared taxable, or be required to be taken into account in computing federal income taxes by any federal income tax law enacted subsequent to the date of this Official Notice of Sale. CLOSING PAPERS: Each proposal will be understood to be conditioned upon the Authority furnishing to the purchaser, without charge, concurrently with payment for and delivery of the Bonds, the following closing papers, each dated the date of delivery: (a) The opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, Bond Counsel to the Authority, substantially in the form attached in Appendix E to the Preliminary Official Statement, with respect to the exclusion from gross income of interest on the Bonds for federal tax purposes and the exemption of interest on the Bonds from income taxation by the State of California. 6 (b) A certificate of the Authority certifying that on the basis of the facts, estimates and circumstances in existence on the date of issue, it is not expected that the proceeds of the Bonds will be used in a manner that would cause the Bonds to be arbitrage bonds; (c) A certificate of the Trustee certifying that the officers and representatives have authenticated the Bonds, and that they were respectively duly authorized to authenticate the same; (d) The receipt of the Authority evidencing the receipt of the purchase price of the Bonds; and (e) A certificate of the Authority certifying that there is no known litigation threatened or pending affecting the validity of the Bonds. DISCLOSURE COUNSEL LETTER: Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach,, California will act as Disclosure Counsel in connection with the issuance of the Bonds. Such firm will provide a letter to the Authority and the original purchaser of the Bonds to the effect that based on their participation in the preparation of the Official Statement, nothing has come to their attention to lead them to believe that the Official Statement (except for certain financial statements, statistical data and other information) contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. CUSIP NUMBERS: It is anticipated that CUSIP numbers will be printed on the Bonds, but neither the failure to print such numbers on any Bond nor error with respect thereto shall constitute cause for a failure or refusal by the purchaser thereof to accept delivery of and pay for the Bonds in accordance with the terms of the purchase contract. All expenses of printing CUSIP numbers on the Bonds and the CUSIP Service Bureau charge for the assignment of said numbers shall be paid by the successful bidder. The Municipal Advisor shall be responsible for obtaining the CUSIP numbers and providing them to the Authority and the successful bidder. QUALIFICATION FOR SALE; BLUE SKY: Compliance with blue sky laws shall be the sole responsibility of the purchaser. The Authority will furnish such information and take such action not inconsistent with law as the purchaser may request and the Authority shall deem necessary or appropriate to qualify the Bonds for offer and sale under the blue sky or other securities laws and regulations of such states and other jurisdictions of the United States of America as may be designated by the purchaser; provided, however, that the Authority shall not execute a general or special consent to service of process or qualify to do business in connection with such qualification or determination in any jurisdiction and shall not be responsible for any fees or other costs related to such filing or qualification. The purchaser will not offer to sell or solicit any offer to buy the Bonds in any jurisdiction where it is unlawful for such purchaser to make such offer, solicitation or sale, and the purchaser shall comply with the blue sky and other securities laws and regulations of the states and jurisdictions in which the purchaser sells the Bonds. ESTABLISHMENT OF ISSUE PRICE FOR THE BONDS: In the event the Authority receives at least three (3) bona fide bids for the Bonds, then the Issue Price for the Bonds shall be established based on the reasonably expected initial offering prices of the Bonds as of the Sale Date (the “Expected Offering Prices”). The Expected Offering Prices shall consist of the prices for each maturity of the Bonds used by the winning bidder in formulating its bid to purchase the Bonds. The winning bidder shall be required to deliver on the Delivery Date a certificate to such effect, and provide to the Authority, in writing, the Expected Offering Prices as of the Sale Date. In the event the Authority receives fewer than three (3) bona fide bids for the Bonds, then the Issue Price for the Bonds shall be established based on the first price at which at least 10% of each maturity of the Bonds was sold to the Public (as defined below). The winning bidder shall be required to deliver on the Delivery Date a certificate to such effect, and provide to the Authority, in writing, evidence satisfactory to Bond Counsel to the Authority of such sales prices for each maturity