$71,090,000 ANTELOPE VALLEY-EAST KERN WATER AGENCY WATER REVENUE REFUNDING BONDS, SERIES 2016

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1 NEW ISSUE FULL BOOK-ENTRY ONLY RATINGS: S&P: AA Moody s: A1 (See RATINGS herein) In the opinion of James F. Anderson Law Firm, A Professional Corporation, Laguna Hills, California, Bond Counsel, based on 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 and agreements, interest on the 2016 Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, as amended (the Code ) and is exempt from State of California personal income taxes. In the opinion of Bond Counsel, interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. Bond Counsel expresses no opinion regarding any other tax consequence related to the ownership or disposition of, or the accrual or receipt of interest on the 2016 Bonds. See TAX MATTERS herein regarding certain other tax considerations. $71,090,000 ANTELOPE VALLEY-EAST KERN WATER AGENCY WATER REVENUE REFUNDING BONDS, SERIES 2016 Dated: Date of Delivery Due: June 1, as shown on inside cover The Antelope Valley-East Kern Water Agency Water Revenue Refunding Bonds, Series 2016 (the 2016 Bonds ) are being issued pursuant to the Indenture of Trust, dated as of April 1, 2016 (the Indenture ), by and between Antelope Valley-East Kern Water Agency (the Agency ) and Wells Fargo Bank, National Association, as trustee (the Trustee ). The 2016 Bonds are being issued (i) to advance prepay a portion of certain prior installment payment obligations of the Agency which are evidenced and represented by certain outstanding Certificates of Participation (the Refunded Prior Certificates ) and (ii) to pay for the costs of delivering the 2016 Bonds. The Refunded Prior Certificates were delivered to finance the acquisition and construction of certain water system improvements of the Agency. The 2016 Bonds are limited obligations of the Agency payable solely from Net Revenues, which consist of Revenues of the Agency s wholesale water system (the Water System ) remaining after payment of Maintenance and Operation Costs, and from amounts on deposit in certain funds and accounts created under the Indenture. No reserve fund will be established for the 2016 Bonds. The obligation of the Agency to pay principal of and interest on the 2016 Bonds is payable from Net Revenues on a parity with the installment payments payable pursuant to the Installment Sale Agreement, dated as of March 1, 2007 (the Original Installment Sale Agreement ), between the Agency and the CSDA Finance Corporation (the Corporation ), as supplemented by a First Supplemental Installment Sale Agreement, dated as of May 1, 2008 (the First Supplemental Installment Sale Agreement, and together with the Original Installment Sale Agreement, the Installment Sale Agreement ), a portion of which will remain outstanding after the prepayment of certain installment payments as described herein. The Agency may incur additional obligations payable from Net Revenues on a parity with the obligation to pay principal of and interest on the 2016 Bonds and the installment payments payable pursuant to the Installment Sale Agreement, subject to the terms and conditions of the Indenture, as more fully described herein. The 2016 Bonds will be delivered as fully registered bonds in book entry form only, initially registered in the name of Cede & Co., as nominee of The Depository Trust Company ( DTC ). DTC will act as securities depository for the 2016 Bonds as described herein under THE 2016 BONDS Book-Entry System. Purchasers will not receive bonds representing the 2016 Bonds. Individual purchases will be in principal amounts of $5,000 and any integral multiple thereof with respect to the 2016 Bonds. Payments of principal of and interest on the 2016 Bonds will be paid by the Trustee to DTC for subsequent disbursement to DTC Participants who will remit such payments to the beneficial owners of the 2016 Bonds. Interest on the 2016 Bonds will be payable on June 1 and December 1 of each year, commencing June 1, 2016, and principal of the 2016 Bonds will be paid on June 1 of each year as set forth in the Maturity Schedule on the inside cover hereof. The 2016 Bonds are subject to optional redemption as described herein. See THE 2016 BONDS Redemption herein. THE 2016 BONDS, AND ANY PREMIUMS PAYABLE UPON THE REDEMPTION OF ANY OF THE 2016 BONDS, ARE LIMITED OBLIGATIONS OF THE AGENCY PAYABLE SOLELY FROM NET REVENUES which consist of Revenues of the water system remaining after payment of Maintenance and Operation Costs of the Water System AND OTHER AMOUNTS HELD UNDER THE INDENTURE. UNDER NO CIRCUMSTANCES WILL THE AGENCY BE REQUIRED TO ADVANCE ANY MONEYS DERIVED FROM ANY SOURCE OF INCOME OTHER THAN NET REVENUES FOR THE PAYMENT OF THE 2016 BONDS. NO OTHER FUNDS OR PROPERTY OF THE AGENCY WILL BE LIABLE FOR THE PAYMENT OF THE 2016 BONDS. THE OBLIGATION OF THE AGENCY TO PAY THE 2016 BONDS DOES NOT CONSTITUTE AN INDEBTEDNESS IN CONTRAVENTION OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMIT OR RESTRICTION AND NEITHER THE FULL FAITH AND CREDIT NOR THE TAXING POWER OF THE AGENCY, THE STATE OF CALIFORNIA OR ANY OF ITS POLITICAL SUBDIVISIONS IS PLEDGED FOR THE PAYMENT THEREOF. This cover page contains information for general reference only. It is not a summary of the security or terms of this issue. Investors are advised to read the entire Official Statement, including the section entitled RISK FACTORS, for a discussion of special factors which should be considered, in addition to the other matters set forth herein, in considering the investment quality of the 2016 Bonds. Capitalized terms used on this cover page and not otherwise defined shall have the meanings set forth herein. The 2016 Bonds are offered when, as and if issued and accepted by the Underwriter and subject to the approval as to their legality by James F. Anderson Law Firm, A Professional Corporation, Laguna Hills, California, Bond Counsel, and subject to certain other conditions. Certain legal matters will be passed upon for the Agency by Brunick, McElhaney & Kennedy, A Professional Law Corporation, San Bernardino, California, the Agency s general counsel, and by James F. Anderson Law Firm, A Professional Corporation, Disclosure Counsel. The Underwriter is being represented by its counsel, Nossaman LLP, Irvine, California. It is anticipated that the 2016 Bonds, in book-entry form, will be available for delivery through the facilities of DTC, on or about April 14, Wells Fargo Securities Dated: March 31, 2016

2 $71,090,000 ANTELOPE VALLEY-EAST KERN WATER AGENCY WATER REVENUE REFUNDING BONDS, SERIES 2016 MATURITY SCHEDULE Base CUSIP No.: 03672Y Maturity (June 1) Principal Amount Interest Rate Yield CUSIP No. Maturity (June 1) Principal Amount Interest Rate 2018 $1,575, % 0.86% AA $2,480, % 2.31% C AL ,880, AB ,600, C AM ,040, AC ,735, C AN ,195, AD ,870, C AP ,365, AE ,015, C AQ ,585, AF ,165, C AR ,815, AG ,325, C AS ,050, AH ,490, C AT ,035, AJ ,665, C AU ,360, C 2.18 AK ,845, C AV8 Yield CUSIP No. C = Yield to first redemption date of June 1, 2026 at par. CUSIP is a registered trademark of the American Bankers Association. CUSIP data is provided by CUSIP Global Services (CGS) which is managed on behalf of the American Bankers Association by S&P Capital IQ. CUSIP data is 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 Agency nor the Underwriter takes any responsibility for the accuracy of CUSIP data.

