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04-17-13 FA&C Committee Packet
1 OTAY WATER DISTRICT FINANCE, ADMINISTRATION AND COMMUNICATIONS COMMITTEE MEETING and SPECIAL MEETING OF THE BOARD OF DIRECTORS 2554 SWEETWATER SPRINGS BOULEVARD SPRING VALLEY, CALIFORNIA BOARDROOM WEDNESDAY April 17, 2013 11:30 A.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 JURISDICTION BUT NOT AN ITEM ON TODAY'S AGENDA DISCUSSION ITEMS 3. APPROVE AND UPHOLD STAFF’S DECISION TO IMPOSE $626.54 IN ADMINISTRATIVE FEES AND A $1,000 FINE TO ARCO AM/PM, JIHAN, INC. FOR FILING THREE FRAUDULENT BACKFLOW CERTIFICATION TEST FORMS (CAREY) [5 minutes] 4. APPOVE RECOMMENDATION TO TAKE AN “OPPOSE UNLESS AMENDED” POSITION ON ASSEMBLY BILL 145 (PEREA), LEGISLATION TO MOVE THE STATE’S DRINKING WATER PROGRAM FROM THE CALIFORNIA DEPARTMENT OF PUBLIC HEALTH TO THE STATE WATER RESOURCES CONTROL BOARD, AND AUTHORIZE THE BOARD PRESIDENT TO SEND A LETTER TO THE AUTHOR OF AB 145 STATING THE DISTRICT’S POSITION (BUELNA) [5 minutes] 2 5. ADOPT RESOLUTION NO. 4203 AUTHORIZING THE ISSUANCE OF, NOT- TO-EXCEED, $9,000,000 IN OTAY WATER DISTRICT 2013 WATER REVENUE REFUNDING BONDS, AND AUTHORIZING THE GENERAL MANAGER AND THE CHIEF FINANCIAL OFFICER TO EXECUTE AND DELIVER RELATED DOCUMENTS AND TAKE OTHER RELATED ACTIONS NECESSARY FOR THE REFINANCING OF THE 2004 CERTIFICATES OF PARTICIPATION (KOEPPEN) [10 minutes] 6. ADJOURNMENT BOARD MEMBERS ATTENDING: Mitch Thompson, Chair Jose Lopez All items appearing on this agenda, whether or not expressly listed for action, may be deliberated and may be subject to action by the Board. The Agenda, and any attachments containing written information, are available at the District’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 Secre- tary by contacting her at (619) 670-2280. If you have any disability which would require accommodation in order to enable you to participate 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 April 12, 2013 I posted a copy of the foregoing agenda near the regular 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 April 12, 2013. ______/s/_ Susan Cruz, District Secretary _____ STAFF REPORT TYPE MEETING: Regular Board MEETING DATE: May 1, 2013 SUBMITTED BY: Andrea Carey Customer Service Manager PROJECT: DIV. NO. All APPROVED BY: Joseph R. Beachem, Chief Financial Officer German Alvarez, Assistant General Manager Mark Watton, General Manager SUBJECT: Customer Arco AM/PM, Jihan Inc.’s Appeal GENERAL MANAGER’S RECOMMENDATION: That the Board uphold staff’s decision to impose $626.54 in administrative fees and a $1,000 fine to Arco AM/PM, Jihan Inc. for filing three fraudulent Backflow Certification Test forms. COMMITTEE ACTION: See Attachment A. PURPOSE: To present to the Board for consideration, Arco AM/PM, Jihan Inc.’s written appeal requesting the Board waive the $626.54 in administrative fees and the $1,000 fine. BACKGROUND: In order to comply with California Department of Health Title 17 regulations, a backflow prevention device is required on commercial, industrial or any other site that has an unprotected connection between any part of a District water system and any other source or system containing water or substance that cannot be approved as safe, wholesome and potable for human consumption. The Health Department regulation is to prevent water from those sites to flow back into and contaminate the public water system. This device must be tested annually to guarantee that it is operating properly. The District requires all commercial, agricultural and industrial properties that receive water from the District to have a backflow prevention device. AGENDA ITEM 3 In the case of the Arco AM/PM, Jihan Inc. site which has a gas station, a car wash and a soft drink dispenser, the risk of an internal cross-connection is not only outside our control, but unsafe to the public water system. Consequently, a backflow prevention device is necessary. ANALYSIS: Investigation On February 27, 2013 District staff received, via facsimile, three Backflow Certification Test forms for the Arco AM/PM, Jihan Inc. at 13886 Campo Rd. Jamul, CA 91935-3210. Upon staff’s review of the forms, it was found that there were inaccuracies in the data they contained. District staff contacted the certified backflow tester listed on the submitted forms to verify the information. The listed tester, Jon Gutschmidt of Best Deal Plumbing, Heating & Air, Inc., stated he had not tested those devices since February 2012. Upon review of the submitted forms, Mr. Gutschmidt verified that neither he nor any of his employees had filled out the test forms submitted on February 27, 2013. On the morning of March 4, 2013, Roger Holly, Recycled Water Systems Supervisor, called the owner of the business, Ms. Souad Yacoub, to inquire about the test reports. As soon as he identified himself, the owner stated she had faxed the completed test forms. When Mr. Holly explained there were some issues with the validity of the forms, the owner stated that there must be some mistake and that they had used the same tester for many years in a row. Mr. Holly informed Ms. Yacoub that the tester had stated that his company had not filled out the forms in 2013. Ms. Yacoub stated she would look into the matter. In a follow up phone call to Jon Gutschmidt on March 4, 2013, Mr. Gutschmidt advised District staff that Ms. Yacoub had called him that day to make arrangements to have the backflows at Arco AM/PM, Jihan Inc. tested later in the week. There was no mention of any mistake with the Backflow Certification Test forms. As a result of this phone call, staff concluded that Ms. Yacoub had been aware that the backflow certification tests had not yet been performed. The District’s costs to investigate and document this incident and determine an appropriate course of action was $626.54. Per Section 72.01 of the District’s Code of Ordinances, customers are “responsible for all costs and damages in connection with any violation of this Code relating to their service.” Costs incurred to investigate and remedy a violation are not appealable to the Board and are treated as inseparable from all other fees and charges on the customer’s account, per subsection (D) of Section 72.01. These charges have thus been added to the customer’s water account due on April 17, 2013. In addition, pursuant to Section 72 of the District’s Code of Ordinances, the District assessed a $1,000 fine for knowingly submitting a fraudulent backflow certification test form. Section 72 was recently amended to clarify the penalties associated with specific violations to the District’s Code of Ordinances. Section 72.06 specifies that a Type II fine is assessed on “any violation that has the potential to endanger the health and safety, including, but not limited to, unauthorized or illegal connections, meter tampering, water theft, or knowingly filing a false statement or report required by a local health officer.” A Type II fine carries a maximum penalty of $5,000 per each day the violation continues. Since this was the customer’s first violation, staff charged a $1,000 fine instead of the maximum amount. This charge has not been placed on the customer’s water account as they have asked to appeal it to the Board. Related Correspondence March 4, 2013 - District letter to Arco AM/PM, Jihan Inc advising of possible violations. (Attachment B) March 19, 2013 - District Notice of Violation to Arco AM/PM, Jihan Inc. explaining the charges and fines being imposed. (Attachment C) March 25, 2013 - Letter from Arco AM/PM, Jihan Inc. appealing to the Board of Directors to waive all charges. (Attachment D) FISCAL IMPACT: Joe Beachem, Chief Financial Officer The fiscal impact is limited to the $626.54 of staff time spent investigating this event and the $1,000 fine. STRATEGIC GOAL: Maintain the health and safety of the District’s water supply. LEGAL IMPACT: None. Attachments: Attachment A - Committee Action Attachment B - District Letter to Arco AM/PM, Jihan Inc. Attachment C - District Notice of Violation to Arco AM/PM, Jihan Inc. Attachment D – Appeal Letter from Arco AM/PM, Jihan Inc. ATTACHMENT A SUBJECT/PROJECT: Customer Arco AM/PM, Jihan Inc.’s Appeal COMMITTEE ACTION: The Finance, Administration and Communications Committee recommend that the Board uphold staff’s decision to impose $626.54 in administrative fees and a $1,000 fine to Arco AM/PM, Jihan Inc. for filing three fraudulent Backflow Certification Test forms. 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. ATTACHMENT B includes the following attachments: Attachment A – 3 Fraudulent Backflow Test Certificates 2013 Attachment B – 3 Legitimate Backflow Test Certificates 2012 Best Deal Plumbing, Heating & Air, Inc. Letter Code of Ordinances Section 72.03 ATTACHMENT C includes the following attachments: Attachment A – 3 Fraudulent Backflow Test Certificates 2013 Attachment B – 3 Legitimate Backflow Test Certificates 2012 STAFF REPORT TYPE MEETING: Regular Board MEETING DATE: May 1, 2013 SUBMITTED BY: Armando Buelna Communications Officer PROJECT: DIV. NO. ALL APPROVED BY: Mark Watton, General Manager SUBJECT: Assembly Bill 145 (Perea)– Legislation to Move the State’s Drinking Water Program from the California Department of Public Health to the State Water Resources Control Board - “Opposed Unless Amended”. GENERAL MANAGER’S RECOMMENDATION: That the Board Directors take an “oppose unless amended” position on Assembly Bill 145 (Perea), legislation to move the State’s Drinking Water Program from the California Department of Public Health to the State Water Resources Control Board, and authorize the Board President to send a letter to the author of AB 145 stating the District’s position. COMMITTEE ACTION: See attached. PURPOSE: To advise the Board of Directors about Assembly Bill 145 (Perea), legislation seeking to move the State’s Drinking Water Program from the California Department of Public Health to the State Water Resources Control Board, and request that the Board take an “opposed unless amended” position on the bill. AGENDA ITEM 4 2 ANALYSIS: Under existing law, the California Department of Public Health (CDPH) is responsible for regulating public water systems, including small water systems in disadvantaged areas of the state, as well as for administering the Safe Drinking Water Revolving Fund (SDWRF) to provide grants and loans to public water systems to enable them to deliver water meeting drinking water standards. While CDPH has been effective in its regulation of large water systems, it has not been able to administer the SDWRF in a manner that would allow small systems in disadvantaged communities to correct water quality problems in a timely manner. AB 145 is an effort to move the State’s Drinking Water Program from CDPH to the State Water Resources Control Board (SWRCB). The California Health and Human Services Agency (HHSA) administers both the CDPH and State’s Drinking Water Program. The bill’s author believes that because California has stretched its water quality agencies thin and housed responsibility for water in separate state agencies, the state is not adequately providing adequate services to all Californians. By moving the Drinking Water Program from the CDPH to SWRCB, this will “maximize the efficiency and effectiveness of drinking water, groundwater, and water quality programs in a single agency whose primary mission is water quality”. Supporters of this action argue that HHSA, which includes CDPH, has enormous responsibility for protecting public health, which results in the CDPH and Department of Water Resources “competing among other urgent needs for attention and resources.” They believe this has caused multi-year delays to needed regulatory changes and other problems. In addition, they note that the Legislative Analyst’s Office (LAO) concluded that the Revolving Fund managed by the CDPH “generally performs less well” than the revolving fund managed by the SWRCB, and that former governor Schwarzenegger’s California Performance Review “recommended combining the two Revolving Funds as a way to save money and improve the operation of both programs.” Opponents of AB 145 acknowledge that millions of Californians, particularly those in disadvantage communities, do not have access to safe drinking water and that this is a problem that must be addressed. They respond to the criticisms of CDPH by noting that the “entire Drinking Water Program is not broken” and that the focus needs to be on targeted solutions that truly address the drinking water problems that disadvantaged communities in unincorporated areas face. 3 They also note that many stakeholders across the state are generally “satisfied” with how the Drinking Water Program has performed its functions, and, in contrast, the SWRBC is already “close to overburdened and underfunded.” Opponents of AB 145 also believe that moving the entire Drinking Water Program from CDPH the SWRCB could negatively affect the parts of the program to that do work, while not necessarily solving the problems experienced by disadvantaged communities. Moreover, while the SWRCB has expertise in environmental and resource protection, it does not have the public health focus needed for ensuring safe drinking water. Keeping the Drinking Water Program in CDPH and in HHSA retains that critical public health focus. Organizations that have taken an “oppose unless amended” position on AB 145 included the San Diego County Water Authority, California Municipal Utilities Association, Association of California Water Agencies (ACWA), Santa Clara Valley Water District, and the Health Officers Association of California. AB 145 is currently in the Assembly Environmental Safety and Toxic Materials Committee. FISCAL IMPACT: Joe Beachem, Chief Financial Officer None. STRATEGIC GOAL: Deliver high quality services to meet customer needs. LEGAL IMPACT: None. Attachments: Attachment A – Committee Action B – Letter to Assemblymember Perea C – Copy of AB 145 ATTACHMENT A SUBJECT/PROJECT: Assembly Bill 145 (Perea)– Legislation to Move the State’s Drinking Water Program from the California Department of Public Health to the State Water Resources Control Board - “Opposed Unless Amended”. COMMITTEE ACTION: 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. california legislature—2013–14 regular session ASSEMBLY BILL No. 145 Introduced by Assembly Members Perea and Rendon January 18, 2013 An act to add Sections 116271, 116272, and 116760.25 to the Health and Safety Code, relating to drinking water. legislative counsel’s digest AB 145, as introduced, Perea. State Water Resources Control Board: drinking water. The California Safe Drinking Water Act (state act) provides for the operation of public water systems and imposes on the State Department of Public Health various duties and responsibilities. Existing law requires the department to conduct research, studies, and demonstration projects relating to the provision of a dependable, safe supply of drinking water, to adopt regulations to implement the state act, and to enforce provisions of the federal Safe Drinking Water Act. This bill would transfer to the State Water Resources Control Board the various duties and responsibilities imposed on the department by the state act. The Safe Drinking Water State Revolving Fund Law of 1997 establishes the Safe Drinking Water State Revolving Fund to provide grants or revolving fund loans for the design and construction of projects for public water systems that will enable suppliers to meet safe drinking water standards. Under that law, the department is responsible for administering the fund. This bill would also transfer to the state board the authority, duties, powers, purposes, responsibilities, and jurisdiction of the department for the purposes of that law. 99 Vote: majority. Appropriation: no. Fiscal committee: yes. State-mandated local program: no. The people of the State of California do enact as follows: line 1 SECTION 1. The Legislature finds and declares the following: line 2 (a) Drinking water is a necessity of human life, and line 3 contaminated drinking water can lead to sickness and death: line 4 (1) California law provides that every human being has the right line 5 to safe, clean, affordable, and accessible water adequate for human line 6 consumption, cooking, and sanitary purposes. line 7 (2) Providing safe drinking water is one of the most fundamental line 8 duties of any government. While Californians rely on public water line 9 systems operated by local agencies and utilities to deliver drinking line 10 water to their homes and businesses, the State of California has a line 11 duty to ensure that water is safe and clean. line 12 (3) Water for drinking is a natural resource that is inherently line 13 public. The people of California own the water within our borders, line 14 and the state grants water rights only for its reasonable use for line 15 beneficial purposes including human consumption. line 16 (4) The California Constitution requires that all diversions and line 17 use of water be reasonable, while the California Supreme Court line 18 has recognized that the state holds a public trust responsibility over line 19 California’s water resources. line 20 (b) Groundwater provides a significant portion of California’s line 21 drinking water, in urban and rural communities alike. From the line 22 earliest days of statehood, communities relied on pumping line 23 groundwater. While not all Californians enjoy groundwater line 24 underlying their communities, those communities that have line 25 groundwater have maximized its use for human consumption: line 26 (1) Of the 8,700 public water systems, 7800 rely on line 27 groundwater, at least in part. These public water systems draw on line 28 more than 15,000 wells, while individual landowners draw drinking line 29 water from thousands more private wells. line 30 (2) Overall, groundwater supplies one-third of the water used line 31 in California in a typical year, and in drought years, as much as line 32 one-half. line 33 (3) Nationally, according to the United States Geological Survey, line 34 51 percent of Americans rely on groundwater for drinking, 99 — 2 —AB 145 line 1 including 99 percent of the nation’s rural population. Groundwater line 2 provides 22 percent of all fresh water. line 3 (c) The governance of California’s groundwater resources is line 4 diffused among many public agencies and private parties: line 5 (1) Landowners enjoy a right to use water lying under their line 6 lands for beneficial uses on the surface. When landowners in a line 7 basin draw too much water out of their aquifer, commonly called line 8 “overdraft,” they may go to a court to adjudicate how much water line 9 each landowner may take out. line 10 (2) Based on an adjudication of an aquifer or litigation over line 11 groundwater contamination, a court may structure the management line 12 of an individual aquifer to address overdraft or groundwater line 13 contamination. line 14 (3) Water agencies and groundwater users may voluntarily line 15 establish a joint program to manage the aquifer on which they rely. line 16 (4) Counties may exercise their police powers to address certain line 17 groundwater issues, including the drilling and operation of line 18 groundwater wells. County public health officers also may provide line 19 oversight to or regulate the smaller public water systems in their line 20 jurisdiction that rely on groundwater. line 21 (5) In state government, the State Water Resources Control line 22 Board (the board) has responsibility for protecting groundwater line 23 quality and may adjudicate groundwater rights under certain line 24 circumstances. The State Department of Public Health (the line 25 department) has responsibility for overseeing the operation of line 26 public water systems that use groundwater to provide drinking line 27 water. The board may regulate drinking water source quality but line 28 not the public water system. The department may regulate the line 29 public water system, but not the water source. line 30 (d) The Legislature has sought to address the difficulties of line 31 communities that suffer poor drinking water quality, especially line 32 those in communities that lack the financial resources to resolve line 33 their drinking water problems: line 34 (1) In 2008 the Legislature approved Senate Bill 1 of the Second line 35 Extraordinary Session of 2008, to address nitrate contamination line 36 in the Tulare Lake Basin and the Salinas Valley. That law required line 37 study and development of pilot projects to better understand and line 38 remediate nitrate contamination in those regions. As required, the line 39 board studied and prepared a report addressing nitrate line 40 contamination, which was delivered to the Legislature in 2013. 99 AB 145— 3 — line 1 (2) In 2009, the Legislature adjusted the safe drinking water line 2 program to maximize use of federal stimulus funds available to line 3 communities that lack the resources to improve their water quality line 4 to meet safe drinking water standards. line 5 (3) In each annual Budget Act, the Legislature has appropriated line 6 funding available from a variety of sources, including line 7 voter-approved general obligation bonds, to fix public water line 8 systems that do not provide safe drinking water. line 9 (e) In order to provide Californians with a comprehensive system line 10 to protect their groundwater for drinking water, the state needs a line 11 consolidated and comprehensive strategy and program for line 12 protecting and improving the quality of California’s drinking water line 13 resources, especially from groundwater. The state needs to improve line 14 the quality and availability of groundwater for those communities line 15 that rely on groundwater for drinking. State and local leaders need line 16 to address the conflicts inherent in competing demands for line 17 high-quality groundwater. line 18 (f) The most effective way to create a consolidated and line 19 comprehensive strategy to ensure safe drinking water for all line 20 Californians is consolidating all water quality programs into the line 21 one state agency whose primary mission relates to water quality, line 22 the board. The benefits of that consolidation are numerous, line 23 including the following: line 24 (1) Greater focus of financial and staff support for the drinking line 25 water program. line 26 (2) More coordination and less duplication among programs line 27 addressing drinking water quality. line 28 (3) Greater efficiencies of scale and shared resources, resulting line 29 in overall lower costs. line 30 (4) Broader array of expertise concentrated on drinking water line 31 quality, with agency experience in water quality science and policy. line 32 (5) Coordination between water source protection and drinking line 33 water treatment programs. line 34 (6) More accountability for drinking water programs, with a line 35 unified agency that has responsibility for oversight and funding line 36 and a five-member expert board that makes decisions in public. line 37 (7) Improved understanding and coordination between water line 38 quality and water rights programs. line 39 (8) Consolidated reporting of water use and quality in one line 40 agency. 99 — 4 —AB 145 line 1 (9) Agency experience in fighting fraud, as part of the line 2 Underground Storage Tank Cleanup Fund. line 3 (10) Consolidated funding programs for related water resources, line 4 including both source water protection and wastewater treatment. line 5 (11) Combined agency experience in working with the private line 6 sector to leverage public funds for public purposes. line 7 (12) A board decision process that allows for public airing of line 8 the conflicts inherent in managing critical and limited water line 9 resources. line 10 (g) Crafting the most effective management structure for line 11 achieving a comprehensive strategy for protecting drinking water line 12 quality requires broad public participation. It is the intent of the line 13 Legislature to lead a public process that includes all stakeholders line 14 and agencies that may be affected by these reforms to assess the line 15 issues and options for fulfilling the state’s responsibilities to ensure line 16 drinking water quality for all Californians. line 17 SEC. 2. Section 116271 is added to the Health and Safety Code, line 18 to read: line 19 116271. The Legislature finds and declares the following: line 20 (a) It is the intent of the Legislature to make the most effective line 21 use of California’s limited water and financial resources to ensure line 22 that all communities, regardless of socioeconomic status, enjoy line 23 access to safe and clean drinking water, consistent with the human line 24 right to safe, clean, affordable, and accessible water recognized in line 25 Section 106.3 of the Water Code. line 26 (b) The objectives of this 2013 reorganization of the state’s line 27 drinking water program include the following: line 28 (1) Maximize the efficiency and effectiveness of drinking water, line 29 groundwater, and water quality programs in a single agency whose line 30 primary mission is water quality as follows: line 31 (A) Consolidate regulatory and financing programs into a single line 32 state agency that is most focused on protection of California water line 33 quality, the State Water Resources Control Board. line 34 (B) Provide a one-stop agency where communities can obtain line 35 comprehensive technical assistance that helps resolve all their line 36 water quality challenges. line 37 (C) Minimize administrative costs and interagency differences line 38 on water quality issues. line 39 (2) Create a comprehensive water quality program that addresses line 40 water quality at all stages of the hydrologic cycle as follows: 99 AB 145— 5 — line 1 (A) Connect source water protection and wastewater treatment line 2 options to create a comprehensive strategy to protect water quality line 3 throughout the hydrologic cycle. line 4 (B) Provide comprehensive protection of groundwater quality line 5 for drinking water purposes for all Californians. line 6 (C) Improve the management of California’s groundwater line 7 resources that are used for drinking and other human consumption line 8 purposes. line 9 (D) Focus heightened public attention and government resources line 10 on protecting the particular groundwater aquifers that provide line 11 drinking water. line 12 SEC. 3. Section 116272 is added to the Health and Safety Code, line 13 to read: line 14 116272. The State Water Resources Control Board succeeds line 15 to and is vested with all of the authority, duties, powers, purposes, line 16 responsibilities, and jurisdiction of the department for the purposes line 17 of this part. The Division of Drinking Water and Environmental line 18 Management of the State Department of Public Health shall line 19 become the Division of Drinking Water Quality of the State Water line 20 Resources Control Board. All references to the department in this line 21 part shall be construed to refer to the State Water Resources line 22 Control Board. This section shall not be construed to impair the line 23 authority of a local health officer to enforce this chapter or a line 24 county’s election not to enforce this chapter, as provided in Section line 25 116500. The State Water Resources Control Board shall accept line 26 responsibility for enforcing this chapter pursuant to a contract, as line 27 provided in Section 116500. line 28 SEC. 4. Section 116760.25 is added to the Health and Safety line 29 Code, to read: line 30 116760.25. The State Water Resources Control Board succeeds line 31 to and is vested with all of the authority, duties, powers, purposes, line 32 responsibilities, and jurisdiction of the department for the purposes line 33 of this chapter. All references to the department in this chapter line 34 shall be construed to refer to the State Water Resources Control line 35 Board. O 99 — 6 —AB 145 STAFF REPORT TYPE MEETING: Regular Board MEETING DATE: May 1, 2013 SUBMITTED BY: Kevin Koeppen, Finance Manager PROJECT: DIV. NO. All APPROVED BY: Joseph R. Beachem, Chief Financial Officer German Alvarez, Assistant General Manager Mark Watton, General Manager SUBJECT: Adopt Resolution No.4203 Authorizing the Issuance Not-to- Exceed $9,000,000 of Otay Water District 2013 Water Revenue Refunding Bonds, and Authorizing the General Manager and the Chief Financial Officer to Execute and Deliver Related Documents and Take Other Related Actions Necessary for the Refinancing of the 2004 Certificates of Participation GENERAL MANAGER’S RECOMMENDATION: Adopt Resolution No.4203 authorizing the issuance not-to-exceed $9,000,000 of Otay Water District 2013 Water Revenue Refunding Bonds, and authorizing the General Manager and the Chief Financial Officer to execute and deliver related documents and take other related actions necessary for the refinancing of the 2004 Certificates of Participation. COMMITTEE ACTION: See Attachment A. PURPOSE: To obtain Board authorization to issue Water Revenue Refunding Bonds to refinance the District’s outstanding 2004 Certificates of Participation and reduce annual debt service for the remaining 10 years that the Certificates of Participation are outstanding. AGENDA ITEM 5 2 ANALYSIS: In 2004, the District issued $12,270,000 2004 Certificates of Participation (COPs). The proceeds of the 2004 COPS were used to refinance the District’s previously issued 1993 COPS, originally issued to raise funds to construct reservoirs, pump stations and 50,000 feet of pipeline. The outstanding principal balance of the 2004 COPs is $8,100,000. The 2004 COPs bear interest at a rate of 4.37% and are scheduled to mature on September 1, 2023. The 2004 COPs are currently eligible for refinancing at lower interest rates. Current market conditions would allow the District to refinance the outstanding balance at an effective rate of approximately 1.7%. The refinancing would save the District approximately $700,000 over the remaining 10 years that the 2004 COPs are outstanding, approximately $45,000 through the next interest payment due on September 1, 2013 and $65,000 annually for the remaining 10 years. Overall, this represents a 7% reduction in total debt service through the final maturity of the 2004 COPs in 2023. The cash flow savings has a present value of 8% of the outstanding par amount of the 2004 COPs. The District’s Debt Policy (Policy 45) states, “the District may commence the refinancing process if a minimum five percent (5%) present value savings, net of issuance costs, and any cash contributions can be demonstrated. Beginning the process with at least a 5% savings should provide the District with some level of protection that it can achieve a minimum of three percent (3%) net present value savings of refinancing the bonds when and if the debt is issued.” Assisting the staff on the issuance of the refinancing are Stradling Yocca Carlson & Rauth as bond counsel and disclosure counsel, and Harrell & Company Advisors, LLC as financial advisor. The proposed method of financing is through the issuance of water revenue bonds by the District, secured by Taxes and Net Revenues of the Water System. The bonds will be paid on parity with the District’s outstanding 1996 COPs, 2007 COPs, and 2010 Bonds. The Bonds will be issued under the provisions of the Refunding Bond Law, and under such provisions, can be issued directly by the District, without the need to include the Otay Service Corporation or Otay Water District Financing Authority as in prior District financings. 3 The District’s financial advisor is recommending a competitive sale of the bonds. This recommendation is based on current market conditions and the fact that there has been renewed interest in highly rated utility bonds by the competitive bidders. The District has only used a negotiated sale method one time, when issuing Build America Bonds in 2010. A negotiated sale method works best when there is a special feature relating to the bonds (such as the taxable component and special redemption feature on the Build America Bonds). Staff and the Financial Advisor recommend that the District issue the Bonds as “Bank Qualified” bonds. This qualification precludes the District from issuing in excess of $10 million in tax-exempt bonds or other lease financing during calendar year 2013. Based on prior and current debt planning the District is a number of years from the need to issue additional debt so this restriction does not pose any difficulties to the District. The “Bank Qualified” designation may cause interest rates to be marginally lower, since banks can receive special treatment on interest paid to finance a purchase of the bonds, and as a result may bid a lower interest rate than on non-Bank Qualified bonds. In order to authorize the issuance of the Bonds, the Board has been presented with a resolution for its consideration. The resolution approves the form of the following documents in connection with the financing: A Preliminary Official Statement, including Appendix D, Continuing Disclosure Agreement (Attachment C); and An Indenture of Trust between the District and Union Bank, N.A., as trustee (Attachment E); An Escrow Agreement between the District and Union Bank, N.A., as escrow bank for the 2004 COPs (Attachment F); and A Notice of Sale containing terms and conditions for the competitive bid for the Bonds (Attachment G); The resolution also approves the distribution of the preliminary official statement and Notice of Sale relating to the Bonds and authorizes award of the bond sale by the General Manager or Chief Financial Officer, within certain parameters. These parameters are: (1) the par amount of the bonds cannot exceed $9,000,000, (2) the true interest cost on the bonds must be less than 2.5% and (3) the underwriters’ discount cannot exceed 1% of the par amount of the Bonds. The resolution authorizes the General Manager or Chief Financial Officer to reject all bids if the winning bid does not meet the District’s savings goal for the refinancing. 4 The documents are attached hereto, in draft form, and will be modified to reflect the terms of the actual sale of the bonds. The Bonds will only be issued in an amount necessary to refund the 2004 COPs and pay costs of issuance. FISCAL IMPACT: Joe Beachem, Chief Financial Officer The refinancing of 2004 COPs is expected to save the District approximately $700,000 in debt service over 10 years. This savings is net of issuance costs. The Costs of issuance associated with the bonds, including fees and expenses of the District’s counsel, consultants and advisors, printing costs, rating fees and trustee fees, will be paid from proceeds of the Bonds. Total costs of issuance, including underwriting fees, are estimated to be $175,000 based on an estimated par amount of bonds to be issued of $7.9 million. Costs of issuance are estimated as follows: Bond Counsel & Disclosure Counsel $ 50,000 Official Statement Preparation 10,000 Financial Advisor 25,000 Trustee 5,000 Printing 2,000 District Counsel 2,500 Rating Fees 14,000 Notice Publication 1,500 Bidding Platform 1,500 111,500 Underwriter 63,500 $ 175,000 STRATEGIC GOAL: The District ensures its continued financial health through long-term financial planning and debt planning. LEGAL IMPACT: None. 5 Attachments: Attachment A – Committee Action Attachment B - Presentation Attachment C – Resolution No. 4203 Attachment D – Preliminary Official Statement Attachment E – Indenture of Trust between the District and Union Bank, N.A. Attachment F - Escrow Agreement between the District and Union Bank, N.A. Attachment G - Notice of Sale ATTACHMENT A SUBJECT/PROJECT: Adopt Resolution No. 4203 Authorizing the Issuance Not-to- Exceed $9,000,000 of Otay Water District 2013 Water Revenue Refunding Bonds, and Authorizing the General Manager and the Chief Financial Officer to Execute and Deliver Related Documents and Take Other Related Actions Necessary for the Refinancing of the 2004 Certificates of Participation COMMITTEE ACTION: Adopt Resolution No. 4203 authorizing the issuance not-to-exceed $9,000,000 of Otay Water District 2013 Water Revenue Refunding Bonds, and authorizing the General Manager and the Chief Financial Officer to execute and deliver related documents and take other related actions necessary for the refinancing of the 2004 Certificates of Participation. 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. Attachment B May 1, 2013 Issued to Refinance 1993 Certificates, which were used to construct reservoirs, pump stations and pipeline. Final Maturity September 1, 2023 Balance Outstanding $8,100,000 Average Interest Rate 4.37% Callable September 1, 2014 Current Effective Rate 1.7% Reduce Annual Debt Service from $940,000 to $875,000 Savings: $45,000 on September 1, 2013 and $65,000 annually thereafter Total Savings $700,000 7% of Remaining $10 million debt service Deposit to Escrow for 2004 COPs $8,570,000 Cost of Issuance 111,500 Underwriter's Discount 63,500 Par Amount to be Issued* $8,745,000 •Assumes Bonds are Issued at Par --Bond Size May be Lower if Bonds are Priced With Premium or Higher if Bonds are Issued With Discount – Depends on Bidder Pricing. Selected Financial Advisor and Bond Counsel Considered Bond Structure ›District can Issue Bonds Directly Pursuant to Refunding Bond Law ›Eliminates the Need to Involve the Otay Service Corporation or the Otay Water District Financing Authority to facilitate issuance ›Determined that No Reserve Fund was Required Considered Alternative Financing Methods ›Competitive Sale; ›Private Placement; ›Negotiated Sale; ›Bank-Qualified Proceed with Refunding Under Current Market Conditions ›$700,000 is a significant savings and the 7% reduction in debt service exceeds the 3% recommended by the Debt Policy Competitive Sale of Bank-Qualified Bonds ›Highly Competitive Market for AA-rated Utility Bonds Only previous District “negotiated” issue were BABs ›Bank-Qualification may lower rates for Banks wanting to Bid on the Bonds Limits Calendar Year 2013 Issuance to $10 M Adopt Resolution ›Authorizes Issuance of: Not-to-Exceed $9,000,000 Underwriting Discount Not-to-Exceed 1% Par True Interest Cost Not-to-Exceed 2.5% (results in at least 4% Savings) Adopt Resolution (Continued) ›Approves Form of Bond Documents Preliminary Official Statement Continuing Disclosure Agreement Indenture of Trust Escrow Agreement Notice of Sale (to Competitive Bidders) ›Authorizes General Manager and CFO to execute documents Preliminary Official Statement ›Describes Security for the Bonds and Important District Financial Information ›Used to Market the Bonds to Bidders/Investors Continuing Disclosure Agreement ›Sets Forth District’s Obligation to Provide Annual Updated Financial Information to Market Participants Indenture of Trust ›Legal Contract between the District and Bondholders ›Sets forth Pledge of Revenues, Terms and Conditions of Payment Escrow Agreement ›Provides for the Prepayment of the 2004 COP Notice of Sale (to Competitive Bidders) Receive Credit Rating April 30 Board Approval May 1 Bid Award May 14 Bond Closing May 30 DOCSOC/1614099v6/200077-0005 RESOLUTION NO. 4203 RESOLUTION OF THE BOARD OF DIRECTORS OF THE OTAY WATER DISTRICT AUTHORIZING THE ISSUANCE OF NOT TO EXCEED $9,000,000 2013 WATER REVENUE REFUNDING BONDS AND APPROVING THE EXECUTION AND DELIVERY OF CERTAIN DOCUMENTS IN CONNECTION THEREWITH AND CERTAIN OTHER MATTERS WHEREAS, the Otay Water District (the “District”), a municipal water district duly organized and existing under and pursuant to the Constitution and laws of the State of California (the “State”), proposes to undertake the refinancing of certain facilities that were financed and refinanced with the proceeds of the Otay Water District Revenue Refunding Certificates of Participation (1993 Water Facilities Project) Series 2004 (the “2004 Certificates”); and WHEREAS, this Board of Directors (the “Board”) has determined that it is in the best interest of the District to issue the Otay Water District 2013 Water Revenue Refunding Bonds (the “Bonds”) to effect such refinancing by defeasing and prepaying the 2004 Certificates; and WHEREAS, this Board desires to approve various documents and authorize certain actions to be taken in order to issue the Bonds and defease and prepay the 2004 Certificates; 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 is adopted by the legislative body of the District. Section 2. The Indenture of Trust, in substantially the form on file with the Board, is hereby approved. Each of the Board President, the Board Vice President, the Board Treasurer, 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 the Indenture of Trust with such changes, insertions and omissions as may be recommended by General Counsel or Stradling Yocca Carlson & Rauth, as Bond Counsel (“Bond Counsel”), and approved by the Authorized Officer or Authorized Officers executing the same, said execution being conclusive evidence of such approval. Section 3. The Board of Directors of the District hereby authorizes the preparation, sale and delivery of the Bonds in an aggregate principal amount not to exceed $9,000,000 (except that such amount may be increased with the approval of the General Manager to provide for original issue discount to the extent that such original issue discount will result in a lower interest rate or yield to maturity with respect to the Bonds) in accordance with the terms and provisions of the Indenture of Trust. Section 4. The Board hereby authorizes the sale of the Bonds by competitive bid pursuant to a Notice of Sale (defined herein) in accordance with Section 5 below. Attachment C 2 DOCSOC/1614099v6/200077-0005 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 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 the Financial Advisor on behalf of the District 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, provided that (i) the purchaser’s discount for the sale of the Bonds shall not exceed 1.0% of the aggregate amount of principal evidenced by such Bonds, (ii) the true interest cost of the Bonds as calculated by the Financial Advisor shall not exceed 2.5%, and (iii) the sale shall be approved by the General Manager or the Chief Financial Officer of the District as evidenced by a written acceptance of such winning bid. However, the General Manager or the Chief Financial Officer may reject all bids should such Authorized Officer determine that none of the bids would serve the best interest of the District. Section 6. The preparation and distribution of the Preliminary Official Statement, in substantially the form presented to the Board, is hereby approved. 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 is further authorized and directed to execute, approve and deliver the Official Statement substantially in the form of the Preliminary Official Statement, with such changes, insertions and omissions as may be recommended by General Counsel or Bond Counsel and approved by the Authorized Officer executing the same, said execution being conclusive evidence of such approval. The General Manager and the Chief Financial Officer are hereby authorized to cause to be distributed copies of said Preliminary Official Statement to persons who may be interested in the initial purchase of the Bonds and is directed to deliver copies of any final Official Statement to all actual initial purchasers of the Bonds. Section 7. The Continuing Disclosure Agreement, in substantially the form on file with the Board is hereby approved. 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 recommended by General Counsel or Bond Counsel and approved by the Authorized Officer executing the same, said execution being conclusive evidence of such approval. Section 8. The Escrow Agreement, in substantially the form on file with the Board is hereby approved. Each of the Authorized Officers, acting alone, is hereby authorized and directed to execute and deliver the Escrow Agreement with such changes, insertions and omissions as may be recommended by General Counsel or Bond Counsel and approved by the Authorized Officer executing the same, said execution being conclusive evidence of such approval. The Authorized Officers are further hereby authorized to select a verification agent to verify the amounts necessary to affect the defeasance of the 2004 Certificates. Section 9. Union Bank, N.A. is hereby appointed to act as trustee under the Indenture of Trust and as escrow agent under the Escrow Agreement. Section 10. The Board has previously selected and approved Stradling Yocca Carlson & Rauth, a Professional Corporation to act as Bond Counsel with respect to the issuance of the Bonds. 3 DOCSOC/1614099v6/200077-0005 The Bond Counsel Agreement in the substantially on file with the Board is hereby approved. Each of the General Manager and the Chief Financial Officer is hereby authorized and directed to execute said agreement. Section 11. The Board has previously selected and approved Harrell & Company Advisors, LLC as the Financial Advisor with respect to the issuance of the Bonds. Each of the General Manager and the Chief Financial Officer is hereby authorized and directed to execute any agreements necessary to effect such appointment. Section 12. Each of the Authorized Officers, acting alone, is hereby authorized (a) to solicit bids on a municipal bond insurance policy, (b) to negotiate the terms of such policy, (c) to finalize the form of such policy with a municipal bond insurer, and (d) to pay the insurance premium of such policy from the proceeds of the sale of the Bonds if it is determined that acquiring such policy will result in debt service savings to the District which exceed the cost of acquiring the policy. Section 13. Each of the Authorized Officers, acting alone, is 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 Notice of Sale, the Continuing Disclosure Agreement, the Official Statement, the Escrow Agreement and this resolution. Section 14. Unless otherwise defined herein, all terms used herein and not otherwise defined shall have the meanings given such terms in the Indenture of Trust unless the context otherwise clearly requires. Section 15. This resolution shall take effect immediately. ADOPTED, SIGNED and APPROVED at a regular meeting of the District this 1st day of May, 2013. President of the Board of Directors Attest: Secretary of the Board of Directors 4 DOCSOC/1614099v6/200077-0005 STATE OF CALIFORNIA ) ) ss COUNTY OF SAN DIEGO ) I, Susan Cruz, Secretary of the Board of Directors of the Otay Water District, do hereby certify that the foregoing Resolution No. 4203 was duly adopted by the Board of Directors of said District at a regular meeting thereof held on the 1st day of May, 2013, 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, Susan Cruz, 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. 4203 of said Board, and that the same has not been amended or repealed. DATED: _________________, 2013. Secretary of the Board of Directors of the Otay Water District (SEAL) PRELIMINARY OFFICIAL STATEMENT DATED APRIL 11, 2013 NEW ISSUE - BOOK-ENTRY-ONLY RATING 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 and corporations. 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 “LEGAL MATTERS - Tax Matters” herein. SAN DIEGO COUNTY STATE OF CALIFORNIA $7,900,000* OTAY WATER DISTRICT 2013 WATER REVENUE REFUNDING BONDS (BANK QUALIFIED) Dated: Date of Delivery Due: September 1, as shown on the inside front cover. 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 2013 Water Revenue Refunding Bonds (the “Bonds”) are payable from and secured by a lien on Taxes and Net Revenues of the Water System (the “Water System”) of the Otay Water District (the “District”) as described herein. The Bonds will be issued pursuant to an Indenture of Trust, dated as of May 1, 2013 (the “Indenture”), by and between the Otay Water District and Union Bank, N.A., as trustee (the “Trustee”). The Bonds are being issued to provide funds to refinance outstanding obligations of the District. See “THE FINANCING PLAN” herein. (See “SOURCES OF PAYMENT FOR THE BONDS” and “RISK FACTORS” herein.) Interest on the Bonds is payable on September 1, 2013, and semiannually thereafter on March 1 and September 1 of each year until maturity or earlier redemption. The Bonds are subject to extraordinary redemption and mandatory sinking fund redemption as described herein (see “THE BONDS - General Provisions” and “THE BONDS - Redemption” herein). The Bonds are limited obligations 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. 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 by Stutz, Artiano, Shinoff & Holtz, San Diego, California, as General Counsel to the District, 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 in New York, New York on or about May 30, 2013 (see “THE BONDS - General Provisions - Book-Entry-Only System” herein). The date of the Official Statement is __________, 2013. __________________________ * 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 e d he 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 c um s t a n c e s s h a l l 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 c o n s t i t u t e a n o f f e r t o s e l l or a s o l i c i t a t i o n o f a n o f f e r t o b u y n o r s h a l l t h e r e b e a n y s a l e o f t h e s e s e c u r i t i e s i n a n y jur 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 o u l d b e u n la w f u l p r i o r t o r e g i s t r a t i o n o r q u a l i f i c a t i o n o f 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 . $7,900,000* OTAY WATER DISTRICT 2013 WATER REVENUE REFUNDING BONDS MATURITY SCHEDULE (Base CUSIP®† ________) Maturity Date Principal Interest Reoffering September 1 Amount Rate Yield CUSIP®† 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 __________________________ * Preliminary, subject to change. † CUSIP® A registered trademark of the American Bankers Association. Copyright © 1999-2013 Standard & Poor’s, a Division of The McGraw-Hill Companies, Inc. CUSIP® data herein is provided by Standard & Poor’s CUSIP® Service Bureau. This data in not intended to create a database and does not serve in any way as a substitute for the CUSIP® Service Bureau. CUSIP® numbers are provided for convenience of reference only. Neither the District nor the Underwriter takes any responsibility for the accuracy of such numbers. 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. Estimates and Forecasts. When used in this Official Statement and in any continuing disclosure by the District in any press release and in 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. Such forward-looking statements include, but are not limited to, certain statements contained in the information under the caption “THE WATER SYSTEM.” 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 Financial 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. Involvement of Underwriter. The Underwriter has submitted the following sentence for inclusion in this Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with, and as a 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. Information Subject to Change. The information and expressions of opinions herein are subject to change without notice and neither 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 or any other entity described or referenced herein since the date hereof. All summaries of the documents referred to in this Official Statement are made subject to the provisions of such documents, respectively, and do not purport to be complete statements of any or all of such provisions. 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 front cover page hereof and said public offering prices may be changed from time to time by the Underwriter. THE BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON AN EXCEPTION FROM THE REGISTRATION REQUIREMENTS CONTAINED IN SUCH ACT. THE BONDS HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE. OTAY WATER DISTRICT SAN DIEGO COUNTY, CALIFORNIA BOARD OF DIRECTORS Jose Lopez, President - Division 4 Mitchell Thompson, Vice President - Division 2 David Gonzalez, Jr., Treasurer - Division 1 Gary D. Croucher, Division 3 Mark Robak, Division 5 ______________________________________________ MANAGEMENT TEAM Mark Watton, General Manager German Alvarez, Assistant General Manager Joseph R. Beachem, Chief Financial Officer Rom Sarno, Jr., Chief of Administrative Services Geoff Stevens, Chief Information Officer Rod Posada, Chief of Engineering Pedro Porras, Chief of Water Operations ________________________________________ PROFESSIONAL SERVICES Bond Counsel and Disclosure Counsel Stradling Yocca Carlson & Rauth, a Professional Corporation Newport Beach, California General Counsel to the District Stutz, Artiano, Shinoff & Holtz San Diego, California Financial Advisor Harrell & Company Advisors, LLC Orange, California Trustee Union Bank, N.A. Los Angeles, California Verifications Grant Thornton LLP Minneapolis, Minnesota TABLE OF CONTENTS INTRODUCTION ...................................................... 