of the Bonds. In the event that the 7 winning bidder has not sold at least 10% of each maturity of the Bonds to the Public as of the Delivery Date (each, an “Unsold Maturity”), the winning bidder shall (i) provide to the Authority, in writing, on the Delivery Date, the Expected Offering Prices for each Unsold Maturity and a certificate regarding same and (ii) have a continuing obligation to provide to the Authority, in writing, evidence satisfactory to Bond Counsel to the Authority of the first price at which at least 10% of each Unsold Maturity is sold to the Public, contemporaneous with each such sale, until at least 10% of all such Unsold Maturities have been sold to the Public. As used herein, the term “Public” means any person (including an individual, trust, estate, partnership, association, company, or corporation) other than an Underwriter (as defined herein) or a related party to an Underwriter. The term “related party” generally means any two or more persons who have greater than 50 percent common ownership, directly or indirectly. As used herein, the term “Underwriter” means (i) any person that agrees pursuant to a written contract with the Authority (or with the lead underwriter to form an underwriting syndicate) to participate in the initial sale of the Bonds to the Public, and (ii) any person that agrees pursuant to a written contract directly or indirectly with a person described in clause (i) of this paragraph to participate in the initial sale of the Bonds to the Public (including a member of a selling group or a party to a retail distribution agreement participating in the initial sale of the Bonds to the Public). CALIFORNIA DEBT AND INVESTMENT ADVISORY COMMISSION: The successful bidder will be required, pursuant to California law, to pay any fees to the California Debt and Investment Advisory Commission when due. DTC FEES: All fees due DTC with respect to the Bonds shall be paid by the successful bidder. OFFICIAL STATEMENT: The Authority and the District have caused to be prepared the Preliminary Official Statement in a form deemed final, as of its date, by the Authority and the District within the meaning of Rule 15c2‐12 of the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, (“Rule 15c2‐12”) except for certain information which is permitted under said Rule 15c2‐12 to be omitted from the Preliminary Official Statement, but is subject to revision, amendment and completion in a final Official Statement. A copy of the Preliminary Official Statement will be furnished upon request to Harrell & Company Advisors, LLC, 333 City Boulevard West, Suite 1215, Orange, California 92868, telephone (714) 939-1464. Upon the sale of the Bonds, the Authority will publish the final Official Statement in substantially the same form as the Preliminary Official Statement, subject to any additions, deletions, and revisions as required to make an Official Statement accurate in all material respects as of its date. The Authority will furnish to the successful bidder within seven business days following the date of award, at no charge, any number of electronic copies and not in excess of 100 printed copies of the Official Statement for use in connection with any resale of the Bonds. The purchaser agrees to supply the Authority all pricing information necessary to complete the Official Statement within 24 hours after the award of the Bonds. Additional printed copies of the final Official Statement may be obtained at additional cost. By making a bid for the Bonds, the purchaser agrees to (1) disseminate to all members of the underwriting syndicate copies of the final Official Statement, including any supplements prepared by the Authority, (2) promptly file a copy of the final Official Statement, including any supplements prepared by the Authority, with the Municipal Securities Rulemaking Board, and (3) take any and all other actions necessary to comply with applicable Securities and Exchange Commission rules and Municipal Securities Rulemaking Board rules governing the offerings sale and delivery of the Bonds and the Official Statement to ultimate purchasers. Prospective bidders must review the Preliminary Official Statement before submitting a bid, including the form of opinion of Bond Counsel set forth in Appendix E to the Preliminary Official Statement. 