3 ANTELOPE VALLEY-EAST KERN WATER AGENCY Elected Officials R. Keith Dyas, President George M. Lane, Vice President Shelley Sorsabal, Director Frank S. Donato, Director Robert A. Parris, Director Marlon Barnes, Director Neal A. Weisenberger, Director Agency Staff Dwayne Chisam, General Manager Holly H. Hughes, Secretary-Treasurer Michael Flood, Assistant General Manager/Agency Engineer Thomas E. Barnes, Resources Manager Agency General Counsel Brunick, McElhaney & Kennedy, A Professional Law Corporation San Bernardino, California Bond Counsel James F. Anderson Law Firm, A Professional Corporation Laguna Hills, California Disclosure Counsel James F. Anderson Law Firm, A Professional Corporation Laguna Hills, California Consulting Engineer AECOM Technical Services, Inc. Bakersfield, California Kennedy/Jenks Consultants San Francisco, California Trustee Wells Fargo Bank, National Association Los Angeles, California Verification Agent Grant Thornton LLP Minneapolis, Minnesota

4 GENERAL INFORMATION ABOUT THE OFFICIAL STATEMENT Authorized Information. No dealer, broker, salesperson or other person has been authorized by the Agency or the Underwriter to give any information or to make any representations in connection with the offer or sale of the 2016 Bonds other than those contained herein and, if given or made, such other information or representations must not be relied upon as having been authorized by the Agency or the Underwriter. 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 2016 Bonds by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale. This Official Statement is not to be construed as a contract with the purchasers of the 2016 Bonds. The information set forth herein has been obtained from the Agency and other sources which are believed to be reliable, but it is not guaranteed as to accuracy or completeness, and is not to be construed as a representation by the Underwriter. This Official Statement is submitted in connection with the sale of the 2016 Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose. Involvement of the Underwriter. The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under 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. 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 changes in the affairs of the Agency 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 THE OFFERING OF THE 2016 BONDS, THE UNDERWRITER MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE 2016 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 2016 BONDS TO CERTAIN DEALERS AND DEALER BANKS AND BANKS ACTING AS AGENT AT PRICES LOWER THAN THE PUBLIC OFFERING PRICE STATED ON THE INSIDE COVER PAGE HEREOF. THE PUBLIC OFFERING PRICE MAY BE CHANGED FROM TIME TO TIME BY THE UNDERWRITER. No Registration Under Securities Act of THE 2016 BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS CONTAINED IN SUCH ACT. THE 2016 BONDS HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE Wells Fargo & Company and its Subsidiaries. Wells Fargo Securities is the trade name for certain securities-related capital markets and investment banking services of Wells Fargo & Company and its subsidiaries, including Wells Fargo Bank, National Association. Wells Fargo Bank, National Association is serving as both Underwriter and Trustee for the 2016 Bonds, and as Escrow Agent for the Refunded Prior Certificates (as defined below). Web Site Addresses. References to web site addresses presented herein are for informational purposes only and may be in the form of a hyperlink solely for the reader s convenience. Unless specified otherwise, such web sites and the information or links contained therein are not incorporated into, and are not part of, this Official Statement for purposes of, and as that term is defined in, the Rule.

5 TABLE OF CONTENTS INTRODUCTION...1 General...1 The 2016 Bonds...1 The Agency and the Water System...1 Security for the 2016 Bonds...2 Forward-Looking Statements...3 Summary of Terms...3 CONTINUING DISCLOSURE...4 THE REFUNDING PLAN...4 ESTIMATED SOURCES AND USES OF FUNDS...7 THE 2016 BONDS...8 General...8 Interest Rates...9 Trustee...9 Redemption...9 Book-Entry System...10 SECURITY FOR THE 2016 BONDS...10 General...10 Debt Service Payments...12 Application of Revenues...12 Limitations on Parity Obligations and Superior Obligations...13 Rate Covenant...14 No Reserve Fund for the 2016 Bonds...15 Debt Service Payments to be Unconditional...15 Additional Covenants...15 THE WATER SYSTEM...16 General; Service Area...16 Organization and Staff...17 Water Service Agreements...19 The Project; Future Water System Improvements...20 Water Sources and Supply; Water Purchases...20 Antelope Valley Groundwater Adjudication...23 Water Demand and Deliveries...24 Water Quality Compliance...26 Water System Rates and Charges...27 Capacity Charges...28 Collection Procedures...28 Outstanding Water System Indebtedness...28 Insurance...28 Historic Water Sales Revenues...29 Property Tax Revenues...29 Unencumbered Reserves...31 Retirement Plan...31 Historic Operating Results...32 Projected Operating Results and Debt Service Coverage...34 Credit Facilities...36 RISK FACTORS...36 Drought Conditions...36 Water System Demand...37 Water System Expenses...37 Water Supply/Water Supply Shortages...38 Economic Conditions...38 Weather Conditions...38 Parity Obligations...38 Proposition Constitutional Limit on Appropriations, Fees and Charges...39 Limited Recourse on Default...40 Limitations on Remedies Available; Bankruptcy...40 No Obligation to Tax...40 Change in Law...40 Geologic, Topographic and Climatic Conditions...41 Environmental Considerations...41 Impact of State Budget...43 Early Redemption of Premium 2016 Bonds...44 Secondary Market for 2016 Bonds...44 Renewal of Credit Facilities...44 Loss of Tax Exemption...44 Impact of Legislative Proposals, Clarifications of the Code and Court Decisions on Tax Exemption...45 IRS Audit of Tax-Exempt Issues...45 UNDERWRITING...45 LEGAL OPINIONS...46 TAX MATTERS...46 LITIGATION...48 PROFESSIONAL FEES...48 RATINGS...48 VERIFICATION OF MATHEMATICAL ACCURACY...49 MISCELLANEOUS...49 APPENDIX A SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE...A-1 APPENDIX B LOS ANGELES COUNTY WATER WORKS DISTRICT NO B-1 APPENDIX C AUDITED FINANCIAL STATEMENTS OF THE AGENCY FOR FISCAL YEAR C-1 APPENDIX D PROPOSED FORM OF FINAL OPINION...D-1 APPENDIX E FORM OF CONTINUING DISCLOSURE CERTIFICATE... E-1 APPENDIX F BOOK ENTRY PROVISIONS... F-1 -i-

6 City of California City City of California City Mojave US Borax Boron Gorman Highway138 KERN LOS ANGELES Quartz Hill Water District AVEK Quartz Hill HQ Rosamond Antelope Valley Fwy Acton City of Lancaster Antelope Valley Fwy Edwards Air Force Base Los Angeles County Waterworks District 40 City of Palmdale Highway138 Littlerock Los Angeles County Waterworks District 40 Pearblossom Lake Los Angeles LOS ANGELES SAN BERNARDINO

7 OFFICIAL STATEMENT $71,090,000 ANTELOPE VALLEY-EAST KERN WATER AGENCY WATER REVENUE REFUNDING BONDS, SERIES 2016 INTRODUCTION This introduction is not a summary of this Official Statement. It is only a brief description of and guide to, and is qualified by, more complete and detailed information contained in the entire Official Statement, including the cover page, the inside cover page and appendices hereto, and the documents summarized or described herein. A full review should be made of the entire Official Statement. The offering of the 2016 Bonds to potential investors is made only by means of the entire Official Statement. General This Official Statement, including the cover page and appendices hereto, is provided to furnish certain information in connection with the offering of $71,090,000 aggregate principal amount of Antelope Valley-East Kern Water Agency Water Revenue Refunding Bonds, Series 2016 (the 2016 Bonds ). The 2016 Bonds are payable from Net Revenues (as defined herein) which consist of Revenues of the Agency s wholesale water system (the Water System ) remaining after payment of Maintenance and Operation Costs. See SECURITY FOR THE 2016 BONDS herein. The 2016 Bonds The 2016 Bonds will be delivered pursuant to a Indenture of Trust, dated as of April 1, 2016 (the Indenture ), between the Agency and Wells Fargo Bank, National Association, as trustee (the Trustee ). The 2016 Bonds will be issued pursuant to the provisions of Articles 10 and 11, Chapter 3, Part 1, Division 2, Title 5 (commencing with Section 53570) of the California Government Code, as amended (the Bond Law ). Interest payable on the 2016 Bonds will be calculated at the rates set forth in the Maturity Schedule on the inside cover hereof and will be payable on the Interest Payment Dates as described herein. The 2016 Bonds are subject to optional redemption prior to maturity as described herein. See THE 2016 BONDS Redemption herein. The 2016 Bonds will be delivered as fully registered 2016 Bonds in book-entry form only, initially registered in the name of Cede & Co., as nominee of The Depository Trust Company ( DTC ). Purchasers will not receive certificates representing their interest in the 2016 Bonds. Individual purchases will be in principal amounts of $5,000 and any integral multiple thereof. The Agency and the Water System The Agency was formed in 1959 pursuant to the Antelope Valley-East Kern Water Agency Law (Sections 49 et. seq. of Act 9095 of Water-Uncodified Acts of the State of California) to supply local water users with water from the California State Water Project (the SWP ). The Agency is located in the Antelope Valley in the Mojave Desert area of California, northeast of Los Angeles. The Agency s 1