1 The District ................................................................ 1 Sources of Payment for the Bonds ............................. 1 Tax Matters ................................................................ 2 Professional Services ................................................. 2 Offering of the Bonds ................................................ 3 Information Concerning this Official Statement ........ 3 THE BONDS ............................................................... 4 General Provisions ..................................................... 4 Redemption ................................................................ 5 Scheduled Debt Service ............................................. 6 THE FINANCING PLAN .......................................... 8 The Refunding Program............................................. 8 Estimated Sources and Uses of Funds ....................... 8 OTAY WATER DISTRICT ...................................... 10 THE WATER SYSTEM ........................................... 11 Existing Facilities .................................................... 11 Water Storage ........................................................... 12 Water Supply ........................................................... 12 Capital Improvement Program ................................. 17 Water Service ........................................................... 19 Water Charges .......................................................... 20 Taxes ........................................................................ 26 Personnel ................................................................. 27 Retirement Program ................................................. 28 Other Post Employment Benefits............................. 32 Insurance .................................................................. 35 District Reserves and Investment Policy ................. 35 Outstanding Indebtedness of the District ................. 36 Historical Operating Results .................................... 38 Historical Debt Service Coverage ............................ 40 Projected Debt Service Coverage ............................ 41 SOURCES OF PAYMENT FOR THE BONDS ..... 44 General ..................................................................... 44 Taxes and Net Revenues .......................................... 44 Allocation of Taxes and Net Revenues .................... 45 Reserve Funds for Existing Parity Obligations ........ 46 Event of Default and Acceleration of Maturities ..... 46 Rate Covenant .......................................................... 46 Parity Debt ............................................................... 47 Property Insurance ................................................... 48 RISK FACTORS ....................................................... 49 System Demand ....................................................... 49 Increased Operation and Maintenance Costs ........... 49 Additional Obligations Payable from Taxes and Net Revenues ........................................................ 49 Risks Relating to Water Supplies ............................. 49 Environmental Regulation ....................................... 50 Proposition 218 ........................................................ 50 Casualty Risk; Earthquakes ..................................... 50 Interest Subsidy Payment; Sequestration ................. 50 Limited Recourse on Default ................................... 51 Bankruptcy Risks ..................................................... 51 No Obligation to Tax................................................ 51 Change in Law ......................................................... 52 Loss of Tax Exemption ............................................ 52 IRS Audit of Tax-Exempt Bond Issues .................... 52 Secondary Market Risk ............................................ 52 LEGAL MATTERS .................................................. 53 Enforceability of Remedies ...................................... 53 Approval of Legal Proceedings ................................ 53 Tax Matters .............................................................. 53 Qualified Tax Exempt Obligations ........................... 55 Litigation .................................................................. 55 CONCLUDING INFORMATION .......................... 56 Rating on the Bonds ................................................. 56 Underwriting ............................................................ 56 Verifications of Mathematical Computations ........... 56 The Financial Advisor .............................................. 56 Continuing Disclosure ............................................. 56 Additional Information ............................................ 57 References ................................................................ 57 Execution ................................................................. 57 APPENDIX A - SUMMARY OF PRINCIPAL 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 - DTC AND THE BOOK-ENTRY- ONLY SYSTEM APPENDIX G - INFORMATION CONCERNING METROPOLITAN WATER DISTRICT’S WATER SUPPLY OTAY WATER DISTRICT LOCATION MAP 1 OFFICIAL STATEMENT $7,900,000* OTAY WATER DISTRICT 2013 WATER REVENUE REFUNDING BONDS This Official Statement which includes the cover page and appendices (the “Official Statement”) is provided to furnish certain information concerning the sale and delivery of the Otay Water District 2013 Water Revenue Refunding Bonds (the “Bonds”) issued in the aggregate principal amount of $7,900,000*. 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 are advised to read the entire Official Statement to obtain information essential to the making of an informed investment decision (see “RISK FACTORS” 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 208,000 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). Sources of Payment for the Bonds The Bonds are being issued pursuant to Section 53570 et seq. of the California Government Code and an Indenture of Trust, dated as of May 1, 2013 (the “Indenture”), by and between the District and Union Bank, N.A., Los Angeles, California, as trustee (the “Trustee”). The Bonds 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, 2007 (the “2007 Installment Purchase Agreement”) securing the District’s outstanding Revenue Certificates of Participation (2007 Water System Project), Series 2007 (the “2007 Certificates”). __________________________ * Preliminary, subject to change. 2 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”). See “SOURCES OF PAYMENT FOR THE BONDS” herein. Collectively, the 1996 Certificates, the 2007 Certificates and the 2010 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 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. Tax Matters In the opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, Bond Counsel, based upon an analysis of existing statutes, regulations, rulings, and court decisions and assuming, among other things, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excludable from gross income for federal income tax purposes under the Code. In the further opinion of Bond Counsel, interest on the Bonds is not a specific preference item for purposes of the alternative minimum tax imposed on individuals and corporations, and such interest is not taken into account in determining adjusted current earnings for the purpose of computing the alternative minimum tax imposed on certain corporations. In the opinion of Bond Counsel, interest on the Bonds is exempt from State of California personal income taxes. Bond Counsel expresses no opinion regarding any other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest on, the Bonds. See “LEGAL MATTERS - Tax Matters” herein. Professional Services The legal proceedings 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 Stutz, Artiano, Shinoff & Holtz, as General Counsel for the District, and by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, as Disclosure Counsel. Union Bank, N.A., Los Angeles, California, serves as Trustee under the Indenture. The Trustee will act on behalf of the Bond Owners for the purpose of receiving all moneys required to be paid to the Trustee, to allocate, use and apply the same, to hold, receive and disburse the Installment Payments and other funds held under the Indenture, and otherwise to hold all the offices and perform all the functions and duties provided in the Indenture to be held and performed by the Trustee. Harrell & Company Advisors, LLC (the “Financial Advisor”) has advised the District as to the financial structure and certain other financial matters relating to the Bonds. Fees payable to Bond Counsel, Disclosure Counsel and the Financial Advisor are contingent upon the sale and delivery of the Bonds. The District’s financial statements for the Fiscal Year ended June 30, 2012, attached hereto as “APPENDIX B” have been audited by White Nelson Diehl Evans LLP, Certified Public Accountants and Consultants, Carlsbad, California. The District’s audited financial statements are included within this Official Statement without the prior approval of the auditor and the auditor has undertaken no procedures to update any of the information in the financial statements. 3 Offering of the Bonds Authority for Issuance and Delivery. The Bonds are to be issued pursuant to Section 53570 et seq. of the California Government Code, the Indenture and by Resolution No. 4203 of the District adopted on May 1, 2013. 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 in New York, New York on or about May 30, 2013 through the facilities of The Depository Trust Company. Information Concerning this Official Statement This Official Statement speaks only as of its date. The information set forth herein has been obtained by the District with the assistance of the Financial Advisor from sources which are believed to be accurate and complete, but such information is not guaranteed as to accuracy or completeness, nor has it been independently verified and is not to be construed as a representation by the Financial Advisor or Disclosure Counsel. Statements contained in this Official Statement which involve estimates, forecasts or matters of opinion, whether or not expressly so described herein, are intended as such and are not to be construed as representations of fact. Preliminary Official Statement Deemed Final. The information set forth herein is in a form deemed final, as of its date, by the District for the purpose of Rule 15c2-12 under the Securities Exchange Act of 1934, as amended (except for the omission of certain information permitted to be omitted under the Rule). The information herein is subject to revision, amendment and completion in a Final Official Statement. The information and expressions of opinion herein are subject to change without notice and the delivery of this Official Statement shall not, under any circumstances, create any implication that there has been no change in the information or opinions set forth herein or in the affairs of the District since the date hereof. Availability of Legal Documents. 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 the documents described herein are available for inspection during the period of initial offering of the Bonds at the offices of the Financial Advisor. Copies of these documents may be obtained after delivery of the Bonds at the corporate trust office of the Trustee, Union Bank, N.A., Los Angeles, California or from the District, 2554 Sweetwater Springs Blvd., Spring Valley, California 91978. 4 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 September 1, 2013 and semiannually on March 1 and September 1 of each year to and including the date of maturity or redemption, whichever is earlier (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. 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 from the Interest Payment Date next preceding the date of authentication thereof unless: (a) a Bond is authenticated after is 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 August 15, 2013, 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, such interest to be paid by check of the Trustee sent by first class mail on the applicable Interest Payment Date to the Owner at the address of such Owner as it appears on the Registration Books (except that in the case of an Owner of one million dollars ($1,000,000) or more in principal amount, such payment may, at such Owner’s option, be made by wire transfer of immediately available funds to an account in the United States in accordance with written instructions provided to the Trustee by such Owner prior to the Record Date. Principal of and premium (if any) on any Bond shall be paid by check of the Trustee upon presentation and surrender thereof at maturity or upon the prior redemption thereof, at the Office of the Trustee. Both the principal of and interest and premium (if any) 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 - DTC AND THE BOOK-ENTRY-ONLY 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. 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 District 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 District 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. 5 Transfer or Exchange of Bonds. 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. The Trustee is not required to transfer or exchange any Bonds (i) within 15 days preceding selection of Bonds for redemption, or (ii) selected for redemption. Redemption No Optional Redemption of Bonds. The Bonds are not subject to optional redemption prior to maturity. Extraordinary Redemption. The Bonds shall be subject to extraordinary redemption prior to their respective stated maturities, as a whole or in part on any date in the order of maturity and within maturities as directed by the District in a Written Request provided to the Trustee at least 35 days (or such lesser number of days acceptable to the Trustee in the sole discretion of the Trustee, such notice for the convenience of the Trustee) prior to such date and by lot within each maturity in integral multiples of $5,000 from certain Net Proceeds not used to repair or replace the portion of the Water System affected, upon the terms and conditions of, and as provided for in the Indenture, at a Redemption Price equal to the principal amount thereof plus accrued interest thereon to the date fixed for redemption, without premium. See “APPENDIX A - SUMMARY OF PRINCIPAL LEGAL DOCUMENTS - THE INDENTURE – Insurance.” Sinking Fund Redemption. The Bonds are subject to mandatory sinking fund redemption in part by lot, commencing on September 1, ____, and on each September 1 thereafter, respectively, from mandatory sinking fund payments at a redemption price equal to the principal amount thereof to be redeemed, together with accrued interest to the date fixed for redemption, without premium, in the aggregate respective principal amounts and on the dates set forth in the following schedule: BONDS MATURING ON SEPTEMBER 1, ____ Redemption Date (September 1) Principal Amount Notice of Redemption. When redemption is authorized or required, notice of redemption shall be mailed by first class mail at least 30 days but not more than 60 days before any redemption date, to the respective Owners of any Bonds designated for redemption at their addresses appearing on the Registration Books, to the Securities Depositories and the Information Services. Any defect in the notice or the mailing thereof will not affect the validity of the redemption of any Bond, or the cessation of accrual of interest from and after the redemption date. 6 Selection of Bonds for Redemption. Whenever provision is made for the redemption of less than all of the Bonds within a maturity, the Trustee shall select the Bonds for redemption by lot within a maturity in integral multiples of $5,000 in such manner as is determined by the Trustee in its discretion. The Trustee will promptly notify the District in writing of the numbers of the Bonds, or portions thereof, so selected for redemption. Effect of Redemption. Notice of redemption having been duly given, and moneys for payment of the redemption price of, together with interest accrued to the date fixed for redemption on, the Bonds (or portions thereof) so called for redemption being 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, interest on the Bonds so called for redemption shall cease to accrue, said Bonds (or portions thereof) shall cease to be entitled to any benefit or security under the Indenture, and the Owners of said Bonds shall have no rights in respect thereof except to receive payment of the redemption price thereof. The Trustee shall, upon surrender for payment of any of the Bonds to be redeemed on their redemption dates, pay such Bonds at the redemption price. Partial Redemption. Upon surrender of any Bond redeemed in part only, the District 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 equal in aggregate principal amount to the unredeemed portion of the Bonds surrendered and of the same series, interest rate and maturity. Scheduled Debt Service The following presents the scheduled Annual Debt Service on the Bonds. Fiscal Year Ending June 30 Principal Interest Total 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Total 7 Estimated annual debt service, along with the expected annual Installment Payments for the outstanding Existing Parity Obligations, are set forth in the following table. Otay Water District Aggregate Parity Obligations Fiscal 1996 2007 2010 2013 Bonds Total Year Ending Installment Installment Installment Debt Parity June 30 Payments (1) Payments Payments Service* Obligations* 2014 $ 936,088 $ 2,508,864 $ 3,725,406 $ 870,000 $ 8,040,358 2015 914,338 2,512,301 3,725,431 870,000 8,022,070 2016 989,325 2,514,239 3,720,356 870,000 8,093,920 2017 963,225 2,514,408 3,714,956 870,000 8,062,589 2018 937,125 2,512,798 3,718,156 870,000 8,038,079 2019 1,007,763 2,509,234 3,714,856 870,000 8,101,853 2020 977,313 2,508,456 3,709,981 870,000 8,065,750 2021 946,863 2,510,056 3,707,981 870,000 8,034,900 2022 1,013,150 2,509,056 3,708,356 870,000 8,100,562 2023 978,350 2,510,279 3,705,981 870,000 8,064,610 2024 1,040,288 2,508,596 3,705,731 870,000 8,124,615 2025 1,001,138 2,509,373 3,700,862 - 7,211,373 2026 1,058,725 2,506,924 3,693,345 - 7,258,994 2027 1,111,963 2,505,900 3,688,589 - 7,306,452 2028 - 2,506,625 3,688,093 - 6,194,718 2029 - 2,504,375 3,681,540 - 6,185,915 2030 - 2,504,044 3,678,609 - 6,182,653 2031 - 2,505,419 3,673,823 - 6,179,242 2032 - 2,503,394 3,669,728 - 6,173,122 2033 - 2,501,578 3,665,558 - 6,167,136 2034 - 2,504,594 3,662,508 - 6,167,102 2035 - 2,503,453 3,655,086 - 6,158,539 2036 - 2,498,156 3,652,634 - 6,150,790 2037 - 2,498,484 3,644,495 - 6,142,979 2038 - - 3,640,010 - 3,640,010 2039 - - 3,633,357 - 3,633,357 2040 - - 3,628,716 - 3,628,716 2041 - - 3,620,262 - 3,620,262 Total $13,875,650 $60,170,606 $103,134,406 $9,570,000 $186,750,662 ____________________________________ (1) Using 4.35% 25 Year Revenue Bonds Index as of March 27, 2013 as the assumed variable rate interest. * Preliminary, subject to change. 8 THE FINANCING PLAN The Refunding Program The District has previously caused to be executed and delivered its $12,270,000 2004 Refunding Certificates of Participation (the “Prior Certificates”), pursuant to a trust agreement (the “Prior Agreement”) and an installment purchase agreement between the District and the Otay Service Corporation (the “Corporation”) (the “Prior Installment Purchase Agreement”). The District pledged the Taxes and Net Revenues of the Water System to repay amounts due under the Prior Installment Purchase Agreement and evidenced by the Prior Certificates. On the Closing Date, a portion of the proceeds of the Bonds, together with certain other funds, will be deposited in trust with Union Bank, N.A., as prior trustee and escrow bank (the “Escrow Bank”) pursuant to an escrow agreement, dated as of May 1, 2013, between the District, the Corporation and the Escrow Bank (the “Escrow Agreement”). The deposit will be in an amount sufficient to prepay principal and interest evidenced by Prior Certificates through and including September 1, 2014 and to pay the prepayment price of the Prior Certificates upon early call and prepayment of the Prior Certificates on September 1, 2014. The lien of the Prior Certificates created by the Prior Agreement and the lien of the Prior Installment Purchase Agreement including, without limitation, the pledge of the Taxes and Net Revenues, will be discharged, terminated and of no further force and effect upon the deposit with the Escrow Bank of the amounts required pursuant to the Escrow Agreement. See “CONCLUDING INFORMATION - Verifications of Mathematical Computations.” 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 will apply them as follows: Sources: Principal Amount of Bonds Original Issue Premium/Discount Total Sources Uses: Escrow Fund Underwriter’s Discount Costs of Issuance Fund (1) Total Uses ____________________________________ (1) Expenses include fees of Bond Counsel, the Financial Advisor, Disclosure Counsel, the Trustee, rating fees, costs of printing the Official Statement, and other costs of delivery of the Bonds. 9 10 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 City of Chula Vista, and a small portion of the City of San Diego on Otay Mesa. The Southern boundary of the District is the international border with Mexico (the “Service Area. The District is the sole provider of water in the Service Area. The District currently provides water service to about 70% of its projected ultimate population, and this percentage will continue to increase as the District’s Service Area continues to develop and grow. The District’s water sales by volume increased by 7.5% per year from 2004 to 2007. From 2007 until 2011, new residential construction had declined significantly. During the first three quarters of Fiscal Year 2012/13, the District’s Public Services Division has approved on average 26 permits per month, compared to the average of 24 permits per month in Fiscal Year 2010/11. As of June 30, 2012, the District had nearly 49,000 potable and 700 recycled service accounts representing a population of approximately 208,000, with an average daily demand of 29.0 million gallons per day (mgd). Ultimately, the District is projected to serve 285,000 people by 2035, creating an average daily demand of 56.3 mgd. The District currently meets all of its potable demands with imported treated water from the Water Authority. Pipeline Number 4 (Pipeline No. 4) of the Second San Diego County Aqueduct (Second SD Aqueduct) that are owned and operated by the Water Authority delivers potable water treated at the Water Authority’s Twin Oaks Water Treatment Plant and also from the Metropolitan Skinner Water Treatment Plant (WTP) located in Riverside County. Pipeline No. 4 is the District’s primary supply system. The Water Authority has multiple flow control facilities (FCFs) 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 WTP (Levy WTP) for treatment and delivery to 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 is required to take a minimum of 10,000 AF/yr of treated water (8.9 mgd) from the Levy WTP. 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. The Otay WTP has hydraulic capacity to increase to 40 mgd in the future. In order to do so, approval is required from the California Department of Public Health (CDPH) and will require a treatment process study (High Filtration Rate Study). The City of San Diego’s typical demand for treated water from the Otay WTP is approximately 20 mgd. Under the terms of the agreement, the City’s obligation to supply treated water to the District is contingent upon its surplus treatment capacity, beyond what the City 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 1990. 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 11 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 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 approximately 3,100 acre-feet per year of potable water to other uses. The District also owns and operates a wastewater collection system, providing public sewer service to approximately 4,652 customer accounts within the Jamacha drainage basin, which is located in the northern section of the District. 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 current members of the Board and key administrative personnel are: DIRECTORS Jose Lopez, President - Division 4 Mitchell Thompson, Vice President - Division 2 David Gonzalez, Jr., Treasurer - Division 1 Gary D. Croucher, Division 3 Mark Robak, Division 5 MANAGEMENT TEAM Mark Watton, General Manager German Alvarez, Assistant General Manager Joseph R. Beachem, Chief Financial Officer Rom Sarno, Jr., Chief of Administrative Services Geoff Stevens, Chief Information Officer Rod Posada, Chief of Engineering Pedro Porras, Chief of Water Operations Under direction of the General Manager, the District has 148 employees. 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, 2012 are attached hereto as “APPENDIX B” and should be read in their entirety. Existing Facilities Potable Water Facilities - The principal facilities of the existing potable water system consist of five water supply connections with CWA, seven water supply connection with the City of San Diego, 20 pump stations, over 724 miles of pipelines, and 40 storage reservoirs. The District currently meets all of its potable demands with imported treated water from CWA. Fifty- eight percent of this water is in turn purchased from the region’s primary water importer, 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 Otay Water District at their Levy WTP. This action brought regional water treatment closer to customers, which helps reduce dependence on water treatment facilities located outside of San Diego County. 12 Recycled Water Facilities - The principal facilities of the existing recycled water system consist of 2 recycled water supply sources, 3 pump stations, 99 miles of pipelines, and 4 storage reservoirs. The District currently produces recycled water at the RWCWRF, which is owned and operated by the District. Recycled water from the RWCWRF and some of the District’s treated potable water supply are delivered into storage reservoirs that provide recycled water service to recycled water customers. 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 two recycled water systems. 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 northeastern part of the North District near Sweetwater reservoir and is the southernmost system of the North District. Two new 10 million gallon reservoirs are located within the La Presa system and provide storage for the treated water delivered through the new 36 inch pipeline, which connects to the Helix Water District system by way of the CWA aqueduct. The reservoirs within the La Presa system provide operational and emergency storage for the 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. Water Storage The District currently operates 40 reservoirs as shown below with a total capacity of 217.6 mg. The District estimates that the reservoirs are between 75% and 80% full on a typical day. System Reservoirs Capacity Hillsdale 6 13.9 Regulatory 14 58.4 La Presa 7 12.6 Central Area 11 85.0 Otay Mesa 2 47.7 40 217.6 Water Supply Service Area Water Supply - Potable. The District does not have a local source of surface water, and is working to complete a modest supply of ground water. The District purchases a significant amount of its potable water from the CWA. Under a contractual arrangement with the CWA the District also receives potable water from the Helix Water District’s Levy Water Treatment Plant, 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. 13 The CWA implemented a water rate increase on January 1, 2013, which resulted in an approximate 9.4% increase for the District’s cost of purchased potable water from CWA. 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 City of San Diego’s South Bay Water Reclamation Plant. Construction on 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 The Metropolitan Water District of Southern California (“MWD”) for sale to the CWA member agencies. For the Fiscal Year ended June 30, 2012, the CWA supplied the District 30,543 acre-feet of water, approximately 5.6% of total CWA water supplies.. As an alternative to purchasing all of its imported water from MWD, CWA has begun to diversify its purchases through core 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-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 2012, CWA received approximately 80,000 acre-feet from the Coachella Canal Lining Project and the All-American Canal Lining Project transfers. CWA also successfully secured dry-year water transfers to provide supplemental supplies to the region during MWD’s mandatory cutbacks to full service customers that started in July 2009 and ended in April 2011. Dry-year transfers are short-term transfers or leases, typically agreed to and completed within one to three years. In 2012, MWD purchases represented approximately 50% of total CWA water supplies, down from approximately 76% in 2008. CWA’s other sources of supply include the IID transfer, the canal lining transfers, surface water, groundwater and recycled water. Litigation related to the QSA is described in “APPENDIX G - INFORMATION CONCERNING METROPOLITAN WATER DISTRICT’S WATER SUPPLY - QSA Related Litigation.” 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 (“Poseidon”) 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 is expected to come on-line in early calendar year 2016. CWA will make a number of improvements to its aqueduct system and a water treatment plant to integrate desalinated water into the CWA aqueduct system, which are expected by CWA to cost $80 million. In addition, a substantial portion of the cost of financing the Carlsbad Project is expected to be made by CWA under various agreements, including the Water Purchase Agreement. 14 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 is to interconnect a number of member agency storage facilities. Another purpose is to enhance the CWA’s own storage capacity. The 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. The 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 Exchange Act (“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. 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. The CWA currently purchases all of its imported water from MWD and IID. CWA is MWD’s largest member agency, purchasing approximately __% of MWD’s supplies in Fiscal Year 2011/12. 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. 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 “APPENDIX G” hereto and 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.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. 15 Historic and Projected Water Supply. As noted, during the early 2000’s the State of California had experienced drought conditions and CWA implemented a base allocation of water to the District. During that period, the District’s base allocation of potable water was 43,162 acre feet. From 2009 to early 2011, CWA implemented an 8% reduction in that base allocation to its customers, resulting in an allocation to the District of 39,680.6 acre feet. On April 28, 2011, CWA announced the end of mandatory water use restrictions and that there will no longer be a base water allocation for member agencies. At its peak in Fiscal Year 2006/07, the District purchased 41,909 acre feet of potable water from CWA. Of this amount, 3,073 acre feet of potable water was used to provide water to the customers of the District’s recycled water system. However, the District has developed additional sources of recycled water and no longer needs to purchase potable water to supplement the recycled system. This along with economic factors, conservation efforts, additional rainfall and cooler temperatures has resulted in a reduction of purchased water from CWA from a high of 41,909 acre feet in Fiscal Year 2006/07 to a low of 29,861 acre feet in Fiscal Year 2010/11, well below both the base allocation of 43,162 acre feet. Set forth below is a summary of the District’s sources of water supply for the last eight fiscal years. HISTORIC WATER SUPPLY IN ACRE-FEET PER YEAR Fiscal Year Ended June 30 Produced Reclaimed Water Purchased Recycled Water Purchased Potable Water Total 2005 (1) 1,150 0 37,678 38,828 2006 1,234 0 40,946 42,180 2007 (2) 1,263 653 41,909 43,825 2008 1,235 3,595 38,045 42,875 2009 844 (3) 3,686 34,971 39,501 2010 1,033 2,871 31,175 35,079 2011 1,058 2,968 29,861 33,887 2012 655 (4) 3,170 30,543 34,368 ____________________________________ (1) Rainfall in 2005 was significantly above average, resulting in decreased purchases of potable water and production of recycled water. (2) After the District began purchasing recycled water from the City of San Diego in May of 2007, it was no longer necessary to purchase potable water for the recycled system to supplement the amount of produced recycled water. See “Water Supply - Service Area Water Supply - Recycled” above. (3) The treatment plant was not in operation for a total of 74 days in Fiscal Year 2008/09 for planned maintenance. (4) The treatment plant was not in operation for a total of 139 days in Fiscal Year 2011/12 for planned maintenance. Source: Otay Water District. The District currently expects that demand for potable water may reach as high as 56,600 acre feet per year at buildout, potentially by the year 2035. The District currently obtains 100 percent of its potable water supply as imported water from CWA. CWA, in turn, obtains imported water from MWD. The reliability of the District’s potable supply is dependent on these wholesale agencies. The District is committed to investing alternative water sources, such as groundwater or desalination that would reduce its dependence on imported water. 16 Currently, the District is pursuing the ability to purchase potable desalinated water from a private business venture, N.S.C. Agua, S.A de C.V., a subsidiary of Consolidated Water Company Ltd. The desalinization plant, if constructed, would be located in Mexico (the “NSC Desalination Plant”). The plant is likely to take three to four years to complete, and is estimated to produce 100,000 acre feet of desalinated water annually. If constructed, it is expected that an approximate 24,000 acre feet of water could initially be supplied to the District from this source. This water supply would be delivered to the District’s boundary coincident with the United States and Mexican international border. In order to take delivery of such water supply, the District needs to construct a conveyance system, within the District, from that delivery point to the District’s distribution system. The construction includes 3.2 miles of pipeline, a pump station and a water treatment plant. The District expects that the conveyance system would take approximately 3 years to construct and the District would commence construction if a purchase contract is entered into. Any water purchases from the desalinization plant would be payable as an Operation and Maintenance Cost of the District, similar to the current water purchases from CWA and other existing sources. The District projects no appreciable difference in the cost of such water compared to current projected costs of water purchased from CWA. If the District is able to negotiate a contract that meets the financial goals of the District and the desalinization plant is completed, the District would expect to reduce the amount of water it purchases from CWA. However, should water from the desalinization plant be unavailable, as a member of CWA, the District would be entitled to receive additional water purchases from CWA. The District believes that such a transition back to increased CWA water purchases could require temporary rate increases but would not have a material adverse effect on the District’s financial condition. The District makes no guarantee that the desalination plant will be constructed, and if so constructed, cannot guarantee construction in accordance with the timelines described herein. The District also provides no assurance that any contractual arrangement for the purchase of water from the facility will be executed with the terms described herein. The District also continues to promote the conversion of existing potable connections to the recycled water system when possible. In addition, the District anticipates converting a significant number of potable connections in the Otay Mesa area to the recycled system once the required pipelines are put in place, estimated to occur in four to five years. 17 Set forth below is a summary of the District’s projection of water sources for the current and five succeeding Fiscal Years beginning in 2013. PROJECTED WATER SUPPLY IN ACRE-FEET PER YEAR Fiscal Year Ending June 30 Produced Reclaimed Water (1) Purchased Reclaimed Water Purchased Potable Water (2) Total 2013 1,000 2,911 30,513 34,424 2014 1,000 2,952 30,513 34,464 2015 1,000 3,005 30,879 34,884 2016 1,000 3,059 31,311 35,370 2017 1,000 3,108 31,812 35,920 2018 1,000 3,161 32,321 36,482 ____________________________________ (1) Maximum capacity for the treatment plant is 1,456 acre feet, but the District bases its projection of 1,000 acre feet on normal (efficient) capacity. (2) Includes purchases from CWA, raw water treated to potable level by the City of San Diego and the Helix Water District, and assumes desalinated water purchases. Source: Otay Water District 2010 Urban Water Management Plan. Capital Improvement Program The District boundaries encompass areas of San Diego County that experienced rapid growth between 2001 and 2007, and moderate growth is expected in future years. The District currently serves a population of approximately 208,000. Ultimately, the District is projected to serve 285,000 people and it estimates an additional $475 million investment in capital assets will be required through ultimate buildout, over 20 years. The District reviews and updates the 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. 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. 18 The table below summarizes the current six-year $116.4 million Capital Improvement Program for the Water System and the categories of work to be completed. Fiscal Year Ending June 30 2013 2014 2015 2016 2017 2018 Total Expansion $ 3,988 $ 2,794 $ 4,205 $ 1,805 $ 400 $ 12,171 $ 25,363 Betterment 4,129 4,706 7,418 9,000 6,010 652 31,915 Replacement 9,273 9,808 4,264 5,499 8,605 7,560 45,009 New Supply 604 1,920 3,920 3,920 3,440 316 14,120 Total $ 17,994 $ 19,228 $ 19,807 $ 22,204 $ 18,455 $ 20,699 $116,407 _______________________________ 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, bond proceeds, transfers between operational areas, other capital related charges, reserves or a combination of these sources. The District expects to fund these improvements with reserves, operating income, investment income, bond proceeds, capacity fees and other fees, grants and additional financing. The District does not expect that additional financing will occur during the next five years. In order to implement the Capital Improvement Program, 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 “Water Charges - Proposition 218.” 19 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, with estimated amounts for 2012/13. There were over 1,000 new residential connections between Fiscal Years 2007/08 and 2011/12, an increase of 2.4%. TABLE NO. 1 CONNECTIONS AND WATER SALES VOLUME AND REVENUE Fiscal Years 2007/08 through 2012/13 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 (5) Potable Residential - Volume in ccf (1) 9,379,544 8,844,440 7,679,494 7,486,069 7,507,214 7,552,200 - Volume in acre feet 21,532 20,304 17,630 17,186 17,234 17,338 Residential - Connections 43,342 43,431 43,619 43,903 44,396 44,546 Residential - Sales Revenue (2) $ 17,775 $ 17,853 $ 18,389 $ 18,743 $ 20,784 $ 22,951 All Others - Volume in ccf 6,196,125 6,077,073 5,067,667 4,877,788 5,003,680 5,030,682 - Volume in acre feet 14,224 13,951 11,634 11,198 11,487 11,549 All Others - Connections 4,251 4,258 4,225 4,251 4,269 4,285 All Others - Sales Revenue (2) $ 12,261 $ 12,523 $ 12,979 $ 13,493 $ 14,832 $ 16,429 Total Potable Connections 47,593 47,689 47,844 48,154 48,665 48,831 Annual Increase In Connections 96 155 310 511 166 Reclaimed (3) Reclaimed - Volume in ccf 2,001,137 1,991,389 1,773,961 1,675,591 1,652,833 1,725,126 - Volume in acre feet 4,594 4,572 4,072 3,847 3,794 3,960 Reclaimed - Connections 626 671 684 685 696 700 Reclaimed - Sales Revenue (2) $ 5,182 $ 5,499 $ 6,002 $ 6,128 $ 6,413 $ 7,575 Annual Increase in Connections 45 13 1 11 4 Total Total Volume in ccf 17,576,806 16,912,902 14,521,122 14,039,448 14,163,727 14,308,005 Total Volume in acre feet 40,350 38,827 33,336 32,231 32,515 32,847 Total Connections 48,219 48,360 48,528 48,839 49,361 49,531 Total Sales Revenue (2) $ 35,218 $ 35,875 $ 37,370 $ 38,364 $ 42,028 $ 46,956 Fixed Charges (4) $ 15,535 $ 16,524 $ 18,840 $ 19,905 $ 21,775 $ 23,072 Total Revenue $ 50,753 $ 52,399 $ 56,210 $ 58,269 $ 63,803 $ 70,028 ____________________________________ (1) ccf refers to a measurement of 100 cubic feet (1 cubic foot = 7.48 gallons). (2) Revenue in $ Thousands. (3) The District receives a credit from CWA and MWD 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 July 1, 2012 to March 31, 2013, forecasted water sales volume and revenue from April 1, 2013 to June 30, 2013, and forecasted connections as of June 30, 2013. Source: Otay Water District. 20 Table No. 2 shows the 10 largest water users for Fiscal Year 2011/12. TABLE NO. 2 TEN LARGEST CUSTOMERS BY WATER SALES REVENUES (1) Year ended June 30, 2012 Customer Usage in HCF % of Water System Consumption Water Sales Revenues % of Total Water Sales Revenues City of Chula Vista 942,348 6.7% $2,534,914 4.0% State of California 365,755 2.6% 983,882 1.5% East Lake Summit Association 204,366 1.4% 741,847 1.2% County of San Diego 261,391 1.8% 703,141 1.1% Sweetwater School District 184,294 1.3% 495,750 0.8% Cuyamaca College 170,861 1.2% 459,615 0.7% ERP Opeating LP 118,995 0.8% 431,952 0.7% Windingwalk Master Association 118,329 0.8% 429,534 0.7% Belleme HOA 109,927 0.8% 399,036 0.6% Eastlake Country Club 109,540 0.8% 397,629 0.6% 2,585,805 18.3% $7,577,300 11.9% ____________________________________ (1) Includes both potable and reclaimed water sales and excludes fixed charges. Source: Otay Water District. Water Charges Water Service Rates. The District held a public hearing on August 24, 2009 and approved a five-year schedule of rates, which included authorization to raise rates by up to 10% per year during the five year period for costs other than CWA, San Diego and MWD rate increases and to pass through all CWA, San Diego and MWD increases without limitation during the five year period. Actual rate increases and their effective dates are as follows: Effective Date % Increase September 1, 2009 19.9% January 1, 2011 10.9 January 1, 2012 7.7 January 1, 2013 7.4 The Board of Directors will continue to take action each year to set rates and they are expecting to hold another Proposition 218 hearing in the fall of 2013. See “Proposition 218” below. Based on its internal rate model and the need to fund the CIP, the District anticipates that it will need to increase its rates by approximately 7.3% and 7.2% in each of the next two years and 2.8% in each of the following three years. These increases do not reflect the rate impact of the recent CWA decision to move forward with a major desalination plant capital improvement plan. The impact of this decision on rates will be built into the upcoming rate review to be presented to the District’s Board in May 2013. Over the past several years the revenues generated by District rate increases have been offset by volume decreases due to conservation, weather and the economic downturn. For Fiscal Year 2012/13, the cost increase passed through by CWA was greater than 7.4% rate increase implemented by the District. 21 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. As a result, each class of customer has a range of rates and for certain classes - commercial, irrigation, and recycled - rates are further differentiated based on meter size. Residential customers (also called domestic customers) have a range of rates beginning at $1.73 and up to $5.39 based on the number of units used. The average residential customer uses 14 units of water. 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. 3 MONTHLY FIXED CHARGES Fiscal Year 2012/13 Meter Size Potable and Non-Potable: System Charge Potable Only: MWD & CWA Pass-through Charge 3/4” $ 16.74 $ 13.28 1” 21.26 22.12 1-1/2” 32.57 44.31 2” 46.13 70.85 3” 82.29 141.71 4” 122.99 221.43 6” 236.02 442.80 8” 371.64 708.53 10” 529.88 1,015.06 Fire 34.57 - ____________________________________ Source: Otay Water District. 22 TABLE NO. 4 COMMODITY RATES As of January 1, 2013 Customer Class: Domestic Customer Class: Master Meter Units Charge Per Unit Units Charge Per Unit 1-5* $1.73 1-4 $2.66 6-10 2.69 5-9 3.45 11-22 3.50 10-up 5.32 23-up 5.39 * Note: Customers whose total consumption is 10 units or less per month shall receive a benefit of a lower rate for units 1-5. 1 unit equals 748 gallons. Customer Class: Commercial Less Than 10” Meter: 10” Meter or Greater: Charge Per Unit 1-173 Units 0-7,426 Units $2.84 174-831 Units 7,427-14,616 Units 2.92 832-up Units 14,617-up Units 2.96 Customer Class: Irrigation 3/4”-1” Meter: 1-1/2”-2” Meter: 3” and Up Meter: Charge Per Unit 1-49 Units 1-144 Units 1-1,044 Units $3.87 50-132 Units 145-355 Units 1,045-8,067 Units 3.95 133-up Units 356-up Units 8,068-up Units 4.01 Customer Class: Recycled 3/4”-1” Meter: 1-1/2”-2” Meter: 3”-4” Meter: 6” Meter: Charge Per Unit 1-42 Units 1-168 Units 1-403 Units 1-7,916 $3.31 43-97 Units 169-402 Units 404-820 Units 7,917-16,357 3.35 98-up Units 403-up Units 821-up Units 16,358-up Units 3.42 ____________________________________ (1) 1 unit equals 100 cubic feet of water. Source: Otay Water District. 23 Additionally, commercial agriculture users participating in MWD or CWA conservation programs are eligible to receive discounts from the base agriculture rate. As previously noted, the District has estimated 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 increases in costs imposed by CWA or MWD not already estimated to occur (approximately 68% of the projected rate increases over the next five years relate to estimated increases in CWA and MWD charges to the District). 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 JANUARY 1, 2013 City/Water Agency Average Rates (1) Lakeside 60.11 San Dieguito Water District 62.33 Yuima Water District 67.02 Helix WD 67.07 Oceanside 70.41 Poway 71.61 Otay Water District 73.72 Carlsbad 75.13 Escondido 75.38 Olivenhain Water District 75.65 Del Mar 76.53 San Diego 77.08 Rincon 78.91 Sweetwater Water District 80.30 Vallecitos Water District D 82.89 Santa Fe 83.18 Fallbrook 83.46 Vista 87.54 Valley Center 93.60 Ramona 95.33 Padre Dam Water District - East 97.55 Padre Dam Water District - West 99.93 Rainbow Water District 103.71 ____________________________________ (1) Average rates based on assumed residential use of 14 ccf of water monthly. Source: Otay Water District. Delinquencies. Accounts receivable that have not been paid in over 60 days represent less than 0.6% 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 0.9% 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 $200,000 a year in uncollectible accounts and has implemented the risk mitigation process of collecting deposits from delinquent commercial accounts. The District has implemented a number of changes over the past few years which are significant in improving the management of the accounts receivables. The collection process is more efficient with the 24 introduction of 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 new convenient payment options by introducing payments by phone and web. 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 has decreased from 10 to 2 days. These improvements implemented over the last few years 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. Some of the improvements currently being implemented are electronic bill presentation, recurring payments via credit card, and the ability to make water payments at any retailer using the same electronic network used by the District’s bank. Other Charges. For all connections over a 450 foot elevation, the District charges an energy charge of $.042 per 100 feet of elevation over 450 feet. Betterment charges in certain areas ranging from $.08 to $.27 per unit to pay for reservoirs, pump stations and other infrastructure. The District also applies additional water development charges in some areas in the North District. Capacity Fees and Meter Fees. The District charges capacity fees to connect to the Water System. Current capacity fees are $7,886 and the new water supply of $909 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 $202 for a single family residence to $10,197 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. 12 and Table No. 13 include only the first $10 of availability fees. To the extent the availability fees in excess of $10 per acre are authorized for operational purposes, they are included in Table No. 12 and Table No. 13 in “Betterment 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 $1,553 for single family residential connections and are adjusted quarterly according to the Engineering News- Record index. Annexation fees were also charged for new service that may be within the District boundaries, but outside of an improvement district within the District boundaries. The current annexation fees apply only to properties outside the District boundaries. As a result of the change in fee structure, future capacity fees and annexation fees may not be comparable to amounts shown in prior years. Proposition 218. On November 5, 1996, California voters approved Proposition 218, the “Right to Vote on Taxes Act.” Proposition 218 added Articles XIIIC and XIIID to the State Constitution, which contain a number of provisions affecting the ability of the District to levy and collect both existing and future taxes, assessments, fees and charges. Proposition 218 also extends the initiative power to reducing or repealing any local taxes, assessments, fees and charges. This extension of the initiative power is not limited to taxes, assessments, fees and charges imposed on or after November 6, 1996, the effective date of Proposition 218, and could result in retroactive repeal or reduction in any existing taxes, assessments, fees or charges, except those which are pledged to the repayment of debt. If such provisions were held to apply to the District’s fees or charges and a repeal or reduction in District fees or charges were to occur, and it was held that any such taxes, assessments, fees or charges were not pledged to any debt repayment, the District’s ability to pay debt service on the Bonds could be adversely affected. It is also possible that the courts would uphold a reduction in rates and charges that reduce the coverage available from Net Revenues below the levels historically maintained by the District. 