8 DISCLOSURE CERTIFICATE: The Authority and the District will deliver to the purchaser of the Bonds a certificate dated the date of Bond delivery, stating that as of the date thereof, except for information relating to DTC and CUSIP Numbers as to which no view is expressed, the Official Statement does not contain an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. CONTINUING DISCLOSURE: In order to assist bidders in complying with Rule 15c2‐12, the District will undertake, pursuant to a Continuing Disclosure Agreement, to provide annual reports and notices of certain events. A description of this undertaking is set forth in the Preliminary Official Statement and will also be set forth in the final Official Statement. Dated: __________, 2018 STAFF REPORT TYPE MEETING: Regular Board MEETING DATE: September 5, 2018 PROJECT: Various DIV. NO. ALL SUBMITTED BY: Kelli Williamson Human Resources Manager APPROVED BY: Adolfo Segura, Chief, Administrative Services Mark Watton, General Manager SUBJECT: REQUEST TO ADD KAISER PERMANENTE AS HEALTH BENEFIT PLAN OPTION GENERAL MANAGER’S RECOMMENDATION: That the Board approve adding Kaiser Permanente as a health benefit plan option. COMMITTEE ACTION: See “Attachment A”. PURPOSE: To obtain Board approval to add Kaiser Permanente as a health benefit plan option. ANALYSIS: The District currently offers three medical plans through its health benefits insurer, Special District Risk Management Authority (SDRMA). The three plans are Gold PPO, EPO, and Access + HMO15 (HMO) and are all offered through Blue Shield of California. SDRMA now has the availability to offer the Kaiser Permanente HMO 15 plan (Kaiser) as an additional option for active and retired employees. The Kaiser plan design is similar to the Access + HMO15. Staff conducted an interest survey among our employees and 72 responded. Of the 72, 15 employees said they would select Kaiser, 22 indicated they were not interested in joining Kaiser at this time, but would 2 consider it in the future, and 35 indicated they were not interested in joining Kaiser. This survey did not include retirees who may also be interested in participating. Based on the employee survey, assuming 15 employees in the Blue Shield HMO switch to Kaiser, the District anticipates that the savings will be approximately $50,400 in the first plan year, which results in a 2.2% reduction in medical costs for active employees only, and a 1.6% reduction in the overall costs for our health plan through SDRMA. This is a conservative estimate as some retirees may also be interested in participating. This change will help mitigate increases in our overall medical plan (for plan year 2019, the EPO and PPO increased by 3.0% and the HMO plan increased by 3.1%). In addition, this savings could increase over time as employees and retirees become more familiar with Kaiser. FISCAL IMPACT: Joe Beachem, Chief Financial Officer The District estimates the cost-savings to be approximately $50,400 in the first plan year, which results in a 2.2% reduction in medical costs for active employees only, and a 1.6% reduction in the overall costs for our health plan through SDRMA. LEGAL IMPACT: None. Attachments: Attachment A – Committee Action Report ATTACHMENT A SUBJECT/PROJECT: REQUEST TO ADD KAISER PERMANENTE AS HEALTH BENEFIT PLAN OPTION COMMITTEE ACTION: The Finance, Administration and Communications Committee met on August 21, 2018 to review this item. The Committee supports presentation to the full Board for their consideration. NOTE: The “Committee Action” is written in anticipation of the Committee moving the item forward for Board approval. This report will be sent to the Board as a committee approved item, or modified to reflect any discussion or changes as directed from the committee prior to presentation to the full Board. STAFF REPORT TYPE MEETING: Regular Board MEETING DATE: September 5, 2018 PROJECT: Various DIV. NO. ALL SUBMITTED BY: Michael Kerr, Information Technology Manager APPROVED BY: Adolfo Segura, Chief, Administrative Services Mark Watton, General Manager SUBJECT: REPLACEMENT OF DATA CENTER NETWORKING EQUIPMENT GENERAL MANAGER’S RECOMMENDATION: That the Otay Water District (District) Board of Directors (Board) authorize the General Manager to approve the issuance of: A) A purchase order to Nth Generation in the amount of $52,478.84 for purchases of Next Generation Palo Alto Firewalls and Aruba ClearPass Policy Management Solution; and B) A purchase order to Groupware Technology in the amount of $47,138.00 for engineering, training, and implementation of Palo Alto Firewalls and Aruba ClearPass Policy Management Solution. COMMITTEE ACTION: Please see “Attachment A”. PURPOSE: To authorize the purchase of equipment and services necessary to support essential operations of District business systems and emerging cybersecurity needs as identified in the District’s Strategic Plan. ANALYSIS: Background Approximately 5 years ago, the District installed two enterprise Cisco firewalls, primary and secondary, and a Cisco policy management solution to secure and protect the District’s computing environment. The two existing firewalls work in concert to manage authorized District data traffic, and protect computing operations by blocking unauthorized 2 external access, and potential exploits such as malware, ransomware, and other malicious software. Discussion The District’s current firewall and policy management solutions are nearing end-of-life status, with limited support and maintenance, and lack new features and functionalities that would make the services they provide more effective. With ever-growing security and cyber threats, network firewalls and policy management