8 boundaries comprise approximately 2,383 square miles in three Southern California counties: 994 square miles in Los Angeles County, 1,377 square miles in Kern County, and 12 square miles in Ventura County (each, a County and together, the Counties ). Major communities in the Antelope Valley include Lancaster, Palmdale, Quartz Hill, Rosamond, Mojave, Boron and California City. The population estimate for the Antelope Valley for calendar year 2015 is 530,179. The Agency s Water System provides water to water retailers which serve approximately 75% of the Antelope Valley s population. See APPENDIX B hereto for a description of Los Angeles County Water Works District No. 40, the Agency s largest customer. The Agency obtains all of its water supply from three sources, the SWP, the local Antelope Valley groundwater basin and water bank operations. The primary facilities comprising the Water System, as of January 1, 2016, include four surface water treatment plants, two water banking/recovery facilities (includes 12 groundwater wells and 500+ acres of direct spreading ponds), one emergency well field (three groundwater wells), 11 water storage reservoirs with a total capacity of 60 million gallons, 7 water booster stations to move water to different elevations, approximately 150 miles of water transmission and distribution mains and related control and telemetering systems. The operational headquarters of the Water System is located at the Quartz Hill Water Treatment Plant in Palmdale, California. See THE WATER SYSTEM herein. Security for the 2016 Bonds The 2016 Bonds are payable from and secured by a pledge of Net Revenues of the Agency, which consist of Revenues of the Agency s Water System remaining after payment of Maintenance and Operation Costs. See SECURITY FOR THE 2016 BONDS and THE WATER SYSTEM herein. Payment of the debt service on the 2016 Bonds is on a parity with the obligation of the Agency to pay the following installment payments securing its payments to the CSDA Finance Corporation (the Corporation ), pursuant to an Installment Sale Agreement, dated as of March 1, 2007 (the Original Installment Sale Agreement ), between the Agency and the Corporation, as supplemented by a First Supplemental Installment Sale Agreement, dated as of May 1, 2008 (the First Supplemental Installment Sale Agreement, and together with the Original Installment Sale, the Installment Sale Agreement ): Certificates of Participation, Series 2007A-1 (Fixed Rate Certificates) (the Series 2007A-1 Prior Certificates ), originally delivered in the principal amount of $75,000,000, $63,400,000 of which is currently outstanding and $59,805,000 of which is being prepaid with proceeds of the 2016 Bonds, leaving $3,595,000 outstanding; Certificates of Participation, Series 2008A-1 (Fixed Rate Certificates) (the Series 2008A-1 Prior Certificates, together with the Series 2007A-1 Prior Certificates, the Prior Certificates ) originally delivered in the principal amount of $39,150,000, $27,190,000 of which is currently outstanding and $20,960,000 of which is being prepaid with proceeds of the 2016 Bonds, leaving $6,230,000 outstanding; and Certificates of Participation, Series 2008A-2 (Variable Rate Certificates) (the Series 2008A-2 Certificates of Participation ) originally delivered in the principal amount of $45,000,000, $45,000,000 of which is currently outstanding. The Agency proposes to prepay a portion of the Installment Payments which secure the $59,805,000 of the Series 2007A-1 Prior Certificates (maturities commencing June 1, 2018 and later and excluding those Series 2007A-1 Prior Certificates maturing June 1, 2016 and June 1, 2017) and to prepay a portion of the Installment Payments which secure the $20,960,000 of the Series 2008A-1 Prior Certificates (maturities 2

9 commencing June 1, 2019 and later and excluding those Series 2008A-1 Prior Certificates maturing June 1, 2016 through June 1, 2018). The Prior Certificates being prepaid are referred to herein as the Refunded Prior Certificates. The Indenture provides that the Agency may incur additional Parity Obligations secured by a pledge of Net Revenues on a parity basis with the 2016 Bonds and Installment Payments only upon the satisfaction of certain conditions as described therein (see SECURITY FOR THE 2016 BONDS Limitations on Parity Obligations and Superior Obligations herein). Pursuant to the Indenture, the Agency has covenanted to fix, prescribe and collect certain rates and charges for service provided by the Water System. See SECURITY FOR THE 2016 BONDS - Rate Covenant herein. THE 2016 BONDS AND ANY PREMIUMS PAYABLE UPON THE REDEMPTION OF ANY OF THE 2016 BONDS ARE LIMITED OBLIGATIONS OF THE AGENCY PAYABLE SOLELY FROM NET REVENUES WHICH CONSIST OF REVENUES OF THE AGENCY S WATER SYSTEM REMAINING AFTER PAYMENT OF MAINTENANCE AND OPERATION COSTS OF THE WATER SYSTEM AND OTHER AMOUNTS HELD UNDER THE INDENTURE. UNDER NO CIRCUMSTANCES WILL THE AGENCY BE REQUIRED TO ADVANCE ANY MONEYS DERIVED FROM ANY SOURCE OF INCOME OTHER THAN NET REVENUES FOR THE PAYMENT OF THE 2016 BONDS. NO OTHER FUNDS OR PROPERTY OF THE AGENCY WILL BE LIABLE FOR THE PAYMENT OF THE 2016 BONDS. THE OBLIGATION OF THE AGENCY TO PAY THE 2016 BONDS DOES NOT CONSTITUTE AN INDEBTEDNESS IN CONTRAVENTION OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMIT OR RESTRICTION AND NEITHER THE FULL FAITH AND CREDIT NOR THE TAXING POWER OF THE AGENCY, THE STATE OF CALIFORNIA OR ANY OF ITS POLITICAL SUBDIVISIONS IS PLEDGED FOR THE PAYMENT THEREOF. Forward-Looking Statements This Official Statement (including the appendices hereto) contains forward-looking statements, including (i) statements containing projections of Net Revenues and other financial items, (ii) statements of future economic performance of the Water System, and (iii) statements of the assumptions underlying or relating to statements described in (i) and (ii) above (collectively, the Forward-Looking Statements ). All statements other than statements of historical facts included in this Official Statement, including, without limitation, statements under SECURITY FOR THE 2016 BONDS and THE WATER SYSTEM regarding the financial position, capital resources and status of the Water System, are Forward-Looking Statements. Although the Agency believes that the expectations reflected in such Forward-Looking Statements are reasonable, no one can be given assurance that such projections will prove to be correct. Important factors which could cause actual results to differ materially from expectations of the Agency (collectively, the Cautionary Statements ) are disclosed in this Official Statement. All Forward-Looking Statements attributable to the Agency are expressly qualified in their entirety by the Cautionary Statements. The Agency does not plan to issue any updates or revisions to those Forward-Looking Statements if or when its expectations or the events, conditions or circumstances on which such statements are based occur or do not occur. See CONTINUING DISCLOSURE herein for a discussion of the Agency s obligation to provide updates to certain historical financial information and operating data. Summary of Terms Brief descriptions of the 2016 Bonds, the Indenture, the Agency and the Water System are included in this Official Statement. Such descriptions do not purport to be comprehensive or definitive. 3

10 All references herein to the Indenture, the Law and the Constitution and the laws of the State, as well as the proceedings of the Agency with respect to the Water System and the 2016 Bonds, are qualified in their entirety by reference to such documents. References herein to the 2016 Bonds are qualified in their entirety by reference to the form thereof included in the Indenture. Copies of the proceedings of the Agency referred to above and the documents described in this Official Statement are available for inspection at the offices of the Agency, 6500 West Avenue N, Palmdale, California CONTINUING DISCLOSURE The Agency has covenanted for the benefit of owners of the 2016 Bonds to provide certain financial information and operating data relating to the Agency by not later than 270 days after the end of the Agency s fiscal year (currently April 1), commencing with the fiscal year ending June 30, 2016 (the Annual Report ), and to provide notices of the occurrence of certain enumerated events. The Annual Report and notices of enumerated events will be filed by the Agency with the Municipal Securities Rulemaking Board through its Electronic Municipal Market Access System (the EMMA System ), or such other electronic system designated by the Municipal Securities Rulemaking Board. These covenants have been made in order to assist the Underwriter in complying with Securities Exchange Commission Rule 15c2-12(b)(5) (the Rule ). The specific nature of the information to be contained in the Annual Report or the notices of enumerated events by the Agency is summarized in APPENDIX E - FORM OF CONTINUING DISCLOSURE CERTIFICATE. A review of previous disclosure filings since March 15, 2011, with respect to financings by the Agency indicates that the Agency may not have complied in all respects with its prior undertakings. Identification of the below described events does not constitute a representation by the Agency that any such events were material. The review indicates that (i) Annual Reports indicated that the Agency s financial statements would also be filed, and on reviewing filings on the Municipal Securities Rulemaking Board s Electronic Municipal Market Access System ( EMMA ), the financial statements for Fiscal Years ending 2011, 2013 and 2014 were prepared and provided to the Trustee but due to miscommunication were not filed on EMMA when required, and (ii) the Agency filed notices with respect to rating changes of municipal bond insurers which insured the Prior Certificates and notices regarding changes to the underlying rating of the Prior Certificates after the dates of the rating changes. The Agency has since made corrective filings except that in one instance a rating downgrade of a municipal bond insurer was not filed in connection with that downgrade, but the rating was subsequently upgraded and notice of that rating change was filed. THE REFUNDING PLAN The Agency is issuing the 2016 Bonds, in part, to provide moneys (together with other available funds of the Agency) necessary to advance prepay a portion of the Installment Payments which secure the Refunded Prior Certificates. See ESTIMATED SOURCES AND USES OF FUNDS herein. Upon deposit of such proceeds and other moneys with the Escrow Agent, the Refunded Prior Certificates will no longer be deemed outstanding. The moneys and securities held by the Escrow Agent are pledged to the payment of the Refunded Prior Certificates and are not available to pay principal of or interest on the 2016 Bonds. 4