25 Article XIIID conditions the imposition or increase of any “fee” or “charge” upon there being no written majority protest after a required public hearing and, for fees and charges other than for sewer, water or refuse collection services, voter approval. Article XIIID defines “fee” or “charge” to mean levies (other than ad valorem or special taxes or assessments) imposed by a local government upon a parcel or upon a person as an incident of the ownership or tenancy of real property, including a user fee or charge for a “property-related service.” One of the requirements of Article XIIID is that before a property related fee or charge may be imposed or increased, a public hearing upon the proposed fee or charge must be held and a mailed notice sent to the record owner of each identified parcel of land upon which the fee or charge is proposed for imposition. In the public hearing if written protests of the proposed fee or charge are presented by a majority of the owners of affected identified parcel(s), an agency may not impose the fee or charge. Following the enactment of Proposition 218 in 1996, appellate court cases and an Attorney General opinion initially indicated that fees and charges levied for water and wastewater services are not property- related fees and charges and thus are not subject to the above described requirements of Proposition 218 regarding notice, hearing and protests in connection with any increase in the fees and charges being imposed. In a decision rendered in February, 2004, the California Supreme Court in Richmond et al. v. Shasta Community Services District, 32 Cal. 4th 409, upheld a Court of Appeals decision that water and wastewater connection fees were not property related fees or charges subject to Article XIIID, while at the same time stating in dicta that fees for ongoing water and wastewater service through an existing connection were property related fees and charges. On March 23, 2005, the California Fifth District Court of Appeal published Howard Jarvis Taxpayers Association v. City of Fresno, concluding that in lieu fees charged as a component of water and wastewater utility service charges are subject to the requirements of Proposition 218. The ruling in the City of Fresno case relied in part on the Richmond decision’s dicta and appeared to conflict with Apartment Association of Los Angeles County, Inc. v. City of Los Angeles, 24 Cal. 4th 830 (2001), in which the California Supreme Court ruled that the property-related fee provisions of Proposition 218 apply only to fees triggered by property ownership alone and not by voluntary conduct of the property owner, such as consuming utility services. The City of Fresno decision is final, as review has been denied by the California Supreme Court. On July 24, 2006, the California Supreme Court stated in Bighorn-Desert View Water Agency v. Beringson that charges for ongoing water delivery are property related fees and charges within the meaning of Article XIIID and are further subject to the initiative provisions of Section 3 of Article XIIIC. This decision reversed the July 2004 California Appellate Court decision (Bighorn-Desert View Water Agency v. Beringson (180 Cal. App 4th 890)) which opined that the costs of water services are not property related or incidents of property ownership because they are based on consumption and not on property ownership. The California Supreme Court held that such water service charges may be reduced or repealed through a local voter initiative pursuant to Article XIIIC of the California Constitution. The Supreme Court stated that it was not holding that the initiative power is free of all limitations and was not determining whether the initiative power is subject to the statutory provision requiring that water service charges be set at a level that will pay debt service on bonded debt and operating expenses. However, the Supreme Court stated in its opinion that water providers may determine rates and charges upon proper action by the governing body and that the legislative body may increase a charge which was not affected by initiative or impose an entirely new charge. As a result of this case, there can be no assurance that Proposition 218 will not limit the ability of the District to impose, levy, charge and collect increased fees and charges for water services. 26 On August 24, 2009, the District approved rate increases effective for water usage beginning September 1, 2009 following mailing of notice and a public hearing held pursuant to Article XIIID of the Constitution. This approval included authorization to raise rates by up to 10% per year for the succeeding five years for costs other than CWA and MWD rate increases. The approval included authorization to pass through all such CWA and MWD increases without limitation during the five year period. The Board of Directors will continue to take action each year to set rates. The Board of Director’s is expected to hold a new Proposition 218 hearing in the fall of 2013. Taxes The County levies a 1% ad valorem tax on behalf of all taxing agencies in the County, including the District. For Fiscal Year 2012/13, the District’s share of such property tax is projected to be $3.2 million, representing a decrease of $317,000 from amounts received in 2011/12. Such taxes are a source of payment for the Installment Payments and debt service on the 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 the 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 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.” Over the last 5 years, the severe economic recession reverberated through the residential housing market in the County, including many portions of the District and particularly the area in Chula Vista. Between 2008/09 and 2012/13, the assessed valuation of property city-wide in Chula Vista declined 15.6%. During this same time, the assessed valuation of property in the District declined 15%. The District’s estimate of Taxes for 2012/13 reflects these reduced assessed values. Foreclosure rates increased significantly in the County from 2009 to 2011, but new filings of notices of default have dropped in the last 12 months. 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 state-wide as of January 31, 2012, the District received $22,085 additional property tax in Fiscal Year 2011/12. The District estimates that in Fiscal Year 2012/13 it will receive $31,617. This additional tax revenue was previously allocated to such redevelopment agencies and no longer required for debts of such agencies. 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 27 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% 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. However, the State Budgets for Fiscal Years 2003/04 through 2005/06 reallocated approximately $1.30 billion of the 1% ad valorem property tax from local government to schools. Of that amount, approximately $350 million was reallocated from special districts. The District estimates that this resulted in a reduction of approximately 40% in Taxes as a result of the ERAF Shift in those years. On July 24, 2009, the California legislature approved amendments to the 2009/10 Budget involving 30 separate pieces of legislation to close a $26.3 billion shortfall. The Governor signed the budget plan on July 28, 2009. Total State general fund spending in Fiscal Year 2009/10 was approximately $86.3 billion, down from nearly $91.7 billion in Fiscal Year 2008/09 and nearly $103 billion in Fiscal Year 2007/08. The budget amendments combined deep spending cuts, borrowing from local governments and accounting maneuvers. The approved amendments included borrowing from local governments and various accounting maneuvers to generate additional revenues in Fiscal Year 2009/10, including (among many others) $2 billion borrowed from cities, counties and special districts’ property tax collections under provisions of Proposition 1A (approved by the voters in 2004), which the State must repay with interest within three years. The declaration by the State of California of a fiscal emergency under Proposition 1A, as a part of the State’s 2009/10 budget adoption, authorized the State to withhold the equivalent of 8% of fiscal 2009/10 property related tax revenues from cities, counties and special districts. The tax revenues are required to be repaid by the State with interest within three years. The District’s Proposition 1A receivable was $267,197. As a part of the budget package, local governments were given the opportunity to sell their Proposition 1A receivable through financing offered by the California Statewide Communities Development Authority, a joint powers authority sponsored by the League of California Cities and California State Association of Counties. California Communities issued bonds in November 2009, securitizing the future payments by the State and remitting the proceeds of the bonds to the local governments who opted to participate in the securitization. The District opted to participate in the securitization program and received all of its Proposition 1A receivable. 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 address future State budget deficits. See “Historical and Projected Taxes, Net Revenues and Debt Service Coverage” herein for historic and projected receipts of Taxes. Personnel The District has 148 full-time positions budgeted for Fiscal Year 2012/13. The OWD Employee Association (the “Union”) represents 108 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 five-year Collective Bargaining Agreement. In January 2013 the Union entered into an agreement with the District to extend the current five-year agreement for a period of one year, which extends the current Collective Bargaining Agreement until June 30, 2014. The extension did not provide for a cost of living increase during the extension period. 28 Retirement Program The District provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries (the “Plan”). The Plan is part of the Public Agency portion of the California Public Employees’ Retirement System (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 of California. A menu of benefit provisions as well as other requirements is established by State statute within the Public Employees’ Retirement Law. The Plan selects optional benefit provisions from the benefit menu by contract with CalPERS and adopts those benefits through District resolution. 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. 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”), which makes changes to both CalPERS and California State Teachers’ Retirement System (“CalSTRS”), 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. Among the other changes to CalPERS and CalSTRS, the Reform Act also: (i) requires all new participants enrolled in CalPERS and CalSTRS 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, (ii) requires CalSTRS and 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. Ultimately, the Reform Act will reduce the District’s long-term pension obligation as existing employees retire and new employees are hired to replace them. Funding Policy. Active members in the Plan are required to contribute 8% of their annual covered salary. Prior to 2011, employees contributed 1% of their annual covered salary and the District contributed the remaining 7% of covered salaries, in addition to paying the actuarially determined remaining amounts necessary to fund the benefits for its members. However, in response to budget concerns as well as an increase in health related benefits for employees, the District and the employees agreed that employees would increase their contributions to CalPERS as an offset to the cost of both the District’s pension and retirement health benefits. By agreement between the employee union and the District, the represented employees paid 5.25% of covered salaries beginning August 15, 2011. Also by agreement, the unrepresented employees began paying 4.5% of covered salaries as of July 15, 2011. After June 30, 2012, all employees pay an additional 3.5% of covered salaries, so that, currently the unrepresented employees are paying the full 8% contribution required and the represented employees are paying 8.75%, more than the required contribution. These increased contributions are applied to offset the District’s retirement health care costs The actuarial methods and assumptions used are those adopted by the CalPERS Board of Administration. 29 Under GASB 27, an employer reports an annual pension cost (“APC”) equal to the annual required contribution (“ARC”) plus an adjustment for the cumulative difference between the APC and the employer’s actual plan contributions for the year. The cumulative difference is called the net pension obligation. The ARC for the period July 1, 2011 to June 30, 2012 was determined by an actuarial valuation of the plan as of June 30, 2009. The contribution rate indicated for that period was 23.428% of payroll. In order to calculate the dollar value of the ARC for inclusion in financial statements prepared as of June 30, 2012, the contribution rate is multiplied by the payroll of covered employees that were paid during the period from July 1, 2011 to June 30, 2012. See “Annual Pension Costs” below. Contribution Rates. The contribution requirements of plan members and the District are established by PERS. These rates are factored in to the District’s 2012/13 budget. PERS set contribution rates for 2010/11 based on a 4.9% negative return on investments which occurred in 2007/08. For the Fiscal Year 2008/09, the PERS portfolio had lost more than 23% of its value. This loss began affecting PERS contribution rates in 2012/13. A history of the PERS portfolio rate of return is shown below. From July 1, 2012 to December 31, 2012, the PERS portfolio rate of return was 7.1%. TABLE NO. 6 PERS HISTORICAL INVESTMENT RETURNS Year Ending June 30 Rate of Return 2002 (6.0%) 2003 3.9 2004 16.7 2005 12.6 2006 12.3 2007 19.1 2008 (4.9) 2009 (23.4) 2010 11.6 2011 20.9 2012 0.1 __________________________________________ Source: California Public Employees’ Retirement System. 30 The District’s percentage of payroll for PERS payments for 2007/08 through 2013/14 and estimates for 2014/15 and 2015/16 are shown in the table below. TABLE NO. 7 OTAY WATER DISTRICT HISTORICAL AND PROJECTED PERS RATES Fiscal Year 2007/08 19.523% 2008/09 19.369 2009/10 19.815 2010/11 20.489 2011/12 23.428 2012/13 24.318 2013/14 25.435 2014/15* 26.500 2015/16* 26.800 __________________________________________ * Projected by PERS at October 2012. The District’s 2011/12 actual and 2012/13 budgeted pension costs were $2,951,409 and $3,083,000, respectively. In March 2012, PERS voted to decrease the investment rate of return used in future actuarial valuations from the current 7.75% to 7.5%. The contribution rates shown above reflect this revised actuarial assumption. Annual Pension Costs. For the Fiscal Year 2011-12, the District’s annual pension cost and actual contribution was $2,951,409. The required contribution for the Fiscal Year 2011-12 was determined as part of the June 30, 2009 actuarial valuation and the contribution for the 2012-13 Fiscal Year was determined as part of the June 30, 2010 actuarial valuation. The following is a summary of the actuarial assumptions and methods that were applied to the Fiscal Year 2013-14 contribution: Valuation Date: June 30, 2011 Actuarial Cost Method: Entry Age Actuarial Cost Method Amortization Method: Level Percent of Payroll Average Remaining Period: 21 Years as of the Valuation Date Asset Valuation Method: 15 Year Smoothed Market Actuarial Assumptions: Investment Rate of Return: 7.50% (Net of Administrative Expenses) Projected Salary Increase: 3.30% to 14.20% Depending on Age, Service, and Type of Employment Inflation: 2.75% Payroll Growth: 3.00% Individual Salary Growth: A merit scale varying by duration of employment coupled with an assumed annual inflation component of 2.75% and an annual production growth of 0.25%. Initial unfunded liabilities are amortized over a closed period that depends on the Plan’s date of entry into CalPERS. 31 Subsequent Plan amendments are amortized as a level percentage of pay over a closed 20-year period. Gains and losses that occur in the operation of the Plan are amortized over a rolling period, which results in an amortization of 6% of unamortized gains and losses each year. If the Plan’s accrued liability exceeds the actuarial value of the Plan assets, then the amortization payment of the total unfunded liability may be lower than the payment calculated over a 30-year amortization period. FIVE-YEAR TREND INFORMATION FOR PERS Fiscal Year Annual Pension Cost (APC) Pension Cost of APC Contributed Net Pension Obligation 6/30/2012 $2,951,409 100% $ 0 6/30/2011 2,427,744 100 0 6/30/2010 2,240,538 100 0 6/30/2009 2,150,579 100 0 6/30/2008 2,252,601 100 0 Funded Status and Funding Progress. The schedule of funding progress presents multi-year trend information about whether the actuarial value of Plan assets is increasing or decreasing over the time relative to the actuarial accrued liability for benefits. Set forth below is a five-year analysis of the actuarial value of assets as a percentage of the actuarial accrual liability and the unfunded actuarial accrued liability as a percentage of the annual covered payroll as of June 30 of each year indicated: Actuarial Valuation Date Actuarial Valuation of Assets Entry Age Actuarial Accrued Liability (AAL) Unfunded Actuarial Accrued Liability (UAAL) Funded Ratio Covered Payroll UAAL as a Percent of Covered Payroll 2011 $62,435,349 $88,411,019 $25,975,670 70.6% $12,289,529 211.4% 2010 57,613,987 81,306,934 23,692,947 70.9 12,140,989 195.1 2009 53,736,612 75,300,790 21,564,178 71.3 11,880,481 181.5 2008 49,712,016 65,542,736 15,830,720 75.8 11,174,528 141.7 2007 44,910,326 59,412,116 14,501,790 75.6 10,663,440 136.0 32 A historical comparison of actuarial value of assets to the market value of assets in the plans is shown below. TABLE NO. 8 OTAY WATER DISTRICT FIVE YEAR TREND INFORMATION FOR ASSET VALUES Actuarial Valuation June 30 Date Actuarial Valuation of Assets Market Value of Assets % of Actuarial Value to Market Value Funded Ratio (Actuarial) Funded Ratio (Market) 2011 $62,435,349 $56,216,251 111.1% 70.6% 63.6% 2010 57,613,987 45,526,530 126.6 70.9 56.0 2009 53,736,612 39,323,209 136.7 71.3 52.2 2008 49,712,016 50,491,252 98.5 75.8 77.0 2007 44,910,326 51,944,239 86.5 75.6 87.4 ____________________________________ Source: California Public Employees’ Retirement System. 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 (see “Retirement Program – Funding Policy” herein). DPHP members receiving benefits contribute based on their selected plan options of EPO, HMO or PPO. Effective January 1, 2013 contributions by plan members range from $0 to $162 per month for coverage to age 65, and from $0 to $161 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 required contribution (ARC) of the employer, an amount actuarially determined in accordance with the parameters of GASB Statement 45. The ARC 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 ARC rate for 2009/10 was 2.9% of annual covered payroll, for 2010/11 was 2.9% of annual covered payroll and for 2011/12, the ARC rate was 10.5% of annual covered payroll. 33 The following table shows the components of the District’s annual OPEB cost for the three previous years, the amount actually contributed to the plan, and changes in the District’s net OPEB obligation/asset: 2012 2011 2010 Annual required contribution $ 1,304,000 $ 289,000 $ 345,000 Interest on net OPEB (asset) (537,685) (525,712) (480,878) Adjustment to annual required contribution 473,000 646,000 591,000 Annual OPEB cost (expense) 1,239,315 409,288 455,122 Contributions made 2,144,871 1,042,249 1,033,637 Increase in net OPEB (asset) (905,556) (632,961) (578,509) Net OPEB (asset) - beginning of year (7,416,346) (6,783,385) (6,204,876) Net OPEB (asset) - end of year $(8,321,902) $(7,416,346) $(6,783,385) For 2012, in addition to the ARC, the District contributed cash benefit payments outside the trust (healthcare premium payments for retirees to Special District Risk Management Authority (SDRMA)) in the amount of $749,871, which is included in the $2,144,871 of contributions shown above. For 2011 this amount was $654,250, which is included in the $1,042,249 of contributions shown above. FIVE-YEAR TREND INFORMATION FOR CERBT Fiscal Year Ended Annual OPEB Cost % of OPEB Cost Contributed Net OPEB (Asset) (1) 6/30/2012 $1,239,315 173% $(8,321,902) 6/30/2011 409,288 255 (7,416,346) 6/30/2010 455,122 227 (6,783,385) 6/30/2009 925,201 160 (6,204,876) 6/30/2008 846,000 100 (5,649,008)\ ____________________________________ (1) Represents funds on deposit with the OPEB plan administrator, CalPERS. The District’s ARC is estimated to be $1,287,000 for Fiscal Year 2012/13. This estimated OPEB contribution is factored in to the District’s budgets. 34 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 6/30/2011 $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 6/30/2008 5,649,000 11,581,000 5,932,000 48.78 11,307,000 52.50 6/30/2007 - 11,408,000 11,408,000 - 10,951,000 104.20 * An actuarial valuation was not prepared as of June 30, 2010. As of June 30, 2012, the Board had designated an additional $1,660,369 in Unrestricted Net Assets for an employee benefits reserve. 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, 2011 Actuarial Cost Method: Entry Age Normal Cost Method Amortization Method: Level Percent of Payroll Remaining Amortization Period: 26 Years as of the Valuation Date Asset Valuation Method: 15 Year Smoothed Market Actuarial Assumptions: Investment Rate of Return: 7.25% (Net of Administrative Expenses) Projected Salary Increase: 3.25% Inflation: 3.00% Individual Salary Growth: CalPERS 1997-2007 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. 35 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 Special Districts Risk Management Authority (SDRMA). Coverages through SDRMA are as follows: property coverage – 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; $400,000 per loss for employee dishonesty coverage; $750,000 for uninsured/underinsured motorists; and $10 million per occurrence for each of the following types of coverage, auto liability, public officials and employees errors, employment practices liability, employee benefits liability, and general liability. 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 $200 million Statutory Workers’ Compensation and $5 million in Employer’s Liability with a Zero Member Deductible. SDRMA currently has a pool of over 340 agencies in the Workers’ Compensation Program. Health Insurance Beginning in January 2008, the District began providing 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 (CSAC). District Reserves and Investment Policy As of June 30, 2012, the District had approximately $88.3 million in cash and investments, of which the Board had designated $16.1 million for capital projects and $1.7 million for insurance. The District’s reserves are not pledged to and do not secure the District’s obligation to make 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 March 31, 2013 are set forth in Table 6 below. For additional information relating to the District’s investments, see “APPENDIX B - DISTRICT AUDITED FINANCIAL STATEMENTS,” Note 2. 36 TABLE NO. 9 SUMMARY OF INVESTMENTS As of March 31, 2013 Investments Market Value Book Value % of Portfolio Federal Agency Issues – Callable $54,769,535 $54,770,093 68.35% Certificates of Deposit – Bank 81,327 81,327 0.10% Local Agency Investment Fund (LAIF) 10,108,276 10,108,276 12.61% San Diego County Pool 15,172,741 15,172,741 18.93% __________________________ 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. Outstanding Indebtedness of the District The District had outstanding indebtedness as of June 30, 2012 as shown in Table No. 10. TABLE NO. 10 OTAY WATER DISTRICT OUTSTANDING INDEBTEDNESS As of June 30, 2012 Category of Original Amount Final Indebtedness Issue Outstanding Maturity (1) 1996 Certificates of Participation $15,400,000 $10,900,000 2026 (2) 2004 Refunding Certificates of Participation 12,270,000 8,680,000 2023 (3) 2007 Certificates of Participation 42,000,000 38,665,000 2036 (4) 2009 General Obligation Refunding Bonds 7,780,000 6,755,000 2023 (6) 2010 Water Revenue Bonds Series A 13,840,000 13,055,000 2025 (6) 2010 Water Revenue Bonds Series B 36,355,000 36,355,000 2041 (1) As described herein, 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 the installment payments securing the the 2007 Certificates and the 2010 Bonds and debt service on the Bonds. Interest is payable at a variable rate of interest, and the interest rate at March 26, 2013 was 0.11% and was 0.15% at June 30, 2012. At current rates, debt service is expected to be $515,000 each year for the next several years. However, the annual installment payments are estimated in the projections at an average $991,000 based on the March 25, 2013 25-Year Revenue Bond Index of 4.35%. (2) To be refinanced with a portion of the proceeds of the Bonds. 37 (3) In March 2007, the District issued its 2007 Revenue Certificates of Participation (the “2007 Certificates”) to provide funds for the design, construction and equipping of two 10 million gallon reservoirs and various water-related facilities. The 2007 Certificates are payable from installment payments which are secured by a pledge of and lien on Net Revenues and Taxes on a parity with the Installment Payments securing the 1996 Certificates. Annual installment payments are approximately $2,501,000. (4) 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 in general obligation bonds authorized between 1960 and 1978 for various Improvement Districts throughout the District, but unissued. The general obligation bonds are payable from ad valorem property tax revenues, which are not a part of Taxes which secure the Installment Payments. The District has no current plans to issue any of the authorized but unissued general obligation bonds. (6) In April 2010, Water Revenue Bonds Series 2010A and Water Revenue Bond Series 2010B (Taxable Build America Bonds) (collectively, 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 the Installment Payments securing the 1996 Certificates. Annual installment payments are approximately $3,700,000. __________________________ Source: Otay Water District. 38 Historical Operating Results The following table summarizes the Statement of Net Assets included in the District’s audited financial statements for the last five fiscal years. The audited financial statements of the District for the Fiscal Year ended June 30, 2012 are attached hereto as “APPENDIX B” and should be read in their entirety. TABLE NO. 11 OTAY WATER DISTRICT NET ASSETS For the Fiscal Year Ended June 30 2008 2009 2010 2011 2012 ASSETS Current Assets: Cash and Cash Equivalents $ 23,351,911 $ 50,823,237 $ 40,180,519 $ 48,563,129 $ 31,075,455 Restricted Cash and Cash Equivalents 3,753,983 1,760,631 21,131,924 5,239,430 4,057,726 Investments 60,682,507 26,169,080 43,085,300 28,691,752 37,069,853 Restricted Investments - - 11,150,549 20,622,679 16,124,042 Accounts Receivable 7,689,720 8,029,609 8,959,367 9,235,138 10,575,970 Accrued Interest Receivable 715,900 319,186 239,355 180,113 106,375 Taxes and Availability Charges Receivable 362,976 413,000 366,535 454,948 481,955 Restricted Taxes and Availability Charges Receivable 174,219 190,151 186,813 75,588 57,313 Inventories 711,240 816,865 954,007 835,321 789,769 Prepaid Expenses and Other Current Assets 1,908,028 976,045 626,421 1,189,206 1,226,703 Total Current Assets $ 99,350,484 $ 89,497,804 $126,880,790 $115,087,304 $101,565,161 Non-Current Assets: Restricted Assets: Net OPEB Obligation $ 5,649,008 $ 6,204,876 $ 6,783,385 $ 7,416,346 $ 8,321,902 Deferred Bond Issuance Costs $ 1,240,166 $ 1,142,762 $ 1,703,282 $ 1,618,069 $ 1,532,857 Capital Assets: Land $ 13,025,364 $ 13,402,840 $ 13,620,963 $ 13,636,663 $ 13,703,463 Construction in Progress 42,338,220 18,280,278 37,081,849 17,909,282 17,452,274 Capital Assets, Net of Depreciation 391,350,813 422,369,157 420,363,833 442,881,020 449,674,352 Total Capital Assets, Net of Depreciation $446,714,397 $454,052,275 $471,066,645 $474,426,965 $480,830,089 Other Non-Current Assets - - - - - Total Non-Current Assets $453,603,571 $461,399,913 $479,553,312 $483,461,380 $490,684,848 Total Assets $552,954,055 $550,897,717 $606,434,102 $598,548,684 $592,250,009 Continued on next page. 39 TABLE NO. 11 OTAY WATER DISTRICT NET ASSETS For the Fiscal Year Ended June 30 Continued from previous page. 2008 2009 2010 2011 2012 LIABILITIES Current Liabilities: Current Maturities of Long-term Debt $ 2,445,214 $ 2,521,772 $ 2,668,734 $ 3,146,010 $ 3,320,000 Accounts Payable 13,705,566 11,565,953 15,327,365 13,000,560 10,478,366 Accrued Payroll Liabilities 2,491,182 2,548,731 2,743,408 2,932,277 2,591,272 Other Accrued Liabilities 1,615,403 444,875 638,015 739,868 3,932,442 Customer Deposits 2,719,331 2,806,990 2,146,360 2,105,187 1,863,992 Accrued Interest 720,545 706,934 1,154,286 1,656,826 1,639,681 Liabilities Payable From Restricted Assets: Accrued Interest 166,096 153,270 100,326 86,405 81,354 Total Current Liabilities 23,863,337 20,748,525 24,778,494 23,667,133 23,907,107 Non-Current Liabilities: Long-term Debt: General Obligation Bonds $ 7,678,302 $ 7,291,575 $ 6,763,127 $ 6,298,577 $ 5,819,027 Certificates of Participation 63,192,774 61,468,693 59,694,612 57,865,531 55,886,449 Revenue Bonds - - 51,255,224 50,395,822 49,521,421 Notes Payable 701,516 359,744 6,010 - - Other Noncurrent Liabilities $ 690,709 $ 684,309 $ 684,309 $ 715,037 $ 721,626 Total Non-Current Liabilities $ 72,263,301 $ 69,804,321 $118,403,282 $115,274,967 $111,948,523 Total Liabilities $ 96,126,638 $ 90,552,846 $143,181,776 $138,942,100 $135,855,630 NET ASSETS Invested in Capital Assets, Net of Related Debt $372,696,591 $382,410,491 $377,855,787 $377,656,762 $381,725,015 Restricted for Net OPEB Asset 5,649,008 6,204,876 6,783,385 7,416,346 8,321,902 Restricted for Debt Service 3,762,106 1,797,512 5,192,111 4,915,555 4,715,904 Unrestricted 74,719,712 69,931,992 73,421,043 69,617,921 61,631,558 Total Net Assets $456,827,417 $460,344,871 $463,252,326 $459,606,584 $456,394,379 TOTAL LIABILITIES AND NET ASSETS $552,954,055 $550,897,717 $606,434,102 $598,548,684 $592,250,009 Source: Otay Water District Audited Financial Statements. 40 Historical Debt Service Coverage Table No. 12 below sets forth historical Taxes and Net Revenues and Debt Service Coverage for the last five fiscal years. TABLE NO. 12 HISTORICAL TAXES AND NET REVENUES (in ‘000’s) AND DEBT SERVICE COVERAGE For the Fiscal Year Ended June 30 Estimated 2008 2009 2010 2011 2012 2013 Revenues: Water Sales $50,809 $52,399 $56,210 $58,270 $63,803 $70,028 Meter Fees 3,336 3,460 1,908 2,406 1,994 1,904 Availability/Annexation Fees 1,214 967 1,175 601 646 645 Capacity Fees 1,962 1,851 1,948 3,203 3,365 2,394 Betterment Fees - - - 614 540 448 BABS Subsidy - - - 792 830 806 Investment Earnings 3,947 2,157 1,324 844 416 335 Total Revenue $61,268 $60,834 $62,565 $66,730 $71,595 $76,560 Operation and Maintenance Costs: Water Purchases $28,187 $29,310 $31,818 $34,270 $38,478 $41,859 Utilities 2,550 2,842 2,223 2,089 2,068 2,409 Payroll 16,488 16,391 16,157 16,152 17,056 17,718 Administrative 6,815 6,866 5,181 5,797 4,704 4,391 Materials and Maintenance 2,381 1,792 1,706 1,809 1,723 2,535 Repairs and Replacement - - - - - - Total Operation and Maintenance Costs $56,421 $57,201 $57,085 $60,117 $64,029 $68,912 Net Revenues $ 4,847 $ 3,633 $ 5,480 $ 6,613 $ 7,566 $ 7,648 Taxes $ 3,280 $ 3,430 $ 3,008 $ 2,924 $ 2,890 $ 3,106 Taxes and Net Revenues $ 8,127 $ 7,063 $ 8,488 $ 9,536 $10,456 $10,754 Debt Service 1993/2004 Installment Payments $ 929 $ 931 $ 929 $ 928 $ 930 $ 925 1996 Installment Payments 651 555 451 457 743 655 COPS 2007 Installment Payments 1,721 2,493 2,493 2,497 2,499 2,500 2010 Water Revenue Bonds A & B - - 463 2,868 3,729 3,721 Letter of Credit 67 63 129 130 - - Total Debt Service $ 3,368 $ 4,042 $ 4,465 $ 6,879 $ 7,901 $ 7,800 Coverage Ratio 241% 175% 190% 139% 132% 138% 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 upon which the projections are based are reasonable; 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 District’s ability to timely make the Installment Payments 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 are projected to increase as follows for an overall 6.7% increase during the next five year period and recycled connections are also projected to increase 8.3% during the next five year period as follows. Potable System Recycled System Number of Meters (EDU) % Increase Number of Meters (EDU) % Increase 2014 629 .87% 59 1.4% 2015 867 1.20% 79 1.8% 2016 980 1.40% 79 1.8% 2017 1,113 1.60% 74 1.6% 2018 1,161 1.60% 77 1.7% (b) Water sales volume (in acre feet) is projected as follows. The District is projecting a 0.7% increase in potable water sales from originally budgeted amounts for 2012/13 due to dry winter season. The District is also projecting some future decreases in potable water sales as a result of further conservation, reducing the overall growth in sales volume. Potable System Recycled System Total 2014 30,778 3,965 34,743 2015 31,148 4,036 35,184 2016 31,584 4,109 35,693 2017 32,089 4,175 36,264 2018 32,602 4,245 36,847 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 are projected to increase 7.3% on January 1, 2014 and approximately 7.2% on January 1, 2015 and 2.8% annually thereafter (see “Water Charges - Proposition 218” herein). These projected rates do not reflect any potential rate increase by CWA resulting from the funding of the desalination plant by CWA (see “Water Supply – CWA Water Supply” herein). Such increases could be significant. (d) Capacity and annexation fee rates are estimated to increase 3% in each year from existing rates 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. (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. 42 (f) Taxes do not include ad valorem taxes levied for the purpose of paying debt service on the District’s 1998 General Obligation Refunding Bonds. Taxes are projected to remain relatively flat for 2014 by collecting approximately $3 million in revenue and then slowly increase by approximately 2%, 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. (h) Water Supply costs are anticipated to increase annually as a result of increases in cost of purchased water and usage by new customers as follows: 2014 8.7% 2015 5.9% 2016 6.7% 2017 6.0% 2018 6.0% These projected increases in supply costs do not reflect any potential supply cost increase by CWA resulting from the funding of the Carlsbad Project desalination plant by CWA (see “Water Supply - CWA Water Supply” herein.) Such increases could be significant. (i) Operating costs shown in Fiscal Year 2012/13 are based on current year estimates. Costs for subsequent fiscal years are based on the 2012/13 estimates with the annual inflationary factors shown below. Utilities 4.8% Materials and Maintenance 4.0% Administrative Costs 3.0% Salaries 1.2% Medical Benefits 7.5% Workers Comp 5.0% Other Benefits 8.9% 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 March 25, 2013 of 4.35%. The current letter of credit expires in June 2014. The projections include the letter of credit fees. (k) The Interest Subsidy Payment for Fiscal Year 2013/14 reflects an estimated $31,112 reduction as a result of sequestration. See “RISK FACTORS – Interest Subsidy Payments; Sequestration” herein. 43 TABLE NO. 13 PROJECTED 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 $ 75,145 $ 81,511 $ 86,946 $ 90,808 $ 94,760 Meter Fees 1,785 1,809 1,868 1,898 1,933 Availability/Annexation Fees 651 667 685 705 726 Capacity Fees 5,525 7,944 9,583 11,188 12,115 Betterment Fees 693 700 707 714 721 BABS Subsidy (1) 799 830 830 830 830 Investment Earnings 455 596 677 1,197 1,712 Total Revenue $85,053 $ 94,057 $101,296 $107,340 $112,797 Operation and Maintenance Costs: Water Purchases $ 45,318 $ 48,737 $ 52,561 $ 56,606 $ 60,964 Utilities 2,388 2,342 2,460 2,587 2,721 Payroll 18,308 18,971 19,508 19,880 20,368 Administrative 4,447 4,588 4,729 4,882 5,035 Materials and Maintenance 2,483 2,582 2,685 2,793 2,905 Total Operation and Maintenance Costs $ 72,943 $ 77,220 $ 81,943 $ 86,747 $ 91,992 Net Revenues $ 12,110 $ 16,838 $ 19,353 $ 20,593 $ 20,805 Taxes $ 3,148 $ 3,211 $ 3,275 $ 3,440 $ 3,615 Taxes and Net Revenues $ 15,258 $ 20,049 $ 22,628 $ 24,034 $ 24,420 Debt Service 2013 Bonds $ 870 $ 870 $ 870 $ 870 $ 870 1996 Installment Payments (2) 869 855 939 922 906 2007 Installment Payments 2,497 2,500 2,501 2,501 2,499 2010 Water Revenue Bonds A & B (1) 3,675 3,665 3,654 3,647 3,648 Total Debt Service $7,911 $7,890 $7,964 $7,940 $7,923 Coverage Ratio 193% 254% 284% 303% 308% ____________________________________ (1) For the purpose of calculating the coverage ratio, when the 1996 Certificates and 2007 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. See “RISK FACTORS – Interest Subsidy Payments; Sequestration.” (2) Based on March 25, 2013 25-Year Revenue Bond Index of 4.35% plus letter of credit fees. Source: Otay Water District. 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 will be achieved (see “RISK FACTORS” herein). 44 SOURCES OF PAYMENT FOR THE BONDS General Pursuant to the Indenture, the Bonds are payable from and secured by Taxes and Net Revenues held under the Indenture and investment earnings thereon, all as set forth in the Indenture and in the manner described herein. The Bonds 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. Should the District default, the Trustee may declare all unpaid principal, together with accrued interest at the rate or rates specified on the respective outstanding Bonds from the immediately preceding Interest Payment Date on which payment was made, to be immediately due and payable, whereupon the same shall become due and payable, and take whatever action at law or in equity may appear necessary or desirable to accelerate the principal of the Outstanding Bonds, or enforce performance and observance of any obligation, agreement or covenant of the District under the Indenture. See “RISK FACTORS - Limited Recourse on Default.” The District’s obligation to pay the Bonds 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 Bonds. Taxes and Net Revenues The Taxes and Net Revenues securing the Bonds are payable on parity with installment payments securing the District’s 1996 Certificates, 2007 Certificates and the Otay Water District Financing Authority’s 2010 Bonds, (the “Existing Parity Obligations”). “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. “Gross 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 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) 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 Expenses” 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 45 payments) required to be paid by it to comply with the terms of the Bonds or of the Installment Purchase Agreement or any Contract or of any resolution or indenture authorizing the issuance of any Bonds or of such 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 or other 12-month period, the Gross Revenues for such Fiscal Year or other 12-month period less the Operation and Maintenance Expenses for such Fiscal Year or other 12-month period. See “Rate Covenant” and “Parity Debt” herein. “Interest Subsidy Payment” means cash subsidy payments entitled to be received by the District from the United States Treasury with respect to the District’s 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 Indenture, 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 Contracts and Parity Bonds, and are continued by the terms of the Indenture, and which funds the District has agreed and covenanted to maintain and to hold separate and apart from other funds so long as any Installment Payments, Contracts or Parity Bonds remain unpaid, including the Bonds. Moneys in the Revenue Fund and Tax Fund shall be used and applied by the District as provided in the Indenture 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 Indenture. 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 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) Interest and Principal Payments. Not later than the fifth Business Day prior to each Interest 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 Payment Fund the payments of interest and principal on the Bonds due and payable on such Interest 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 respective 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 Parity Bond or Contract. (ii) Reserve Funds. On or before each Interest Payment Date 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 Parity Bonds or Contracts, that sum, if any, necessary to restore such funds or accounts to an amount equal to the reserve 46 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 District 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 Reserve Funds for Existing Parity Obligations There is no reserve fund established for the Bonds. With respect to certain Existing Parity Obligations, the District has deposited a Reserve Credit Facility in the reserve funds for such obligations as described below. A Reserve Credit Facility is a policy of insurance, a surety bond, a letter of credit or other comparable credit facility, or a combination thereof, which, together with money on deposit in the reserve fund, if any, provide an aggregate amount equal to the Reserve Requirement, so long as the provider of any such policy of insurance, surety bond, letter of credit or other comparable credit facility is rated in the highest rating category by Standard & Poor’s Ratings Group, Moody’s Investors Service or A.M. Best & Company. With respect to the reserve requirement attributable to the 2007 Certificates, the District has previously deposited a Reserve Policy in the 2007 Certificates reserve fund (the “2007 Surety Bond”) in the amount of $2,552,562.50. The 2007 Surety Bond was provided by Ambac Assurance Corporation (“Ambac”). In the event Ambac becomes insolvent, under the trust agreement for the 2007 Certificates, the District would be required to deposit $2,552,562.50 in the 2007 Certificates reserve fund, from any available source, after payment of debt service and installment payments during such fiscal year. With respect to the reserve requirement attributable to the 2010 Bonds, the District deposited $3,738,105.85 from proceeds of the 2010 Bonds in the 2010 Bonds reserve fund. Event of Default and Acceleration of Maturities The Bonds are payable only from Taxes and Net Revenues and are not secured by, and the Bond Owners have no security interest in or mortgage on the property of the Water System or any other assets of the District. Should the District default, the Trustee, shall have the right at its option and without any further demand or notice, but subject in all respects to the provisions of the Indenture, declare the entire principal amount of the unpaid Bonds 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 in the Indenture to the contrary notwithstanding. See “APPENDIX A - SUMMARY OF PRINCIPAL LEGAL DOCUMENTS - THE INDENTURE - Default and Limitation of Liability” and “- Events of Default and Acceleration of Maturities.” Rate Covenant Pursuant to the Indenture, the District will fix, prescribe, revise and collect rates, fees and charges for the Water Service which will be at least sufficient to yield during each fiscal year Taxes and Net Revenues equal to 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) on the Bonds, the Existing Parity Obligations and additional Contracts or Parity Bonds (as defined herein) 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 the Indenture. 47 For purposes of calculating the ratio required by the rate covenant, when the 1996 Certificates and the 2007 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 the purposes of the calculations described above, the adjustments to Net Revenues and Debt Service relating to the Interest Subsidy Payments will be made when the 1996 Certificates and the 2007 Certificates are no longer outstanding with respect to the 2010B Bonds or with respect to any Parity Bonds or additional Contracts that are designated as “Build America Bonds.” See “APPENDIX A - SUMMARY OF PRINCIPAL LEGAL DOCUMENTS - CERTAIN DEFINITIONS” and “APPENDIX A - SUMMARY OF PRINCIPAL LEGAL DOCUMENTS - SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE.” Parity Debt Pursuant to the Agreements and the Indenture, 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 Bonds (“Contracts” or “Parity Bonds”), as the case may be, provided an Independent Financial Consultant or 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 and the 2007 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 the purposes of the calculations described above, the adjustments to Net Revenues and Debt Service relating to the Interest Subsidy Payments will be made when the 1996 Certificates and the 2007 Certificates are no longer outstanding with respect to the 2010B Bonds or with respect to any Parity Bonds or additional Contracts that are designated as “Build America Bonds.” 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 Parity Bonds or additional 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 Parity Bonds or additional 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 Parity Bonds or additional Contracts; and 48 (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 Parity Bonds or additional Contracts. Notwithstanding the foregoing, Parity Bonds issued or additional Contracts executed to refund Parity Bonds or additional 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 additional 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 additional 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 PRINCIPAL LEGAL DOCUMENTS - CERTAIN DEFINITIONS” and “APPENDIX A - SUMMARY OF PRINCIPAL LEGAL DOCUMENTS - SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE.” In addition to the foregoing, in the event any amounts that are past due and owing to any insurer of Bonds or with respect to any Contracts, such insurer must provide written consent to the issuance of any additional Bonds or the execution of any Contracts. Property Insurance The Indenture 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 at reasonable costs (see “APPENDIX A - SUMMARY OF PRINCIPAL LEGAL DOCUMENTS - THE INDENTURE - Insurance” herein). All proceeds of insurance against property damage and all proceeds of condemnation awards relating to the Project 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. See also “APPENDIX A - SUMMARY OF PRINCIPAL LEGAL DOCUMENTS - THE INDENTURE - Insurance” herein. 49 RISK FACTORS The following information should be considered by prospective investors in evaluating the 1996 Certificates. 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 increase 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 Indenture. Such rate increases could increase the likelihood of nonpayment, and could also further decrease demand. 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. 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, including but not limited to any additional unexpected cost to treat desalinated water received from the NSC Desalination Plant (See “THE WATER SYSTEM – Water Supply – Historic and Projected Water Supply”) or other expenses could require increases in rates or charges in order to comply with the rate covenant described herein and in the Indenture, and could increase the possibility of nonpayment of the Bonds. Additional Obligations Payable from Taxes and Net Revenues The District may issue additional parity obligations 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 debt service on the Bonds and the installment payments relating to the Existing Parity Obligations. The ability of the District to enter into such Parity Debt is subject to certain requirements set forth in the Indenture. See “SOURCES OF PAYMENT FOR THE CERTIFICATES - Parity Debt.” The District may also enter into obligations payable from Taxes and Net Revenues which are subordinate to the Bonds 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 87% 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. 50 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 and other limitations on the imposition of new or increased taxes, assessments and property-related fees and charges. See “THE WATER SYSTEM - Water Charges - 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. Casualty Risk; Earthquakes Any natural disaster or other physical calamity, including earthquake, 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 Indenture 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 insurance proceeds will be adequate to rebuild the Water System or to prepay all Outstanding Bonds or that losses in excess of the insured amount will not occur. Interest Subsidy Payment; Sequestration The District’s 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. For Fiscal Years 2012/13 through 2024/25, the Interest Subsidy Payment was projected to be $830,154 annually, decreasing over time until the final maturity of the 2010B Bonds in Fiscal Year 2040/41. Sequestration, sometimes called “the sequester,” is a process that automatically cuts the federal budget across all departments and agencies. Sequestration was included in the Budget Control Act of 2011 as a way to encourage compromise on deficit reduction efforts. When Congress did not agree on a budget by the deadline set in the Budget Control Act, mandatory budget cuts were scheduled to go into effect on January 2, 2013. Congress stopped the cuts from happening by passing the American Taxpayer Relief Act of 2012 on January 1, 2013. This law pushed the budget cuts back until March 1, 2013. Congress did not agree on a budget to reduce the deficit by March 1, 2013, or agree on other legislation extending the date for implementation of the mandatory budget cuts, and on March 1, 2013, in accordance with Section 251A of the Balanced Budget and Emergency Deficit Control Act, as amended, President Obama issued a sequestration order for Fiscal Year 2013. 51 On March 4, 2013, the Internal Revenue Service published a notice that set forth the sequestration reduction rate to be applied until the end of the federal government’s fiscal year (September 30, 2013), or intervening Congressional action, at which time the sequestration rate is subject to change. As determined by the Office of Management and Budget, payments to issuers from the budget accounts associated with certain qualified bonds, such as the 2010B Bonds referenced above, are subject to a reduction of 8.7% of the amount budgeted for such payments. The District received $415,077 on February 28, 2013 with respect to the March 1, 2013 Interest Subsidy Payment and estimates it would have received $415,077 in Interest Subsidy Payments with respect to the September 1, 2013, without reduction due to sequestration. An 8.7% reduction in the amount of $415,077 is $31,112. The District cannot predict the amount of reduction in Interest Subsidy Payments due to any future sequestration or the period of time that Interest Subsidy Payments will be reduced due to any future sequestration. Limited Recourse on Default If the District defaults on its obligation to pay debt service on the Bonds when due, the Trustee has the right to accelerate the total unpaid principal amount of 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 debt service on the Bonds 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 debt service on the Bonds 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. 52 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 District has covenanted in the Indenture to comply with each applicable requirement of Section 103 and Sections 141 through 150 of the Internal Revenue Code. The interest due with respect to 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 District in violation of this or other covenants in the Indenture. 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 or until prepaid under one of the redemption provisions contained in the Indenture. See “LEGAL MATTERS - 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 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. 53 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 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 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 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 is not so enforceable against 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 by Stutz, Artiano, Shinoff & Holtz, San Diego, California, General Counsel to the District, and by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, as Disclosure Counsel. Fees payable to Bond Counsel and Disclosure Counsel are contingent upon the sale and delivery of the Bonds. 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 and corporations. In the further opinion of Bond Counsel, interest (and original issue discount) on the Bonds is exempt from State of California personal income tax. Bond Counsel notes that, with respect to corporations, interest on the Bonds may be included as an adjustment in calculation of alternative minimum taxable income, which may affect the alternative minimum tax liability of such corporations. 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 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. 54 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 [Purchaser] 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 INTERPRETATIONS OF FEDERAL, STATE OR LOCAL LAW) THAT AFFECT THE FEDERAL, STATE OR LOCAL TAX TREATMENT OF THE INTEREST ON THE BONDS OR THE MARKET VALUE OF THE BONDS. LEGISLATIVE CHANGES HAVE BEEN PROPOSED IN CONGRESS, WHICH, IF ENACTED, WOULD RESULT IN ADDITIONAL FEDERAL INCOME TAX BEING IMPOSED ON CERTAIN OWNERS OF TAX-EXEMPT STATE OR LOCAL OBLIGATIONS, SUCH AS THE BONDS. THE INTRODUCTION OR ENACTMENT OF ANY OF SUCH CHANGES COULD ADVERSELY AFFECT THE MARKET VALUE OR LIQUIDITY OF THE BONDS. NO ASSURANCE CAN BE GIVEN THAT, SUBSEQUENT TO THE EXECUTION AND DELIVERY OF THE BONDS, SUCH CHANGES (OR OTHER CHANGES) WILL NOT BE INTRODUCED OR ENACTED OR INTERPRETATIONS WILL NOT OCCUR. 