solutions play a critical role in the prevention, protection, and authorized usage of the District’s computing environment. Proceeding with the direction to continuously improve the District’s essential enterprise computing safeguards, in December of 2017, staff began extensive research into a right-fit and cost-effective replacement firewall and policy management solution. Additional requirements for a replacement solution included advanced antivirus protection, port-scanning, built-in security certificate processing, and content inspection. Staff solicited and invited three technology vendors to propose a new firewall management solution and also bid on the engineering and implementation of services based on District requirements. Cisco Systems, Fortinet Technologies, and Palo Alto Networks were selected. The proposed solutions were evaluated by the District’s technology team. Proposal and interview rankings were based on the vendor’s relevant experience, technical/functional fit, support and maintenance, and cost. The respondents’ recommendation for the new firewall system and contact information is listed below: Manufacturer Address Proposed Solution Cisco Systems 170 West Tasman Drive San Jose, CA 95134 Cisco ASA Firewall Palo Alto Networks 3000 Tannery Way Santa Clara, CA 95054 Palo-Alto PA-820 Fortinet Technologies 899 Kifer Road Sunnyvale, CA 94086 Fortigate FG300E The selection panel held discussions on each vendor’s firewall solution and were given the opportunity to seek additional information, if needed. Based on their threat intelligence feature, endpoint security architecture, and support staff, the team came away impressed with the Palo-Alto PA-820 system. Staff reached out to the local MISAC (Municipal Information Systems Association of California) community for feedback and the results were highly favorable in support of the Palo Alto Firewall solution (Palo Alto solution). Below is a cost breakdown of the submitted quotes for the selected firewall solution: 3 Reseller Product Cost Nth Generation Palo-Alto PA-820 $37,788.84 Groupware Technologies Palo-Alto PA-820 $47,005.25 Pinnacle Palo-Alto PA-820 $50,966.00 (cost breakdown of firewall management solution from vendors) The policy management solution provides an advanced layer of authentication, authorization, and accounting (AAA) of network users, system services, and connected devices. The District solicited vendor solutions targeted for our computing environment. The AAA solution provides the District detailed knowledge of end-user, wired-wireless device, and system services activities, as well awareness of detection of possible intrusions. The solution also provides end-user and device policy controls for enhanced enterprise management. Cisco System, Hewlett Packard Enterprise (HPE), and Fortinet Technologies were selected and evaluated. The respondents’ recommendation for the new AAA system solution and contact information is listed below: Manufacturer Address Proposed Solution Cisco Systems 170 West Tasman Drive San Jose, CA 95134 Cisco Identity Services Engine (ICE) HPE 3333 Scott Blvd Santa Clara, CA 95054 Aruba ClearPass Policy Management Fortinet Technologies 190 West Tasman Drive San Jose, CA 95134 FortiGate Staff was impressed with HPE’s Aruba ClearPass Policy Management (Aruba) solution. The representatives from HPE were able to demonstrate and test many of the features and functionalities required and requested by District staff. Staff again reached out to the local MISAC community for feedback and the results were highly favorable in support of HPE’s Aruba solution. Below is a cost breakdown of the submitted quotes for the selected policy management solution: Reseller Product Cost Nth Generation Aruba ClearPass $14,690.00 Groupware Technologies Aruba ClearPass $20,734.72 Vector USA Aruba ClearPass $22,471.00 (cost breakdown of policy management solution from vendors) Analysis and Selection Panel Recommendation Representatives from the IT department were empaneled to conduct a decision analysis consistent with the District’s standard practices. As a result of the analysis, the panel recommended the District move forward with both the Palo Alto and Aruba solutions. 4 Implementation and Deployment In order to successfully engineer and implement the solutions, staff also solicited the associated vendors for these devices. The District received a total of three bids, two were deemed responsive (capable of performing the project), and one other vendor responded, however, declined due to the scope of work required, which would require the vendor to sub-contract the consultant work. Based on the requirements presented in the solicitation and interviews, staff believes two of the firms were more than qualified to implement the Palo Alto and Aruba solutions. During the decision analysis, the panel discussed several key findings, which are described below. Nth Generation The panel felt that Nth Generation was qualified to conduct the requested scope of work