11 The portion of the Series 2007A-1 Prior Certificates which are being refunded (the Refunded Series 2007A-1 Prior Certificates ) with proceeds of the 2016 Bonds are listed in the following table: Maturity (June 1) ANTELOPE VALLEY-EAST KERN WATER AGENCY CERTIFICATES OF PARTICIPATION SERIES 2007A-1 $59,805,000 Refunded Series 2007A-1 Certificates Prepayment Price (% of Par Amount) CUSIP No. Principal Amount Prepayment Date TAL1 $1,915,000 6/1/ TAM9 2,010,000 6/1/ TAN7 2,090,000 6/1/ TAP2 2,175,000 6/1/ TAQ0 2,275,000 6/1/ TAR8 2,390,000 6/1/ TAS6 2,510,000 6/1/ TAV9 8,190,000 6/1/ TBA4 16,220,000 6/1/ TBF3 20,030,000 6/1/ The portion of the Series 2007A-1 Prior Certificates which are not being refunded (the Non- Refunded Series 2007A-1 Prior Certificates) and will remain outstanding and payable on a parity with the 2016 Bonds are listed in the following table: ANTELOPE VALLEY-EAST KERN WATER AGENCY CERTIFICATES OF PARTICIPATION SERIES 2007A-1 $3,595,000 Unrefunded Series 2007A-1 Certificates Maturity (June 1) CUSIP No. Principal Amount TAJ6 $1,755, TAK3 1,840,000 CUSIP is a registered trademark of the American Bankers Association. CUSIP data is provided by CUSIP Global Services (CGS) which is managed on behalf of the American Bankers Association by S&P Capital IQ. CUSIP data is 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 Agency nor the Underwriter take any responsibility for the accuracy of CUSIP data. 5

12 The portion of the Series 2008A-1 Prior Certificates which are being refunded (the Refunded Series 2008A-1 Prior Certificates and together with the Refunded Series 2007A-1 Prior Certificates, the Refunded Prior Certificates ) with proceeds of the 2016 Bonds are listed in the following table: Maturity (June 1) ANTELOPE VALLEY-EAST KERN WATER AGENCY CERTIFICATES OF PARTICIPATION SERIES 2008A-1 $20,960,000 Refunded Series 2008A-1 Certificates Prepayment Price (% of Par Amount) CUSIP No. Principal Amount Prepayment Date TBT3 $2,245,000 6/1/ TBU0 2,360,000 6/1/ TBV8 2,475,000 6/1/ TBW6 2,600,000 6/1/ TBX4 2,710,000 6/1/ TBY2 2,825,000 6/1/ TBZ9 2,945,000 6/1/ TCA3 2,800,000 6/1/ The portion of the Series 2008A-1 Prior Certificates which are not being refunded (the Non- Refunded Series 2008A-1 Prior Certificates ) and will remain outstanding and payable on a parity with the 2016 Bonds are listed in the following table: ANTELOPE VALLEY-EAST KERN WATER AGENCY CERTIFICATES OF PARTICIPATION SERIES 2008A-1 $6,230,000 Unrefunded Series 2008A-1 Certificates Maturity (June 1) CUSIP No. Principal Amount TBQ9 $1,995, TBR7 2,075, TBS5 2,160,000 In addition, the Agency s Certificates of Participation, Series 2008A-2 (Variable Rate Certificates) (the Series 2008A-2 Prior Certificates ) issued in the amount of $45,000,000, all of which are outstanding and are not being refunded at this time and will remain outstanding and payable on a parity with the 2016 Bonds. The Non-Refunded Series 2007A-1 Prior Certificates, the Non-Refunded CUSIP is a registered trademark of the American Bankers Association. CUSIP data is provided by CUSIP Global Services (CGS) which is managed on behalf of the American Bankers Association by S&P Capital IQ. CUSIP data is 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 Agency nor the Underwriter take any responsibility for the accuracy of CUSIP data. 6

13 Series 2008A-1 Prior Certificates and the Series 2008A-2 Prior Certificates are referred to herein as the Parity Certificates. Refunding Plan. The net proceeds of the 2016 Bonds will be transferred to Wells Fargo Bank, National Association, as escrow agent (the Escrow Agent ) for deposit in an escrow fund to be established under an Escrow Agreement, dated as of the Closing Date (the Escrow Agreement ), by and between the Agency and the Escrow Agent, with separate accounts with respect to the Refunded Series 2007A-1 Prior Certificates and the Refunded Series 2008A-1 Prior Certificates. The Escrow Agent will invest the net proceeds of the 2016 Bonds in the Escrow Investments specified under the Escrow Agreement that mature no later than June 1, 2017, with respect to the Refunded Series 2007A-1 Prior Certificates and June 1, 2018, with respect to the Series 2008A-1 Prior Certificates. These funds will be sufficient to pay the prepayment price of the Refunded Series 2007A-1 Prior Certificates on June 1, 2017, as well as the debt service due on the Refunded Series 2007A-1 Prior Certificates on and before June 1, These funds will also be sufficient to pay the prepayment price of the Refunded Series 2008A-1 Prior Certificates on June 1, 2018, as well as the debt service due on the Refunded Series 2008A-1 Prior Certificates on and before June 1, Sufficiency of the deposits in the Escrow Fund for those purposes will be verified by Grant Thornton LLP, Minneapolis, Minnesota. See VERIFICATION OF MATHEMATICAL ACCURACY below. Assuming the accuracy of the Verification Agent s computations, as a result of the deposit and application of funds as provided in the Escrow Agreement, as of the date of issuance of the 2016 Bonds, the Refunded Prior Certificates will be defeased under the provisions of the Trust Agreement under which they were issued. ESTIMATED SOURCES AND USES OF FUNDS The proceeds to be received from the sale of the 2016 Bonds and other funds related to the Refunded Prior Certificates are anticipated to be applied as follows: SOURCES: Principal Amount of 2016 Bonds $71,090, NetOriginalIssuePremium 14,390, Funds relating to Refunded Prior Certificates 1,323, TOTAL SOURCES: $86,803, USES: Transfer to Escrow Agent $86,323, Costs of Issuance (1) 480, TOTAL USES: $86,803, (1) Includes fees of Bond Counsel, Disclosure Counsel, Verification Agent, Escrow Agent and Trustee, Underwriter s discount and other costs of issuing the 2016 Bonds. 7