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 provided with respect thereto. Bond Counsel expresses no opinion as to the exclusion from gross income for federal income tax purposes of interest (and original issue discount) with respect to any Bond if any 55 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”. Qualified Tax Exempt Obligations The District has designated the Bonds as “qualified tax-exempt obligations” within the meaning of Section 265(b)(3) of the Code. In connection with such designation, the District has covenanted that (i) the Bonds do not constitute private activity bonds as defined in Section 141 of the Code, and (ii) not more than $10,000,000 aggregate principal amount of obligations, the interest on which is excludable (under Section 103(a) of the Code) from gross income for federal income taxes (excluding, however, private activity bonds, as defined in Section 141 of the Code, other than qualified 50l(c)(3) bonds as defined in Section 145 of the Code), including the Bonds, have been or shall be issued by or on behalf of the District, including all subordinate entities of the District, during the calendar year 2013. 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 it’s Revenues. 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 Indenture, or the sale or delivery of the Bonds or in any manner questioning the proceedings and authority under which the Indenture is to be executed or delivered or the Bonds are to be delivered or affecting the validity thereof or, 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 Bonds. 56 CONCLUDING INFORMATION Rating on the Bonds Standard & Poor’s has assigned their 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. 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”). The Underwriter is offering the Bonds at the 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 has purchased the Bonds at a price equal to $________, which amount represents the principal amount of the Bonds, plus an original issue premium of $________ and less an Underwriter’s discount of $________. The Underwriter will pay certain of its expenses relating to the offering. Verifications of Mathematical Computations Grant Thornton LLP will verify from the information provided to them the mathematical accuracy as of the date of the closing on the Bonds of (1) the computations contained in the provided schedules to determine that the cash deposits listed in the schedules prepared by the Financial Advisor, to be held in escrow, will be sufficient to pay, when due, the principal, prepayment premium and interest requirements of the Prior Certificates, and (2) the computation of yield on the Bonds contained in the provided schedules used by Bond Counsel in its determination that the interest with respect to the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Code. Grant Thornton LLP will express no opinion on the assumptions provided to them, nor as to the exemption from taxation of the interest with respect to the Bonds. The Financial Advisor The material contained in this Official Statement was prepared by the District with the assistance of the Financial Advisor, who advised the District as to the financial structure and certain other financial matters relating to the Bonds. The information set forth herein has been obtained from sources which are believed to be reliable, but such information is not guaranteed by the Financial Advisor as to accuracy or completeness, nor has it been independently verified. Fees paid to the Financial Advisor are contingent upon the sale and delivery of the Bonds. Continuing Disclosure The District will covenant to provide annually certain financial information and operating data relating to the District by not later than nine months after the end of the District’s fiscal year, each year, commencing March 31, 2012 and to provide the audited General Purpose Financial Statements of the District for the Fiscal Year ending June 30, 2013 and for each subsequent fiscal year when they are available (together, the “Annual Report”), and to provide notices of the occurrence of certain other enumerated events if deemed by the District to be material. The Annual Report and notices of material events can be accessed from the Electronic Municipal Market Access Website (“EMMA”) operated by the Municipal Securities 57 Rulemaking Board (www.emma.msrb.org). These covenants have been made in order to assist the Underwriter in complying with Securities and Exchange Commission Rule 15c2-12(b)(5). The specific nature of the information to be contained in the Annual Report or the notices of material events and certain other terms of the continuing disclosure obligation are summarized in “APPENDIX D - FORM OF CONTINUING DISCLOSURE AGREEMENT.” Failure of the District to provide the required ongoing information may have a negative impact on the value of the Bonds in the secondary market. The District has entered into previous continuing disclosure undertakings with respect to the (i) Otay Water District Improvement District No. 27 San Diego County, California General Obligation Refunding Bonds, Series 1998 (the “1998 Bonds”), (ii) 2004 Certificates, (iii) 2007 Certificates, (iv) 2010 Bonds, and (v) Otay Water District Improvement District No. 27, 2009 General Obligation Refunding Bonds to provide continuing disclosure pursuant to Rule 15c2-12. With respect to the undertaking for the 1998 Bonds, between March 2004 and March 2009, the District filed its Comprehensive Annual Financial Report on a timely basis. However, the supplemental information required by the undertaking regarding the tax base for ID 27 was not timely filed, and was subsequently filed on September 16, 2009. With respect to the undertaking for the 2007 Certificates, the Comprehensive Annual Financial Report and the supplemental information required by the undertaking for the reporting period ending June 30, 2007 were provided to the dissemination agent, but were inadvertently not filed. The information was subsequently filed on March 19, 2010. As of March 31, 2013 the District was current with all filing requirements. Additional Information The summaries and references contained herein with respect to the Indenture, the Bonds, statutes and other 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. Definitions of certain terms used herein are set forth in “APPENDIX A.” Copies of the Indenture are available for inspection during the period of initial offering on the Bonds at the offices of the Financial Advisor. Copies of these documents may be obtained after delivery of the Bonds from the District, 2554 Sweetwater Springs Blvd., Spring Valley, California 91978. 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 PRINCIPAL LEGAL DOCUMENTS B-1 APPENDIX B DISTRICT AUDITED FINANCIAL STATEMENTS C-1 APPENDIX C ECONOMIC PROFILE FOR 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 which contributes approximately $10 billion into the retail and service businesses of the area. The County is also growing as a major center for culture and education. Over 30 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. C-2 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 2003, 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 Percentage Percentage Year Population Change Population Change 2003 2,927,216 35,163,609 2004 2,953,703 0.9% 35,570,847 1.2% 2005 2,966,783 0.4% 35,869,173 0.8% 2006 2,976,492 0.3% 36,116,202 0.7% 2007 2,998,477 0.7% 36,399,676 0.8% 2008 3,032,689 1.1% 36,704,375 0.8% 2009 3,064,436 1.0% 36,966,713 0.7% 2010 3,091,579 0.9% 37,223,900 0.7% 2011 3,115,810 0.8% 37,427,946 0.5% 2012 3,143,429 0.9% 37,678,563 0.7% % Increase Between 2003 - 2012 7.4% 7.2% 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, “E-5 Population and Housing Estimates for Cities, Counties, and the State, 2011 and 2012, with 2010 Benchmark” Sacramento, California, May 2012. C-3 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 2007 – 2011 Year San Diego County State of California United States 2007 $45,768 $43,211 $39,506 2008 47,197 44,003 40,947 2009 44,107 41,034 38,637 2010 44,951 41,893 39,791 2011 46,800 43,647 41,560 ____________________________________ (1) Per capita personal income was computed using Census Bureau midyear population estimates. Estimates for 2000-2011 reflect county population estimates available as of April 2012. All state and local area dollar estimates are in current dollars (not adjusted for inflation). Last updated: November 26, 2012 - new estimates for 2011; revised estimates for 2009-2010. Source: U.S. Department of Commerce, Bureau of Economic Analysis. C-4 The District is located in the San Diego-Carlsbad-San Marcos Metropolitan Statistical Area (MSA). Six major job categories constitute 81.4% of the work force. They are government (18.0%), professional and business services (17.3%), service producing (13.8%), leisure and hospitality (12.5%), educational and health services (12.4%), and manufacturing (7.4%). The February 2013 unemployment rate in the San Diego-Carlsbad-San Marcos MSA was 8.0%. The State of California February 2013 unemployment rate (unadjusted) was 9.7%. TABLE NO. C-3 SAN DIEGO-CARLSBAD-SAN MARCOS MSA WAGE AND SALARY WORKERS BY INDUSTRY (1) (in $ thousands) Industry 2009 2010 2011 2012 2013 Government 226.9 225.6 232.9 229.4 229.7 Other Services 47.0 46.1 46.8 48.3 50.1 Leisure and Hospitality 152.5 148.4 150 153.3 159.3 Educational and Health Services 143.1 146.0 149.5 152.7 157.7 Professional and Business Services 210.5 203.7 209.5 210.1 221.0 Financial Activities 72.0 67.2 67.2 68.4 69.6 Information 30.3 25.4 24.3 24.3 25.0 Transportation, Warehousing and Utilities 27.3 26.1 25.7 26.4 28.2 Service Producing Retail Trade 131.6 128.3 129.5 133.3 133.3 Wholesale Trade 42.0 38.9 40.9 42.2 42.9 Manufacturing Nondurable Goods 22.9 21.4 21.9 22.3 22.4 Durable Goods 77.0 70.7 70.9 70.4 71.1 Goods Producing Construction 64.2 54.8 54.2 54.1 56.3 Mining and Logging 0.4 0.4 0.4 0.4 0.4 Total Nonfarm 1,247.7 1,203.0 1,223.7 1,235.6 1,267.0 Farm 9.6 10.3 10.4 9.6 9.5 Total (all industries) 1,257.3 1,213.3 1,234.1 1,245.2 1,276.5 ____________________________________ (1) Annually, as of February 2013. Source: State of California Employment Development Department, Labor Market Information Division, “Industry Employment & Labor Force - by month, March 2012 Benchmark.” C-5 Major Employers The major employers operating within the County as of June 30, 2012 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 Federal Government 45,500 3.14% State of California 42,900 2.96% University of California, San Diego 27,391 1.89% County of San Diego 15,687 1.08% Sharp Healthcare 15,231 1.05% San Diego Unified School District 14,603 1.01% Scripps Health 14,097 0.97% Qualcomm Inc. 11,400 0.79% City of San Diego 10,057 0.69% Kaiser Permanente 7,731 0.53% ____________________________________ Source: County of San Diego Comprehensive Annual Financial Report. Building Activity Building activity within the County from 2007 to 2011 is shown in Table No. C-5. TABLE NO. C-5 COUNTY OF SAN DIEGO BUILDING PERMIT VALUATION (in $ thousands) 2007 2008 2009 2010 2011 Construction Costs Single-family $ 944,642 $ 745,164 $ 550,525 $ 653,155 $ 707,672 Multi-family 472,486 324,480 137,334 118,911 380,977 Total $1,417,128 $1,069,644 $ 687,858 $ 772,066 $1,088,649 New Housing Units Single-family 3,384 2,361 1,778 2,270 2,242 Multi-family 3,988 2,996 1,168 1,224 3,125 Total 7,372 5,357 2,946 3,494 5,367 ____________________________________ Source: Construction Industry Research Board. C-6 Transportation Excellent surface, sea and air transportation facilities service County residents and businesses. Interstate 5 parallels the coast from Mexico to the Los Angeles area and points north. Interstate 15 runs inland, leading to Riverside-San Bernardino, Las Vegas and Salt Lake City. Interstate 8 runs eastward through 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 18 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, has also become an extremely popular destination for 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. Research and Development Research and development activity plays an important role in the area’s economy. The County is a leading health sciences and biomedical center. Approximately 35,000 persons are engaged in life sciences-related activities in the metropolitan area, with over 28,000 employed directly in health services. In addition to the University of California San Diego, other established research institutions include the Salk Institute for Biological Studies, the Scripps Clinic and Research Foundation, and the Scripps Institution of Oceanography. Visitor and Convention Activity An excellent climate, proximity to Mexico, extensive maritime facilities, and such attractions as the San Diego Zoo and Wild Animal Park, Sea World, Cabrillo National Monument, and Palomar Observatory allow San Diego to attract visitor and convention business each year. The development of the 4,600-acre Mission Bay Park at San Diego and the construction of meeting and convention facilities at the San Diego community concourse have contributed to the growth in tourism. The visitor and convention business is expected to continue to increase steadily. D-1 APPENDIX D FORM OF CONTINUING DISCLOSURE AGREEMENT This Continuing Disclosure Agreement, dated as of __________, 2013 (the “Disclosure Agreement”) is executed and delivered by the Otay Water District (the “District”) and __________ (the “Dissemination Agent”) in connection with the issuance of $__________ Otay Water District 2013 Water Revenue Refunding Bonds (the “Bonds”). The Bonds are being issued pursuant to an Indenture of Trust, dated as of __________, 2013 (the “Indenture”), by and between __________, as trustee (the “Trustee”) and the District. 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 __________, 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) of this Disclosure Agreement. “MSRB” shall mean the Municipal Securities Rulemaking Board. “Official Statement” shall mean the Official Statement relating to the Bonds, dated __________, 2013. “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. 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, 2014, 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 8 under the caption “THE WATER SYSTEM.” D-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; D-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 subsections (a)(iv) and (v) 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 and the Trustee. The Dissemination Agent 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. D-5 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 Trust Agreement, 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 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. D-6 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: __________ __________ __________ __________ 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. D-7 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: Its: Chief Financial Officer __________, as Dissemination Agent By: Its: Authorized Officer D-8 EXHIBIT A NOTICE TO REPOSITORY OF FAILURE TO FILE ANNUAL REPORT Name of Issuer: Otay Water District Name of Bond Issues: $__________ Otay Water District 2013 Water Revenue Refunding Bonds Date of Issuance: __________, 2013 NOTICE IS HEREBY GIVEN that the Otay Water District has not provided an Annual Report with respect to the above-named Bonds as required by the Continuing Disclosure Agreement by and between the District and __________, as dissemination agent, dated __________, 2013. The District anticipates that the Annual Report will be filed by ______________. Dated: Dissemination Agent By: cc: Issuer E-1 APPENDIX E PROPOSED FORM OF LEGAL OPINION OF BOND COUNSEL F-1 APPENDIX F DTC AND THE BOOK-ENTRY-ONLY 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 these Internet sites 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-only 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. G-1 APPENDIX G INFORMATION CONCERNING METROPOLITAN WATER DISTRICT’S WATER SUPPLY The following information concerning the Metropolitan Water District’s water supply is presented as general background data. 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 http://emma.msrb.org. 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. MWD faces a number of challenges resulting from a combination of population growth, increased competition for low-cost water supplies, variable weather conditions and increased environmental regulations. MWD’s resources and strategies for meeting these long-term challenges are set forth in its Integrated Water Resources Plan, as updated from time to time. See “Integrated Water Resources Plan (“IRP”) and Five-Year Supply Plan” herein. It is MWD’s declared policy to meet all the supplemental needs of each of its member agencies, including CWA. The Water Supply Allocation Plan (“Water Supply Allocation Plan”) provides a formula for equitable distribution of available water supplies in case of extreme water shortages within MWD’s service area. Delivery within a member agency of more than its allocated amount of MWD supplies will subject the member agency to a penalty of one to four times MWD’s full service rate for untreated Tier 2 water, depending on how much the member agency’s water use for the twelve-month period beginning on July 1 exceeds its allocated amount. Any penalties collected may be rebated to the member agency that paid them to fund water management projects. The Water Supply Allocation Plan was approved by the Board in February 2008. On April 14, 2009, MWD’s Board adopted a resolution declaring a regional water shortage and implementing the Water Supply Allocation Plan, effective July 1, 2009. The Board set the “Regional Shortage Level” at Water Supply Allocation Plan Level 2, which required reduction of regional water use by approximately 10% and resulted in a total allocation of about 2.09 million acre-feet of MWD water in Fiscal Year 2009/10. On April 13, 2010, the Board adopted a resolution recognizing the continuing regional water shortage and again setting the Regional Shortage Level at Water Supply Allocation Plan Level 2, which sustained the regional water use reduction of approximately 10%. Due to improved hydrologic and storage conditions, on April 12, 2011, the Board terminated implementation of the 2010/11 Water Supply Allocation Plan, restoring imported water deliveries to member agencies without risk of allocation penalties. MWD Water Supply MWD’s principal sources of water at the Colorado River and the State Water Project (“SWP”). Colorado River Water. Under applicable laws, agreements and treaties governing the use of water from the Colorado River, California is apportioned the use of 4.4 million acre-feet of Colorado River water each year, plus one-half G-2 of any surplus that may be available for use collectively in Arizona, California and Nevada as declared on an annual basis by the United States Secretary of the Interior. Under the 1931 priority system that has formed the basis for the distribution of Colorado River water made available to California, MWD holds the fourth priority right of 550,000 acre-feet per year and a fifth priority right of 662,000 acre-feet per year. MWD’s fourth priority right is the last priority within California’s basic annual apportionment of 4.4 million acre-feet; however, the fifth priority right is outside of this entitlement and therefore is not considered a firm supply of water. Until 2003, MWD had been able to take full advantage of its fifth priority right as a result of the availability of surplus water and apportioned but unused water. However, Arizona and Nevada have increased their use of water from the Colorado River, significantly reducing unused apportionment available for California since 2002. In addition, a severe drought in the Colorado River Basin reduced storage in system reservoirs, such that MWD stopped taking surplus deliveries in 2003 in an effort to mitigate the effects of the drought. Prior to 2003, MWD could divert over 1.2 million acre-feet in any year, but since that time, MWD’s net diversions of Colorado River water have been limited to a low of approximately 633,000 acre-feet in 2006 and a high of approximately 1,105,232 acre- feet in 2009. Average annual net deliveries for 2003 through 2010 were approximately 849,500 acre-feet, with annual volumes dependent primarily on availability of unused higher priority agricultural water and increasing transfers of conserved water. MWD projects that its Colorado River Aqueduct deliveries in 2011 will reach approximately 700,000 acre-feet, which includes leaving 200,000 acre-feet of intentionally-created surplus water in Lake Mead. Colorado River Aqueduct. The Colorado River Aqueduct is owned and operated by MWD. Work on the Colorado River Aqueduct commenced in 1933 and water deliveries started in 1941. Additional facilities were completed by 1961 to meet additional requirements of MWD’s member agencies. The Colorado River Aqueduct is 242 miles long, starting at Lake Havasu and terminating at Lake Mathews in Riverside County. After deducting for conveyance losses in transporting and storing the water and considering maintenance requirements, up to 1.25 million acre-feet per year may be conveyed through the Colorado River Aqueduct to MWD’s member agencies, subject to the availability of Colorado River water. California’s Colorado River Water Use Plan. With Arizona’s and Nevada’s increasing use of their respective apportionments and the uncertainty of continued Colorado River surpluses, in 1997 the Colorado River Board of California, in consultation with MWD, Imperial Irrigation District (“IID”), Coachella Valley Water District (“CVWD”), the Palo Verde Irrigation District (“PVID”), the Los Angeles Department of Water and Power and the San Diego County Water Authority (“CWA”), developed a plan for reducing California’s use of Colorado River water to its basic annual apportionment of 4.4 million acre-feet when use of that allotment is necessary (the “California Plan”). The May 2000 California Plan proposed to optimize the use of the available Colorado River supply through water conservation, transfers from higher priority agricultural users to MWD’s service area and storage programs. Quantification Settlement Agreement. Many of the core elements of the California Plan are being put into effect under the October 2003 Quantification Settlement Agreement (the “QSA”) executed by CVWD, IID and MWD. The QSA establishes Colorado River water use limits for IID, CVWD and MWD, provides for specific acquisitions of conserved water and water supply arrangements for up to 75 years, and restores the opportunity for MWD to receive any “special surplus water” under the Interim Surplus Guidelines. See “Interim Surplus Guidelines” below. The QSA also allows MWD to enter into other cooperative Colorado River supply programs. Related agreements modify existing conservation and cooperative water supply agreements consistent with the QSA, and set aside several disputes among California’s Colorado River water agencies. Specific programs under the QSA include lining portions of the All-American and Coachella Canals, which are projected to conserve 96,000 acre-feet annually. As a result, 80,000 acre-feet of conserved water is projected to be delivered to CWA by exchange with MWD and 16,000 acre-feet is projected to be delivered for the benefit of the La Jolla, Pala, Pauma, Rincon and San Pasqual Bands of Mission Indians, the San Luis Rey Indian Water Authority, the City of Escondido and Vista Irrigation District, by exchange under a water rights settlement annually. An amendment to the IID-MWD 1988 Conservation Agreement G-3 and the associated 1989 Approval Agreement extended the term of the 1988 Conservation Agreement and limited the amount of water used by CVWD to 20,000 acre-feet. In 2021, the transfer of water conserved annually by IID to CWA is expected to reach 205,000 acre-feet (see discussion below under the caption “Sale of Water by the Imperial Irrigation District to San Diego County Water Authority”). With full implementation of the programs identified in the QSA, at times when California is limited to its basic apportionment of 4.4 million acre-feet per year, MWD expects to be able to annually divert to its service area approximately 850,000 acre-feet of Colorado River water plus any unused agricultural water that may be available. This is further augmented by the PVID program, which provides up to approximately 130,000 acre-feet of water per year. A complicating factor in completing the QSA was the fate of the Salton Sea. The Salton Sea is an important habitat for a wide variety of fish-eating birds as a stopover spot along the Pacific flyway. Some of these birds are listed as threatened or endangered species under the State and Federal endangered species acts (“ESAs”). Located at the lowest elevations of an inland basin and fed primarily by agricultural drainage with no outflows other than evaporation, the Salton Sea is trending towards hyper- salinity, which has already impacted the Salton Sea’s fishery. This fishery has historically been suitable habitat for the fish-eating birds. The transfer of water from IID to CWA, one of the core programs implemented under the QSA, would reduce the volume of agricultural run-off from IID into the Salton Sea, which in turn would accelerate this natural trend of the Salton Sea to hyper-salinity. See “Sale of Water by the Imperial Irrigation District to San Diego County Water Authority” below. The appropriate mitigation for impacts to the Salton Sea from the IID-CWA transfer and the larger issue of Salton Sea restoration was addressed by State legislation facilitating implementation of the QSA. In passing that legislation, the Legislature committed the State to undertake restoration of the Salton Sea ecosystem. Restoration of the Salton Sea is subject to selection and approval of an alternative by the Legislature and finding of the associated capital improvements and operating costs. The Secretary for the California Natural Resources Agency submitted an $8.9-billion preferred alternative for restoration of the Salton Sea to the Legislature in May 2007. While withholding authorization of the preferred alternative, the Legislature has appropriated funds from Proposition 84 to undertake demonstration projects and investigations called for in the Secretary’s recommendation. On September 25, 2010 Governor Schwarzenegger signed Senate Bill 51 establishing the “Salton Sea Restoration Council” as a state agency in the National Resources Agency to oversee restoration of the Salton Sea. The newly created Council was directed to evaluate alternative Sale Sea restoration plans, including those evaluated by the Secretary for the National Resources Agency, and to report to the Governor and Legislature by June 30, 2013 with a recommended Salton Sea restoration plan. The QSA implementing legislation also established the Salton Sea Restoration Fund, which will be funded in part by payments made by the parties to the QSA and fees on certain water transfers among the parties to the QSA. Under the QSA agreements MWD will pay $20 per acre-foot into the Salton Sea Restoration Fund for any special surplus Colorado River water that MWD elects to take under the Interim Surplus Guidelines. MWD also agreed to acquire up to 1.6 million acre-feet of water conserved by IID, excluding water transferred from IID to CWA (see “-Sale of Water by the Imperial Irrigation District to San Diego County Water Authority” below), if such water can be transferred consistent with plans for Salton Sea restoration, at an acquisition price of $250 per acre-foot (in 2003 dollars), with net proceeds to be deposited into the Salton Sea Restoration Fund. No conserved water has been made available to MWD under this program. MWD may receive credit for the special surplus water payments against future contributions for the Lower Colorado River Multi-Species Conservation Program (see “Environmental Considerations” below). In consideration of these agreements, MWD will not have or incur any liability for restoration of the Salton Sea. As part of an effort to mitigate the effects of the drought in the Colorado River Basin that began in 2000, MWD elected not to take delivery of special surplus Colorado River water that was available from October 2003 through 2004 and from 2006 through 2007. No special surplus water has been available since 2007. G-4 Sale of Water by the Imperial Irrigation District to San Diego County Water Authority. On April 29, 1998, CWA and IID executed an agreement (the “Transfer Agreement”) for CWA’s purchase from IID of Colorado River water delivered to IID. An amended Transfer Agreement, executed as one of the QSA agreements, set the maximum transfer amount at 205,000 acre-feet in 2021, with the transfer gradually ramping up to that amount over an approximately twenty-year period, stabilizing at 200,000 acre-feet per year beginning in 2023. No facilities exist to deliver water directly from IID to CWA. Under the Transfer Agreement, conserved water from IID is delivered to CWA through existing facilities owned by MWD. MWD and CWA entered into an exchange contract that provides for conserved Colorado River water acquired by CWA from IID and water conserved from lining the All-American and Coachella Canals to be made available to MWD for diversion at Lake Havasu. By exchange from the sources of water available to MWD, an equal volume of water is delivered to CWA through MWD’s distribution system. The price payable by CWA for these deliveries is calculated using the charges set by MWD’s Board from time to time that are applicable to the conveyance of water by MWD on behalf of its member agencies. QSA Related Litigation. On November 5, 2003, IID filed a validation action in Imperial County Superior Court, seeking a judicial determination that thirteen agreements associated with the IID/CWA water transfer and the QSA are valid, legal and binding. Other lawsuits also were filed challenging the execution, approval and subsequent implementation of the QSA on various grounds. All of the QSA cases were coordinated in Sacramento Superior Court. Between early 2004 and late 2009, a number of pretrial challenges and dispositive motions were filed by the parties and ruled on by the court, which reduced the number of active cases and narrowed the issues for trial, the first phase of which began on November 9, 2009 and concluded on December 2, 2009. One of the key issues in this first phase was the constitutionality of the QSA Joint Powers Agreement, pursuant to which IID, CVWD and CWA agreed to commit $163 million toward certain mitigation and restoration costs associated with implementation of the QSA and related agreements, and the State agreed to be responsible for any costs exceeding this amount. A final judgment was issued on February 11, 2010, in which the court held that the State’s commitment was unconditional in nature and, as such, violated the State’s debt limitation under the California Constitution. The court also invalidated eleven other agreements, including the QSA, because they were inextricably interrelated with the QSA Joint Powers Agreement. Lastly, the court ruled that all other claims raised by the parties, including CEQA claims related to the QSA Programmatic EIR and the IID Transfer Project EIR, are moot. MWD, IID, CVWD, CWA, the State and others have appealed various aspects of the court’s ruling, which has been stayed pending outcome of the appeal. If the ruling stands, it could delay the implementation of programs authorized under the QSA or result in increased costs or other adverse impacts. The impact, if any, that the ruling might have on MWD’s water supplies cannot be adequately determined at this time. On January 28, 2010, MWD was served with a complaint filed by the County of Imperial and the Imperial County Air Pollution Control District alleging that the execution and implementation of the QSA violates the National Environmental Policy Act and federal Clean Air Act. The compliant names the Department of Interior, Secretary of the Interior, Bureau of Reclamation and Commissioner of Reclamation as defendants, and MWD, CVWD, IID and CWA as real parties in interest. On March 29, 2010, MWD and the other defendants and real parties filed separate answers to the complaint. On August 23, 2010, MWD and the other real parties intervened as additional defendants. On September 9, 2010 the administrative record was filed with the court. However, on March 14, 2011, the case was transferred to a new judge and all existing filing and hearing dates were subsequently vacated. No schedule has since been issued by the court. The impact, if any, that the litigation might have on MWD’s water supplies cannot be adequately determined at this time. The Navajo Nation has filed litigation against the Department of the Interior, specifically the Bureau of Reclamation and the Bureau of Indian Affairs, alleging that the Bureau of Reclamation has failed to determine the extent and quantity of the water rights of the Navajo Nation in the Colorado River and that the Bureau of Indian Affairs has failed to otherwise protect the interests of the Navajo Nation. The G-5 complaint challenges the adequacy of the environmental review for the Interim Surplus Guidelines (as defined under “Interim Surplus Guidelines” below) and seeks to prohibit the Department of the Interior from allocating any “surplus” water until such time as a determination of the rights of the Navajo Nation is completed. MWD has filed a motion to intervene in this action. In October 2004 the court granted the motions to intervene and stayed the litigation to allow negotiations among the Navajo Nation, federal defendants, CAWCD, State of Arizona and Arizona Department of Water Resources. The Navajo Nation approved the terms of a proposed settlement in 2010. Under its terms the Navajo would have specified rights to water from the Colorado River, the Little Colorado River and groundwater basins under the reservation. All Colorado River water would come from Arizona’s apportionment. There would be no financial or water resource impact on MWD. The proposed agreement requires approval of all the affected bodies and federal implementing legislation. The litigation stay has been extended until August 15, 2011, to permit the parties to finalize the settlement. In the event the settlement is not finalized, the impact on MWD, if any, cannot be adequately determined at this time. Other MWD Colorado River Supply Programs. MWD has taken steps to enhance its share of Colorado River water through agreements with other agencies that have rights to use such water such as IID, the PVID and the Central Arizona Water Conservation District. Interim Surplus Guidelines. In January 2001, the Secretary of the Interior adopted guidelines (the “Interim Surplus Guidelines”) for use through 2016 in determining if there is surplus Colorado River water available for use in California, Arizona and Nevada. The purpose of the Interim Surplus Guidelines is to provide a greater degree of predictability with respect to the availability and quantity of surplus water through 2016. The Interim Surplus Guidelines were later extended through 2026. The Interim Surplus Guidelines contain a series of benchmarks for reductions in agricultural use of Colorado River water within California by set dates. Under the Interim Surplus Guidelines, MWD initially expected to divert up to 1.25 million acre-feet of Colorado River water annually under foreseeable runoff and reservoir storage scenarios from 2004 through 2016. However, an extended drought in the Colorado River Basin reduced these initial expectations. From 2000 to 2004, snow pack and runoff in the Colorado River Basin were well below average. Although runoff was slightly above average in 2005 and 2008, average annual runoff from 2000 through 2010 was 69% of normal, representing the driest eleven-year period on record. In November 2010, Lake Mead’s elevation had dropped below 1,081 feet above sea level, the lowest elevation since 1937. Precipitation over the Colorado River Basin from October 2010 through April 2011 was significantly above normal. Upper Colorado River Basin snowpack measured on May 1, 2011 was 150% of normal with accumulations at the highest level on record and the annual runoff forecast was increased to 145% of normal. The above-normal precipitation triggered more than 3 million acre-feet of additional releases from Lake Powell to Lake Mead, the most since 2000. Lake Mead’s elevation is projected to reach 1,113 feet by December 2011, or 32 feet higher than observed in November 2010. Each ten-foot increase in Lake Mead’s elevation represents approximately 1 million acre-feet of increased storage. MWD’s estimated 2011 Colorado River supply is 901,500 acre-feet plus any unused Priority 1 through 3 water. MWD projects its ultimate 2011 diversions will be approximately 700,000 acre-feet, including storage of up to 200,000 acre-feet of intentionally-created surplus water in Lake Mead. SNWA and MWD entered into an Agreement Relating to Implementation of Interim Colorado River Surplus Guidelines on May 16, 2002, in which SNWA and MWD agreed to the allocation of unused apportionment as provided in the Interim Surplus Guidelines and on the priority of SNWA for interstate banking of water in Arizona. SNWA and MWD entered into a storage and interstate release agreement on October 21, 2004. Under this program, Nevada can request that MWD store unused Nevada apportionment in California. The amount of water stored through 2009 under this agreement was 70,000 acre-feet. In subsequent years, Nevada may request recovery of this stored water. As part of a recently executed amendment, it is expected that Nevada will not request return of this water until 2022. The stored water provides flexibility to MWD for blending Colorado River water with State Water Project water and improves near-term water supply reliability. G-6 Lower Basin Shortage Guidelines and Coordinated Management Strategies for Lake Powell and Lake Mead. In November 2007, the Bureau of Reclamation issued a Final Environmental Impact Statement (“EIS”) regarding new federal guidelines concerning the operation of the Colorado River system reservoirs. These new guidelines provide water release criteria from Lake Powell and water storage and water release criteria from Lake Mead during shortage and surplus conditions in the Lower Basin, provide a mechanism for the storage and delivery of conserved system and non-system water in Lake Mead and extend the Interim Surplus Guidelines through 2026. The Secretary of the Interior issued the final guidelines through a Record of Decision signed in December 2007. The Record of Decision and accompanying agreement among the Colorado River Basin States protect reservoir levels by reducing deliveries during drought periods, encourage agencies to develop conservation programs and allow the states to develop and store new water supplies. The Colorado River Basin Project Act of 1968 insulates California from shortages in all but the most extreme hydrologic conditions. Environmental Considerations. Several fish species and other wildlife species either directly or indirectly have the potential to affect Colorado River operations, thus changing power operations and the amount of water deliveries to the Colorado River Aqueduct. A number of species that are on either “endangered” or “threatened” lists under the federal and/or California ESAs are present in the area of the Lower Colorado River. To address this issue, a broad-based state/federal/tribal private regional partnership, which includes water, hydroelectric power and wildlife management agencies in Arizona, California and Nevada, developed a multi-species conservation plan for the main stem of the Lower Colorado River (the Lower Colorado River Multi-Species Conservation Program or “MSCP”). The MSCP allows MWD to obtain federal and state permits for any incidental take of protected species resulting from current and future water and power operations and to minimize any uncertainty from additional listings of endangered species. The MSCP also covers operations of federal dams and power plants on the Colorado River. The non-profit conservation organization Grand Canyon Trust filed litigation in December 2007 against the Bureau of Reclamation in the United States District Court for the District of Arizona, alleging that the Bureau of Reclamation’s planning for, and operation of, the Glen Canyon Dam (which impounds Lake Powell) does not comply with requirements of the National Environmental Policy Act and the Federal ESA. Grand Canyon Trust later named the USFWS as a defendant. MWD, IID and CAWCD have intervened in this case. On May 27, 2009, the court ordered the Bureau of Reclamation to reconsider how the dam flows may harm the endangered fish and develop a new operating plan. Grand Canyon Trust filed its third supplemental complaint challenging the Bureau of Reclamation’s latest schedule of releases from Lake Powell on September 23, 2010. On March 29, 2011, the court issued a final ruling upholding all of the Bureau of Reclamations’ prior decision making for Glen Canyon Dam operations. Seismic Considerations. MWD’s water conveyance and distribution facilities are designed to either withstand a maximum probable seismic event or to minimize the potential repair time in the event of damage. The five pumping plants on the Colorado River Aqueduct have been buttressed to better withstand seismic events. Other components of the Colorado River Aqueduct are monitored for any necessary rehabilitation and repair. Supplies are dispersed throughout Metropolitan’s service area, and a six-month reserve supply of water normally held in local storage (including emergency storage in Diamond Valley Lake) provides reasonable assurance of continuing water supplies during such events. However, major portions of the California Aqueduct, the Colorado River Aqueduct and MWD’s internal distribution system are located near major earthquake faults, including the San Andreas Fault. A significant earthquake could damage project structures and interrupt the supply of water. State Water Project. MWD’s other major source of water is the State Water Project (“SWP”). The SWP is owned by the State of California and operated by the California Department of Water Resources (“DWR”). The SWP transports Feather River water stored in and released from Oroville Dam and unregulated flows diverted directly from the San Francisco Bay/Sacramento-San Joaquin Delta Estuary (“Bay-Delta”) south via the G-7 California Aqueduct to four delivery points near the northern and eastern boundaries of MWD. The total length of the California Aqueduct is 444 miles. MWD is one of 29 agencies that have long-term contracts for water service from DWR, and is the largest agency in terms of the number of people it serves (almost 19 million), the share of SWP water to which it has contracted to receive (approximately 46%), and the percentage of total annual payments made to DWR (approximately 58% in 2010). Upon expiration of the State Water Contract term (currently 2035), MWD has the option to continue service under substantially the same terms and conditions. MWD presently intends to exercise this option to at least 2052. The SWP was originally intended to meet demands of 4.2 million acre-feet per year. Initial SWP facilities were completed in the early 1970’s, and it was envisioned that additional facilities would be constructed as contractor demands increased. Several factors, including public opposition, increased costs, and increased non-SWP demands for limited water supplies, combined to delay the construction of additional facilities. The quantity of SWP water available for delivery each year is controlled by both hydrology and operational considerations. Under a 100% allocation, the State Water Contract provides MWD with 1,911,500 acre-feet of water. Water received from the SWP by MWD over the eight years from 2002 through 2010, including water from water transfer, groundwater banking and exchange programs varied from a low of 908,000 acre-feet in calendar year 2009 to a high of 1,800,000 acre-feet in calendar year 2004. For calendar year 2010, DWR’s allocation to SWP contractors was 50% of contracted amounts, reflecting pumping restrictions due to biological opinions for Delta smelt and Chinook salmon, late spring storms, a return to normal precipitation and reservoir levels and above-normal Sierra snowpack. For MWD, the 2010 allocation provided 955,750 acre-feet, or 50% of its 1,911,500-acre-foot contractual amount. In 2010, MWD took delivery of 1,129,062 acre-feet to its service area plus approximately 175,000 acre-feet of net deliveries to storage in its Central Valley groundwater storage programs. This includes State Water Project supplies from water transfers and exchanges delivered through the California Aqueduct. For calendar year 2011, DWR’s initial allocation estimate to SWP contractors was set at 25% of contracted amounts. The 2011 allocation was adjusted upwards, most recently on April 20, 2011 to 80% of contracted amounts, reflecting significantly above-normal precipitation over the entire Sierra Nevada Range and accumulating snowpack to levels of 179% of normal and greater. For Metropolitan, the revised allocation is 1,529,200 acre-feet, or 80% of its 1,911,500 acre-foot contractual amount. This revised 80% allocation for 2011 is the highest water supply allocation in five years. In addition, the availability of interruptible supplies in excess of MWD’s 80% allocation from February through April of 2011, as well as State Water Project supplies from water transfers and exchanges delivered through the California Aqueduct, permitted storage of an additional 180,000 acre-feet in Diamond Valley Lake and the Central Valley groundwater storage programs. DWR may further revise allocations for 2011 if warranted by the year’s developing hydrologic and water supply conditions. Due to drought conditions and the court-ordered restrictions described under “Endangered Species Act Considerations” below, California Governor Arnold Schwarzenegger issued a proclamation on February 27, 2009 declaring a statewide drought emergency. The proclamation requested that all urban water users in California increase water conservation and directed that various state agencies take action to address impacts of the drought. These actions included expediting approvals for water transfers (provided that such transfers do not injure other legal users of water or unreasonably affect fish and wildlife); pursuing short-term efforts, such as installation of temporary barriers in the Bay-Delta, to protect water quality and water supply; and expediting regulatory consideration of proposed modifications to Bay-Delta water quality standards. Although cold Pacific storms in April and May 2010 significantly improved water supply outlook conditions, as of November 1, 2010, DWR has classified the water year as below normal and the statewide drought emergency was still in effect. [to be updated] Bay-Delta Regulatory and Planning Activities. The State Water Resources Control Board (“SWRCB”) is the agency responsible for setting water quality standards and administering water rights throughout G-8 California. Decisions of SWRCB can affect the availability of water to MWD and other users of SWP water. SWRCB exercises its regulatory authority over the Bay-Delta by means of public proceedings leading to regulations and decisions. These include the Bay Delta Water Quality Control Plan (“WQCP”), which establishes the water quality standards and proposed flow regime of the estuary, and water rights decisions which assign responsibility for implementing the objectives of the WQCP to users throughout the system by adjusting their respective water rights. Since 2000, SWRCB’s Water Rights Decision 1641 has governed the SWP’s ability to export water from the Bay-Delta for delivery to MWD and other SWP contractors. The CALFED Bay-Delta Program is a collaborative effort among state and federal agencies to improve water supplies in California and the health of the Bay-Delta watershed. In August 2000, the federal government and the State of California issued a Record of Decision (“ROD”) and related documents approving the final programmatic environmental documentation for the CALFED Bay-Delta Program. Implementing the CALFED Bay-Delta Program has resulted in investment of $3 billion on a variety of projects and programs to begin addressing the Bay-Delta’s water supply, water quality, ecosystem, and levee stability problems. To guide future development of the CALFED Bay-Delta Program and identify a strategy for managing the Bay-Delta as a sustainable resource, Governor Schwarzenegger in September 2006 established, by Executive Order, a Delta Vision process. The Delta Vision process is tied to legislation that created a cabinet-level committee tasked with developing a strategic vision for the Delta. The 41-member Delta Vision Blue Ribbon Task Force issued its Delta Vision Strategic Plan (the “Strategic Plan”) on October 17, 2008, providing its recommendations for long-term sustainable management of the Bay-Delta. The Strategic Plan was reviewed by the Delta Vision Committee, chaired by the State Secretary for Resources. The Implementation Report summarizing the Delta Vision Committees recommendations was submitted to Governor Schwarzenegger on December 31, 2008. These recommendations include completing the BDCP and associated environmental assessments to permit ecosystem revitalization and conveyance water improvements, identifying and reducing stressors to the Bay-Delta ecosystem, strengthening levees, increasing emergency preparedness, continuing finding for the CALFED ecosystem restoration program, updating Bay-Delta regulatory flow and water quality standards to protect beneficial uses of water and working with the State Legislature on a comprehensive water bond package to fund Bay-Delta infrastructure projects. On November 4, 2009, the State Legislature authorized an $11.1 billion water bond measure that includes over $2 billion for Bay-Delta ecosystem restoration, as well as $3 billion for new water storage and additional funds for water recycling, drought relief, conservation and watershed projects. The bonds are subject to voter approval and were scheduled to be included on the November 2010 ballot; however, in August 2010, the Legislature postponed the bond election to 2012. Related legislation created a new oversight council for the Bay-Delta and directs that the Bay-Delta be managed with the dual goals of water supply reliability and ecosystem protection, sets a statewide conservation target for urban per capita water use of 20% reductions by 2020, provides funding for increase enforcement of illegal water diversions and establishes a statewide groundwater monitoring program. The Council, formed on February 3, 2010, is CALFED’s successor agency and was directed to adopt and oversee implementation of a comprehensive management plan for the Bay-Delta by January 1, 2012. Delaying the bond election did not impact other parts of the 2009 water legislation. Endangered Species Act Considerations. The listing of several fish species as threatened or endangered under the federal or California Endangered Species Acts (respectively, the “Federal ESA” and the “California ESA” and, collectively, the “ESAs”) have adversely impacted SWP operations and limited the flexibility of the SWP. Currently, five species (the winter-run and spring-run Chinook salmon, Delta smelt, North American green sturgeon and Central Valley steelhead) are listed under the ESAs. In addition, on June 25, 2009, the California Fish and Game Commission declared the longfin smelt a threatened species under the California ESA. The United States Fish and Wildlife Service (“USFWS”) announced on April 9, 2009, that the Bay-Delta population of longfin smelt does not qualify as a distinct population segment and cannot be listed under the Federal ESA. G-9 The Federal ESA requires that before any federal agency authorizes finds or carries out an action it must consult with the appropriate federal fishery agency to determine whether the action would jeopardize the continued existence of any threatened or endangered species, or adversely modify habitat critical to the species’ needs. The result of the consultation is known as a “biological opinion.” In the biological opinion the federal fishery agency determines whether the action would cause jeopardy to a threatened or endangered species or adverse modification to critical habitat and recommends reasonable and prudent alternatives or measures that would allow the action to proceed without causing jeopardy or adverse modification. The biological opinion also includes an “incidental take statement.” The incidental take statement allows the action to go forward even though it will result in some level of “take,” including harming or killing some members of the species, incidental to the agency action, provided that the agency action does not jeopardize the continued existence of any threatened or endangered species and complies with reasonable mitigation and minimization measures recommended by the federal fishery agency. In 2004 and 2005, the USFWS and National Marine Fisheries Service (“NMFS”) issued biological opinions and incidental take statements that govern operations of the SWP and the federal Central Valley Project (the “CVP”) with respect to the Delta smelt, the winter-run and spring-run Chinook salmon and the Central Valley steelhead. In July 2006, the Bureau of Reclamation reinitiated consultation with the USFWS and NMFS with respect to the 2004 and 2005 biological opinions (with the addition of the North American green sturgeon, which was listed in April 2006) following the filing of legal challenges to those biological opinions and incidental take statements described under ―Federal ESA Litigation below. In a separate action on June 2, 2010, the National Marine Fisheries Service published regulations under the Federal ESA, applying Federal ESA “take” prohibitions to the North American green sturgeon. Existing restrictions on project operations for the benefit of other listed species will also protect the North American green sturgeon and it is unclear whether additional restrictions and impacts on project operations could result from the rule. Under the Federal ESA, critical habitat must also be designated for each listed species. Critical habitat has been designated for each of the currently listed species, including the North American green sturgeon. The NMFS issued critical habitat designation for the North American green sturgeon on October 9, 2009. The habitat designated as critical for the sturgeon includes the lower Feather River, which could have an adverse impact on SWP operations. The extent of any such impacts cannot be determined at this time. Litigation filed by several environmental interest groups (NRDC v. Kempthorne; and Pacific Coast Federation of Fishermen’s Associations v. Gutierrez) in the United States District Court for the Eastern District of California alleged that the 2004 and 2005 biological opinions and incidental take statements inadequately analyzed impacts on listed species under the Federal ESA. On May 25, 2007, Federal District Judge Wanger issued a decision on summary judgment in NRDC v. Kempthorne, finding the USFWS biological opinion for Delta smelt to be invalid. The USFWS released a new biological opinion on the impacts of the SWP and CVP on Delta smelt on December 15, 2008. MWD, the San Luis & Delta Mendota Water Authority, Westlands Water District, Kern County Water Agency, Coalition for a Sustainable Delta and State Water Contractors, a California nonprofit corporation formed by agencies contracting with DWR for water from the State Water Project (the “State Water Contractors”), the Family Farm Alliance and the Pacific Legal Foundation on behalf of several owners of small farms in California’s Central Valley have filed separate lawsuits in federal district court challenging the biological opinion which the federal court has consolidated under the caption Delta Smelt Consolidated Cases. On December 14, 2010, Judge Wanger issued a decision on summary judgment finding that there were major scientific and legal flaws in the Delta smelt biological opinion and remanding the biological opinion to the USFWS for reconsideration. The court’s decision invalidates some of the restrictions on project operations contained in the Delta smelt biological opinion. On May 4, 2011, Judge Wanger issued a decision directing the USFWS to complete a new draft biological opinion by October 1, 2011, and to complete a final biological opinion with environmental documentation by December 1, 2013. On April 16, 2008, in Pacific Coast Federation of Fishermen’s Associations v. Gutierrez the court invalidated the 2004 NMFS’s biological opinion for the salmon and other fish species that spawn in rivers flowing into the Bay-Delta. Among other things, the court found that the no jeopardy conclusions in the G-10 biological opinion were inconsistent with some of the factual findings in the biological opinion; that the biological opinion failed to adequately address the impacts of SWP and CVP operations on critical habitat and that there was a failure to consider how climate change and global warming might affect the impacts of the projects on salmonid species. The NMFS released its new biological opinion for salmonid species on June 4, 2009. The salmonid species biological opinion contains additional restrictions on SWP and CVP operations. The NMFS calculated that these restrictions will reduce the amount of water the SWP and CVP combined will be able to export from the Bay-Delta by 5 to 7%. DWR estimated a 10% average water loss, expected to begin in 2010, under this biological opinion. See “State Water Project Operational Constraints” below for the estimated impact to MWD’s water supply. Six lawsuits have been filed challenging the 2009 salmon biological opinion. These various lawsuits have been brought by the San Luis & Delta Mendota Water Authority, Westlands Water District, Stockton East Water District, Oakdale Irrigation District, Kern County Water Agency, the State Water Contractors and MWD. The court has consolidated the cases under the caption Consolidated Salmon Cases. On May 25, 2010, the court granted the plaintiffs’ request for preliminary injunction in the Consolidated Salmon Cases, restraining enforcement of two requirements under the salmon biological opinion that limit exported water during the spring months based on San Joaquin River flows into the Bay Delta and reverse flows on the Old and Middle Rivers. Hearings on motions for summary judgment in the Consolidated Salmon Cases were held on December 16, 2010. It is unknown when the court will issue a decision in the Consolidated Salmon Cases. On November 13, 2009, the Center for Biological Diversity filed separate lawsuits challenging the USFWS’ failure to respond to a petition to change the Delta smelt’s federal status from threatened to endangered and the USFWS’ denial of federal listing for the longfin smelt. On April 2, 2010, the USFWS issued a finding that uplisting the Delta smelt was warranted but precluded by the need to devote resources to higher-priority matters. This warranted but precluded finding did not change the regulatory restrictions applicable to Delta smelt. An agreement settling the longfin smelt litigation was approved on February 2, 2011. Under the agreement, the USFWS agreed to complete a rangewide status review of the longfin smelt and consider whether the Bay-Delta longfin smelt population, or any other longfin smelt population from California to Alaska, qualifies as a “distinct population” that warrants federal protection. The USFWS agreed to make a new determination on federal listing for the longfin smelt by September 30, 2011. State Water Project Operational Constraints. DWR has altered the operations of the SWP to accommodate species of fish listed under the ESAs. These changes in project operations have adversely affected SWP deliveries. Restrictions on Bay-Delta pumping under the Interim Remedial Order in NRDC v. Kempthorne reduced deliveries of SWP water to MWD by approximately 250,000 acre-feet in 2008 and 199,000 acre-feet in 2009. The impact on total SWP deliveries attributable to the Delta smelt and salmonid species biological opinions combined is estimated to be one million acre-feet in an average year, reducing SWP deliveries from approximately 3.3 million acre-feet to approximately 2.3 million acre-feet for the year under average hydrology. On August 24, 2010, DWR reported that approximately 800,000 acre-feet of water was lost from the SWP for calendar year 2010 as a result of pumping restrictions, of which about 370,000 acre-feet would have been made available to MWD. The initial allocation to SWP contractors for 2011 was 25% of their contracted amounts, based on low storage in SWP reservoirs and regulatory agency restrictions on water exports from the Bay-Delta to protect listed fish species. DWR revisited this allocation as conditions changed and, following significantly above-normal precipitation over the entire Sierra Nevada Range, on April 20, 2011, DWR announced an allocation of 80% (1,529,200 acre-feet for MWD). Despite operational restrictions in 2011, high flows from above-normal precipitation reaching the Bay-Delta have provided increased storage in SWP reservoirs and greater than anticipated exports since late December 2010. Operational constraints likely will continue until a long-term solution to the problems in the Bay-Delta is identified and implemented. The Delta Vision process, established by Governor Schwarzenegger, is aimed at identifying long-term solutions to the conflicts in the Bay-Delta, including natural resource, infrastructure, land use and governance issues. In addition, State and federal resource agencies and G-11 various environmental and water user entities are currently engaged in the development of the Bay-Delta Conservation Plan, which is aimed at addressing ecosystem needs and securing long-term operating permits for the SWP. Other issues, such as the recent decline of some fish populations in the Bay-Delta and surrounding regions and certain operational actions in the Bay-Delta, may significantly reduce MWD’s water supply from the Bay-Delta. SWP operational requirements may be further modified under new biological opinions for listed species under the Federal ESA or by the California Department of Fish and Game’s issuance of incidental take authorizations under the California ESA. Biological opinions or incidental take authorizations under the Federal ESA and California ESA might further adversely affect SWP and CVP operations. Additionally, new litigation, listings of additional species or new regulatory requirements could further adversely affect SWP operations in the future by requiring additional export reductions, releases of additional water from storage or other operational changes impacting water supply operations. MWD cannot predict the ultimate outcome of any litigation or regulatory process described above, but believed they could have a materially adverse impact on the operation of SWP pumps, MWD’s SWP supplies and MWD’s water resources. Integrated Water Resources Plan (“IRP”) and Five-Year Supply Plan. MWD, its member agencies, sub- agencies and groundwater basin managers developed the IRP that was adopted by the MWD Board in January 1996 as a long-term planning guideline for resources and capital investments. The purpose of the IRP was the development of a preferred resource mix to meet the water supply reliability and water quality needs for the region in a cost effective and environmentally sound manner. This plan was updated in 2004. On October 12, 2010, MWD’s Board adopted an IRP update (the “2010 IRP Update”) as a strategy to set goals and a framework for water resources development. This strategy enables MWD and its member agencies to manage future challenges and changes in California’s water conditions and to balance investments with water reliability benefits. The 2010 IRP Update was formulated with input from member agencies, retail water agencies, and other stakeholders including water and wastewater managers, environmental and business interests and the community. The framework places an emphasis on regional collaboration. The 2010 IRP Update seeks to provide regional flexibility through 2035 by stabilizing MWD’s traditional imported water supplies and continuing to develop additional local resources. It also advances long-term planning for potential future contingency resources, such as storm water capture and large-scale seawater desalination, in close coordination with MWD’s 26 member agencies and other utilities. The 2010 IRP Update is available on MWD’s website. Specific projects that may be developed by MWD in connection with the implementation of the IRP will be subject to future Board consideration and approval, as well as environmental and regulatory documentation and compliance. The information set forth on MWD’s web site is not incorporated by reference. Additional MWD Water Supply Enhancements. MWD is currently pursuing voluntary water transfer and storage and exchange programs with the State, federal, public and private water districts and individuals. MWD has entered into groundwater basin storage agreements with the Arvin-Edison Water Storage District and the Semitropic Water Storage District, an agreement with San Bernardino Valley Municipal Water District to coordinate the use of facilities and SWP supplies and groundwater banking and exchange transfer agreements with the Kern Delta Water District and the Mojave Water Agency. MWD has also entered into an agreement with DWR to purchase a portion of the water released by the Yuba County Water Agency, and has been negotiating water purchase, storage and exchange programs with other agencies in the Sacramento and San Joaquin Valleys. MWD also has an exchange transfer and delivery agreement with the CVWD and the Desert Water Agency. Stradling Yocca Carlson & Rauth Draft of 4/9/13 DOCSOC/1614034v4/200077-0005 INDENTURE OF TRUST Dated as of May 1, 2013 By and between UNION BANK, N.A., as Trustee and the OTAY WATER DISTRICT Relating to $_______ OTAY WATER DISTRICT 2013 WATER REVENUE REFUNDING BONDS Attachment E TABLE OF CONTENTS Page i DOCSOC/1614034v4/200077-0005 ARTICLE I DEFINITIONS; CONTENT OF CERTIFICATES AND OPINIONS Section 1.01. Definitions .............................................................................................................. 3 Section 1.02. Content of Certificates and Opinions.................................................................... 14 Section 1.03. Interpretation......................................................................................................... 14 ARTICLE II THE 2013 BONDS Section 2.01. Authorization of 2013 Bonds ................................................................................ 15 Section 2.02. Terms of the 2013 Bonds ...................................................................................... 15 Section 2.03. Transfer of 2013 Bonds ........................................................................................ 16 Section 2.04. Exchange of 2013 Bonds ...................................................................................... 17 Section 2.05. Registration Books ................................................................................................ 17 Section 2.06. Form and Execution of 2013 Bonds ..................................................................... 17 Section 2.07. 2013 Bonds Mutilated, Lost, Destroyed or Stolen................................................ 18 Section 2.08. Book Entry System ............................................................................................... 18 ARTICLE III ISSUANCE OF 2013 BONDS; APPLICATION OF PROCEEDS Section 3.01. Issuance of the 2013 Bonds .................................................................................. 21 Section 3.02. Application of Proceeds of the 2013 Bonds and Certain Other Moneys .............. 21 Section 3.03. Establishment and Application of Costs of Issuance Fund ................................... 21 Section 3.04. Validity of 2013 Bonds ......................................................................................... 21 ARTICLE IV REDEMPTION OF 2013 BONDS Section 4.01. Terms of Redemption ........................................................................................... 22 Section 4.02. Selection of 2013 Bonds for Redemption ............................................................. 22 Section 4.03. Notice of Redemption ........................................................................................... 22 Section 4.04. Partial Redemption of 2013 Bonds ....................................................................... 22 Section 4.05. Effect of Redemption ............................................................................................ 23 ARTICLE V REVENUES, FUNDS AND ACCOUNTS; PAYMENT OF PRINCIPAL AND INTEREST Section 5.01. Pledge and Assignment; Revenue Fund ............................................................... 23 Section 5.02. Allocation of Revenues and Taxes ....................................................................... 24 Section 5.03. [Reserved.] ............................................................................................................ 25 Section 5.04. Application of Interest Account ............................................................................ 25 TABLE OF CONTENTS (continued) Page ii DOCSOC/1614034v4/200077-0005 Section 5.05. Application of Principal Account ......................................................................... 25 Section 5.06. Application of Redemption Fund ......................................................................... 25 Section 5.07. Investments ........................................................................................................... 25 Section 5.08. Rebate Fund .......................................................................................................... 26 Section 5.09. Application of Funds and Accounts When No 2013 Bonds are Outstanding....... 28 ARTICLE VI PARTICULAR COVENANTS Section 6.01. Punctual Payment ................................................................................................. 28 Section 6.02. Extension of Payment of 2013 Bonds .................................................................. 28 Section 6.03. Against Encumbrances ......................................................................................... 28 Section 6.04. Power to Issue 2013 Bonds and Make Pledge and Assignment ........................... 29 Section 6.05. Accounting Records and Financial Statements .................................................... 29 Section 6.06. Tax Covenants ...................................................................................................... 29 Section 6.07. Waiver of Laws ..................................................................................................... 30 Section 6.08. Further Assurances ............................................................................................... 30 Section 6.09. Observance of Laws and Regulations ................................................................... 30 Section 6.10. Compliance with Contracts ................................................................................... 30 Section 6.11. Prosecution and Defense of Suits ......................................................................... 30 Section 6.12. Continuing Disclosure .......................................................................................... 31 Section 6.13. Additional Contracts and Bonds ........................................................................... 31 Section 6.14. Against Sale or Other Disposition of Property ..................................................... 32 Section 6.15. Against Competitive Facilities ............................................................................. 32 Section 6.16. Maintenance and Operation of the Water System ................................................ 32 Section 6.17. Payment of Claims ................................................................................................ 32 Section 6.18. Insurance ............................................................................................................... 32 Section 6.19. Payment of Taxes and Compliance with Governmental Regulations .................. 33 Section 6.20. Amount of Rates and Charges .............................................................................. 33 Section 6.21. Collection of Rates and Charges ........................................................................... 34 Section 6.22. Eminent Domain Proceeds ................................................................................... 34 Section 6.23. Enforcement of Contracts ..................................................................................... 34 ARTICLE VII EVENTS OF DEFAULT AND REMEDIES OF 2013 BOND OWNERS Section 7.01. Events of Default .................................................................................................. 34 Section 7.02. Remedies Upon Event of Default ......................................................................... 35 Section 7.03. Application of Revenues and Other Funds After Default ..................................... 36 Section 7.04. Trustee to Represent 2013 Bond Owners ............................................................. 37 Section 7.05. 2013 Bond Owners’ Direction of Proceedings ..................................................... 37 Section 7.06. Suit by Owners ..................................................................................................... 37 Section 7.07. Absolute Obligation of the District ....................................................................... 38 Section 7.08. Remedies Not Exclusive ....................................................................................... 38 Section 7.09. No Waiver of Default ........................................................................................... 38 TABLE OF CONTENTS (continued) Page iii DOCSOC/1614034v4/200077-0005 ARTICLE VIII THE TRUSTEE Section 8.01. Duties, Immunities and Liabilities of Trustee ...................................................... 38 Section 8.02. Merger or Consolidation ....................................................................................... 40 Section 8.03. Liability of Trustee ............................................................................................... 40 Section 8.04. Right to Rely on Documents ................................................................................. 42 Section 8.05. Preservation and Inspection of Documents .......................................................... 43 Section 8.06. Compensation and Indemnification ...................................................................... 43 ARTICLE IX MODIFICATION OR AMENDMENT OF THE INDENTURE Section 9.01. Amendments Permitted ........................................................................................ 43 Section 9.02. Effect of Supplemental Indenture ......................................................................... 44 Section 9.03. Endorsement of 2013 Bonds; Preparation of New 2013 Bonds ........................... 45 Section 9.04. Amendment of Particular 2013 Bonds ................................................................. 45 ARTICLE X DEFEASANCE Section 10.01. Discharge of Indenture ......................................................................................... 45 Section 10.02. Discharge of Liability on 2013 Bonds .................................................................. 46 Section 10.03. Deposit of Money or Securities with Trustee ....................................................... 46 Section 10.04. Payment of 2013 Bonds After Discharge of Indenture......................................... 47 ARTICLE XI MISCELLANEOUS Section 11.01. Liability of District Limited to Revenues ............................................................. 47 Section 11.02. Successor Is Deemed Included in All References to Predecessor ........................ 47 Section 11.03. Limitation of Rights to Parties and 2013 Bond Owners ....................................... 47 Section 11.04. Waiver of Notice; Requirement of Mailed Notice ................................................ 48 Section 11.05. Destruction of 2013 Bonds ................................................................................... 48 Section 11.06. Severability of Invalid Provisions ........................................................................ 48 Section 11.07. Evidence of Rights of 2013 Bond Owners ........................................................... 48 Section 11.08. Disqualified 2013 Bonds ...................................................................................... 49 Section 11.09. Money Held for Particular 2013 Bonds ................................................................ 49 Section 11.10. Funds and Accounts .............................................................................................. 49 Section 11.11. Waiver of Personal Liability ................................................................................. 49 Section 11.12. Execution in Several Counterparts ....................................................................... 50 Section 11.13. CUSIP Numbers ................................................................................................... 50 Section 11.14. Choice of Law....................................................................................................... 50 TABLE OF CONTENTS (continued) Page iv DOCSOC/1614034v4/200077-0005 Signatures ............................................................................................................................ S-1 Exhibit A Form of 2013 Bond ............................................................................................. A-1 1 DOCSOC/1614034v4/200077-0005 INDENTURE OF TRUST THIS INDENTURE OF TRUST, made and entered into and dated as of __________ 1, 2013 (the “Indenture”), by and between OTAY WATER DISTRICT, a municipal water district duly organized and existing under the laws of the State of California (the “District”), and ____________________, a national banking association duly organized and existing under the laws of the United States of America, as trustee hereunder (the “Trustee”); W I T N E S S E T H: WHEREAS, the District has determined that it is in the best interest of the public to refund all of the outstanding Otay Water District Revenue Refunding Certificates of Participation (1993 Water Facilities Project) Series 2004 (the “2004 Certificates”); and WHEREAS, the District is authorized by Article 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the Government Code of the State of California, including but not limited to Section 53583, to issue bonds for the purpose of refunding any evidences of indebtedness of the District; and WHEREAS, in order to provide for the authentication and delivery of water revenue refunding bonds (the “2013 Bonds”), to establish and declare the terms and conditions upon which such 2013 Bonds are to be issued and secured and to secure the payment of the principal thereof and interest and premium, if any, thereon, the District has authorized the execution and delivery of the Indenture; and WHEREAS, the District has determined that all acts and proceedings required by law necessary to make the 2013 Bonds, when executed by the District, authenticated and delivered by the Trustee, and duly issued, the valid, binding and legal special obligations of the District, and to constitute the Indenture a valid and binding agreement for the uses and purposes herein set forth in accordance with its terms, have been done and taken, and the execution and delivery of the Indenture have been in all respects duly authorized; NOW, THEREFORE, THE INDENTURE WITNESSETH: GRANTING CLAUSES The District, in consideration of the premises and the acceptance by the Trustee of the trusts hereby created and of the mutual covenants herein contained and of the purchase and acceptance of the 2013 Bonds by the owners thereof, and for other valuable considerations, the receipt whereof is hereby acknowledged, in order to secure the payment of the principal of and the interest and premium (if any) on all 2013 Bonds at any time issued and Outstanding under the Indenture, according to their tenor, and to secure the performance and observance of all the covenants and conditions therein and herein set forth, does hereby assign and pledge unto, and grant a security interest in, the following (the “Trust Estate”) to the Trustee, and its successors in trust and assigns forever, for the securing of the performance of the obligations of the District to the 2013 Bond Owners hereinafter set forth: 2 DOCSOC/1614034v4/200077-0005 GRANTING CLAUSE FIRST All right, title and interest of the District in and to the Revenues (as defined herein) and Taxes (as defined herein) on a parity with certain existing Contracts (as defined herein), including, but without limiting the generality of the foregoing, the present and continuing right to make claim for, collect, receive and receipt for any Revenues payable to or receivable by the District under the Constitution of the State, the Government Code of the State of California and the Indenture and any other applicable laws of the State or otherwise, to bring actions and proceedings thereunder for the enforcement thereof, and to do any and all things which the District is or may become entitled to do thereunder, subject to the terms hereof. GRANTING CLAUSE SECOND All moneys and securities held in funds and accounts of the Indenture, except amounts held in the Rebate Fund, and all other rights of every name and nature from time to time herein or hereafter by delivery or by writing of any kind pledged, assigned or transferred as and for additional security hereunder to the Trustee by the District or by anyone on its behalf, or with its written consent, and to hold and apply the same, subject to the terms hereof. TO HAVE AND TO HOLD all and singular the Trust Estate, whether now owned or hereafter acquired, unto the Trustee and its respective successors in trust and assigns forever for the benefit of the Owners and such pledge shall constitute a lien on and security interest in such Trust Estate; IN TRUST NEVERTHELESS, upon the terms and trusts herein set forth for the equal and proportionate benefit, security and protection of all present and future owners of the 2013 Bonds issued under and secured by the Indenture without privilege, priority or distinction as to the lien or otherwise of any of the 2013 Bonds over any of the other 2013 Bonds; PROVIDED, HOWEVER, that if the District, its successors or assigns shall well and truly pay, or cause to be paid, the principal of and interest and any redemption premium on the 2013 Bonds due or to become due thereon, at the times and in the manner provided in the 2013 Bonds according to the true intent and meaning thereof, and shall well and truly keep, perform and observe all the covenants and conditions pursuant to the terms of the Indenture to be kept, performed and observed by it, and shall pay or cause to be paid to Trustee all sums of money due or to become due in accordance with the terms and provisions hereof, then upon such final payments or deposits as herein provided, the Indenture and the rights hereby granted shall cease, terminate and be void; otherwise the Indenture shall remain in full force and effect. THE INDENTURE FURTHER WITNESSETH, and it is expressly declared, that all 2013 Bonds issued and secured hereunder are to be issued, authenticated and delivered, and all sold property, rights and interests, including, without limitation, the Revenues and Taxes, hereby assigned and pledged, are to be dealt with and disposed of, under, upon and subject to the terms, conditions, stipulations, covenants, agreements, trusts, uses and purposes hereinafter expressed, and the District has agreed and covenanted and does hereby covenant and agree with the Trustee, for the benefit of the respective Owners from time to time of the 2013 Bonds, as follows: 3 DOCSOC/1614034v4/200077-0005 ARTICLE I DEFINITIONS; CONTENT OF CERTIFICATES AND OPINIONS Section 1.01. Definitions. Unless the context otherwise requires, the terms defined in this Section 1.01 shall, for all purposes of the Indenture and of any indenture supplemental hereto and of any certificate, opinion or other document herein mentioned, have the meanings herein specified, to be equally applicable to both the singular and plural forms of any of the terms herein defined. Accountant’s Report. The term “Accountant’s Report” means a report signed by an Independent Certified Public Accountant. Authorized Representative. The term “Authorized Representative” means, with respect to the District, its Board President, Board Vice President, Board Treasurer, 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 Stradling Yocca Carlson & Rauth, a Professional Corporation, or another firm of nationally recognized attorneys experienced in the issuance of obligations the interest on which is excludable from gross income under Section 103 of the Code. Bonds. The term “Bonds” means all revenue bonds or notes of the District authorized, executed, issued and delivered by the District, the payments of which are payable from Net Revenues on a parity with the 2013 Bonds and which are secured by a pledge of and lien on Revenues as described in Section 5.01 hereof. Bond Year. The term “Bond Year” means the period beginning on the date of issuance of the 2013 Bonds and ending on September 1, 2013, and each successive one year or, during the last period prior to maturity, shorter period thereafter until there are no Outstanding 2013 Bonds. Business Day. The term “Business Day” means: (i) a day which is not a Saturday, Sunday or legal holiday on which banking institutions in the State, or in any other state in which the Office of the Trustee is located, are closed; or (ii) a day on which the New York Stock Exchange is not closed. Certificate; Direction; Request; Requisition. The terms “Certificate,” “Direction,” “Request” and “Requisition” of the District mean a written certificate, direction, request or requisition signed in the name of the District by its Authorized Representative. Any such instrument and supporting opinions or representations, if any, may, but need not, be combined in a single instrument with any other instrument, opinion or representation, and the two or more so combined shall be read and construed as a single instrument. If and to the extent required by Section 1.02, each such instrument shall include the statements provided for in Section 1.02. Closing Date. The term “Closing Date” means the date on which the 2013 Bonds are delivered to the original purchaser thereof. Code. The term “Code” means the Internal Revenue Code of 1986, as amended. 4 DOCSOC/1614034v4/200077-0005 Continuing Disclosure Agreement. The term “Continuing Disclosure Agreement” means the Continuing Disclosure Agreement, dated the Closing Date, by and between the District and Union Bank, N.A., as Dissemination Agent, as originally executed or as it may be from time to time amended or supplemented in accordance with its terms. Contracts. The term “Contracts” means all contracts of the District previously or hereafter authorized and executed by the District, the payments under which are payable from Net Revenues on a parity with the 2013 Bonds and which are secured by a pledge and lien on Revenues as described in Section 5.01 hereof, including the 1996 Installment Sale Agreement, the 2007 Installment Purchase Agreement and the 2010 Installment Sale Agreement; and excluding contracts entered into for operation and maintenance of the Water System. Corporation. The term “Corporation” means the Otay Service Corporation, a nonprofit public benefit corporation duly organized and existing under and by virtue of the laws of the State of California. Costs of Issuance. The term “Costs of Issuance” means all items of expense directly or indirectly payable by or reimbursable to the District and related to the authorization, issuance, sale and delivery of the 2013 Bonds, including but not limited to costs of preparation and reproduction of documents, printing expenses, filing and recording fees, initial fees and charges of the Trustee and counsel to the Trustee, legal fees and charges, fees and disbursements of consultants and professionals, rating agency fees, title insurance premiums, letter of credit fees and bond insurance premiums (if any), fees and charges for preparation, execution and safekeeping of the 2013 Bonds and any other cost, charge or fee in connection with the original issuance of the 2013 Bonds. Costs of Issuance Fund. The term “Costs of Issuance Fund” means the fund by that name established pursuant to Section 3.03. Debt Service. means, for any Fiscal Year, the sum of: (1) the interest accruing during such Fiscal Year on all outstanding Bonds, assuming that all outstanding serial Bonds are retired as scheduled and that all outstanding term Bonds are prepaid 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 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 Bonds required to be prepaid 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 under all Contracts, in each case computed as if such installment payments were deemed to accrue daily during such Fiscal 5 DOCSOC/1614034v4/200077-0005 Year in equal amounts (except to the extent that the 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 Bonds to the extent such earnings are deposited in a debt service fund; provided that, as to any such Bonds or installment payments due under any Contracts 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 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 Bonds or installment payments due under any Contracts 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 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 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 Bonds; and provided further that, if the Bonds or Contracts constitute Paired Obligations, the interest rate on such 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. provided further that, effective when the 1996 Certificates and the 2007 Certificates are no longer Outstanding, the calculation of Debt Service payable by the District on Bonds or Contracts shall be reduced by the amount of Interest Subsidy Payments the District is entitled to receive during such twelve-month period. Depository; DTC. The term “Depository” or “DTC” means The Depository Trust Company, New York, New York, a limited purpose trust company organized under the laws of the State of New York, in its capacity as securities depository for the 2013 Bonds. District. The term “District” means Otay Water District, a municipal water district duly organized and existing under and by virtue of the laws of the State. 6 DOCSOC/1614034v4/200077-0005 Escrow Agent. The term “Escrow Agent” means ______________, as escrow agent pursuant to the terms of the Escrow Agreement, or its successor thereunder. Escrow Agreement. The term “Escrow Agreement means the Escrow Agreement, dated as of __________ 1, 2013, by and between the District and the Escrow Agent, as originally executed or as it may from time to time be amended or supplemented in accordance with its terms. Event of Default. The term “Event of Default” means any of the events specified in Section 7.01. Federal Securities. The term “Federal Securities” means any direct, noncallable general obligations of the United States of America (including obligations issued or held in book entry form on the books of the Department of the Treasury of the United States of America), or noncallable obligations the timely payment of principal of and interest on which are fully and unconditionally guaranteed by the United States of America. Fiscal Year. The term “Fiscal Year” means the twelve month period beginning on July 1 of each year and ending on the next succeeding June 30, both dates inclusive, or any other twelve month period hereafter selected and designated as the official fiscal year period of the District. Indenture. The term “Indenture” means this Indenture of Trust, dated as of May 1, 2013, by and between the District and the Trustee, as originally executed or as it may from time to time be supplemented, modified or amended by any Supplemental Indenture. Independent Certified Public Accountant. The term “Independent Certified Public Accountant” means any firm of certified public accountants appointed by the District, each of whom is independent of the District 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, which may, for purposes of the certification described in the definition of “Paired Obligations” be an interest rate swap adviser, 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 thereof, but who may be regularly retained to make reports thereto. Information Services. The term “Information Services” means the Municipal Securities Rulemaking Board; or, in accordance with then-current guidelines of the Securities and Exchange 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. Initial Rating Requirement. The term “Initial Rating Requirement” means the rating requirement described in Section 11.16(a). Interest Account. The term “Interest Account” means the account by that name in the Payment Fund established pursuant to Section 5.02. Interest Payment Date. The term “Interest Payment Date” means September 1, 2013 and each March 1 and September 1 thereafter. 7 DOCSOC/1614034v4/200077-0005 Interest Subsidy Payment. 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 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. Investment Agreement. The term “Investment Agreement” means an investment agreement by a provider, supported by appropriate opinions of counsel, provided that, without limiting the foregoing, any such Investment Agreement shall: (i) be from a provider rated by S&P or Moody’s at “A-” or “A3”, respectively, or above; (ii) require the District to terminate such agreement and immediately reinvest the proceeds thereof in other Permitted Investments if the rating assigned to the provider by S&P or Moody’s falls to “BBB+” or “Baa1”, respectively, or below; and (iii) expressly permit the withdrawal, without penalty, of any amounts necessary at any time to fund any deficiencies on account of debt service requirements with respect to the 2013 Bonds, together with such amendments as may be approved by the District and the Trustee from time to time. 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. Letter of Representations. The term “Letter of Representations” means the letter of the District and the Trustee delivered to and accepted by the Depository on or prior to delivery of the 2013 Bonds as book entry bonds setting forth the basis on which the Depository serves as depository for such book entry bonds, as originally executed or as it may be supplemented or revised or replaced by a letter from the District and the Trustee delivered to and accepted by the Depository. Minimum Rating Requirement. The term “Minimum Rating Requirement” means the rating requirement described in Section 11.16(b). Moody’s. The term “Moody’s” means Moody’s Investors Service, Inc. or any successor 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. Net Revenues. The term “Net Revenues” means, for any Fiscal Year, the Revenues for such Fiscal Year less the Operation and Maintenance Costs for such Fiscal Year. When held by the Trustee in any funds or accounts established hereunder, Net Revenues shall include all interest or gain derived from the investment of amounts in any of such funds or accounts. 1996 Certificates. The term “1996 Certificates” means the Otay Water District $15,400,000 Variable Rate Demand Certificates of Participation (1996 Capital Projects) issued 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, by and between the District and the 8 DOCSOC/1614034v4/200077-0005 Corporation, as amended by the Second Amendment to Installment Sale Agreement, dated as of June 1, 2011, and as further amended from time to time. Nominee. The term “Nominee” means the nominee of the Depository, which may be the Depository, as determined from time to time pursuant to Section 2.08 hereof. Office. The term “Office” means with respect to the Trustee, the principal corporate trust office of the Trustee in Los Angeles, California, or such other or additional offices as may be specified in writing by the Trustee to the District, except that with respect to presentation of 2013 Bonds for payment or for registration of transfer and exchange such term means the office or agency of the Trustee at which, at any particular time, its corporate trust agency business shall be conducted. 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 the Indenture or any Contract or of any resolution or indenture authorizing the issuance of any Bonds or of such 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. Opinion of Counsel. The term “Opinion of Counsel” means a written opinion of counsel (including but not limited to counsel to the District) selected by the District. If and to the extent required by the provisions of Section 1.02, each Opinion of Counsel shall include the statements provided for in Section 1.02. Outstanding. The term “Outstanding,” when used as of any particular time with reference to 2013 Bonds, means (subject to the provisions of Section 11.09) all 2013 Bonds theretofore or thereupon being authenticated and delivered by the Trustee under the Indenture except: (i) 2013 Bonds theretofore canceled by the Trustee or surrendered to the Trustee for cancellation; (ii) 2013 Bonds with respect to which all liability of the District shall have been discharged in accordance with Section 10.02, including 2013 Bonds (or portions thereof) described in Section 11.09; and (iii) 2013 Bonds for the transfer or exchange of or in lieu of or in substitution for which other 2013 Bonds shall have been authenticated and delivered by the Trustee pursuant to the Indenture. Owner; 2013 Bond Owner. The term “Owner” or “2013 Bond Owner,” whenever used herein with respect to a 2013 Bond, means the person in whose name the ownership of such 2013 Bond is registered on the Registration Books. Paired Obligations. The term “Paired Obligations” means any 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 9 DOCSOC/1614034v4/200077-0005 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 fixed interest rate obligation of the District for the term of such Bond or Contract, as certified by an Independent Financial Consultant in writing, and which comply with the provisions of Section 11.16 hereof. Participants. The term “Participants” means those broker-dealers, banks and other financial institutions from time to time for which the Depository holds book entry certificates as securities depository. Payment Fund. The term “Payment Fund” means the fund by that name established pursuant to Section 5.02. Permitted Investments. The term “Permitted Investments” means, for all purposes other than defeasing investments in a refunding escrow account, any of the following to the extent permitted by law: (a) Direct obligations of the United States of America (including obligations issued or held in book-entry form on the books of the Department of the Treasury) or obligations the principal of and interest on which are unconditionally guaranteed by the United States of America. (b) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following federal agencies and provided such obligations are backed by the full faith and credit of the United States of America (stripped securities are only permitted if they have been stripped by the agency itself): (i) U.S. Export-Import Bank Direct obligations or fully guaranteed Bonds of beneficial ownership (ii) Farmers Home Administration (FmHA) Bonds of beneficial ownership (iii) Federal Financing Bank (iv) Federal Housing Administration Debentures (FHA) (v) General Services Administration Participation Bonds (vi) Government National Mortgage Association (GNMA or “Ginnie Mae”) GNMA-guaranteed mortgage-backed bonds GNMA-guaranteed pass-through obligations (vii) U.S. Maritime Administration Guaranteed Title XI financing (qualified under the Ship Financing Act of 1972) (viii) U.S. Department of Housing and Urban Development (HUD) Project Notes Local Authority Bonds 10 DOCSOC/1614034v4/200077-0005 (c) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following non-full faith and credit U.S. government agencies (stripped securities are only permitted if they have been stripped by the agency itself): (i) Federal Home Loan Bank System Senior debt obligations (ii) Federal Home Loan Mortgage Authority (FHLMC or “Freddie Mac”) Participation Bonds Senior debt obligations (iii) Federal National Mortgage Association (FNMA or “Fannie Mae”) Mortgage-backed securities and senior debt obligations (excluding stripped mortgage securities which are valued greater than par on the portion of unpaid principal) (iv) Resolution Funding Corp (REFCORP) The interest only component of REFCORP strips which have been stripped by request to the Federal Reserve Bank of New York (v) Student Loan Marketing Association (SLMA) (vi) Federal Farm Credit Bank (FFCB) (d) Money market funds registered under the Investment Company Act of 1940, whose shares are registered under the Securities Act of 1933, and having a rating by S&P of AAAm-G, AAAm, or better (including those of the Trustee and its affiliates). (e) Certificates of deposit secured at all times by collateral described in (a) and/or (b) above and having a maturity of one year or less. Such Certificates must be issued by commercial banks, savings and loan associations or mutual savings banks whose short-term obligations are rated “A-1+” by S&P and “Prime-1” by Moody’s. The collateral must be held by a third party and the Owners must have a perfected first security interest in the collateral. (f) Certificates of deposit, savings accounts, deposit accounts or money market deposits which are fully insured by FDIC (including those of the Trustee and its affiliates). (g) Investment Agreements, including guaranteed investment contracts with financial entities whose long-term debt obligations are rated in one of the two highest long-term rating categories by Moody’s and S&P. (h) Commercial paper rated, at the time of purchase, “Prime 1” by Moody’s and “A 1+” or better by S&P and which matures no later than 270 calendar days after the date of purchase. (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) 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 11 DOCSOC/1614034v4/200077-0005 maturity or as to which irrevocable instructions have been given by the obligor to call on the date specified in the notice; and (A) 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 (B) (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 of 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 of and interest and redemption 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. (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 or the District is authorized to register such investment in its name. Principal Account. The term “Principal Account” means the account by that name in the Payment Fund established pursuant to Section 5.02. Rating. The term “Rating” means any currently effective rating on the 2013 Bonds issued by a Rating Agency. Rating Agencies. The term “Rating Agencies” means S&P and Moody’s. Rebate Fund. The term “Rebate Fund” means the fund by that name established pursuant to Section 5.08. Record Date. The term “Record Date” means, with respect to any Interest Payment Date, the fifteenth (15th) day of the calendar month preceding such Interest Payment Date, whether or not such day is a Business Day. Redemption Fund. The term “Redemption Fund” means the fund by that name established pursuant to Section 5.06. Redemption Price. The term “Redemption Price” means, with respect to any 2013 Bond (or portion thereof), the principal amount of such 2013 Bond (or portion) plus the interest accrued to the applicable redemption date, payable upon redemption thereof pursuant to the provisions of such 2013 Bond and this Indenture. Refunded 2004 Certificates. The term “Refunded 2004 Certificates” has the meaning set forth in the Escrow Agreement. Registration Books. The term “Registration Books” means the records maintained by the Trustee for the registration of ownership and registration of transfer of the 2013 Bonds pursuant to Section 2.05. 12 DOCSOC/1614034v4/200077-0005 Responsible Officer of the Trustee. The term “Responsible Officer of the Trustee” means any officer within the corporate trust division (or any successor group or department of the Trustee) including any vice president, assistant vice president, assistant secretary or any other officer or assistant officer of the Trustee customarily performing functions similar to those performed by the persons who at the time shall be such officers, respectively, with responsibility for the administration of the Indenture. Revenue Fund. The term “Revenue Fund” means the fund of the District by that name continued pursuant to Section 5.01(b). Revenues. “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 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 Indenture and (d) 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. S&P. The term “S&P” means Standard and Poor’s Ratings Services, a Standard & Poor’s Financial Services LLC business, or any successor thereto. Securities Depositories. The term “Securities Depositories” means The Depository Trust Company; and, in accordance with then current guidelines of the Securities and Exchange Commission, such other addresses and/or such other securities depositories as the District may designate in a Written Request of the District deliver to the Trustee. State. The term “State” means the State of California. Supplemental Indenture. The term “Supplemental Indenture” means any indenture hereafter duly authorized and entered into between the District and the Trustee, supplementing, modifying or amending the Indenture; but only if and to the extent that such Supplemental Indenture is specifically authorized hereunder. Tax Certificate. The term “Tax Certificate” means the Tax Certificate dated the Closing Date, concerning certain matters pertaining to the use and investment of proceeds of the 2013 Bonds issued by the District on the date of issuance of the 2013 Bonds, including any and all exhibits attached thereto. 