having experience with other public agencies. The proposal presented by Nth Generation, however, was incomplete and their approach to the project was not as detailed as the panel had expected. Although Nth Generation has current experience in engineering and deploying enterprise network firewalls and network access control solutions, the team could not quantify its migration and deployment experience of both systems. Additionally, Nth Generation did not offer any training of the solutions once implemented and staff felt that this was one of the key requirements in determining their selection. Groupware Technology Groupware Technology (Groupware) demonstrated a thorough and systematic approach to this engagement, including a sound methodology in the engineering design, configuration, and cutover activities for the District’s firewall replacement project. Although Nth Generation’s general experience matched that of Groupware’s, familiarity with similar projects and staff proposed by Groupware, indicated they were clearly much more experienced with the Palo Alto firewall systems and migrations, which impressed the panel. Another pivotal point for the panel was Groupware’s migration plan to include the configuration parameters for both solutions, Palo Alto and Aruba. The panel was impressed with the overall migration plan, proposed staff, and project timeline, which would minimize operational downtime and impact on District users. Below is a cost breakdown of the submitted quotes for implementation, deployment services, and configuration from the vendors selected: 5 Firm Address Total Project Implementation Cost Nth Generation 17055 Camino San Bernardo San Diego, CA 92127 $84,284.00 Groupware Technology 541 Division Street Campbell, CA 95008 $47,138.00 The Pinnacle Group 1945 Camino Vida Roble, Suite N Carlsbad, CA 92008 Unresponsive Recommendation Following the selection panel’s recommendation, staff conducted due diligence on the Palo Alto system, Aruba solution, and the integration team for Groupware. Based on additional information from one of the leading technology research firms, Gartner Inc., both the Palo Alto enterprise firewall and Aruba network management system are leaders in these security technology areas. Staff is also confident in the selection of Groupware’s team based on a thorough review of their submitted proposal, interviews, and references from other firms that have partnered with Groupware in similar projects. Post-deployment, District IT staff will operate and maintain the day- to-day services provided by these solutions. FISCAL IMPACT: Joe Beachem, Chief Financial Officer The approved capital budget for CIP 2571 (Data Center Network – Data, Storage, and Infrastructure Enhancements) is $200,000 for FY 2019. To date, there are no current expenditures dispersed for this CIP. The expenditure of $99,616.84 will leave a remaining balance of $100,383.16 in this CIP. The Project Manager anticipates, based on financial analysis, that the budget will be sufficient to support this project. Finance has determined that 100% of the funding is available from the Replacement Fund. STRATEGIC GOAL: These items are in support of the District’s required services and Strategic Plan, which specifically improve the overall operating costs and ensures business continuity. LEGAL IMPACT: None. ATTACHMENTS: Attachment A – Committee Action Report Attachment B – Network Equipment Decision Analysis 6 ATTACHMENT A SUBJECT/PROJECT: REPLACEMENT OF DATA CENTER NETWORKING EQUIPMENT COMMITTEE ACTION: The Finance & Administration Committee met on August 21, 2018, to review this item. The Committee supports presentation to the full Board for their review. NOTE: The “Committee Action” is written in anticipation of the Committee moving the item forward for Board approval. This report will be sent to the Board as a committee approved item, or modified to reflect any discussion or changes as directed from the committee prior to presentation to the full Board. Staff interviewed and ranked the top three firms for the firewall system: Palo Alto Networks, Cisco Systems, and Fortinet. Results are summarized below. Palo Alto FW Cisco ASA Fortinet Technologies EVALUATION CRITERIA Weight Score Total Score Total Score Total Ease of Use 10 9 90 7 70 6 60 Technical Fit 9 9 81 7 63 7 63 Functional Fit 9 8 72 8 72 7 63 Support/Maintenance 8 8 64 8 64 7 56 Cost 7 6 42 5 35 6 42 Total 349 304 284 Additionally, staff also interviewed and ranked the top three firms for the authentication, authorization, and accounting solution: Cisco Systems, HPE, and Fortinet Technologies. Utilizing the Decision Analysis methodology, the selection panel ranked the firms established. Results are summarized below. Fortinet Technologies HPE (Aruba) Cisco ICE EVALUATION CRITERIA Weight Score Total Score Total Score Total Ease of Use 10 7 70 9 90 8 80 Technical Fit 9 7 63 8 72 8 72 Functional Fit 9 7 63 8 72 8 72 Support/Maintenance 8 7 56 8 64 7 56 Cost 7 5 35 6 42 6 42 Total 287 340 322