14 THE 2016 BONDS General 2016 Bonds. The 2016 Bonds shall be delivered in the form of fully registered 2016 Bonds, without coupons, in denominations of $5,000 or any integral multiple thereof, and shall be dated the date of delivery to the initial purchaser thereof. Interest on the 2016 Bonds will be calculated as set forth in Interest Rates below. The 2016 Bonds will mature as set forth on the inside cover hereof. See APPENDIX A SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE. General Provisions. The principal and premium, if any, of and interest on the 2016 Bonds shall be payable in lawful money of the United States of America. The interest on the 2016 Bonds shall be payable on the Interest Payment Dates by check mailed, via first-class mail, on the Interest Payment Date by the Trustee to the respective Owners thereof at their addresses as they appear on the applicable Record Date (as defined below) in the Registration Books, except that in the case of an Owner of $1,000,000 or more in aggregate principal amount of a Series of 2016 Bonds, upon the written request of such Owner to the Trustee, received at least ten days prior to a Record Date, specifying the account or accounts in the United States of America to which such payment shall be made, payment of interest shall be made by wire transfer of immediately available funds on the following Interest Payment Date. Record Date means the 15th day of the calendar month preceding each Interest Payment Date, whether or not such day is a Business Day, and any date established by the Trustee pursuant to the Indenture as a Record Date for the payment of defaulted interest on the Bonds, if any. Interest Payment Date is defined in the Indenture to mean with respect to the 2016 Bonds, June 1 and December 1 of each year, commencing June 1, Each 2016 Bond shall bear interest from the Interest Payment Date immediately preceding the date of authentication thereof, unless such date of authentication is after a Record Date and on or before the next succeeding Interest Payment Date, in which event any such 2016 Bond shall bear interest from and including such Interest Payment Date, or unless such date of authentication is prior to the initial Record Date, in which event any such 2016 Bond shall bear interest from the date of original issuance. The principal and premium, if any, of each 2016 Bond shall be payable on each Principal Payment Date, or on redemption prior thereto, upon surrender thereof at the Trust Office of the Trustee. Book-Entry Provisions. The 2016 Bonds, when executed and delivered, will be registered in the name of Cede & Co., as registered owner and nominee of The Depository Trust Company ( DTC ). Ownership interests in the 2016 Bonds may be purchased in book-entry form only, in the denominations set forth above. So long as DTC, or Cede & Co. as its nominee, is the registered owner of all 2016 Bonds, all payments with respect to the 2016 Bonds will be made directly to DTC, and disbursement of such payments to the DTC Participants (defined below) will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners (defined below) will be the responsibility of the DTC Participants, as more fully described hereinafter. See Book-Entry System below. 8

15 Interest Rates 2016 Bonds. Interest on the 2016 Bonds shall be payable on each Interest Payment Date. Interest on the 2016 Bonds shall be computed on the basis of a 360-day year consisting of twelve 30-day months. Trustee Wells Fargo Bank, National Association, Los Angeles, California has been appointed Trustee for all of the 2016 Bonds under the Indenture. The Trustee may be removed or replaced by the Agency as provided in the Indenture. Redemption Optional Redemption of 2016 Bonds. The 2016 Bonds may be called and redeemed, in whole or in part, prior to maturity from moneys legally available therefor, including funds provided by the Agency from any source of available funds, on any date on or after June 1, 2026, at a redemption price equal to the principal of the 2016 Bonds to be redeemed, plus accrued interest to the redemption date, without premium. Purchase in Lieu of Redemption. In lieu, or partially in lieu, of such call and redemption, moneys of the Agency may be used to purchase Outstanding 2016 Bonds prior to the selection of 2016 Bonds for redemption by the Trustee, at public or private sale as and when and at such prices as the Agency may in its discretion determine but only at prices (including brokerage or other expenses) of not more than par plus applicable accrued interest and redemption premiums, and any accrued interest payable upon the purchase of 2016 Bonds may be paid from the amount in the applicable Account in the Payment Fund for payment of interest on the 2016 Bonds on the following Interest Payment Date. Notice of Redemption; Rescission. When redemption is authorized or required, the Trustee shall give notice (the Redemption Notice ) of the redemption of the applicable 2016 Bonds. Such Redemption Notice shall specify: (a) the 2016 Bonds or designated portions thereof (in the case of redemption of the 2016 Bonds in part but not in whole) which are to be redeemed, (b) the date of redemption, (c) the place or places where the redemption will be made, including the name and address of any paying agent, (d) the redemption price, (e) the CUSIP numbers (if any) assigned to the 2016 Bonds to be redeemed, (f) if less than all the 2016 Bonds of a maturity are to be redeemed, the certificate numbers of the 2016 Bonds to be redeemed and, in the case of any 2016 Bond to be redeemed in part only, the amount of such 2016 Bond to be redeemed, and (g) the original issuance date, interest rate and stated maturity date of each 2016 Bond to be redeemed in whole or in part. Such Redemption Notice shall further state that on the specified date there shall become due and payable upon each 2016 Bond or portion thereof being redeemed the redemption price, together with interest accrued to the redemption date, and that from and after such date interest with respect thereto shall cease to accrue and be payable. Notice of any redemption of the 2016 Bonds shall either (i) explicitly state that the proposed redemption is conditioned on there being on deposit in the applicable fund or account on the redemption date sufficient money to pay the full redemption price of the 2016 Bonds to be redeemed, or (ii) be sent only if sufficient money to pay the full redemption price of the 2016 Bond to be redeemed is on deposit in the applicable fund or account. Such notice in respect of optional redemption shall not be provided unless there has been deposited with the Trustee funds sufficient to pay such redemption price (except in the case of redemption resulting from the issuance of refunding obligations). Neither failure to give any redemption notice nor any defect in such redemption notice so given shall affect the sufficiency of the 9

16 proceedings for the redemption of such 2016 Bonds or the cessation of the accrual of interest thereon from and after the redemption date. The Agency shall have the right to rescind any optional redemption by written notice to the Trustee with respect to 2016 Bonds on or prior to the date fixed for redemption. Any such notice of optional redemption shall be canceled and annulled if for any reason funds will not be or are not available on the date fixed for redemption for the payment in full of the 2016 Bonds then called for redemption, and such cancellation shall not constitute an Event of Default under the Indenture. The Agency and the Trustee shall have no liability to the Owners or any other party related to or arising from such rescission of redemption. The Trustee shall mail notice of such rescission of redemption in the same manner as the original notice of redemption was sent. Effect of Redemption. From and after the date so designated for redemption, the interest on the 2016 Bonds so called for redemption will cease to accrue, and such 2016 Bonds will cease to be entitled to any protection, benefit or security under the Indenture, and the registered owners of such 2016 Bonds will have no rights in respect thereof except to receive payment of the redemption price represented thereby or such portions to be redeemed. Book-Entry System DTC will act as securities depository for the 2016 Bonds. The 2016 Bonds will be issued as fully-registered 2016 Bonds registered in the name of Cede & Co. (DTC s partnership nominee). One fully-registered 2016 Bond will be issued for each maturity of the 2016 Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC. See APPENDIX F - BOOK ENTRY PROVISIONS herein. The Agency and the Trustee cannot and do not give any assurances that DTC, DTC Participants or others will distribute payments of principal and premium, of and interest on the 2016 Bonds paid to DTC or its nominee as the registered owner, or will distribute any redemption notices or other notices, to the Beneficial Owners, or that they will do so on a timely basis or will serve and act in the manner described in this Official Statement. The Agency and the Trustee are not responsible or liable for the failure of DTC or any DTC Participant to make any payment or give any notice to a Beneficial Owner of the 2016 Bonds or an error or delay relating thereto. General SECURITY FOR THE 2016 BONDS THE 2016 BONDS AND ANY PREMIUMS PAYABLE UPON THE REDEMPTION OF ANY OF THE 2016 BONDS ARE LIMITED OBLIGATIONS OF THE AGENCY PAYABLE SOLELY FROM NET REVENUES WHICH CONSIST OF REVENUES OF THE AGENCY S WHOLESALE WATER SYSTEM REMAINING AFTER PAYMENT OF MAINTENANCE AND OPERATION COSTS OF THE WATER SYSTEM AND OTHER AMOUNTS HELD UNDER THE INDENTURE. UNDER NO CIRCUMSTANCES WILL THE AGENCY BE REQUIRED TO ADVANCE ANY MONEYS DERIVED FROM ANY SOURCE OF INCOME OTHER THAN NET REVENUES FOR THE PAYMENT OF THE 2016 BONDS. NO OTHER FUNDS OR PROPERTY OF THE AGENCY WILL BE LIABLE FOR THE PAYMENT OF THE 2016 BONDS. THE OBLIGATION OF THE AGENCY TO PAY THE 2016 BONDS DOES NOT CONSTITUTE AN INDEBTEDNESS IN CONTRAVENTION OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMIT OR RESTRICTION AND NEITHER THE FULL FAITH AND CREDIT NOR THE TAXING POWER OF 10