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 continued in existence under the 1996 Installment Sale Agreement, the 1996 Installment Purchase Agreement, the 2007 Installment 13 DOCSOC/1614034v4/200077-0005 Purchase Agreement and the 2010 Installment Purchase Agreement and continued by the terms of Section 5.02 hereof. Trustee. The term “Trustee” means Union Bank, N.A., a national banking association duly organized and existing under the laws of the United States of America, or its successor as Trustee hereunder as provided in Section 8.01. 2007 Certificates. The term “2007 Certificates” means the Otay Water District Refunding Certificates of Participation (2007 Water System Project) Series 2007. 2007 Installment Purchase Agreement. The term “2007 Installment Purchase Agreement” means the Installment Purchase Agreement, dated as of March 1, 2007, by and between the District and the Corporation, as originally executed and as it may from time to time be amended or supplemented in accordance therewith. 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 Corporation, as originally executed and as it may from time to time be amended or supplemented in accordance therewith. 2010A Bonds. The term “2010A Bonds” means the Otay Water District Financing Authority Water Revenue Bonds, Series 2010A (Non-AMT Tax-Exempt Bonds). 2010B Bonds. The term “2010B Bonds” means the Otay Water District Financing Authority Water Revenue Bonds, Series 2010B (Taxable Build America Bonds). 2013 Bonds. The term “2013 Bonds” means the Otay Water District 2013 Water Revenue Refunding Bonds, authorized pursuant to the Indenture. Valuation Date. “Valuation Date” means the fifth Business Day preceding the date of redemption. Value. The term “Value,” which shall be determined as of the end of each month, means that the value of any investments shall be calculated as follows: (a) for the purpose of determining the amount of any fund, all Permitted Investments credited to such fund shall be valued at fair market value. The Trustee shall determine the fair market value based on accepted industry standards and from accepted industry providers. Accepted industry providers shall include, but are not limited to, pricing services provided by Financial Times Interactive Data Corporation, Bank of America Merrill Lynch and Morgan Stanley Smith Barney. (b) As to certificates of deposit and bankers’ acceptances: the face amount thereof, plus accrued interest. (c) As to any investment not specified above: market value, or, if the market value is not ascertainable by the District or the Trustee, at cost. Water System. The term “Water System” means the water distribution service made available or provided by the Water System. 14 DOCSOC/1614034v4/200077-0005 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. Written Consent of the District; Written Order of the District; Written Request of the District; Written Requisition of District. The terms “Written Consent of the District,” “Written Order of the District,” “Written Request of the District” and “Written Requisition of the District” mean, respectively, a written consent, order, request or requisition signed by or on behalf of the District by the President or General Manager or its Chief Financial Officer or by the Secretary or by any two persons (whether or not members of the Board of Directors) who are specifically authorized by resolution of the District to sign or execute such a document on its behalf. Section 1.02. Content of Certificates and Opinions. Every certificate or opinion provided for in the Indenture except the certificate of destruction provided for in Section 11.05 hereof, with respect to compliance with any provision hereof shall include: (1) a statement that the person making or giving such certificate or opinion has read such provision and the definitions herein relating thereto; (2) a brief statement as to the nature and scope of the examination or investigation upon which the certificate or opinion is based; (3) a statement that, in the opinion of such person he has made or caused to be made such examination or investigation as is necessary to enable him to express an informed opinion with respect to the subject matter referred to in the instrument to which his signature is affixed; (4) a statement of the assumptions upon which such certificate or opinion is based, and that such assumptions are reasonable; and (5) a statement as to whether, in the opinion of such person, such provision has been complied with. Any such certificate or opinion made or given by an officer of the District may be based, insofar as it relates to legal or accounting matters, upon a certificate or opinion of or representation by counsel or an Independent Certified Public Accountant or Independent Financial Consultant, unless such officer knows, or in the exercise of reasonable care should have known, that the certificate, opinion or representation with respect to the matters upon which such certificate or statement may be based, as aforesaid, is erroneous. Any such certificate or opinion made or given by counsel or an Independent Certified Public Accountant or Independent Financial Consultant may be based, insofar as it relates to factual matters (with respect to which information is in the possession of the District) upon a certificate or opinion of or representation by an officer of the District, unless such counsel or Independent Certified Public Accountant or Independent Financial Consultant knows, or in the exercise of reasonable care should have known, that the certificate or opinion or representation with respect to the matters upon which such person’s certificate or opinion or representation may be based, as aforesaid, is erroneous. The same officer of the District, or the same counsel or Independent Certified Public Accountant or Independent Financial Consultant, as the case may be, need not certify to all of the matters required to be certified under any provision of the Indenture, but different officers, counsel or Independent Certified Public Accountants or Independent Financial Consultants may certify to different matters, respectively. Section 1.03. Interpretation. 15 DOCSOC/1614034v4/200077-0005 (a) Unless the context otherwise indicates, words expressed in the singular shall include the plural and vice versa and the use of the neuter, masculine, or feminine gender is for convenience only and shall be deemed to include the neuter, masculine or feminine gender, as appropriate. (b) Headings of articles and sections herein and the table of contents hereof are solely for convenience of reference, do not constitute a part hereof and shall not affect the meaning, construction or effect hereof. (c) All references herein to “Articles,” “Sections” and other subdivisions are to the corresponding Articles, Sections or subdivisions of the Indenture; the words “herein,” “hereof,” “hereby,” “hereunder” and other words of similar import refer to the Indenture as a whole and not to any particular Article, Section or subdivision hereof. ARTICLE II THE 2013 BONDS Section 2.01. Authorization of 2013 Bonds. The District hereby authorizes the issuance hereunder from time to time of the 2013 Bonds, which shall constitute special obligations of the District, for the purpose of refunding all of the outstanding 2004 Certificates. The 2013 Bonds are hereby designated the “Otay Water District 2013 Water Revenue Refunding Bonds” in the aggregate principal amount of $_____. The Indenture constitutes a continuing agreement with the Owners from time to time of the 2013 Bonds to secure the full payment of the principal of and interest and premium (if any) on all the 2013 Bonds, subject to the covenants, provisions and conditions herein contained. Section 2.02. Terms of the 2013 Bonds. The 2013 Bonds shall be issued in fully registered form without coupons in denominations of $5,000 or any integral multiple thereof. (a) The 2013 Bonds shall mature on September 1 in each of the years and in the amounts set forth below and shall bear interest on each Interest Payment Date at the rates set forth below: 16 DOCSOC/1614034v4/200077-0005 Maturity Date (September 1) Principal Amount Interest Rate $ % Interest on the 2013 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, such interest to be paid by check of the Trustee sent by first class mail on the applicable Interest Payment Date to the Owner at the address of such Owner as it appears on the Registration Books (except that in the case of an Owner of one million dollars ($1,000,000) or more in principal amount, such payment may, at such Owner’s option, be made by wire transfer of immediately available funds to an account in the United States in accordance with written instructions provided to the Trustee by such Owner prior to the Record Date. Principal of and premium (if any) on any 2013 Bond shall be paid by check of the Trustee upon presentation and surrender thereof at maturity or upon the prior redemption thereof, at the Office of the Trustee. Both the principal of and interest and premium (if any) on the 2013 Bonds shall be payable in lawful money of the United States of America. Each 2013 Bond shall be dated the date of initial delivery, and shall bear interest from the Interest Payment Date next preceding the date of authentication thereof unless: (a) it is authenticated after 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) unless it is authenticated on or before August 15, 2013, 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 2013 Bond, interest thereon is in default, such 2013 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 2013 Bonds shall be calculated on the basis of a 360 day year composed of twelve 30 day months. Section 2.03. Transfer of 2013 Bonds. Any 2013 Bond may, in accordance with its terms, be transferred on the Registration Books by the person in whose name it is registered, in person or by his or her duly authorized attorney, upon surrender of such 2013 Bond at the Office of the Trustee for cancellation, accompanied by delivery of a written instrument of transfer, duly executed in a form acceptable to the Trustee. The Trustee shall not be required to register the transfer of any 2013 Bond 17 DOCSOC/1614034v4/200077-0005 during the period in which the Trustee is selecting 2013 Bonds for redemption and any 2013 Bond that has been selected for redemption. Whenever any 2013 Bond or 2013 Bonds shall be surrendered for transfer, the District shall execute and the Trustee shall authenticate and shall deliver a new 2013 Bond or 2013 Bonds of authorized denomination or denominations for a like series and aggregate principal amount of the same maturity. The Trustee shall require the 2013 Bond Owner requesting such transfer to pay any tax or other governmental charge required to be paid with respect to such transfer. Following any transfer of 2013 Bonds, the Trustee will cancel and destroy the 2013 Bonds it has received. Section 2.04. Exchange of 2013 Bonds. 2013 Bonds may be exchanged at the Office of the Trustee for a like aggregate principal amount of other authorized denominations of the same series and maturity. The Trustee shall not be required to exchange any 2013 Bond during the period in which the Trustee is selecting 2013 Bonds for redemption and any 2013 Bond that has been selected for redemption. The Trustee shall require the 2013 Bond Owner requesting such exchange to pay any tax or other governmental charge required to be paid with respect to such exchange. Following any exchange of 2013 Bonds, the Trustee will cancel and destroy the 2013 Bonds it has received. Section 2.05. Registration Books. The Trustee will keep or cause to be kept, at the Office of the Trustee, sufficient records for the registration and transfer of ownership of the 2013 Bonds, which shall upon reasonable notice and at reasonable times be open to inspection during regular business hours by the District and the Owners; 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 such records, the ownership of the 2013 Bonds as hereinbefore provided. The person in whose name any 2013 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 and Redemption Price of by such 2013 Bonds 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 2013 Bond to the extent of the sum or sums so paid. Section 2.06. Form and Execution of 2013 Bonds. The 2013 Bonds shall be in substantially the form set forth in Exhibit A hereto. The 2013 Bonds shall be executed in the name and on behalf of the District with the manual or facsimile signature of its President. The 2013 Bonds may carry a seal, and such seal may be in the form of a facsimile of the District’s seal and may be reproduced, imprinted or impressed on the 2013 Bonds. The 2013 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 2013 Bonds shall cease to be such officer or officers of the District before the 2013 Bonds so signed or attested shall have been authenticated or delivered by the Trustee, or issued by the District, such 2013 Bonds may nevertheless be authenticated, delivered and issued and, upon such authentication, delivery and issue, shall be as binding upon the District as though those who signed and attested the same had continued to be such officers of the District, and also any 2013 Bonds may be signed and attested on behalf of the District by such persons as at the actual date of execution of such 2013 Bonds shall be the proper officers of the District although at the nominal date of such 2013 Bonds any such person shall not have been such officer of the District. Only such of the 2013 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 any purpose or entitled to the benefits of the Indenture, and such certificate of or on 18 DOCSOC/1614034v4/200077-0005 behalf of the Trustee shall be conclusive evidence that the 2013 Bonds so authenticated have been duly executed, authenticated and delivered hereunder and are entitled to the benefits of the Indenture. Section 2.07. 2013 Bonds Mutilated, Lost, Destroyed or Stolen. If any 2013 Bond shall become mutilated, the District, at the expense of the Owner of said 2013 Bond, shall execute, and the Trustee shall thereupon authenticate and deliver, a new 2013 Bond of like tenor, series and authorized denomination in exchange and substitution for the 2013 Bonds so mutilated, but only upon surrender to the Trustee of the 2013 Bond so mutilated. Every mutilated 2013 Bond so surrendered to the Trustee shall be canceled by it and upon the Written Request of the District delivered to, or upon the order of, the District. If any 2013 Bond shall be lost, destroyed or stolen, evidence of such loss, destruction or theft may be submitted to the Trustee and, if such evidence be satisfactory to the Trustee and indemnity satisfactory to the Trustee shall be given, the District, at the expense of the Owner, shall execute, and the Trustee shall thereupon authenticate and deliver, a new 2013 Bond of like tenor, series and authorized denomination in lieu of and in substitution for the 2013 Bond so lost, destroyed or stolen (or if any such 2013 Bond shall have matured or shall be about to mature, instead of issuing a substitute 2013 Bond, the Trustee may pay the same without surrender thereof). The District may require payment by the Owner of a sum not exceeding the actual cost of preparing each new 2013 Bond issued under this Section and of the expenses which may be incurred by the District and the Trustee in the premises. Any 2013 Bond issued under the provisions of this Section in lieu of any 2013 Bond alleged to be lost, destroyed or stolen shall constitute an original additional contractual obligation on the part of the District whether or not the 2013 Bond so alleged to be lost, destroyed, or stolen be at any time enforceable by anyone, and shall be entitled to the benefits of the Indenture with all other 2013 Bonds secured by the Indenture. Notwithstanding any other provision of this Section, in lieu of delivering a new 2013 Bond for a 2013 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 2013 Bond upon receipt of indemnity satisfactory to the Trustee. Section 2.08. Book Entry System. (a) Election of Book Entry System. Prior to the issuance of the 2013 Bonds, the District may provide that such 2013 Bonds shall be initially issued as book entry 2013 Bonds. If the District shall elect to deliver any 2013 Bonds in book entry form, then the District shall cause the delivery of a separate single fully registered bond (which may be typewritten) for each maturity date of such 2013 Bonds in an authorized denomination corresponding to that total principal amount of the 2013 Bonds designated to mature on such date. Upon initial issuance, the ownership of each such 2013 Bond shall be registered in the 2013 Bond Registration Books in the name of the Nominee, as nominee of the Depository, and ownership of the 2013 Bonds, or any portion thereof may not thereafter be transferred except as provided in Section 2.08(e). With respect to book entry 2013 Bonds, the District 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 2013 Bonds. Without limiting the immediately preceding sentence, the District 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 2013 Bonds; (ii) the delivery to any Participant or any other person, other than an Owner as shown in the 2013 Bond Registration Books, of any notice with respect to book entry 2013 Bonds, including any notice of redemption; (iii) the selection by the Depository and its Participants of the beneficial interests in book entry 2013 Bonds to be redeemed in the event that 19 DOCSOC/1614034v4/200077-0005 the District redeems the 2013 Bonds in part; or (iv) the payment by the Depository or any Participant or any other person, of any amount of principal of, premium, if any, or interest on book entry 2013 Bonds. The District and the Trustee may treat and consider the person in whose name each book entry 2013 Bond is registered in the 2013 Bond Registration Books as the absolute Owner of such book entry 2013 Bond for the purpose of payment of principal of, premium and interest on such 2013 Bond, for the purpose of giving notices of redemption and other matters with respect to such 2013 Bond, for the purpose of registering transfers with respect to such 2013 Bond, and for all other purposes whatsoever. The Trustee shall pay all principal of, premium, if any, and interest on the 2013 Bonds only to or upon the order of the respective Owner, as shown in the 2013 Bond Registration Books, or his respective attorney duly authorized in writing, and all such payments shall be valid and effective to fully satisfy and discharge the District’s obligations with respect to payment of principal of, premium, if any, and interest on the 2013 Bonds to the extent of the sum or sums so paid. No person other than an Owner, as shown in the 2013 Bond Registration Books, shall receive a 2013 Bond evidencing the obligation to make payments of principal of, premium, if any, and interest on the 2013 Bonds. Upon delivery by the Depository to the District 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 the Indenture shall refer to such nominee of the Depository. (b) Delivery of Letter of Representations. In order to qualify the book entry 2013 Bonds for the Depository’s book entry system, the District and the Trustee (if required by the Depository) shall execute and deliver to the Depository a Letter of Representations. The execution and delivery of a Letter of Representations shall not in any way impose upon the District or the Trustee any obligation whatsoever with respect to persons having interests in such book entry 2013 Bonds other than the Owners, as shown on the 2013 Bond Registration Books. By executing a Letter of Representations, the Trustee shall agree to take all action necessary at all times so that the Trustee will be in compliance with all representations of the Trustee in such Letter of Representations. In addition to the execution and delivery of a Letter of Representations, the District and the Trustee shall take such other actions, not inconsistent with the Indenture, as are reasonably necessary to qualify book entry 2013 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 2013 Bonds; or (ii) the District determines that continuation of the book entry system is not in the best interest of the beneficial owners of the 2013 Bonds or the District, then the District will discontinue the book entry system with the Depository. If the District determines to replace the Depository with another qualified securities depository, the District shall prepare or direct the preparation of a new single, separate, fully registered 2013 Bond for each of the maturity dates of such book entry 2013 Bonds, registered in the name of such successor or substitute qualified securities depository or its Nominee as provided in subsection (e) hereof. If the District fails to identify another qualified securities depository to replace the Depository, then the 2013 Bonds shall no longer be restricted to being registered in such 2013 Bond Registration Books in the name of the Nominee, but shall be registered in whatever name or names the Owners transferring or exchanging such 2013 Bonds shall designate, in accordance with the provisions of Sections 2.03 and 2.04 hereof. (d) Payments To Depository. Notwithstanding any other provision of the Indenture to the contrary, so long as all Outstanding 2013 Bonds are held in book entry form and registered in the name of the Nominee, all payments of principal of, redemption premium, if any, and interest on such 2013 Bond and all notices with respect to such 2013 Bond shall be made and given, 20 DOCSOC/1614034v4/200077-0005 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 2013 Bonds to Substitute Depository. (i) The 2013 Bonds shall be initially issued as provided in Section 2.01 hereof. Registered ownership of such 2013 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 Section 2.08(e) (“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: (1) the resignation of DTC or its successor (or any Substitute Depository or its successor) from its functions as depository; or (2) a determination by the District 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: (1) the resignation of DTC or its successor (or any Substitute Depository or its successor) from its functions as depository; or (2) a determination by the District 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 Section 2.08(e), upon receipt of all Outstanding 2013 Bonds by the Trustee, together with a Written Request of the District to the Trustee designating the Substitute Depository, a single new 2013 Bond, which the District shall prepare or cause to be prepared, shall be issued for each maturity of 2013 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 District. In the case of any transfer pursuant to clause (C) of subsection (i) of this Section 2.08(e), upon receipt of all Outstanding 2013 Bonds by the Trustee, together with a Written Request of the District to the Trustee, new 2013 Bonds, which the District shall prepare or cause to be prepared, shall be issued in such denominations and registered in the names of such persons as are requested in such Written Request of the District, subject to the limitations of Section 2.01 hereof, provided that the Trustee shall not be required to deliver such new 2013 Bonds within a period of less than sixty (60) days from the date of receipt of such Written Request from the District. (iii) In the case of a partial redemption or an advance refunding of any 2013 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 2013 Bonds indicating the date and amounts of such reduction in principal, in form acceptable to the Trustee, 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 and the records of the Trustee as to the Outstanding principal amount of such 2013 Bonds shall be controlling. (iv) The District and the Trustee shall be entitled to treat the person in whose name any 2013 Bond is registered as the Owner thereof for all purposes of the Indenture and 21 DOCSOC/1614034v4/200077-0005 any applicable laws, notwithstanding any notice to the contrary received by the Trustee or the District; and the District and the Trustee shall not have responsibility for transmitting payments to, communicating with, notifying, or otherwise dealing with any beneficial owners of the 2013 Bonds. Neither the District 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 2013 Bonds, and the Trustee may rely conclusively on its records as to the identity of the Owners of the 2013 Bonds. ARTICLE III ISSUANCE OF 2013 BONDS; APPLICATION OF PROCEEDS Section 3.01. Issuance of the 2013 Bonds. At any time after the execution of the Indenture, the District may execute and the Trustee shall authenticate and, upon Written Request of the District, deliver the 2013 Bonds in the aggregate principal amount of $______. Section 3.02. Application of Proceeds of the 2013 Bonds and Certain Other Moneys. The proceeds received from the sale of the 2013 Bonds [and certain other moneys], other than the amount of $_____, which shall be transferred directly to the Escrow Agent for deposit in the escrow fund created pursuant to the Escrow Agreement in connection with the Refunded 2004 Certificates, shall be deposited with the Trustee, who shall deposit the sum of $_____ into the Costs of Issuance Fund. The Trustee may establish a fund or account in its records to record and facilitate such deposits and transfer. Section 3.03. Establishment and Application of Costs of Issuance Fund. The Trustee shall establish, maintain and hold in trust a separate fund designated as the “Costs of Issuance Fund.” The moneys in the Costs of Issuance Fund shall be used and withdrawn by the Trustee to pay the Costs of Issuance upon submission of Requisitions of the District stating the person to whom payment is to be made, the amount to be paid, the purpose for which the obligation was incurred, that such payment is proper charge against said fund and that payment for such charge has not previously been made. On the six month anniversary of the issuance of the 2013 Bonds, or upon the earlier Written Request of the District, all amounts remaining in the Costs of Issuance Fund shall be transferred by the Trustee to the Interest Account and the Costs of Issuance Fund shall be closed. Investment earnings on amounts on deposit in the Costs of Issuance Fund shall be applied in accordance with Section 5.07 hereof. Section 3.04. Validity of 2013 Bonds. The validity of the authorization and issuance of the 2013 Bonds is not dependent on and shall not be affected in any way by any proceedings taken by the District or the Trustee with respect to any other agreement. The recital contained in the 2013 Bonds that the same are issued pursuant to the Constitution and laws of the State shall be conclusive evidence of the validity and of compliance with the provisions of law in their issuance. 22 DOCSOC/1614034v4/200077-0005 ARTICLE IV REDEMPTION OF 2013 BONDS Section 4.01. Terms of Redemption. The 2013 Bonds shall be subject to extraordinary redemption prior to their respective stated maturities, as a whole or in part on any date in the order of maturity and within maturities as directed by the District in a Written Request provided to the Trustee at least 35 days (or such lesser number of days acceptable to the Trustee in the sole discretion of the Trustee, such notice for the convenience of the Trustee) prior to such date and by lot within each maturity in integral multiples of $5,000 from Net Proceeds, upon the terms and conditions of, and as provided for in, Sections 6.18 and 6.22, at a Redemption Price equal to the principal amount thereof plus accrued interest thereon to the date fixed for redemption, without premium. Section 4.02. Selection of 2013 Bonds for Redemption. Whenever provision is made pursuant to Section 4.01 for the redemption of less than all of the 2013 Bonds within a maturity, the Trustee shall select the 2013 Bonds for redemption by lot within a maturity in integral multiples of $5,000 in such manner as is determined by the Trustee in its discretion. The Trustee will promptly notify the District in writing of the numbers of the 2013 Bonds, or portions thereof, so selected for redemption. Section 4.03. Notice of Redemption. Notice of redemption shall be mailed by first class mail at least thirty (30) days but not more than sixty (60) days before any redemption date, to the respective Owners of any 2013 Bonds designated for redemption at their addresses appearing on the Registration Books, to the Securities Depositories and the Information Services. Each notice of redemption shall state the date of notice, the redemption date, the place or places of redemption and the Redemption Price, shall designate the maturities, CUSIP numbers, if any, and, if less than all Bonds of any such maturity are to be redeemed, the serial numbers of the Bonds of such maturity to be redeemed by giving the individual number of each Bond or by stating that all Bonds between two stated numbers, both inclusive, have been called for redemption and, in the case of Bonds to be redeemed in part only, the respective portions of the principal amount thereof to be redeemed. Each such notice shall also state that 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 represented thereby 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 with respect thereto shall cease to accrue, and shall require that such Bonds be then surrendered to the Trustee. Any defect in the notice or the mailing thereof will not affect the validity of the redemption of any Bond. Notice of redemption of Bonds shall be given by the Trustee on behalf of and at the expense of the District. Section 4.04. Partial Redemption of 2013 Bonds. Upon surrender of any 2013 Bond redeemed in part only, the District shall execute and the Trustee shall authenticate and deliver to the Owner thereof, at the expense of the District, a new 2013 Bond or 2013 Bonds of authorized denominations equal in aggregate principal amount to the unredeemed portion of the 2013 Bonds surrendered and of the same series, interest rate and maturity. 23 DOCSOC/1614034v4/200077-0005 Section 4.05. Effect of Redemption. Notice of redemption having been duly given as aforesaid, and moneys for payment of the Redemption Price of, together with interest accrued to the date fixed for redemption on, the 2013 Bonds (or portions thereof) so called for redemption being held by the Trustee, on the redemption date designated in such notice, the 2013 Bonds (or portions thereof) so called for redemption shall become due and payable, interest on the 2013 Bonds so called for redemption shall cease to accrue, said 2013 Bonds (or portions thereof) shall cease to be entitled to any benefit or security under the Indenture, and the Owners of said 2013 Bonds shall have no rights in respect thereof except to receive payment of the Redemption Price thereof. The Trustee shall, upon surrender for payment of any of the 2013 Bonds to be redeemed on their redemption dates, pay such 2013 Bonds at the Redemption Price. All 2013 Bonds redeemed pursuant to the provisions of this Article shall be canceled upon surrender thereof. ARTICLE V REVENUES, FUNDS AND ACCOUNTS; PAYMENT OF PRINCIPAL AND INTEREST Section 5.01. Pledge and Assignment; Revenue Fund. (a) All Taxes and Revenues and all amounts held in the Revenue Fund and the Tax Fund described in subsection (b) below and any other amounts held in any fund or account established pursuant to the Indenture (except the Rebate Fund) are hereby irrevocably pledged to secure the payment of the principal of and interest, and the premium, if any, on the 2013 Bonds in accordance with their terms and the provisions of the Indenture, and the Revenues and Taxes shall not be used for any other purpose while the 2013 Bonds remain Outstanding; provided that out of the Revenues and Taxes there may be apportioned such sums for such purposes as are expressly permitted herein. This pledge shall constitute a first and exclusive lien on Revenues and Taxes and all amounts on deposit in the Revenue Fund and the Tax Fund on a parity with the pledge under all Contracts and Bonds, subject to application of amounts on deposit therein as permitted herein. Such lien shall attach, be perfected and be valid and binding from and after the Closing 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. (b) In order to carry out and effectuate the pledge and lien contained herein, the District agrees and covenants that all Revenues and Taxes shall be received by the District in trust hereunder 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 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 Bonds remain unpaid. Moneys in the Revenue Fund and Tax Fund shall be used and applied by the District as provided herein and in the other Contracts and 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 this Section. 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 24 DOCSOC/1614034v4/200077-0005 and Maintenance Costs 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 for the transfer to the following respective special funds in the following order of priority: (i) Interest and Principal Payments. Not later than the fifth Business Day prior to each Interest 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 Payment Fund the payments of interest and principal on the 2013 Bonds due and payable on such Interest 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 respective 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 Bond or Contract. (ii) Reserve Funds. On or before each Interest Payment Date 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 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 Bonds or Contracts. (iii) Surplus. Moneys on deposit in the Tax Fund or the Revenue Fund on any date when the District reasonably expects such moneys will not be needed for any of the purposes described in clauses (b)(i) or (b)(ii) may be expended by the District at any time for any purpose permitted by law. (iv) Investments. All moneys held by the District in the Revenue Fund and the Tax Fund shall be invested in the manner authorized by the District’s financial policies or as otherwise permitted by law. The investment earnings thereon shall remain on deposit in such funds, except as otherwise provided herein. Section 5.02. Allocation of Revenues and Taxes. There is hereby established with the Trustee the Payment Fund which the Trustee covenants to maintain and hold in trust separate and apart from other funds held by it so long as any principal of and interest on the 2013 Bonds remain unpaid. Except as directed herein, all payments of interest and principal on the 2013 Bonds received by the Trustee pursuant to Section 5.01(b) shall be promptly deposited by the Trustee upon receipt thereof into the Payment Fund; except that all moneys received by the Trustee and required hereunder to be deposited in the Redemption Fund shall be promptly deposited therein. All payments of interest and principal on the 2013 Bonds deposited with the Trustee shall be held, disbursed, allocated and applied by the Trustee only as provided in the Indenture. The Trustee shall also establish and hold an Interest Account and a Principal Account within the Payment Fund. The Trustee shall transfer from the Payment Fund and deposit into the following respective accounts, the following amounts in the following order of priority and at the following times, the requirements of each such account (including the making up of any deficiencies in any such account 25 DOCSOC/1614034v4/200077-0005 resulting from lack of Revenues sufficient to make any earlier required deposit) at the time of deposit to be satisfied before any transfer is made to any account subsequent in priority: (a) Not later than the Business Day preceding each Interest Payment Date, the Trustee shall deposit in the Interest Account that sum, if any, required to cause the aggregate amount on deposit in the Interest Account to be at least equal to the amount of interest becoming due and payable on such date on all 2013 Bonds then Outstanding. No deposit need be made into the Interest Account so long as there shall be in such fund moneys sufficient to pay the interest becoming due and payable on such date on all 2013 Bonds then Outstanding. (b) Not later than the Business Day preceding each date on which the principal of the 2013 Bonds shall become due and payable hereunder, the Trustee shall deposit in the Principal Account that sum, if any, required to cause the aggregate amount on deposit in the Principal Account to equal the principal amount of the 2013 Bonds coming due and payable on such date or subject to mandatory sinking fund redemption on such date. No deposit need be made into the Principal Account so long as there shall be in such fund moneys sufficient to pay the principal becoming due and payable on such date on all 2013 Bonds then Outstanding. Section 5.03. [Reserved.] Section 5.04. Application of Interest Account. All amounts in the Interest Account shall be used and withdrawn by the Trustee solely for the purpose of paying interest on the 2013 Bonds as it shall become due and payable (including accrued interest on any 2013 Bonds purchased or accelerated prior to maturity pursuant to the Indenture). Section 5.05. Application of Principal Account. All amounts in the Principal Account shall be used and withdrawn by the Trustee solely to pay the principal amount of the 2013 Bonds at maturity, mandatory sinking fund redemption, purchase or acceleration; provided, however, that at any time prior to selection for redemption of any such 2013 Bonds, upon written direction of the District, the Trustee shall apply such amounts to the purchase of 2013 Bonds at public or private sale, as and when and at such prices (including brokerage and other charges, but excluding accrued interest, which is payable from the Interest Account) as shall be directed pursuant to a Written Request of the District, except that the purchase price (exclusive of accrued interest) may not exceed the Redemption Price then applicable to the 2013 Bonds. Section 5.06. Application of Redemption Fund. There is hereby established with the Trustee a special fund designated as the “Redemption Fund.” All amounts in the Redemption Fund shall be used and withdrawn by the Trustee solely for the purpose of paying the Redemption Price of the 2013 Bonds to be redeemed on any redemption date pursuant to Section 4.01; provided, however, that at any time prior to selection for redemption of any such 2013 Bonds, upon written direction of the District, the Trustee shall apply such amounts to the purchase of 2013 Bonds at public or private sale, as and when and at such prices (including brokerage and other charges, but excluding accrued interest, which is payable from the Interest Account) as shall be directed pursuant to a Written Request of the District, except that the purchase price (exclusive of accrued interest) may not exceed the Redemption Price then applicable to the 2013 Bonds. Section 5.07. Investments. All moneys in any of the funds or accounts established with the Trustee pursuant to the Indenture shall be invested by the Trustee solely in Permitted Investments. Such investments shall be directed by the District pursuant to a Written Request of the District filed 26 DOCSOC/1614034v4/200077-0005 with the Trustee at least two (2) Business Days in advance of the making of such investments (which directions shall be promptly confirmed to the Trustee in writing). In the absence of any such directions from the District, the Trustee shall invest any such moneys in Permitted Investments described in clause (b)(5) of the definition thereof; provided, however, that any such investment shall be made by the Trustee only if, prior to the date on which such investment is to be made, the Trustee shall have received a written direction from the District specifying a specific money market fund and, if no such written direction from the District is so received, the Trustee shall hold such moneys uninvested. Obligations purchased as an investment of moneys in any fund shall be deemed to be part of such fund or account. All interest or gain derived from the investment of amounts in any of the funds or accounts established hereunder shall be deposited in the Interest Account unless otherwise provided in the Indenture. For purposes of acquiring any investments hereunder, the Trustee may commingle funds (other than the Rebate Fund) held by it hereunder upon the Written Request of the District. The Trustee may act as principal or agent in the acquisition or disposition of any investment and may impose its customary charges therefor. The Trustee shall incur no liability for losses arising from any investments made pursuant to this Section 5.07. The District acknowledges that to the extent that regulations of the Comptroller of the Currency or other applicable regulatory entity grant the District the right to receive brokerage confirmations of security transactions as they occur, the District specifically waives receipt of such confirmations to the extent permitted by law. The Trustee will furnish the District periodic cash transaction statements which shall include detail for all investment transactions made by the Trustee hereunder. The Trustee or any of its affiliates may act as sponsor, advisor or manager in connection with any investments made by the Trustee under the Indenture. The District shall invest, or cause to be invested, all moneys in any fund or accounts established with the Trustee as provided in the Tax Certificate. For investment purposes, the Trustee may commingle the funds and accounts established hereunder, but shall account for each separately. In making any valuations of investments hereunder, the Trustee may utilize and rely on computerized securities pricing services that may be available to the Trustee, including those available through the Trustee accounting system. Section 5.08. Rebate Fund. (a) Establishment. The Trustee shall establish a fund for the 2013 Bonds 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 2013 Bonds will not be adversely affected, the District 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 for the 2013 Bonds shall be governed by this Section and the Tax Certificate, unless and to the extent that the District delivers to the Trustee an opinion of Bond Counsel that the exclusion from gross income for federal income tax purposes of interest on the 2013 Bonds will not be adversely affected if such requirements are not satisfied. Notwithstanding anything to the contrary contained herein or in the Tax Certificate, the Trustee: (i) shall be deemed 27 DOCSOC/1614034v4/200077-0005 conclusively to have complied with the provisions thereof if it follows all Requests of the District; and (ii) shall have no liability or responsibility to enforce compliance by the District with the terms of the Tax Certificate; and (iii) may rely conclusively on the District’s calculations and determinations and certifications relating to rebate matters; and (iv) shall have no responsibility to independently make any calculations or determinations or to review the District’s calculations or determinations thereunder. (i) Annual Computation. Within 55 days of the end of the fifth Bond Year (as such term is defined in the Tax Certificate) and each succeeding fifth anniversary, the District 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 exceptions of Section 148(f)(4)(B) and the construction expenditures exception of Section 148(f)(4)(C) of the Code), 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 date, within the meaning of Section 1.148-1(b) of the Treasury Regulations (the “Rebatable Arbitrage”). The District shall obtain expert advice as to the amount of the Rebatable Arbitrage to comply with this Section. (ii) Annual Transfer. Within 55 days of the end of the fifth Bond Year and each succeeding fifth anniversary, upon the Written Request of the District, an amount shall be deposited to the Rebate Fund by the Trustee from any Net Revenues legally available for such purpose (as specified by the District 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 clause (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 District, the Trustee shall withdraw the excess from the Rebate Fund and then credit the excess to the Payment Fund. (iii) Payment to the Treasury. The Trustee shall pay, as directed by Written Request of the District, 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 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 2013 Bonds, an amount equal to 100% of the Rebatable Arbitrage calculated as of the end of such applicable Bond Year, and any income attributable to the Rebatable Arbitrage, computed in accordance with Section 148(f) of the Code and 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 District 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, 28 DOCSOC/1614034v4/200077-0005 and shall be accompanied by Internal Revenue Service Form 8038-T (prepared by the District), 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 of the 2013 Bonds and the payments described in subsection (a) above being made may be withdrawn by the District and utilized in any manner by the District. (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 2013 Bonds. Section 5.09. Application of Funds and Accounts When No 2013 Bonds are Outstanding. On the date on which all 2013 Bonds shall be retired hereunder or provision made therefor pursuant to Article X and after payment of all amounts due the Trustee hereunder, all moneys then on deposit in any of the funds or accounts (other than the Rebate Fund) established with the Trustee pursuant to the Indenture shall be withdrawn by the Trustee and paid to the District for use by the District at any time for any purpose permitted by law. ARTICLE VI PARTICULAR COVENANTS Section 6.01. Punctual Payment. The District shall punctually pay or cause to be paid the principal and interest to become due in respect of all of the 2013 Bonds, in strict conformity with the terms of the 2013 Bonds and of the Indenture, according to the true intent and meaning thereof, but only out of Net Revenues and other assets pledged for such payment as provided in the Indenture. Section 6.02. Extension of Payment of 2013 Bonds. The District shall not directly or indirectly extend or assent to the extension of the maturity of any of the 2013 Bonds or the time of payment of any claims for interest by the purchase of such 2013 Bonds or by any other arrangement, and in case the maturity of any of the 2013 Bonds or the time of payment of any such claims for interest shall be extended, such 2013 Bonds or claims for interest shall not be entitled, in case of any default hereunder, to the benefits of the Indenture, except subject to the prior payment in full for the principal of all of the 2013 Bonds then Outstanding and of all claims for interest thereon which shall not have been so extended. Nothing in this Section shall be deemed to limit the right of the District to issue Bonds for the purpose of refunding any Outstanding 2013 Bonds, and such issuance shall not be deemed to constitute an extension of maturity of 2013 Bonds. Section 6.03. 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. The District may at any time, or from time to time, execute Contracts or issue Bonds as permitted herein. The District may also at any time, or from time to time, incur evidences of indebtedness or incur other obligations for any lawful purpose which are not Contracts or Bonds and 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, provided that such pledge and lien shall be subordinate in all respects to the pledge of and lien thereon provided herein. 29 DOCSOC/1614034v4/200077-0005 Section 6.04. Power to Issue 2013 Bonds and Make Pledge and Assignment. The District is duly authorized pursuant to law to issue the 2013 Bonds and to enter into the Indenture and to pledge and assign the Revenues and other assets purported to be pledged and assigned under the Indenture in the manner and to the extent provided in the Indenture. The 2013 Bonds and the provisions of the Indenture are and will be the legal, valid and binding special obligations of the District in accordance with their terms, and the District and the Trustee shall at all times, subject to the provisions of Article VIII and to the extent permitted by law, defend, preserve and protect said pledge and assignment of Revenues and other assets and all the rights of the 2013 Bond Owners under the Indenture against all claims and demands of all persons whomsoever. Section 6.05. Accounting Records and Financial Statements. (a) The Trustee shall at all times keep, or cause to be kept, proper books of record and account, prepared in accordance with corporate trust industry standards, in which complete and accurate entries shall be made of all transactions made by it relating to the proceeds of 2013 Bonds and all funds and accounts established by it pursuant to the Indenture. Such books of record and account shall be available for inspection by the District upon reasonable prior notice during business hours and under reasonable circumstances. (b) The District will keep appropriate accounting records in which complete and correct entries shall be made of all transactions relating to the Water System, which records shall be available for inspection by the Trustee (which shall have no duty to inspect such records) at reasonable hours and under reasonable conditions. Section 6.06. Tax Covenants. Notwithstanding any other provision of the Indenture, absent an opinion of Bond Counsel that the exclusion from gross income of the portion of interest on the 2013 Bonds will not be adversely affected for federal income tax purposes, the District covenants to comply with all applicable requirements of the Code necessary to preserve such exclusion from gross income with respect to the 2013 Bonds and specifically covenants, without limiting the generality of the foregoing, as follows: (a) Private Activity. The District will take no action or refrain from taking any action or make any use of the proceeds of the 2013 Bonds or of any other moneys or property which would cause the 2013 Bonds to be “private activity bonds” within the meaning of Section 141 of the Code; (b) Arbitrage. The District will make no use of the proceeds of the 2013 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 2013 Bonds to be “arbitrage bonds” within the meaning of Section 148 of the Code; (c) Federal Guarantee. The District will make no use of the proceeds of the 2013 Bonds or take or omit to take any action that would cause the 2013 Bonds to be “federally guaranteed” within the meaning of Section 149(b) of the Code; (d) Information Reporting. The District will take or cause to be taken all necessary action to comply with the informational reporting requirement of Section 149(e) of the Code necessary to preserve the exclusion of interest on the 2013 Bonds pursuant to Section 103(a) of the Code; 30 DOCSOC/1614034v4/200077-0005 (e) Hedge Bonds. The District will make no use of the proceeds of the 2013 Bonds or any other amounts or property, regardless of the source, or take any action or refrain from taking any action that would cause the 2013 Bonds to be considered “hedge bonds” within the meaning of Section 149(g) of the Code unless the District 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 2013 Bonds for federal income tax purposes; and (f) Miscellaneous. The District will take no action or refrain from taking any action inconsistent with its expectations stated in the Tax Certificate executed by the District in connection with the issuance of the 2013 Bonds and will comply with the covenants and requirements stated therein and incorporated by reference herein. This Section and the covenants set forth herein shall not be applicable to, and nothing contained herein shall be deemed to prevent the District from causing the Trustee to issue revenue bonds or to execute and deliver contracts payable on a parity with the 2013 Bonds, the interest with respect to which has been determined by Bond Counsel to be subject to federal income taxation. Section 6.07. Waiver of Laws. The District shall not at any time insist upon or plead in any manner whatsoever, or claim or take the benefit or advantage of, any stay or extension law now or at any time hereafter in force that may affect the covenants and agreements contained in the Indenture or in the 2013 Bonds, and all benefit or advantage of any such law or laws is hereby expressly waived by the District to the extent permitted by law. Section 6.08. Further Assurances. The District will make, execute and deliver any and all such further indentures, instruments and assurances as may be reasonably necessary or proper to carry out the intention or to facilitate the performance of the Indenture and for the better assuring and confirming unto the Owners of the 2013 Bonds of the rights and benefits provided in the Indenture. Section 6.09. Observance of Laws and Regulations. To the extent necessary to assure its performance hereunder, the District will well and truly keep, observe and perform all valid and lawful obligations or regulations now or hereafter imposed on the District by contract, or prescribed by any law of the United States of America, or of the State, or by any officer, board or commission having jurisdiction or control, as a condition of the continued enjoyment of any and every right, privilege or franchise now owned or hereafter acquired by the District, respectively, including its right to exist and carry on its business, to the end that such contracts, rights and franchises shall be maintained and preserved, and shall not become abandoned, forfeited or in any manner impaired. Section 6.10. Compliance with Contracts. The District will neither take nor omit to take any action under any contract if the effect of such act or failure to act would in any manner impair or adversely affect the ability of the District to pay principal of or interest on the 2013 Bonds; and 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 other contracts affecting or involving the Water System, to the extent that the District is a party thereto. Section 6.11. Prosecution and Defense of Suits. The District will preserve and protect the security hereof and the rights of the Trustee to the Taxes and Revenues hereunder and will warrant and defend such rights against all claims and demands of all persons. 31 DOCSOC/1614034v4/200077-0005 Section 6.12. Continuing Disclosure. The District hereby covenants and agrees that it will comply with and carry out all of its obligations under the Continuing Disclosure Agreement to be executed and delivered by the District in connection with the issuance of the 2013 Bonds. Notwithstanding any other provision of the Indenture, failure of the District to comply with the Continuing Disclosure Agreement shall not be considered an Event of Default; however, any Owner or Beneficial Owner 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 Section. For purposes of this Section, “Beneficial Owner” means any person which has or shares the power, directly or indirectly, to make investment decisions concerning ownership of any 2013 Bonds (including persons holding 2013 Bonds through nominees, depositories or other intermediaries). Section 6.13. Additional Contracts and Bonds. The District may, at any time, execute any Contract or issue any 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 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 Bonds had been issued at the beginning of 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 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 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 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 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 Bonds or Contracts. Notwithstanding the foregoing, Bonds issued or Contracts executed to refund 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 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 Bonds or execution of such Contracts. 32 DOCSOC/1614034v4/200077-0005 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 Bonds or the execution of any additional Contracts. Section 6.14. 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 principal of and interest on the 2013 Bonds, or which would otherwise impair 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 principal of and interest on the 2013 Bonds 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 6.15. Against Competitive Facilities. To the extent that it can so legally obligate itself, the District covenants that it will not 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 6.16. 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. Section 6.17. 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 Taxes or Revenues or the funds or accounts created hereunder or on any funds in the hands of the District pledged to pay the principal of or interest on the 2013 Bonds or to the Owners prior or superior to the lien under the Indenture. Section 6.18. Insurance. (a) The District will procure and maintain or cause to be procured and maintained insurance on the Water System with responsible insurers 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 33 DOCSOC/1614034v4/200077-0005 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 may be applied in part to the redemption of 2013 Bonds as provided in Section 4.01(a) and in part to such other fund or account as may be appropriate and used for the retirement of Bonds and Contracts in the same proportion which the aggregate unpaid principal balance of 2013 Bonds then bears to the aggregate unpaid principal amount of such Bonds and Contracts. If such Net Proceeds are sufficient to enable the District to retire the entire obligation evidenced hereby prior to the final due date of the 2013 Bonds as well as the entire obligations evidenced by 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 such Net Proceeds shall be applied to the redemption of 2013 Bonds as provided in Section 4.01(a) and to the retirement of such Bonds and Contracts. (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 2013 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 6.19. 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 6.20. 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 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 Revenues from such reduced rates and charges will at all times be sufficient to meet the requirements of this Section. When the 1996 Certificates and the 2007 Certificates are no longer 34 DOCSOC/1614034v4/200077-0005 Outstanding, then the Interest Subsidy Payments will be deducted from Net Revenues for purposes of the coverage calculations of this Section. Section 6.21. 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 System 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 6.22. 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 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 redemption of 2013 Bonds as provided in Section 4.01(a) and in part to such other fund or account as may be appropriate and used for the retirement of Bonds and Contracts in the same proportion which the aggregate unpaid principal balance of 2013 Bonds then bears to the aggregate unpaid principal amount of such Bonds and Contracts. Section 6.23. Enforcement of Contracts. The District will not voluntarily consent to or permit any rescission of, nor will it consent to any amendment to or otherwise take any action under or in connection with any contracts previously or hereafter entered into if such rescission or amendment would in any manner impair or adversely affect the ability of the District to pay principal of and interest on the 2013 Bonds. ARTICLE VII EVENTS OF DEFAULT AND REMEDIES OF 2013 BOND OWNERS Section 7.01. Events of Default. The following events shall be Events of Default hereunder: 35 DOCSOC/1614034v4/200077-0005 (a) Default by the District in the due and punctual payment of the principal of any 2013 Bonds, the principal of any Bonds or the principal with respect to any Contract, when and as the same shall become due and payable, whether at maturity as therein expressed, by proceedings for redemption, by acceleration, or otherwise. (b) Default by the District in the due and punctual payment of any installment of interest on any 2013 Bonds, any installment of interest on any Bond or any installment of interest with respect to any Contract, when and as the same shall become due and payable. (c) Default by the District in the observance of any of the other covenants, agreements or conditions on its part in the Indenture or in the 2013 Bonds, or required by any Bond or indenture relating thereto or by any Contract, if such default shall have continued for a period of sixty (60) days after written notice thereof, specifying such default and requiring the same to be remedied, shall have been given to the District by the Trustee or by the Owners of not less than a majority in aggregate principal amount of 2013 Bonds Outstanding, a majority in principal amount of such Bond outstanding, or a majority in principal amount outstanding with respect to such Contract, as applicable; provided, however, that if in the reasonable opinion of the District the default stated in the notice can be corrected, but not within such sixty (60) day period and corrective action is instituted by the District within such sixty (60) day period and diligently pursued in good faith until the default is corrected such default shall not be an Event of Default hereunder. (d) 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. (e) Payment of the principal of any Bond or with respect to any Contract is accelerated in accordance with its terms. Section 7.02. Remedies Upon Event of Default. If any Event of Default specified in Section 7.01(d) or (e) shall occur and be continuing, the Trustee shall, and for any other Event of Default, the Trustee may, and, at the written direction of the Owners of not less than a majority in aggregate principal amount of the 2013 Bonds at the time Outstanding, shall, in each case, upon notice in writing to the District, declare the principal of all of the 2013 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 the Indenture or in the 2013 Bonds contained to the contrary notwithstanding. Nothing contained herein shall permit or require the Trustee to accelerate payments due under the Indenture if the District is not in default of its obligation hereunder. 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 District shall deposit with the Trustee a sum sufficient to pay all the principal of and installments of interest on the 2013 Bonds payment of which is overdue, with interest on such 36 DOCSOC/1614034v4/200077-0005 overdue principal at the rate borne by the respective 2013 Bonds to the extent permitted by law, and the reasonable charges and expenses of the Trustee, or shall deposit with the applicable trustee with respect to any Contract a sum sufficient to pay all the principal and installments of interest with respect to such Contract payment of which is overdue, with interest on such overdue principal at the rate borne by such Contract to the extent permitted by law, and the reasonable charges and expenses of the applicable trustee with respect to such Contract, or shall deposit with the applicable trustee with respect to any Bond a sum sufficient to pay all the principal of and installment of interest on such Bond payment of which is overdue, with interest on such overdue principal at the rate borne by such Bonds to the extent permitted by law, and the reasonable charges and expenses of the applicable trustee with respect to such Bonds, and any and all other Events of Default known to the Trustee or the applicable trustee with respect to such Contract or Bonds (other than in the payment of principal of and interest on the 2013 Bonds, payment of principal and interest with respect to such Contract or payment of principal and interest on such Bond, as applicable, 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 2013 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 Revenues and Other Funds After Default. If an Event of Default shall occur and be continuing, all Revenues held or thereafter received by the Trustee and any other funds then held or thereafter received by the Trustee under any of the provisions of the Indenture (other than amounts held in the Rebate Fund) shall be applied in the following order: (a) To the payment of any expenses necessary in the opinion of the Trustee to protect the interests of the Owners of the 2013 Bonds, Contract or Bonds and payment of reasonable fees 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 the Indenture; (b) To the payment of Operation and Maintenance Costs; and (c) To the payment of the principal of and interest then due on the 2013 Bonds (upon presentation of the 2013 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 the Indenture, the payment of the principal and interest then due with respect to such Contract in accordance with the provisions thereof and the payment of the principal of and interest then due on such Bonds in accordance with the provisions thereof and of any indenture related thereto, in the following order of priority: First: To the payment to the persons entitled thereto of all installments of interest then due on the 2013 Bonds, with respect to such Contract or on such Bonds, as applicable, in the order of the maturity of such installments, and, if the amount available shall not be sufficient to pay in full any installment or installments maturing 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 2013 Bonds, principal with respect to such Contract or principal of any Bonds, as 37 DOCSOC/1614034v4/200077-0005 applicable, which shall have become due, whether at maturity or by acceleration or redemption, with interest on the overdue principal at the rate of eight percent (8%) per annum, and, if the amount available shall not be sufficient to pay in full all the 2013 Bonds, all amounts due under such Contract or all the Bonds, as applicable, 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; and Third: If there shall exist any remainder after the foregoing payments, such remainder shall be paid to the District. Section 7.04. Trustee to Represent 2013 Bond Owners. The Trustee is hereby irrevocably appointed (and the successive respective Owners of the 2013 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 2013 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 2013 Bonds or the Indenture and applicable provisions of 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 2013 Bond Owners, the Trustee in its discretion may, and upon the written request of the Owners of a majority in aggregate principal amount of the 2013 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 2013 Bonds or the Indenture or any law; and upon instituting such proceeding, the Trustee shall be entitled, as a matter of right, to the appointment of a receiver of the Revenues and other assets pledged under the Indenture, pending such proceedings. All rights of action under the Indenture or the 2013 Bonds or otherwise may be prosecuted and enforced by the Trustee without the possession of any of the 2013 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 2013 Bonds, subject to the provisions of the Indenture. Section 7.05. 2013 Bond Owners’ Direction of Proceedings. Anything in the Indenture to the contrary notwithstanding, the Owners of a majority in aggregate principal amount of the 2013 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 the 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 2013 Bond Owners not parties to such direction. Section 7.06. Suit by Owners. No Owner of any 2013 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 the Indenture with respect to such 2013 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 not less than fifty percent (50%) in aggregate principal amount of the 2013 Bonds then Outstanding shall have made written request upon the Trustee to exercise the powers hereinbefore granted or to 38 DOCSOC/1614034v4/200077-0005 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; and (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 2013 Bonds then Outstanding. 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 2013 Bonds of any remedy hereunder or under law; it being understood and intended that no one or more Owners of 2013 Bonds shall have any right in any manner whatever by his or their action to affect, disturb or prejudice the security of the Indenture or the rights of any other Owners of 2013 Bonds, or to enforce any right under the 2013 Bonds, the Indenture, or applicable law with respect to the 2013 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 2013 Bonds, subject to the provisions of the Indenture. Section 7.07. Absolute Obligation of the District. Nothing in this Section 7.07 or in any other provision of the Indenture or in the 2013 Bonds shall affect or impair the obligation of the District, which is absolute and unconditional, to pay the principal of and interest on the 2013 Bonds to the respective Owners of the 2013 Bonds at their respective dates of maturity, or upon call for redemption, as herein provided, but only out of the 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 2013 Bonds. Section 7.08. Remedies Not Exclusive. No remedy herein conferred upon or reserved to the Trustee or to the Owners of the 2013 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 7.09. No Waiver of Default. No delay or omission of the Trustee or of any Owner of the 2013 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. ARTICLE VIII THE TRUSTEE Section 8.01. Duties, Immunities and Liabilities of Trustee. (a) The Trustee shall, prior to an Event of Default, and after the curing or waiving of all Events of Default which may have occurred, perform such duties and only such duties as are expressly and specifically set forth in the Indenture and no implied covenants or duties shall be read into the Indenture against the Trustee. 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 39 DOCSOC/1614034v4/200077-0005 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 such person’s own affairs. (b) The District may remove the Trustee at any time, unless an Event of Default shall have occurred and then be continuing, and shall remove the Trustee if at any time requested to do so by an instrument or concurrent instruments in writing signed by the Owners of not less than a majority in aggregate principal amount of the 2013 Bonds then Outstanding (or their attorneys duly authorized in writing) or if at any time the Trustee shall cease to be eligible in accordance with subsection (e) of this Section, or shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or its property shall be appointed, or any public officer shall take control or charge of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, in each case by giving written notice of such removal to the Trustee and thereupon shall promptly appoint a successor Trustee by an instrument in writing. (c) The Trustee may at any time resign by giving written notice of such resignation to the District and by giving the 2013 Bond Owners notice of such resignation by mail at the addresses shown on the Registration Books. Upon receiving such notice of resignation, the District shall promptly appoint a successor Trustee by an instrument in writing. (d) Any removal or resignation of the Trustee and appointment of a successor Trustee shall become effective upon acceptance of appointment by the successor Trustee. If no successor Trustee shall have been appointed and have accepted appointment within forty five (45) days of giving notice of removal or notice of resignation as aforesaid, the resigning Trustee or any 2013 Bond Owner (on behalf of himself and all other 2013 Bond Owners) may petition any court of competent jurisdiction for the appointment of a successor Trustee, and such court may thereupon, after such notice (if any) as it may deem proper, appoint such successor Trustee. Any successor Trustee appointed under the Indenture shall signify its acceptance of such appointment by executing and delivering to the District and to its predecessor Trustee a written acceptance thereof, and thereupon such successor Trustee, without any further act, deed or conveyance, shall become vested with all the moneys, estates, properties, rights, powers, trusts, duties and obligations of such predecessor Trustee, with like effect as if originally named Trustee herein; but, nevertheless at the Written Request of the District or the request of the successor Trustee, such predecessor Trustee shall execute and deliver any and all instruments of conveyance or further assurance and do such other things as may reasonably be required for more fully and certainly vesting in and confirming to such successor Trustee all the right, title and interest of such predecessor Trustee in and to any property held by it under the Indenture and shall pay over, transfer, assign and deliver to the successor Trustee any money or other property subject to the trusts and conditions herein set forth. Upon request of the successor Trustee, the District shall execute and deliver any and all instruments as may be reasonably required for more fully and certainly vesting in and confirming to such successor Trustee all such moneys, estates, properties, rights, powers, trusts, duties and obligations. Upon acceptance of appointment by a successor Trustee as provided in this subsection, the District shall mail or cause the successor trustee to mail a notice of the succession of such Trustee to the trusts hereunder to each rating agency which is then rating the 2013 Bonds and to the 2013 Bond Owners at the addresses shown on the Registration Books. If the District fails to mail such notice within fifteen (15) days after acceptance of appointment by the successor Trustee, the successor Trustee shall cause such notice to be mailed at the expense of the District. (e) Any Trustee appointed under the provisions of this Section in succession to the Trustee shall be a trust company, banking association or bank having the powers of a trust 40 DOCSOC/1614034v4/200077-0005 company, having a combined capital and surplus of at least Seventy Five Million Dollars ($75,000,000), and subject to supervision or examination for federal or state authority. If such bank, 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 purpose of this subsection the combined capital and surplus of such trust company, banking association or bank shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this subsection (e), the Trustee shall resign immediately in the manner and with the effect specified in this Section. Section 8.02. Merger or Consolidation. Any trust company, banking association or bank into which the Trustee may be merged or converted or with which it may be consolidated or any trust company, banking association or bank resulting from any merger, conversion or consolidation to which it shall be a party or any trust company, banking association or bank to which the Trustee may sell or transfer all or substantially all of its corporate trust business, provided that such trust company, banking association or bank shall be eligible under subsection (e) of Section 8.01, shall be the successor to such Trustee, without the execution or filing of any paper or any further act, anything herein to the contrary notwithstanding. Section 8.03. Liability of Trustee. (a) The recitals of facts herein and in the 2013 Bonds shall be taken as statements of the District, and the Trustee shall not assume responsibility for the correctness of the same, or make any representations as to the validity or sufficiency of the Indenture or the 2013 Bonds, nor shall the Trustee incur any responsibility in respect thereof, other than as expressly stated herein in connection with the respective duties or obligations herein or in the 2013 Bonds assigned to or imposed upon it. The Trustee shall, however, be responsible for its representations contained in its certificate of authentication on the 2013 Bonds. The Trustee shall not be liable in connection with the performance of its duties hereunder, except for its own negligence or willful misconduct. The Trustee may become the Owner of 2013 Bonds with the same rights it would have if it were not Trustee, and, to the extent permitted by law, may act as depository for and permit any of its officers or directors to act as a member of, or in any other capacity with respect to, any committee formed to protect the rights of 2013 Bond Owners, whether or not such committee shall represent the Owners of a majority in principal amount of the 2013 Bonds then Outstanding. (b) The Trustee shall not be liable for any error of judgment made in good faith by a responsible officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts. (c) The Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Owners of not less than a majority (or such other percentage provided for herein) in aggregate principal amount of the 2013 Bonds at the time Outstanding relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee under the Indenture. (d) The Trustee shall not be liable for any action taken by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by the Indenture. 41 DOCSOC/1614034v4/200077-0005 (e) The Trustee shall not be deemed to have knowledge of any Default or Event of Default hereunder or any other event which, with the passage of time, the giving of notice, or both, would constitute an Event of Default hereunder unless and until a Responsible Officer of the Trustee shall have actual knowledge of such event or the Trustee shall have been notified in writing, in accordance with Section 11.07, of such event by the District or the Owners of not less than fifty percent (50%) of the 2013 Bonds then Outstanding. Except as otherwise expressly provided herein, the Trustee shall not be bound to ascertain or inquire as to the performance or observance by the District of any of the terms, conditions, covenants or agreements herein of any of the documents executed in connection with the 2013 Bonds, or as to the existence of an Event of Default thereunder or an event which would, with the giving of notice, the passage of time, or both, constitute an Event of Default thereunder. The Trustee shall not be responsible for the validity, effectiveness or priority of any collateral given to or held by it. (f) No provision of the 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. (g) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by the Indenture at the request, order or direction of any of the Owners pursuant to the Indenture, unless such Owners shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction. No permissive power, right or remedy conferred upon the Trustee hereunder shall be construed to impose a duty to exercise such power, right or remedy. (h) Whether or not herein expressly so provided, every provision of the Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Article VIII. (i) The Trustee shall have no responsibility or liability 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 2013 Bonds. (j) The immunities extended to the Trustee also extend to its directors, officers, employees and agents. (k) The Trustee may execute any of the trusts or powers of the Indenture and perform any of its duties through attorneys, agents and receivers and shall not be answerable for the conduct of the same if appointed by it with reasonable care. (l) The Trustee shall not be considered in breach of or in default in its obligations hereunder or progress in respect thereto in the event of enforced delay (“unavoidable delay”) in the performance of such obligations due to unforeseeable causes beyond its control and without its fault or negligence, including, but not limited to, Acts of God or of the public enemy or terrorists, acts of a government, acts of the other party, fires, floods, epidemics, quarantine restrictions, strikes, freight embargoes, earthquakes, explosion, mob violence, riot, inability to procure or general sabotage or rationing of labor, equipment, facilities, sources of energy, material or supplies in the open market, litigation or arbitration involving a party or others relating to zoning or other governmental action or inaction pertaining to the Water System, malicious mischief, 42 DOCSOC/1614034v4/200077-0005 condemnation, and unusually severe weather or delays of suppliers or subcontractors due to such causes or any similar event and/or occurrences beyond the control of the Trustee. (m) The Trustee agrees to accept and act upon instructions or directions pursuant to the Indenture sent by unsecured e-mail, facsimile transmission or other similar unsecured electronic methods, provided, however, that, the Trustee shall have received an incumbency certificate listing persons designated to give such instructions or directions and containing specimen signatures of such designated persons, which such incumbency certificate shall be amended and replaced whenever a person is to be added or deleted from the listing. If the District elects to give the Trustee e-mail or facsimile instructions (or instructions by a similar electronic method) and the Trustee in its discretion elects to act upon such instructions, the Trustee’s understanding of such instructions shall be deemed controlling. 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 such instructions conflict or are inconsistent with a subsequent written instruction. The District agrees to assume all risks arising out of the use of such electronic methods to submit instructions and directions 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. (n) The Trustee shall not be concerned with or accountable to anyone for the subsequent use or application of any moneys which shall be released or withdrawn in accordance with the provisions hereof. (o) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it hereby at the request, order or direction of any of the Owners pursuant to the provisions hereof 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. (p) The permissive right of the Trustee to do things enumerated herein shall not be construed as a duty and it shall not be answerable for other than its negligence or willful misconduct. Section 8.04. Right to Rely on Documents. The Trustee shall be protected in acting upon any notice, resolution, requisition, request, consent, order, certificate, report, opinion, notes, direction, facsimile transmission, electronic mail or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties. The Trustee may consult with counsel, who may be counsel of or to the District, with regard to legal questions, and the opinion of such counsel shall be full and complete authorization and protection in respect of any action taken or suffered by it hereunder in good faith and in accordance therewith. The Trustee may treat the Owners of the 2013 Bonds appearing in the Trustee’s Registration Books as the absolute owners of the 2013 Bonds for all purposes and the Trustee shall not be affected by any notice to the contrary. Whenever in the administration of the trusts imposed upon it by the 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, Request or Requisition of the District, and such Certificate, Request or Requisition shall be full warrant to the Trustee for any action taken or suffered in good faith under the provisions of the Indenture in reliance 43 DOCSOC/1614034v4/200077-0005 upon such Certificate, Request or Requisition, 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. Section 8.05. Preservation and Inspection of Documents. All documents received by the Trustee under the provisions of the Indenture shall be retained in their respective possession and shall be subject at all reasonable times to the inspection of the District and any 2013 Bond Owner, and their agents and representatives duly authorized in writing, at reasonable hours and under reasonable conditions. Section 8.06. Compensation and Indemnification. The District shall pay to the Trustee from time to time all reasonable compensation for all services rendered under the Indenture, and also all reasonable expenses, charges, legal and consulting fees and other disbursements and those of their attorneys, agents and employees, incurred in and about the performance of their powers and duties under the Indenture. The District shall indemnify, defend and hold harmless the Trustee, its officers, employees, directors and agents from and against any loss, costs, claims, liability or expense (including fees and expenses of its attorneys and advisors) incurred without negligence or bad faith on its part, arising out of or in connection with the execution of the Indenture, acceptance or administration of this trust, including costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers hereunder. The rights of the Trustee and the obligations of the District under this Section 8.06 shall survive removal or resignation of the Trustee hereunder or the discharge of the 2013 Bonds and the Indenture. ARTICLE IX MODIFICATION OR AMENDMENT OF THE INDENTURE Section 9.01. Amendments Permitted. (a) The Indenture and the rights and obligations of the District and of the Owners of the 2013 Bonds and of the Trustee may be modified or amended from time to time and at any time by an indenture or indentures supplemental thereto, which the District and the Trustee may enter into when the written consent of the Owners of a majority in aggregate principal amount of all 2013 Bonds then Outstanding, exclusive of 2013 Bonds disqualified as provided in Section 11.09 hereof, shall have been filed with the Trustee. No such modification or amendment shall: (1) extend the fixed maturity of any 2013 Bonds, or reduce the amount of principal thereof or premium (if any) thereon, or extend the time of payment, or change the rate of interest or the method of computing the rate of interest thereon, or extend the time of payment of interest thereon, without the consent of the Owner of each 2013 Bond so affected; or (2) reduce the aforesaid percentage of 2013 Bonds the consent of the Owners of which is required to affect any such modification or amendment, or permit the creation of any lien on the Revenues and other assets pledged under the Indenture prior to or on a parity with the lien created by the Indenture except as permitted herein, or deprive the Owners of the 2013 Bonds of the lien created by the Indenture on such Revenues and other assets except as permitted herein, without the consent of the Owners of all of the 2013 Bonds then Outstanding. It shall not be necessary for the consent of the 2013 Bond Owners to approve the particular form of any Supplemental Indenture, but it shall be sufficient if such consent shall approve the substance thereof. Promptly after the execution by the District and the Trustee of any Supplemental Indenture pursuant 44 DOCSOC/1614034v4/200077-0005 to this subsection (a), the Trustee shall mail a notice, setting forth in general terms the substance of such Supplemental Indenture, to each Rating Agency and the Owners of the 2013 Bonds at the respective addresses shown on the Registration Books. Any failure to give such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such Supplemental Indenture. (b) The Indenture and the rights and obligations of the District, the Trustee and the Owners of the 2013 Bonds may also be modified or amended from time to time and at any time by a Supplemental Indenture, which the District and the Trustee may enter into without the consent of any 2013 Bond Owners, if the Trustee shall receive an opinion of Bond Counsel to the effect that the provisions of such Supplemental Indenture shall not materially adversely affect the interests of the Owners of the Outstanding 2013 Bonds, including, without limitation, for any one or more of the following purposes: (1) to add to the covenants and agreements of the District contained in the Indenture other covenants and agreements thereafter to be observed, to pledge or assign additional security for the 2013 Bonds (or any portion thereof), or to surrender any right or power herein reserved to or conferred upon the District; (2) to make such provisions for the purpose of curing any ambiguity, inconsistency or omission, or of curing or correcting any defective provision, contained in the Indenture, or in regard to matters or questions arising under the Indenture, as the District may deem necessary or desirable; (3) to modify, amend or supplement the Indenture in such manner as to permit the qualification hereof under the Trust Indenture Act of 1939, as amended, or any similar federal statute hereunder in effect, and to add such other terms conditions and provisions as may be permitted by said act or similar federal statute; (4) to modify, amend or supplement the Indenture in such manner as to cause interest on the 2013 Bonds to remain excludable from gross income under the Code; and (5) to modify, amend or supplement the Indenture in connection with the issuance of additional Contracts or Bonds in accordance with the provisions of Section 6.13 hereof. (c) The Trustee may in its discretion, but shall not be obligated to, enter into any such Supplemental Indenture authorized by subsections (a) or (b) of this Section which materially adversely affects the Trustee’s own rights, duties or immunities under the Indenture or otherwise. (d) Prior to the Trustee entering into any Supplemental Indenture hereunder, there shall be delivered to the Trustee an opinion of Bond Counsel stating, in substance, that such Supplemental Indenture has been adopted in compliance with the requirements of the Indenture and that the adoption of such Supplemental Indenture will not, in and of itself, adversely affect the exclusion of interest on the 2013 Bonds from federal income taxation and from state income taxation. Section 9.02. Effect of Supplemental Indenture. Upon the execution of any Supplemental Indenture pursuant to this Article, the Indenture shall be deemed to be modified and amended in accordance therewith, and the respective rights, duties and obligations under the Indenture of the District, the Trustee and all Owners of 2013 Bonds Outstanding shall thereafter be determined, 45 DOCSOC/1614034v4/200077-0005 exercised and enforced thereunder subject in all respects to such modification and amendment, and all the terms and conditions of any such Supplemental Indenture shall be deemed to be part of the terms and conditions of the Indenture for any and all purposes. Section 9.03. Endorsement of 2013 Bonds; Preparation of New 2013 Bonds. 2013 Bonds delivered after the execution of any Supplemental Indenture pursuant to this Article may, and if the Trustee so determines shall, bear a notation by endorsement or otherwise in form approved by the District and the Trustee as to any modification or amendment provided for in such Supplemental Indenture, and, in that case, upon demand on the Owner of any 2013 Bonds Outstanding at the time of such execution and presentation of his or her 2013 Bonds for the purpose at the Office of the Trustee or at such additional offices as the Trustee may select and designate for that purpose, a suitable notation shall be made on such 2013 Bonds. If the Supplemental Indenture shall so provide, new 2013 Bonds so modified as to conform, in the opinion of the District and the Trustee, to any modification or amendment contained in such Supplemental Indenture, shall be prepared and executed by the District and authenticated by the Trustee, and upon demand on the Owners of any 2013 Bonds then Outstanding shall be exchanged at the Office of the Trustee, without cost to any 2013 Bond Owner, for 2013 Bonds then Outstanding, upon surrender for cancellation of such 2013 Bonds, in equal aggregate principal amount of the same maturity. Section 9.04. Amendment of Particular 2013 Bonds. The provisions of this Article shall not prevent any 2013 Bond Owner from accepting any amendment as to the particular 2013 Bonds held by him. ARTICLE X DEFEASANCE Section 10.01. Discharge of Indenture. The 2013 Bonds may be paid by the District in any of the following ways, provided that the District also pays or causes to be paid any other sums payable hereunder by the District: (a) by paying or causing to be paid the principal of and interest and redemption premiums (if any) on the 2013 Bonds, as and when the same become due and payable; (b) by depositing with the Trustee, in trust, at or before maturity, money or securities in the necessary amount (as provided in Section 10.03) to pay or redeem all 2013 Bonds then Outstanding; or (c) by delivering to the Trustee, for cancellation by it, all of the 2013 Bonds then Outstanding. If the District shall also pay or cause to be paid all other sums payable hereunder by the District, then and in that case, at the election of the District (as evidenced by a Certificate of the District, filed with the Trustee, signifying the intention of the District to discharge all such indebtedness and the Indenture), and notwithstanding that any 2013 Bonds shall not have been surrendered for payment, the Indenture and the pledge of Revenues and other assets made under the Indenture and all covenants, agreements and other obligations of the District under the Indenture shall cease, terminate, become void and be completely discharged and satisfied. In such event, upon the Written Request of the District, the Trustee shall execute and deliver to the District all such 46 DOCSOC/1614034v4/200077-0005 instruments as may be necessary or desirable to evidence such discharge and satisfaction, and the Trustee shall pay over, transfer, assign or deliver all moneys or securities or other property held by it pursuant to the Indenture which are not required for the payment or redemption of 2013 Bonds not theretofore surrendered for such payment or redemption to the District. Section 10.02. Discharge of Liability on 2013 Bonds. Upon the deposit with the Trustee, in trust, at or before maturity, of money or securities in the necessary amount (as provided in Section 10.03) to pay or redeem any Outstanding 2013 Bonds (whether upon the maturity of such 2013 Bonds), provided that, if such Outstanding 2013 Bonds are to be redeemed prior to maturity, notice of such redemption shall have been given as provided in Article IV or provisions satisfactory to the Trustee shall have been made for the giving of such notice, then all liability of the District in respect of such 2013 Bonds shall cease, terminate and be completely discharged, and the Owners thereof shall thereafter be entitled only to payment out of such money or securities deposited with the Trustee as aforesaid for their payment, subject however, to the provisions of Section 10.04. The District may at any time surrender to the Trustee for cancellation by it any 2013 Bonds previously issued and delivered, which the District may have acquired in any manner whatsoever, and such 2013 Bonds, upon such surrender and cancellation, shall be deemed to be paid and retired. Section 10.03. Deposit of Money or Securities with Trustee. Whenever in the Indenture it is provided or permitted that there be deposited with or held in trust by the Trustee money or securities in the necessary amount to pay or redeem any 2013 Bonds, the money or securities so to be deposited or held may include money or securities held by the Trustee in the funds and accounts established pursuant to the Indenture and shall be: (a) lawful money of the United States of America in an amount equal to the principal amount of such 2013 Bonds and all unpaid interest thereon to maturity, except that, in the case of 2013 Bonds which are to be redeemed prior to maturity and in respect of which notice of such redemption shall have been given as provided in Article IV or provisions satisfactory to the Trustee shall have been made for the giving of such notice, the amount to be deposited or held shall be the principal amount of such 2013 Bonds and all unpaid interest and premium, if any, thereon to the redemption date; or (b) Federal Securities the principal of and interest on which when due will, in the written opinion of an Independent Certified Public Accountant or Independent Financial Consultant filed with the District and the Trustee, provide money sufficient to pay the principal of and all unpaid interest to maturity, or to the redemption date (with premium, if any), as the case may be, on the 2013 Bonds to be paid or redeemed, as such principal, interest and premium, if any, become due, provided that in the case of 2013 Bonds which are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as provided in Article IV or provision satisfactory to the Trustee shall have been made for the giving of such notice; provided, in each case, that: (i) the Trustee shall have been irrevocably instructed (by the terms of the Indenture or by Written Request of the District) to apply such money to the payment of such principal, interest and premium, if any, with respect to such 2013 Bonds; and (ii) the District shall have delivered to the Trustee an opinion of Bond Counsel addressed to the District and the Trustee to the effect that such 2013 Bonds have been discharged in accordance with the Indenture (which opinion may rely upon and assume the accuracy of the Independent Certified Public Accountants or Independent Financial Consultant’s opinion referred to above). 47 DOCSOC/1614034v4/200077-0005 Section 10.04. Payment of 2013 Bonds After Discharge of Indenture. Notwithstanding any provisions of the Indenture, any moneys held by the Trustee in trust for the payment of the principal of, or interest on, any 2013 Bonds and remaining unclaimed for two (2) years after the principal of all of the 2013 Bonds has become due and payable (whether at maturity or upon call for redemption or by acceleration as provided in the Indenture), if such moneys were so held at such date, or two (2) years after the date of deposit of such moneys if deposited after said date when all of the 2013 Bonds became due and payable, shall be repaid to the District free from the trusts created by the Indenture upon receipt of an indemnification agreement acceptable to the District and the Trustee indemnifying the Trustee with respect to claims of Owners of 2013 Bonds which have not yet been paid, and all liability of the Trustee with respect to such moneys shall thereupon cease; provided, however, that before the repayment of such moneys to the District as aforesaid, the Trustee shall at the written direction of the District (at the cost of the District) first mail to the Owners of 2013 Bonds which have not yet been paid, at the addresses shown on the Registration Books, a notice, in such form as may be deemed appropriate by the Trustee with respect to the 2013 Bonds so payable and not presented and with respect to the provisions relating to the repayment to the District of the moneys held for the payment thereof. ARTICLE XI MISCELLANEOUS Section 11.01. Liability of District Limited to Revenues. Notwithstanding anything in the Indenture or the 2013 Bonds, but subject to the priority of payment with respect to Operation and Maintenance Costs, the District shall not be required to advance any moneys derived from any source other than the Revenues, the Revenue Fund and other moneys pledged under the Indenture for any of the purposes in the Indenture mentioned, whether for the payment of the principal of or interest on the 2013 Bonds or for any other purpose of the Indenture. Nevertheless, the District may, but shall not be required to, advance for any of the purposes hereof any funds of the District which may be made available to it for such purposes. The obligation of the District to pay interest and principal on the 2013 Bonds is a special obligation of the District payable solely from the Net Revenues, and does not constitute a debt of the District or of the State of California or of any political subdivision thereof (other than the District) in contravention of any constitutional or statutory debt limitation or restriction. Section 11.02. Successor Is Deemed Included in All References to Predecessor. Whenever in the Indenture either the District or the Trustee is named or referred to, such reference shall be deemed to include the successors or assigns thereof, and all the covenants and agreements in the Indenture contained by or on behalf of the District or the Trustee shall bind and inure to the benefit of the respective successors and assigns thereof whether so expressed or not. Section 11.03. Limitation of Rights to Parties and 2013 Bond Owners. Nothing in the Indenture or in the 2013 Bonds expressed or implied is intended or shall be construed to give to any person other than the District, the Trustee and the Owners of the 2013 Bonds, any legal or equitable right, remedy or claim under or in respect of the Indenture or any covenant, condition or provision therein or herein contained; and all such covenants, conditions and provisions are and shall be held to be for the sole and exclusive benefit of the District, the Trustee and the Owners of the 2013 Bonds. 48 DOCSOC/1614034v4/200077-0005 Section 11.04. Waiver of Notice; Requirement of Mailed Notice. Whenever in the Indenture the giving of notice by mail or otherwise is required, the giving of such notice may be waived in writing by the person entitled to receive such notice and in any such case the giving or receipt of such notice shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. Whenever in the Indenture any notice shall be required to be given by mail, such requirement shall be satisfied by the deposit of such notice in the United States mail, postage prepaid, by first class mail. Section 11.05. Destruction of 2013 Bonds. Whenever in the Indenture provision is made for the cancellation by the Trustee and the delivery to the District of any 2013 Bonds, the Trustee shall destroy such 2013 Bonds as may be allowed by law, and deliver a certificate of such destruction to the District. Section 11.06. Severability of Invalid Provisions. If any one or more of the provisions contained in the Indenture or in the 2013 Bonds shall for any reason be held to be invalid, illegal or unenforceable in any respect, then such provision or provisions shall be deemed severable from the remaining provisions contained in the Indenture and such invalidity, illegality or unenforceability shall not affect any other provision of the Indenture, and the Indenture shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein. The District hereby declares that it would have entered into the Indenture and each and every other Section, paragraph, sentence, clause or phrase hereof and authorized the issuance of the 2013 Bonds pursuant thereto irrespective of the fact that any one or more Sections, paragraphs, sentences, clauses or phrases of the Indenture may be held illegal, invalid or unenforceable. Notices. Any notice to or demand upon the District or the Trustee shall be deemed to have been sufficiently given or served for all purposes by being sent by facsimile or email or by being deposited, first class mail, postage prepaid, in a post office letter box, addressed, as the case may be, to the District at Otay Water District, 2554 Sweetwater Springs Boulevard, Spring Valley, California 91978, Attention: General Manager (or such other address as may have been filed in writing by the District with the Trustee), or to the Trustee at Union Bank, N.A., 120 San Pedro Street, Suite 400, Los Angeles, California 90012, Attention: Corporate Trust Department, Reference: Otay Water District, Series 2013. Notwithstanding the foregoing provisions of this Section 11.07, the Trustee shall not be deemed to have received, and shall not be liable for failing to act upon the contents of, any notice unless and until the Trustee actually receives such notice. Section 11.07. Evidence of Rights of 2013 Bond Owners. Any request, consent or other instrument required or permitted by the Indenture to be signed and executed by 2013 Bond Owners may be in any number of concurrent instruments of substantially similar tenor and shall be signed or executed by such 2013 Bond Owners in person or by an agent or agents duly appointed in writing. Proof of the execution of any such request, consent or other instrument or of a writing appointing any such agent, or of the holding by any person of 2013 Bonds transferable by delivery, shall be sufficient for any purpose of the Indenture and shall be conclusive in favor of the Trustee and the District if made in the manner provided in this Section. The fact and date of the execution by any person of any such request, consent or other instrument or writing may be proved by the certificate of any notary public or other officer of any jurisdiction, authorized by the laws thereof to take acknowledgments of deeds, certifying that the person signing such request, consent or other instrument acknowledged to him the execution thereof, 49 DOCSOC/1614034v4/200077-0005 or by an affidavit of a witness of such execution duly sworn to before such notary public or other officer. The Ownership of 2013 Bonds shall be proved by the Registration Books. Any request, consent, or other instrument or writing of the Owner of any 2013 Bond shall bind every future Owner of the same 2013 Bond and the Owner of every 2013 Bond issued in exchange therefor or in lieu thereof, in respect of anything done or suffered to be done by the Trustee or the District in accordance therewith or reliance thereon. Section 11.08. Disqualified 2013 Bonds. In determining whether the Owners of the requisite aggregate principal amount of 2013 Bonds have concurred in any demand, request, direction, consent or waiver under the Indenture, 2013 Bonds which are known by the Trustee to be owned or held by or for the account of the District, or by any other obligor on the 2013 Bonds, or by any person directly or indirectly controlling or controlled by, or under direct or indirect common control with, the District or any other obligor on the 2013 Bonds, shall be disregarded and deemed not to be Outstanding for the purpose of any such determination. 