17 THE AGENCY, THE STATE OF CALIFORNIA OR ANY OF ITS POLITICAL SUBDIVISIONS IS PLEDGED FOR THE PAYMENT THEREOF. Each 2016 Bond is payable from Net Revenues. All Net Revenues (defined below) are pledged to the payment of the principal of and interest on the 2016 Bonds and debt service on other Parity Obligations as provided in the Indenture, and Net Revenues shall not be used for any other purpose while any of the 2016 Bonds remain unpaid; provided, however, that out of the Net Revenues there may be apportioned such sums for such purposes as are expressly permitted by the Indenture, including payment of debt service on any Parity Obligations. This pledge is a first lien on the Net Revenues for the payment of the principal of and interest on the 2016 Bonds, Installment Payments and debt service on any Parity Obligations in accordance with the Indenture. At the time of issuance of the 2016 Bonds, other than the Installment Payments and the 2016 Bonds, there will be no other outstanding Parity Obligations. Maintenance and Operation Costs of the Water System means, for any Fiscal Year or twelve (12) calendar month period, all reasonable and necessary costs paid or incurred by the Agency during such Fiscal Year or twelve (12) calendar month period for maintaining and operating the Water System, determined in accordance with Generally Accepted Accounting Principles, including the cost of purchased water, scheduled payments on Contract Resource Obligations (as defined in the Indenture), all reasonable expenses of management and repair and other expenses necessary to maintain and preserve the Water System in good repair and working order, all administrative costs of the Agency that are charged directly or apportioned to the operation of the Water System, such as salaries and wages of employees, overhead, taxes (if any), insurance premiums and payments into pension funds, and all other reasonable and necessary costs of the Agency or charges required to be paid by it to comply with the terms of the Indenture or of any resolution authorizing the execution of any Supplemental Contract or of such Supplemental Contract, such as compensation, reimbursement and indemnification of the Trustee and fees and expenses of Independent Certified Public Accountants and Independent Engineers, but excluding in all cases depreciation, replacement and obsolescence charges or reserves therefor and amortization of intangibles. Net Revenues means, for any Fiscal Year or twelve calendar month period, an amount equal to all of the Revenues received during such Fiscal Year or twelve calendar month period less the Maintenance and Operation Costs during such Fiscal Year or twelve calendar month period. Revenues means, for any Fiscal Year or twelve (12) calendar month period, all income and revenue received or receivable by the Agency during such Fiscal Year or twelve (12) calendar month period from the ownership or operation of the Water System, determined in accordance with Generally Accepted Accounting Principles, together with all ad valorem taxes, ad valorem assessments, standby charges, rates, fees and charges received by the Agency for the service provided by the Water System (the Water Service ) and the other services of the Water System and all proceeds of insurance covering business interruption loss relating to the Water System and all connection fees and charges payable to the Agency for the Water Service made available or provided by the Water System and all payments for the lease of property comprising a part of the Water System and all other income and revenue howsoever derived by the Agency from the ownership or operation of the Water System or arising from the Water System, and including all Payment Agreement Receipts (as defined in the Indenture, and including all income from the investment of amounts on deposit in the Revenue Fund and the Parity Obligation Payment Fund (as defined in the Indenture), but excluding in all cases (i) any proceeds of taxes (including ad valorem taxes) and assessments levied and collected by or on behalf of the Agency for obligations that are payable solely from such taxes (including ad valorem taxes) or assessments and not from any other Revenues, (ii) reserves, taxes or assessments specifically pledged to the payment of debt service with respect to notes, bonds or other obligations of the Agency and which reserves, taxes or 11

18 assessments are not available for any other purposes of the Agency; (iii) any refundable deposits made to establish credit and any advances or contributions in aid of construction, and (iv) any income from the investment of amounts on deposit in the Project Fund. Water System means all facilities for providing the water storage and delivery services and all other contractual services provided by the Agency now owned by the Agency and all other facilities acquired and constructed by the Agency and determined to be a part of the Water System, including reclamation of recycled water, together with all additions, betterments and improvements to such facilities or any part thereof hereafter acquired and constructed by the Agency. The physical assets of the Water System are not security for the Installment Payments or the 2016 Bonds. Debt Service Payments Pursuant to the Indenture, the Agency has covenanted that the principal of and interest on the 2016 Bonds shall be paid in the amounts and on the dates as follows: Interest. On or before the fifth Business Day preceding each Interest Payment Date for each 2016 Bond, an amount which is equal to the amount to become due on such 2016 Bond on the next succeeding Interest Payment Date. Principal. Commencing on the fifth Business Day preceding June 1 of each year, an amount which, together with any moneys already on deposit with the Trustee and available to make such payment, is not less than the entire amount of the next succeeding principal becoming due on the 2016 Bonds on such date by maturity. Credits Towards Debt Service Payments. Notwithstanding any provision in the Indenture to the contrary, the Agency shall be entitled to credits towards payment of the Debt Service Payments from amounts on deposit in the Payment Account. See Application of Revenues below, and APPENDIX A hereto. Application of Revenues The Agency has covenanted to establish and maintain the Revenue Fund, which the Agency shall continue to hold and maintain for the purposes and uses set forth in the Indenture. The Agency shall deposit all Revenues in the Revenue Fund immediately on receipt. The Agency shall apply amounts in the Revenue Fund as set forth in the Indenture and any agreements relating to the issuance of Parity Obligations. The Agency shall apply amounts on deposit in the Revenue Fund to pay when due the following amounts in the following order of priority: (i) (ii) (iii) (iv) all Maintenance and Operation Costs; the Debt Service Payments and all payments of principal of and interest on any Parity Obligations; to the Trustee the amount of any deficiency in any reserve fund established for Parity Obligations; any other payments required to comply with the provisions of the Indenture and any agreements relating to the issuance of Parity Obligations; and 12

19 (v) so long as no Event of Default has occurred and is continuing, the Agency may use and apply moneys in the Revenue Fund for (i) the payment of any subordinate obligations or any unsecured obligations, (ii) the acquisition and construction of improvements to the Water System, (iii) the prepayment of any other obligations of the Agency relating to the Water System, or (iv) any other lawful purposes of the Agency. Limitations on Parity Obligations and Superior Obligations No Obligations Superior to Debt Service Payments. The Agency has covenanted in the Indenture that it will not, so long as any 2016 Bonds are outstanding, issue or incur any obligations payable from Net Revenues superior to the Debt Service Payments (see RISK FACTORS Parity Obligations herein). Obligations on a Parity with the Debt Service Payments. The Agency has covenanted in the Indenture that, except for obligations issued or incurred to redeem the 2016 Bonds, the Agency shall not issue or incur any Parity Obligations unless: (A) There shall be on file with the Agency either: (1) A certificate of the Agency demonstrating that, during the last audited Fiscal Year or any consecutive twelve (12) calendar month period during the immediately preceding eighteen (18) calendar month period, the Adjusted Annual Net Revenues were at least equal to 110% of Maximum Annual Debt Service on all Outstanding Parity Obligations plus the Parity Obligations proposed to be executed; provided, that for the purpose of providing the certificate, the Agency may adjust the foregoing Adjusted Annual Net Revenues to reflect: (a) An allowance for Net Revenues that would have been derived from each new user supply contract entered into with respect to the Water System that, during all or any part of such Fiscal Year or twelve (12) calendar month period, was not in existence, in an amount equal to the estimated additional Net Revenues that would have been derived from each such user supply contract if it had been made prior to the beginning of such Fiscal Year or twelve (12) calendar month period, as certified by an Engineer s Report or Independent Certified Public Accountant; and (b) An allowance for Net Revenues that would have been derived from any increase in the rates, fees and charges fixed and prescribed for Water Service which, during all or any part of such Fiscal Year or twelve (12) calendar month period, was not in effect, in an amount equal to the estimated additional Net Revenues that would have been derived from such increase in rates, fees and charges if it had been in effect prior to the beginning of such Fiscal Year or twelve (12) calendar month period, as certified by an Engineer s Report or Independent Certified Public Accountant; or (2) An Engineer s Report stating that the estimated Adjusted Annual Net Revenues for each of the five (5) Fiscal Years next following the earlier of (i) the end of the period during which interest on the Parity Obligations proposed to be issued is to be capitalized or, if no interest is capitalized, the Fiscal Year in which the Parity Obligations proposed to be issued is authenticated or executed, or (ii) the date on which substantially all Projects financed with the Parity Obligations proposed to be executed or issued are expected to commence operations, will be at least equal to 110% of the Maximum Annual Debt Service for such period; provided, that 13