2013 Bonds so owned which have been pledged in good faith may be regarded as Outstanding for the purposes of this Section if the pledgee shall establish to the satisfaction of the Trustee the pledgee’s right to vote such 2013 Bonds and that the pledgee is not a person directly or indirectly controlling or controlled by, or under direct or indirect common control with, the District or any other obligor on the 2013 Bonds. In case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. Upon request, the District shall certify to the Trustee those 2013 Bonds that are disqualified pursuant to this Section 11.09 and the Trustee may conclusively rely on such certificate. Section 11.09. Money Held for Particular 2013 Bonds. The money held by the Trustee for the payment of the interest, principal or premium due on any date with respect to particular 2013 Bonds (or portions of 2013 Bonds in the case of registered 2013 Bonds redeemed in part only) shall, on and after such date and pending such payment, be set aside on its books and held in trust by it for the Owners of the 2013 Bonds entitled thereto, subject, however, to the provisions of Section 10.04 hereof but without any liability for interest thereon. Section 11.10. Funds and Accounts. Any fund or account required by the Indenture to be established and maintained by the Trustee may be established and maintained in the accounting records of the Trustee, either as a fund or an account, and may, for the purposes of such records, any audits thereof and any reports or statements with respect thereto, be treated either as a fund or as an account; but all such records with respect to all such funds and accounts shall at all times be maintained in accordance with corporate trust industry standards to the extent practicable, and with due regard for the requirements of Section 6.05(a) and for the protection of the security of the 2013 Bonds and the rights of every Owner thereof. Section 11.11. Waiver of Personal Liability. No member, officer, agent, employee, consultant or attorney of the District shall be individually or personally liable for the payment of the principal of or premium or interest on the 2013 Bonds or be subject to any personal liability or accountability by reason of the issuance thereof; but nothing herein contained shall relieve any such member, officer, agent, employee, consultant or attorney from the performance of any official duty provided by law or by the Indenture. 50 DOCSOC/1614034v4/200077-0005 Section 11.12. Execution in Several Counterparts. The Indenture may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original; and all such counterparts, or as many of them as the District and the Trustee shall preserve undestroyed, shall together constitute but one and the same instrument. Section 11.13. CUSIP Numbers. Neither the Trustee nor the District shall be liable for any defect or inaccuracy in the CUSIP number that appears on any 2013 Bond or in any redemption notice. The Trustee may, in its discretion, include in any redemption notice a statement to the effect that the CUSIP numbers on the 2013 Bonds have been assigned by an independent service and are included in such notice solely for the convenience of the 2013 Bondholders and that neither the District nor the Trustee shall be liable for any inaccuracies in such numbers. Section 11.14. Choice of Law. THE INDENTURE SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA. S-1 DOCSOC/1614034v4/200077-0005 IN WITNESS WHEREOF, the District has caused the Indenture to be signed in its name by its President, and the Trustee, in token of its acceptance of the trusts created hereunder, has caused the Indenture to be signed in its corporate name by its officer thereunto duly authorized, all as of the day and year first above written. OTAY WATER DISTRICT By: Its: President ____________________, as Trustee By: Its: Authorized Officer A-1 DOCSOC/1614034v4/200077-0005 EXHIBIT A FORM OF 2013 BOND UNLESS THIS BOND IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY (AS DEFINED IN THE INDENTURE) TO THE TRUSTEE FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY BOND ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. No. ____ $__________ UNITED STATES OF AMERICA STATE OF CALIFORNIA OTAY WATER DISTRICT 2013 WATER REVENUE REFUNDING BOND INTEREST RATE MATURITY DATE ORIGINAL ISSUE DATE CUSIP ____% September 1, 20__ __________, 2013 ________ REGISTERED OWNER CEDE & CO. PRINCIPAL AMOUNT: _________________________________________ DOLLARS The OTAY WATER DISTRICT, a municipal water district duly organized and existing under the laws of the State of California (the “District”), 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, whether or not such day is a business day, 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 August 15, 2013, in which event it shall bear interest from the Original Issue 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 September 1, 2013 and each March 1 and September 1 thereafter, calculated on the basis of a 360 day year composed of twelve 30 day months. Principal hereof and premium, if any, upon early redemption hereof are payable by check of the Trustee upon presentation and surrender hereof at the Office (as defined in the hereinafter described Indenture) of Union Bank, N.A., as trustee (the “Trustee”). Interest hereon A-2 DOCSOC/1614034v4/200077-0005 is payable by check of the Trustee sent by first class mail on the applicable interest payment date to the Registered Owner hereof at the Registered Owner’s address as it appears on the registration books of the Trustee as of the close of business on the fifteenth day of the month preceding each interest payment date (except that in the case of a Registered Owner of one million dollars ($1,000,000) or more in principal amount, such payment may, at such Registered Owner’s option, be made by wire transfer of immediately available funds to an account in the United States in accordance with written instructions provided to the Trustee by such Registered Owner prior to the fifteenth (15th) day of the month preceding such interest payment date). This Bond is not a debt of the State of California, or any of its political subdivisions (other than the District), and neither the State, nor any of its political subdivisions (other than the District), is liable hereon, nor in any event shall this Bond be payable out of any funds or properties of the District other than the Net Revenues (as such term is defined in the Indenture of Trust, dated as of May 1, 2013 (the “Indenture”), by and between the District and the Trustee) and other moneys pledged therefor under the Indenture. The obligation of the District to make payments in accordance with the Indenture is a limited obligation of the District as set forth in the Indenture and the District shall have no liability or obligation in connection herewith except with respect to such payments to be made pursuant to the Indenture. This Bond does not constitute an indebtedness of the District in contravention of any constitutional or statutory debt limitation or restriction. This Bond is one of a duly authorized issue of bonds of the District designated as the “Otay Water District 2013 Water Revenue Refunding Bonds” (the “2013 Bonds”), of an aggregate principal amount of ___ Million ___ Hundred ___ Thousand Dollars ($_____), all of like tenor and date (except for such variation, if any, as may be required to designate varying series, numbers or interest rates) and all issued pursuant to the provisions of Article 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the Government Code of the State of California, including but not limited to Section 53583, and pursuant to the Indenture and the resolution authorizing the issuance of the 2013 Bonds. Reference is hereby made to the Indenture (copies of which are on file at the office of the District) and all supplements thereto for a description of the terms on which the 2013 Bonds are issued, the provisions with regard to the nature and extent of the Net Revenues, and the rights thereunder of the Owners of the 2013 Bonds and the rights, duties and immunities of the Trustee and the rights and obligations of the District hereunder, to all of the provisions of which the Registered Owner of this Bond, by acceptance hereof, assents and agrees. The 2013 Bonds have been issued in fully registered form without coupons in denominations of $5,000 or any integral multiple thereof. The 2013 Bonds have been issued by the District to refund all the outstanding Otay Water District Revenue Refunding Certificates of Participation Series (1993 Water Facilities Project) 2004, as more fully described in the Indenture. This Bond and the interest, premium, if any, hereon and all other 2013 Bonds and the interest and premium, if any, thereon (to the extent set forth in the Indenture) are special obligations of the District, secured by a pledge and lien on the Revenues and Taxes and any other amounts on deposit in certain funds and accounts created under the Indenture, and payable from the Revenues and Taxes. As and to the extent set forth in the Indenture, all of the Revenues and Taxes are exclusively and irrevocably pledged in accordance with the terms and the provisions of the Indenture, to the payment of the principal of and interest and premium (if any) on this Bond. The Indenture and the rights and obligations of the District and the Owners of the 2013 Bonds and the Trustee may be modified or amended from time to time and at any time with the A-3 DOCSOC/1614034v4/200077-0005 written consent of the Owners of a majority in aggregate principal amount of all 2013 Bonds then Outstanding, exclusive of Bonds disqualified as set forth in the Indenture, in the manner, to the extent and upon the terms provided in the Indenture, but no such modification or amendment shall: (i) extend the fixed maturity of any 2013 Bonds, or reduce the amount of principal thereof or premium (if any) thereon, or extend the time of payment, or change the method of computing the rate of interest thereon, or extend the time of payment of interest thereon, without the consent of the owner of each 2013 Bond so affected; or (ii) reduce the aforesaid percentage of 2013 Bonds the consent of the Owners of which is required to affect any such modification or amendment, or permit the creation of any lien on the Revenues and other assets pledged under the Indenture prior to or on a parity with the lien created by the Indenture except as permitted in the Indenture, or deprive the Owners of the 2013 Bonds of the lien created by the Indenture on such Revenues and other assets, except as expressly provided in the Indenture, without the consent of the Owners of all of the 2013 Bonds then Outstanding. The Indenture and the rights and obligations of the District, of the Trustee and the Owners of the 2013 Bonds may also be modified or amended for certain purposes described more fully in the Indenture at any time in the manner, to the extent and upon the terms provided in the Indenture by a supplemental indenture, which the District and the Trustee may enter into without the consent of any 2013 Bond Owners, if the Trustee shall receive an opinion of Bond Counsel to the effect that the provisions of such supplemental indenture will not materially adversely affect the interests of the Owners of the Outstanding 2013 Bonds. The 2013 Bonds are subject to extraordinary redemption prior to their respective stated maturities, as a whole or in part on any date in the order of maturity and within maturities as directed by the District in a Written Request provided to the Trustee at least 35 days (or such lesser number of days acceptable to the Trustee in the sole discretion of the Trustee, such notice for the convenience of the Trustee) prior to such date and by lot within each maturity in integral multiples of $5,000 from Net Proceeds, upon the terms and conditions of, and as provided for in, the Indenture at a redemption price equal to the principal amount thereof plus accrued interest thereon to the date fixed for redemption, without premium. As provided in the Indenture, notice of redemption shall be mailed by the Trustee by first class mail at least 30 days but not more than 60 days prior to the date fixed for redemption to the respective Owners of any 2013 Bonds designated for redemption at their addresses appearing on the registration books of the Trustee, but neither the failure to receive such notice nor any defect in the notice or the mailing thereof shall affect the validity of the redemption. If this Bond is called for redemption and payment is duly provided therefor as specified in the Indenture, interest shall cease to accrue hereon from and after the date fixed for redemption. If an Event of Default, as defined in the Indenture, shall occur, the principal of all of the 2013 Bonds and the interest accrued thereon 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 in writing, 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 2013 Bond or 2013 Bonds A-4 DOCSOC/1614034v4/200077-0005 of the same series, of authorized denomination or denominations, for the same aggregate principal amount of the same maturity will be issued to the transferee in exchange therefor. This Bond may be exchanged at said office of the Trustee for a like aggregate principal amount of Bonds of other authorized denominations of the same series and same 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 or exchange of this Bond during the period in which the Trustee is selecting 2013 Bonds for redemption or if this Bond has been selected for redemption. The District and the Trustee may treat the Registered Owner hereof as the absolute owner hereof for all purposes, and the District 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 Indenture and the laws of the State of California and that the amount of this Bond, together with all other indebtedness of the District, does not exceed any limit under any laws of the State of California, and is not in excess of the amount of 2013 Bonds permitted to be issued under the Indenture. 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 manually signed by the Trustee. IN WITNESS WHEREOF, the District has caused this Bond to be executed in its name and on its behalf with the manual or facsimile signature of its President as of this ____ day of __________, 2013. OTAY WATER DISTRICT By: Its: President A-5 DOCSOC/1614034v4/200077-0005 [FORM OF TRUSTEE’S CERTIFICATE OF AUTHENTICATION TO APPEAR ON BONDS] This is one of the Bonds described in the within-mentioned Indenture. Dated: __________, 2013 _________________________, as Trustee By: Its: Authorized Signatory A-6 DOCSOC/1614034v4/200077-0005 [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: 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 guarantee shall be made by a guarantor institution participating in the Securities Transfer Agents Medallion Program or in such other guarantee program acceptable to the Trustee. DOCSOC/1614064v4/200077-0005 ESCROW AGREEMENT THIS ESCROW AGREEMENT, dated as of May 1, 2013 (the “Agreement”), by and between the Otay Water District (the “District”) and Union Bank, N.A., as escrow agent (the “Escrow Agent”), is entered into in accordance with Resolution No. 4203 of the District adopted on May 1, 2013 and a Trust Agreement, dated as of July 1, 2004 (the “Trust Agreement”), by and among the Otay Service Corporation (the “Corporation”), Union Bank, N.A., formerly known as Union Bank of California, N.A. (the “2004 Trustee”), and the District to advance refund the outstanding Otay Water District Revenue Refunding Certificates of Participation (1993 Water Facilities Project) Series 2004 set forth in Schedule A hereto (the “Refunded 2004 Certificates”). W I T N E S S E T H : WHEREAS, the District previously authorized the execution and delivery of the Refunded 2004 Certificates pursuant to the Trust Agreement; WHEREAS, the District has determined that a portion of the proceeds of the $__________ aggregate principal amount of the Otay Water District 2013 Water Revenue Refunding Bonds, (the “Bonds”) issued pursuant to an Indenture of Trust, dated as of May 1, 2013, by and between the District and Union Bank, N.A., as trustee (the “Trustee”), will be used to provide the Escrow Agent with sufficient funds to pay on and prior to September 1, 2014, all regularly scheduled payments of interest and principal with respect to the Refunded 2004 Certificates, and to pay on September 1, 2014 the principal with respect to the Refunded 2004 Certificates maturing after September 1, 2014, plus interest with respect thereto accrued to such date, without premium (the “Prepayment Price”); and WHEREAS, the Escrow Agent will use the moneys deposited with it to purchase the securities described on Schedule B hereto (the “Federal Securities”), which Federal Securities satisfy the criteria set forth in Section 10.01 of the Trust Agreement; NOW THEREFORE, in consideration of the mutual covenants and agreements herein contained, the District and the Escrow Agent agree as follows: SECTION 1. Deposit of Moneys. The District hereby irrevocably deposits with the Escrow Agent $__________ from the net proceeds of the Bonds and instructs the Escrow Agent to deposit such funds in the Escrow Fund established hereunder. The District further instructs the Escrow Agent to deposit $__________ transferred to it by the 2004 Trustee in the Escrow Fund. The Escrow Agent shall hold all such amounts in irrevocable escrow separate and apart from other funds of the District and the Escrow Agent in a fund hereby created and established to be known as the “Escrow Fund” and to be applied solely as provided in this Agreement. The District represents that the moneys set forth above are at least equal to an amount sufficient to purchase the Federal Securities listed in Schedule B hereto, and to hold $____ uninvested as cash. SECTION 2. Investment of Moneys. The Escrow Agent acknowledges receipt of the moneys described in Section 1 and agrees immediately to invest such moneys in the Federal Securities listed on Schedule B hereto, to deposit such Federal Securities in the Escrow Fund and to hold $_________ uninvested in cash. The Escrow Agent shall be entitled to rely upon the conclusion Attachment F 2 DOCSOC/1614064v4/200077-0005 of __________ (the “Verification Agent”), that the Federal Securities listed on Schedule B hereto mature and bear interest payable in such amounts and at such times as, together with cash on deposit in the Escrow Fund, will be sufficient to pay when due all regularly scheduled payments of interest and principal with respect to the Refunded 2004 Certificates on and prior to September 1, 2014, and to pay on September 1, 2014 the Prepayment Price of the Refunded 2004 Certificates maturing after September 1, 2014. SECTION 3. Investment of Any Remaining Moneys. At the written direction of the District, the Escrow Agent shall reinvest any other amount of principal and interest, or any portion thereof, received from the Federal Securities prior to the date on which such payment is required for the purposes set forth herein, in noncallable Federal Securities maturing not later than the date on which such payment or portion thereof is required for the purposes set forth in Section 5, at the written direction of the District, as verified in a report prepared by an independent certified public accountant or firm of certified public accountants of favorable national reputation experienced in the refunding of obligations of political subdivisions to the effect that the reinvestment described in said report will not adversely affect the sufficiency of the amounts of securities, investments and money in the Escrow Fund to pay when due all regularly scheduled payments of interest with respect to the Refunded 2004 Certificates on and prior to September 1, 2014, and to pay on September 1, 2014 the Prepayment Price of the Refunded 2004 Certificates maturing after September 1, 2014, and provided that the District has obtained and delivered to the Escrow Agent an unqualified opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, that such reinvestment will not adversely affect the exclusion from gross income for federal income tax purposes of the interest portion of the Installment Payments (as such term is defined in the Trust Agreement) or interest on the Bonds. Any interest income resulting from investment or reinvestment of moneys pursuant to this Section 3 which are not required for the purposes set forth in Section 5, as verified in the letter of the Verification Agent originally obtained by the District with respect to the refunding of the Refunded 2004 Certificates or in any other report prepared by an independent certified public accountant or firm of certified public accountants of favorable national reputation experienced in the refunding of tax-exempt obligations of political subdivisions, shall be paid to the District promptly upon the receipt of such interest income by the Escrow Agent. The determination of the District as to whether an accountant qualifies under this Escrow Agreement shall be conclusive. SECTION 4. Substitution of Securities. Upon the written request of the District, and subject to the conditions and limitations herein set forth and applicable governmental rules and regulations, the Escrow Agent shall sell, redeem or otherwise dispose of the Federal Securities, provided that there are substituted therefor from the proceeds of the Federal Securities other Federal Securities, but only after the District has obtained and delivered to the Escrow Agent: (i) an unqualified opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, to the effect that the substitution of securities is permitted under the Trust Agreement and that such reinvestment will not adversely affect the exclusion from gross income for federal income tax purposes of the interest portion of the Installment Payments (as such term is defined in the Trust Agreement) or interest on the Bonds; and (ii) a report by a firm of independent certified public accountants to the effect that the reinvestment described in said report will not adversely affect the sufficiency of the amounts of securities, investments and money in the Escrow Fund to pay when due all regularly scheduled payments of interest and principal with respect to the Refunded 2004 Certificates on and prior to September 1, 2014, and to pay on September 1, 2014 the Prepayment Price of the Refunded 2004 Certificates maturing after September 1, 2014. The Escrow Agent shall not be liable or responsible for any loss resulting from any reinvestment made pursuant to this Agreement and in full compliance with the provisions hereof. 3 DOCSOC/1614064v4/200077-0005 SECTION 5. Payment of Refunded 2004 Certificates. (a) Payment. From the maturing principal of the Federal Securities and the investment income and other earnings thereon and other moneys on deposit in the Escrow Fund, the Escrow Agent shall on each March 1 and September 1, commencing September 1, 2013, through and including September 1, 2014, apply the amounts on deposit in the Escrow Fund to pay when due all regularly scheduled payments of principal and interest with respect to the Refunded 2004 Certificates on and prior to September 1, 2014, and to pay on September 1, 2014 the Prepayment Price of the Refunded 2004 Certificates maturing after September 1, 2014. (b) Irrevocable Instructions to Provide Notice. The forms of the notice of prepayment and notice of defeasance required to be mailed pursuant to Sections 4.03 and 10.01 of the Trust Agreement are substantially in the forms attached hereto as Exhibits A and B. The District hereby irrevocably instructs the Escrow Agent to mail a notice of prepayment and a notice of defeasance of the Refunded 2004 Certificates in accordance with Sections 4.03 and 10.01, respectively, of the Trust Agreement, as required to provide for the prepayment of the Refunded 2004 Certificates in accordance with this Section 5. (c) Unclaimed Moneys. Any moneys which remain unclaimed for one year after September 1, 2014 shall be repaid by the Escrow Agent to the District. (d) Priority of Payments. The owners of the Refunded 2004 Certificates shall have a first and exclusive lien on all moneys and securities in the Escrow Fund until such moneys and such securities are used and applied as provided in this Agreement. (e) Termination of Obligation. As provided in the Trust Agreement, upon deposit of moneys with the Escrow Agent in the Escrow Fund as set forth in Section 1 hereof and the purchase of the various Federal Securities as provided in Section 2 hereof, all obligations of the District under the Trust Agreement with respect to the Refunded 2004 Certificates shall cease, terminate and become void except as set forth in the Trust Agreement. As provided in Section 9.01 of the Installment Purchase Agreement, dated as of July 1, 2004 (the “Installment Purchase Agreement”), the obligations of the District under the Installment Purchase Agreement shall cease, terminate, become void and be completely discharged and satisfied (except for the rights of the 2004 Trustee and the obligation of the District to have the Federal Securities and moneys on deposit in the Escrow Fund applied to Installment Payments). SECTION 6. Application of Certain Terms of the Trust Agreement. All of the terms of the Trust Agreement relating to the making of payments of principal and interest with respect to the Refunded 2004 Certificates and relating to the exchange or transfer of the Refunded 2004 Certificates are incorporated in this Agreement as if set forth in full herein. The procedures set forth in Section 8.03 of the Trust Agreement relating to the resignation and removal and merger of the 2004 Trustee under the Trust Agreement are also incorporated in this Agreement as if set forth in full herein and shall be the procedures to be followed with respect to any resignation or removal of the Escrow Agent hereunder. SECTION 7. Performance of Duties. The Escrow Agent agrees to perform only the duties set forth herein and shall have no responsibility to take any action or omit to take any action not set forth herein. 4 DOCSOC/1614064v4/200077-0005 SECTION 8. Escrow Agent’s Authority to Make Investments. Except as provided in Section 2 hereof, the Escrow Agent shall have no power or duty to invest any funds held under this Agreement or to sell, transfer or otherwise dispose of the moneys or Federal Securities held hereunder. SECTION 9. Indemnity. The District hereby assumes liability for, and hereby agrees (whether or not any of the transactions contemplated hereby are consummated) to indemnify, protect, save and keep harmless the Escrow Agent and its respective successors, assigns, agents, employees and servants, from and against any and all liabilities, obligations, losses, damages, penalties, claims, actions, suits, costs, expenses and disbursements (including reasonable legal fees and disbursements) of whatsoever kind and nature which may be imposed on, incurred by, or asserted against, the Escrow Agent at any time (whether or not also indemnified against the same by the District or any other person under any other agreement or instrument, but without double indemnity) in any way relating to or arising out of the execution, delivery and performance of this Agreement, the establishment hereunder of the Escrow Fund, the acceptance of the funds and securities deposited therein, the retention of the proceeds thereof and any payment, transfer or other application of moneys or securities by the Escrow Agent in accordance with the provisions of this Agreement; provided, however, that the District shall not be required to indemnify the Escrow Agent against the Escrow Agent’s own negligence or willful misconduct or the negligence or willful misconduct of the Escrow Agent’s respective employees or the willful breach by the Escrow Agent of the terms of this Agreement. In no event shall the District or the Escrow Agent be liable to any person by reason of the transactions contemplated hereby other than to each other as set forth in this Section. The indemnities contained in this Section shall survive the termination of this Agreement. SECTION 10. Responsibilities of Escrow Agent. The Escrow Agent and its agents and servants shall not be held to any personal liability whatsoever, in tort, contract, or otherwise, in connection with the execution and delivery of this Agreement, the establishment of the Escrow Fund, the acceptance of the moneys or securities deposited therein, the retention of the Federal Securities or the proceeds thereof, the sufficiency of the Federal Securities to pay the Refunded 2004 Certificates or any payment, transfer or other application of moneys or obligations by the Escrow Agent in accordance with the provisions of this Agreement or by reason of any non-negligent act, non-negligent omission or non-negligent error of the Escrow Agent made in good faith in the conduct of its duties. The recitals of fact contained in the “Whereas” clauses herein shall be taken as the statements of the District, and the Escrow Agent assumes no responsibility for the correctness thereof. The Escrow Agent makes no representation as to the sufficiency of the proceeds to accomplish the refunding of the Refunded 2004 Certificates or to the validity of this Agreement as to the District and, except as otherwise provided herein, the Escrow Agent shall incur no liability in respect thereof. The Escrow Agent shall not be liable in connection with the performance of its duties under this Agreement except for its own negligence, willful misconduct or default, and the duties and obligations of the Escrow Agent shall be determined by the express provisions of this Agreement. The Escrow Agent may consult with counsel, who may or may not be counsel to the District, and in reliance upon the written opinion of such counsel shall have full and complete authorization and protection in respect of any action taken, suffered or omitted by it in good faith in accordance therewith. Whenever the Escrow Agent shall deem it necessary or desirable that a matter be proved or established prior to taking, suffering, or omitting any action under this Agreement, such matter may be deemed to be conclusively established by a certificate signed by an officer of the District. 5 DOCSOC/1614064v4/200077-0005 SECTION 11. Amendments. This Agreement is made for the benefit of the District and the owners from time to time of the Refunded 2004 Certificates and it shall not be repealed, revoked, altered or amended without the written consent of all such owners, the Escrow Agent and the District; provided, however, that the District and the Escrow Agent may, without the consent of, or notice to, such owners, amend this Agreement or enter into such agreements supplemental to this Agreement as shall not adversely affect the rights of such owners and as shall not be inconsistent with the terms and provisions of this Agreement, Division 11 of the Water Code of the State of California, or the Trust Agreement, for any one or more of the following purposes: (i) to cure any ambiguity or formal defect or omission in this Agreement; (ii) to grant to, or confer upon, the Escrow Agent for the benefit of the owners of the Refunded 2004 Certificates, any additional rights, remedies, powers or authority that may lawfully be granted to, or conferred upon, such owners or the Escrow Agent; and (iii) to include under this Agreement additional funds. The Escrow Agent shall be entitled to rely conclusively upon an unqualified opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, with respect to compliance with this Section, including the extent, if any, to which any change, modification, addition or elimination affects the rights of the owners of the various Refunded 2004 Certificates or that any instrument executed hereunder complies with the conditions and provisions of this Section. SECTION 12. Notice to Rating Agencies. In the event that this agreement or any provision thereof is severed, amended or revoked the Escrow Agent shall provide written notice of such severance, amendment or revocation to the rating agencies then rating the Refunded 2004 Certificates. SECTION 13. Term. This Agreement shall commence upon its execution and delivery and shall terminate on the later to occur of either: (i) the date upon which the Refunded 2004 Certificates have been paid in accordance with this Agreement; or (ii) the date upon which no unclaimed moneys remain on deposit with the Escrow Agent pursuant to Section 5(c) of this Agreement. SECTION 14. Compensation. The Escrow Agent shall receive its reasonable fees and expenses as previously agreed to by the Escrow Agent and the District and any other reasonable fees and expenses of the Escrow Agent approved by the District; provided, however, that under no circumstances shall the Escrow Agent be entitled to any lien or assert any lien whatsoever on any moneys or obligations in the Escrow Fund for the payment of fees and expenses for services rendered or expenses incurred by the Escrow Agent under this Agreement. SECTION 15. Severability. If any one or more of the covenants or agreements provided in this Agreement on the part of the District or the Escrow Agent to be performed should be determined by a court of competent jurisdiction to be contrary to law, such covenants or agreements shall be null and void and shall be deemed separate from the remaining covenants and agreements herein contained and shall in no way affect the validity of the remaining provisions of this Agreement. SECTION 16. Counterparts. This Agreement may be executed in several counterparts, all or any of which shall be regarded for all purposes as an original but all of which shall constitute and be but one and the same instrument. SECTION 17. Governing Law. THIS AGREEMENT SHALL BE CONSTRUED UNDER THE LAWS OF THE STATE OF CALIFORNIA. 6 DOCSOC/1614064v4/200077-0005 SECTION 18. Insufficient Funds. If at any time the Escrow Agent has actual knowledge that the moneys and investments in the Escrow Fund, including the anticipated proceeds of and earnings thereon, will not be sufficient to make all payments required by this Agreement, the Escrow Agent shall notify the District in writing, of the amount thereof and the reason therefor to the extent known to it. The Escrow Agent shall have no responsibility regarding any such deficiency. SECTION 19. Notice to District and Escrow Agent. Any notice to or demand upon the Escrow Agent may be served or presented, and such demand may be made, at the principal corporate trust office of the Escrow Agent at Union Bank, N.A., 120 San Pedro Street, Suite 400, Los Angeles, California 90012, Attention: Corporate Trust Department. Any notice to or demand upon the District shall be deemed to have been sufficiently given or served for all purposes by being mailed by registered or certified mail, and deposited, postage prepaid, in a post office letter box, addressed to the District at 2554 Sweetwater Springs Boulevard, Spring Valley, California 91978, Attention: General Manager (or such other address as may have been filed in writing by the District with the Escrow Agent). [Remainder of Page Intentionally Left Blank] S-1 DOCSOC/1614064v4/200077-0005 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers and attested as of the date first above written. OTAY WATER DISTRICT By: President UNION BANK, N.A., as Escrow Agent and 2004 Trustee By: Authorized Officer Schedule A-1 DOCSOC/1614064v4/200077-0005 SCHEDULE A Refunded 2004 Certificates Payment Date Rate Principal Schedule B-1 DOCSOC/1614064v4/200077-0005 SCHEDULE B Federal Securities Security Maturity Principal Amount Interest Rate Exhibit A-1 DOCSOC/1614064v4/200077-0005 EXHIBIT A NOTICE OF PREPAYMENT OTAY WATER DISTRICT REVENUE REFUNDING CERTIFICATES OF PARTICIPATION (1993 WATER FACILITIES PROJECT), SERIES 2004 BASE CUSIP NO. __________ NOTICE IS HEREBY GIVEN to the owners of the above-captioned Certificates of Participation (the “Certificates”) of the Otay Water District (the “District”) pursuant to the Trust Agreement, dated as of July 1, 2004 (the “Trust Agreement”), by and among the District, the Otay Service Corporation and Union Bank, N.A. (formerly known as Union Bank of California, N.A.), as trustee (the “Trustee”), that the Certificates in the amount of $__________ have been called for prepayment on September 1, 2014 (the “Prepayment Date”). CUSIP Maturity (September 1) Rate Amount Price 100% 100 100 100 100 100 The Certificates will be payable on the Prepayment Date at a prepayment price of 100% of the principal amount plus accrued interest to such date (the “Prepayment Price”). The Prepayment Price of the Certificates will become due and payable on the Prepayment Date. Interest with respect to the Certificates to be prepaid will cease to accrue on and after the Prepayment Date, and such Certificates will be surrendered to the Trustee. All Certificates are required to be surrendered to the principal corporate office of the Trustee, on the Prepayment Date at the following location. If the Certificates are mailed, the use of registered, insured mail is recommended: [To Come] If the Owner of any Certificate subject to optional prepayment fails to deliver such Certificate to the Trustee on the Prepayment Date, such Certificate shall nevertheless be deemed prepaid on the Prepayment Date and the Owner of such Certificate shall have no rights in respect thereof except to receive payment of the Prepayment Price from funds held by the Trustee for such payment. A form W-9 must be submitted with the Certificates. Failure to provide a completed form W-9 will result in 31% backup withholding pursuant to the Interest and Dividend Tax Compliance Act of 1983. Under the Jobs and Growth Tax Relief Reconciliation Act of 2003, 28% will be withheld if the tax identification number is not properly certified. UNION BANK, N.A., as Trustee DATED this 1st day of August, 2014. Exhibit B-1 DOCSOC/1614064v4/200077-0005 EXHIBIT B NOTICE OF DEFEASANCE OTAY WATER DISTRICT REVENUE REFUNDING CERTIFICATES OF PARTICIPATION (1993 WATER FACILITIES PROJECT), SERIES 2004 BASE CUSIP NO. __________ NOTICE IS HEREBY GIVEN to the owners of the above-captioned certificates of participation (the “2004 Certificates”) of the Otay Water District (the “District”), that the District has deposited with Union Bank, N.A. (formerly known as Union Bank of California, N.A.), as trustee (the “Trustee”) under the Trust Agreement, dated as of July 1, 2004 (the “Trust Agreement”), by and among the District, the Otay Service Corporation (the “Corporation”) and the Trustee, cash and federal securities, the principal of and interest on which when paid will provide moneys sufficient to pay on and prior to September 1, 2014 the regularly scheduled payments of principal and interest with respect to the 2004 Certificates, and to pay on September 1, 2014 the principal with respect to the 2004 Certificates and the prepayment premium of the 2004 Certificates maturing after September 1, 2014. In accordance with the Trust Agreement, the 2004 Certificates are deemed to have been paid in accordance with Section 10.01 thereof and the obligations of the District and the Corporation under the Trust Agreement and the Installment Purchase Agreement, dated as of July 1, 2004, by and between the District and the Corporation, with respect to the 2004 Certificates have been released and shall thereupon cease, terminate and become void and be discharged and satisfied. UNION BANK, N.A., as Trustee DATED this ___ day of __________, 2013. 1 OFFICIAL NOTICE OF SALE $7,900,000* OTAY WATER DISTRICT 2013 WATER REVENUE REFUNDING BONDS (BANK QUALIFIED) NOTICE IS HEREBY GIVEN that electronic bids only will be received by representatives of the Otay Water District (the “District”) for the purchase of $7,900,000* approximate aggregate principal amount of 2013 Water Revenue Refunding Bonds (Bank Qualified) (the “Bonds”), more particularly described below. DATE AND TIME: TUESDAY, MAY 14, 2013, at 9:30 A.M. (Pacific Time). SUBMISSION OF BIDS: Bids may be submitted (for receipt not later than the time set forth above) electronically only through the I‐Deal LLC 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 if the refunding of the Otay Water District’s outstanding 2004 Refunding Certificates of Participation (the “2004 Certificates”) do not meet its minimum savings goals but in any event may be adjusted to fit the District’s refunding requirements. See “ADJUSTMENT OF PRINCIPAL AMOUNTS AND OF MATURITIES” below. TERMS OF BONDS; PRELIMINARY OFFICIAL STATEMENT: The terms of issuance, payment of the principal and the interest on the Bonds, redemption, security, tax exemption and all other information regarding the Bonds and the Otay Water District are given in the Preliminary Official Statement for the Bonds, dated _______, 2013 (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 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 May 1, 2013 (the “Indenture”), by and between the District and Union Bank, N.A., as trustee (the “Trustee), as approved by a resolution of the Board of Directors of the District, adopted on May 1, 2013. 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. __________________________ * Preliminary, subject to change. Attachment G 2 MATURITIES: The Bonds will mature, or be subject to mandatory sinking fund 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: Maturity Date Principal Maturity Date Principal (September 1) Amount* (September 1) Amount* 2013 2019 2014 2020 2015 2021 2016 2022 2017 2023 2018 __________________________ * Preliminary, subject to change. ADJUSTMENT OF PRINCIPAL AMOUNTS AND OF MATURITIES: The maturity amounts set forth in this Official Notice of Sale reflect certain estimates of the District and its financial 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 achieve approximately proportional annual savings with respect to the refunding of the 2004 Certificates 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 6 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 no successful bid may be withdrawn. The successful bidder will not be permitted to change the interest rates in its bid. INTEREST: Interest with respect to the Bonds, calculated on a 30/360 day basis, at a rate or rates to be fixed upon the sale thereof, but not to exceed 5% per annum, will be payable semiannually on each September 1 and March 1, commencing September 1, 2013. PAYMENT: DTC will act as securities depository for the Bonds. Principal of the Bonds upon maturity or earlier redemption 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. NO OPTIONAL REDEMPTION: The Bonds are not subject to optional redemption prior to their respective stated maturities. SINKING FUND 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 fund 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,” at a redemption price equal to the principal amount thereof to be redeemed together with accrued interest thereon to the redemption date, without premium. 3 PURPOSE: The proceeds of the Bonds, together with other available moneys, will be applied by the District to provide funds to refinance the District’s outstanding 2004 Certificates, and pay costs incurred in connection with issuance of the Bonds. SECURITY: The Bonds are secured by Taxes and Net Revenues of the District’s Water System, as described in the Preliminary Official Statement, pursuant to the Indenture and any other amounts held in certain funds under the Indenture. The Bonds are payable on a parity with other obligations of the District as described in the Preliminary Official Statement. The Bonds are a special obligation of the District payable solely from Taxes and Net Revenues, as described in the Preliminary Official Statement, and other funds provided for in the Indenture, and do not constitute a debt of the District or of the State, or of any political subdivision thereof, in contravention of any constitutional or statutory debt limitation or restriction. Neither the faith and credit nor the taxing power of the District or the State, or any political subdivision thereof, is pledged to the payment of the Bonds or other payments required to be made under the Indenture. RATING: Standard & Poor’s Ratings Services has assigned a rating of “__” to the Bonds. The cost of obtaining such rating will be borne entirely by the District 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. 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 may not exceed 5%; (iii) a zero rate of interest cannot be specified; (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 not less than all of the Bonds hereby offered for sale and for not less than 99% of the aggregate par amount thereof. ELECTRONIC BIDS: To the extent any instructions or directions set forth in BiDCOMP/PARITY© conflict with this Official Notice of Sale, the terms of this Official Notice of Sale shall control. For further information about BiDCOMP/PARITY©, bidders may contact Harrell & Company Advisors, LLC (the “Financial Advisor”) at (714) 939‐1464 or BiDCOMP/PARITY© at (212) 849-5021. THE DISTRICT RETAINS ABSOLUTE DISCRETION TO DETERMINE WHETHER ANY BID IS TIMELY, LEGIBLE AND COMPLETE. NONE OF THE DISTRICT, THE FINANCIAL 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. 4 EACH BIDDER SUBMITTING AN ELECTRONIC BID UNDERSTANDS AND AGREES BY DOING SO THAT IT IS SOLELY RESPONSIBLE FOR ALL ARRANGEMENTS WITH BiDCOMP/PARITY© AND THAT BiDCOMP/PARITY© IS NOT ACTING AS AN AGENT OF THE DISTRICT. INSTRUCTIONS AND FORMS FOR SUBMITTING ELECTRONIC BIDS MUST BE OBTAINED FROM BiDCOMP/PARITY© AND THE DISTRICT ASSUMES NO RESPONSIBILITY FOR ENSURING OR VERIFYING BIDDER COMPLIANCE WITH THE PROCEDURES OF BiDCOMP/PARITY©. THE DISTRICT SHALL ASSUME THAT ANY BID RECEIVED THROUGH BiDCOMP/PARITY© HAS BEEN MADE BY A DULY AUTHORIZED AGENT OF THE BIDDER. THE DISTRICT WILL MAKE ITS BEST EFFORTS TO ACCOMMODATE ELECTRONIC BIDS; HOWEVER THE DISTRICT, THE FINANCIAL 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 DISTRICT, AND THE DISTRICT SHALL NOT BE REQUIRED TO ACCEPT THE TIME KEPT BY 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 District. 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 May 30, 2013) 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 District, which shall be considered as informative only and shall not be binding on either the bidder or the District. The determination of the best bid by the Financial Advisor shall be binding and conclusive on all bidders. RIGHT OF CANCELLATION OF SALE BY DISTRICT: The District reserves the right, in its sole discretion, at any time to cancel the public sale of the Bonds. In such event, the District 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. RIGHT TO MODIFY OR AMEND: The District 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 10:00 A.M., California time, on the business day prior to the bid opening and communicated through the Bond Buyer Wire or TM3. RIGHT OF POSTPONEMENT BY DISTRICT: The District 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 10:00 A.M., California time, on the business day prior to any announced date for receipt of bids. If any date is postponed, any 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. 5 RIGHT OF REJECTION: The District reserves the right, in its sole discretion, to reject any and all bids and to waive any irregularity or informality in any bid except that no bids will be accepted later than 9:30 A.M. on the date set for receipt of bids. PROMPT AWARD: Pursuant to authority granted by the Board of Directors, the District 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 said Board 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 his 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. 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 (except alternative minimum taxes and environmental taxes payable by corporations) by any federal income tax law enacted subsequent to the date of this Official Notice of Sale. CLOSING PAPERS; BOND PRINTING: Each proposal will be understood to be conditioned upon the District 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 District, substantially to the effect, subject to the matters expressed therein, that the Bonds constitute the valid and binding special obligations of the District and that based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes, interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, but that such interest on the Bonds is included in adjusted current earnings when calculating corporate alternative minimum taxable income. (b) A certificate of the District 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 District evidencing the receipt of the purchase price of the Bonds; (e) A certificate of the District certifying that there is no known litigation threatened or pending affecting the validity of the Bonds; and 6 (f) A certificate of the District, to the effect that at the time of the sale of the Bonds, and at all times subsequent thereto up to and including the time of the delivery of the Bonds, the Official Statement relating to the Bonds did not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. DISCLOSURE COUNSEL OPINION: Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California will also act as Disclosure Counsel in connection with the issuance of the Bonds. Such firm will render a legal opinion to the District 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. QUALIFICATION FOR SALE; BLUE SKY: Compliance with blue sky laws shall be the sole responsibility of the purchaser. The District will furnish such information and take such action not inconsistent with law as the purchaser may request and the District 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 District 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. 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. CERTIFICATION OF REOFFERING PRICE: The successful bidder shall be required, as a condition to the delivery of the Bonds, to provide to the District initial offering price information in form and substance as Bond Counsel may require, including certification that, as of the date of sale, (i) all of the Bonds were expected to be reoffered in a bona fide public offering at the stated initial offering price, which was the price at which all the Bonds were expected to be sold to the public, (ii) the Bonds were offered to the general public in a bona fide offering at the stated initial offering price, and (iii) the initial offering prices at which the Bonds were sold to the public, including the first price at which at least 10% of each maturity of the Bonds actually has been sold to the general public. CALIFORNIA DEBT AND INVESTMENT ADVISORY COMMISSION: The successful bidder will be required, pursuant to State 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 or bidders. 7 OFFICIAL STATEMENT: The District has caused to be prepared the Preliminary Official Statement in a form deemed final, as of its date, by 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 1430, Orange, California 92868, telephone (714) 939-1464. Upon the sale of the Bonds, the District will publish the final Official Statement in substantially the same form as the Preliminary Official Statement, subject to minor additions, deletions, and revisions as required to complete the Preliminary Official Statement. The District 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 District 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 District, (2) promptly file a copy of the final Official Statement, including any supplements prepared by the District, 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 should review the form of opinion of Bond Counsel set forth in Appendix E to the Preliminary Official Statement. DISCLOSURE CERTIFICATE: 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, 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: May __, 2013