20 for the purpose of providing this Engineer s Report, the Independent Engineer may adjust the foregoing estimated Adjusted Annual Net Revenues to reflect: (a) An allowance for Net Revenues that are estimated to be derived from any increase in the rates, fees and charges for Water Service in effect and being charged or from any increase in the rates, fees and charges for Water Service that are expected to be charged; and (b) An allowance for Net Revenues that are estimated to be derived from customers of the Water System anticipated to be served by the additions, betterments or improvements to the Water System to be financed by the Parity Obligations proposed to be issued together with any additional Supplemental Contracts expected to be executed and entered into during such five (5)-year period. (B) Notwithstanding the foregoing, there shall be at least one times coverage of the Agency s obligations with respect to repayment of Policy Costs (as defined in the Indenture) then due and owing. (C) Notwithstanding the foregoing provisions, except as provided in the preceding paragraph (B), there shall be no limitations on the ability of the Agency to issue any Parity Obligations at any time to refund any outstanding Parity Obligations so long as the Annual Debt Service payable by the Agency for each Fiscal Year with respect to such refunding Parity Obligations is less than or equal to 105% of the Annual Debt Service for each corresponding Fiscal Year for such Parity Obligations being refunded. Obligations Subordinate to Debt Service Payments. The Agency may at any time issue any Subordinate Obligations; provided (i) that no Event of Default under the Indenture has occurred and is continuing; (ii) that all Maintenance and Operations Costs are being and have been paid and are then current; and (iii) all deposits and payments contemplated with respect to the 2016 Bonds and any Parity Obligations shall have been made in full and no deficiency in any reserve fund for any Parity Obligations shall exist and no Reserve Fund Credit Facility Costs shall be due and payable, and (iv) that, upon the issuance of such Subordinate Obligations, the Agency will continue to satisfy the test contained in paragraph (ii) of the definition of Coverage Requirement. Rate Covenant The Agency has covenanted in the Indenture to fix, prescribe, revise and collect rates, fees and charges for the services and facilities furnished by the Water System during each Fiscal Year, which are reasonably fair and nondiscriminatory and which are estimated to yield Adjusted Annual Net Revenues for such Fiscal Year in an amount not less than the Coverage Requirement for such Fiscal Year. The Agency may make adjustments from time to time in such fees and charges and may make such classification thereof as it deems necessary, but shall not reduce the rates, fees and charges then in effect unless the Adjusted Annual Net Revenues from such reduced rates, fees and charges are estimated to be sufficient to meet the requirements of this covenant. Coverage Requirement means, for any Fiscal Year or twelve (12) calendar month period, (i) an amount of Adjusted Annual Net Revenues which, together with available unrestricted cash reserves of the Agency, equals at least one hundred ten percent (110%) of the Adjusted Annual Debt Service for such Fiscal Year or twelve (12) calendar month period, and (ii) an amount of Net Revenues which equals one hundred per cent (100%) of all Payment Agreement Payments (as defined in the Indenture) payable in such Fiscal Year or twelve (12) calendar month period; provided, that, for purposes of determining compliance with the Coverage Requirement, it shall be assumed that all Obligations accrue interest at the 14

21 applicable Assumed Interest Rate (as defined in the Indenture). Adjusted Annual Net Revenues are Net Revenues less interest earnings on the reserve fund, if any. No Reserve Fund for the 2016 Bonds No reserve fund has been created or will be funded with respect to the 2016 Bonds. Debt Service Payments to be Unconditional The obligation of the Agency to make the Debt Service Payments, additional costs and other payments required to be made by it under the Indenture, solely from Net Revenues, is absolute and unconditional, and until such time as the Debt Service Payments, and such other payments shall have been paid in full (or provision for the payment thereof shall have been made), the Agency shall not discontinue or suspend any Debt Service Payments, additional costs or other payments required to be made by it under the Indenture when due, whether or not the Project or any part thereof is operating or operable or has been completed, or its use is suspended, interfered with, reduced or curtailed or terminated in whole or in part, and such Debt Service Payments, additional costs and other payments shall not be subject to reduction whether by offset or otherwise and shall not be conditional upon the performance or nonperformance by any party of any agreement for any cause whatsoever. Additional Covenants Additional covenants of the Agency contained in the Indenture include, but are not limited to, the following (see APPENDIX A hereto): (a) Insurance. The Agency will procure and maintain such insurance relating to the Water System which it shall deem advisable or necessary to protect its interests and the interests of the Trustee, which insurance shall afford protection in such amounts and against such risks as are usually covered in the State in connection with water systems comparable to the Water System; provided, that any 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 in the State comparable to the Water System and is, in the opinion of an independent accredited actuary, actuarially sound. (b) Operation of the Water System. The Agency shall operate the Water System in an efficient and economical manner and operate, maintain and preserve the Water System in good repair and working order. (c) Eminent Domain and Insurance Proceeds. If all or any part of the Water System shall be taken by eminent domain proceedings, or if the Agency receives any insurance proceeds resulting from a casualty loss to the Water System, the Net Proceeds thereof, at the option of the Agency, shall be applied either to the prepayment of the Payment Agreement Payments or to acquire and construct additions, betterments or improvements to the Water System to replace the condemned or destroyed portion of the Water System. (d) Sale or Other Disposition of Property. The Agency will only sell, transfer or otherwise dispose of any of the facilities of the Water System or any real or personal property comprising a part of the Water System consistent with one or more of the following limitations: (A) The Agency in its discretion may carry out such a sale, transfer or other disposition (each, as used in this section, a transfer ) if the facilities or property of the Water System 15

22 transferred are not material to the operation of the Water System, or shall have become unserviceable, inadequate, obsolete or unfit to be used in the operation of the Water System, or are no longer necessary, material or useful to the operation of the Water System; or (B) The Agency in its discretion may carry out such a transfer if the aggregate depreciated cost value of the facilities or property of the Water System transferred in any one Fiscal Year comprises no more than ten per cent (10%) of the total assets of the Water System; or (C) The Agency in its discretion may carry out such a transfer if the Agency receives from the transferee an amount equal to the fair market value of the facilities or property of the Water System transferred (as used in this subparagraph, fair market value means the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, with a willing buyer and a willing seller each acting prudently and knowledgeably and assuming that the price is not affected by coercion or undue stimulus) and if the proceeds of such transfer are used (i) to promptly prepay, or irrevocably set aside for the prepayment of, first the Parity Payments and, thereafter, the Subordinate Payments, and/or (ii) to provide for the cost of additions, betterments or improvements to the Water System; provided, that before any such transfer is made under this subparagraph, the Agency shall obtain an Engineer s Report that upon such transfer and the use of the proceeds thereof as proposed by the Agency, the remaining facilities or property of the Water System will retain their operational integrity and the estimated Adjusted Annual Net Revenues during each of the five (5) Fiscal Years next following the Fiscal Year in which the transfer is to occur will be at least equal to the estimated Coverage Requirement in each of such Fiscal Years, taking into account (w) the estimated reduction in Revenues resulting from such transfer, (x) the use of the proceeds of such transfer for the prepayment of first, the Parity Payments and thereafter, the Subordinate Payments, (y) the estimated additional Revenues from customers anticipated to be served by any additions, betterments or improvements to the Water System financed by the portion of the proceeds received from such transfer, and (z) any other adjustment permitted in the preparation of an Engineer s Report under the Indenture. General; Service Area THE WATER SYSTEM The Agency was formed in 1959 pursuant to the Antelope Valley-East Kern Water Agency Law (Sections 49 et. seq. of Act 9095 of Water-Uncodified Acts of the State of California) to supply local water users with water from the California State Water Project (the SWP ). The Agency encompasses 2,383 square miles in the Antelope Valley in the Mojave Desert area of California, northeast of Los Angeles. The Agency s boundaries comprise approximately 2,383 square miles in three Southern California counties: 994 square miles in Los Angeles County, 1,377 square miles in Kern County, and 12 square miles in Ventura County. Major communities in the Antelope Valley include Lancaster, Palmdale, Quartz Hill, Rosamond, Mojave, Boron, and California City. The latest population estimate for the Antelope Valley (as provided by the Greater Antelope Valley Economic Alliance for 2015) was approximately 530,179. The Water System provides water to water retailers which serve approximately 75% of the Antelope Valley s population. See APPENDIX B hereto for a description of Los Angeles County Water Works District No. 40, the Agency s largest customer. The Agency obtains its water from the SWP, local groundwater pumping rights and water bank operations. The primary facilities comprising the Water System, as of January 1, 2016, include four surface water treatment plants, two water banking/recovery facilities (includes 12 groundwater wells and 16

23 500+ acres of direct spreading ponds), one emergency well field (three groundwater wells), 11 water storage reservoirs with a total capacity of 60 million gallons, 7 water booster stations to move water to different elevations, approximately 150 miles of water transmission and distribution mains and related control and telemetering systems. The operational headquarters of the Water System is located at the Quartz Hill Water Treatment Plant in Palmdale, California. Organization and Staff The Agency is divided into seven divisions and is governed by seven directors, elected from their respective divisions for staggered four-year terms. The boundaries of the seven divisions were originally established (and may be relocated) to equalize, as nearly as practicable, the population of the respective divisions. The current Board and the expiration of their terms are as follows: Member Office Term Expires Shelley Sorsabal (Division 1) Director January 2018 Keith Dyas (Division 2) President January 2018 Frank S. Donato (Division 3) Director January 2018 George M. Lane (Division 4) Vice President January 2017 Robert A. Parris (Division 5) Director January 2018 Marlon Barnes (Division 6) Director January 2017 Neal A. Weisenberger (Division 7) Director January 2017 Dwayne Chisam General Manager Appointed Holly Hughes Secretary-Treasurer Appointed The Water System is under the direction of Dwayne Chisam, the Agency s General Manager. Mr. Chisam is a professional civil engineer with over 33 years of public works and utility management experience in the operation and expansion of water, wastewater and solid waste utilities. He holds a Bachelor of Science Degree in Civil Engineering from California State University at Long Beach, and was instrumental in establishing the Central Coast Water Authority and construction the Coastal Branch of the State Water Project. Mr. Chisam joined the Agency in October 2012, as Assistant General Manager and was appointed as General Manager in March Prior to joining the Agency s management team, Mr. Chisam was Director of Public Works and City Engineer for the cities of Pismo Beach and Los Banos, after serving in progressively more responsible roles as Utilities Director for Santa Maria and Public Works Director for Guadalupe. Prior to Mr. Chisam s appointment as General Manager, Mr. Flory had served as Interim General Manager. Mr. Flory earned a Bachelor s Degree in Civil Engineering. Mr. Flory held several positions in the State Water Project before serving as the Project s Executive Manager. In 2010, Mr. Flory joined the Agency as General Manager and served as General Manager until recently. In October 2015, Mr. Flory agreed to take a new position at a private company. Mr. Flory had served as Interim General Manager on a contract basis through that company while the Board of Directors conducted its recruitment process to select a successor for the General Manager position and will continue to be available on a contract basis as needed by the Agency. The Agency also employs an administrative staff of 11 and an operations staff of 31. Years. The following Table 1 summarizes the operation of the Water System for the past ten Fiscal 17

24 TABLE 1 ANTELOPE VALLEY-EAST KERN WATER AGENCY WATER SYSTEM SUMMARY OF OPERATIONS (1) (As of June 30) (4) (4) (4) (2) Water Purchased 81,250 80,384 49,821 41,082 58,334 73,336 95,922 66,434 38,158 16,708 Ground Water/Other Sources ,567 17,230 Total Purchased 81,250 80,384 49,821 41,082 58,334 73,336 95,992 66,434 43,725 33,938 Water Sold Municipal/Industrial 67,162 61,701 45,796 40,096 51,859 51,048 44,721 46,479 39,768 33,172 Agricultural (2) 14,088 18,683 4, ,475 22,288 51,201 19,955 3, Total Sold 81,250 80,384 49,821 41,082 58,334 73,336 95,922 66,434 43,725 33,938 Change from previous year 34.5% (1.1%) (38.1%) (17.5%) 41.9% 25.7% 30.8% (30.7%) (34.2%) (22.4%) Cost of SWP Water $/a-f (3) $145 $140 $145 $147 $140 $136 $154 $183 $238 $253 Source: Antelope Valley-East Kern Water Agency. (1) In acre-feet. (2) Increase in agricultural sales due to an increase of water banking sales from approximately 4,000 acre-feet in to approximately 21,000 acre-feet in (3) Variable cost of SWP water. (4) This table represents a compilation of information summarizing operations prepared over a number of years, and the Years through were calculated on a calendar year basis when that information was initially prepared.. 18

25 Water Service Agreements The Agency only provides wholesale water to customers pursuant to agreements (the Water Service Agreements ). Pursuant to the Water Service Agreements, the customers order the amount of water they want for that year. If the Agency is unable to obtain the necessary supply, deliveries are reallocated based on substantiated actual need of the customers. The Agency currently has 58 Water Service Agreements with local purveyors for municipal and industrial water and agricultural water. Users include U.S. Borax/Rio Tinto and 26 public or private municipal water systems, including Los Angeles County Waterworks District No. 40 (which consists of the consolidation of 8 former waterworks districts). Municipal and industrial water is sold either treated or raw. All customers are metered, and the Agency bills monthly. The following table presents a summary of the ten largest current Water Service Agreements with municipal and industrial customers. TABLE 2 ANTELOPE VALLEY-EAST KERN WATER AGENCY WATER SYSTEM TOP TEN MUNICIPAL AND INDUSTRIAL WATER SERVICE AGREEMENTS (As of June, 2015) Customer Initial Date of Agreement FY Revenues LA County Water Works District No. 40 (1) 7/17/1970 $8,795,309 Edwards Air Force Base and Propulsion Lab. 6/28/1990 2,055,240 FPL Energy 5/27/1986 1,437,706 Quartz Hill WD 6/23/1970 1,405,388 US Borax 6/4/ ,274 City of California City 10/14/ ,231 White Fence Farms #3 4/8/ ,168 Rancho Vista Golf Course 6/12/ ,985 California Water Service Co. 12/18/ ,943 Boron CSD 2/28/ ,272 Source: Antelope Valley-East Kern Water Agency. (1) See APPENDIX B hereto. Pursuant to the Water Service Agreements with irrigation customers, the Agency charges a lower rate per acre-foot than that for either treated or raw municipal and industrial water (see Water System Rates and Charges below). However, irrigation water service is available only to the extent the Agency has surplus water available after providing for the municipal and industrial users. Agricultural users are served by direct turnouts from the California Aqueduct, or from the Agency s west feeder. There are currently 32 irrigation Water Service Agreements. The following table presents a summary of the ten largest current Water Service Agreements with agricultural customers. 19

26 TABLE 3 ANTELOPE VALLEY-EAST KERN WATER AGENCY WATER SYSTEM TOP TEN AGRICULTURAL WATER SERVICE AGREEMENTS (As of June, 2015) Customer 20 Initial Date of Agreement Fiscal Year Revenues Frank Lane 9/15/1976 $ 7,993 Frances Lane 8/17/1989 7,574 Alan & Akiko Nishino 6/25/1984 5,917 Allan Copeland 8/29/1978 4,342 Gary Shafer 5/23/2000 4,339 Rancho Colima 6/27/1984 3,028 Terry Milford 3/19/1982 2,826 Keith Miller 1/27/1981 2,644 Earl Jacques 12/30/1987 2,609 Darik Bolin 7/25/1995 2,552 Source: Antelope Valley-East Kern Water Agency. The Project; Future Water System Improvements The Prior Certificates funded certain improvements (the Project ) to the Water System. The Project consisted of modifications to four water treatment plants to meet new drinking water standards set by the United States Environmental Protection Agency, including the addition of new filtering equipment, changing disinfectant applications, and expanding capacity from 65 million gallons per day ( mgd ) to 90 mgd. The Project also included improvements to water distribution systems, including pipelines, inter-ties and storage reservoirs. The Project also included development of water banking facilities for the Agency, and increasing the Agency s water treatment capacity to more fully utilize its SWP amounts. The entire cost of the Project was approximately $160 million. Construction was completed in Water Sources and Supply; Water Purchases The Agency obtains its water from the California State Water Project ( SWP ), pursuant to a contract with the California Department of Water Resources ( DWR ), dated September 20, 1962, as amended (the State Water Supply Contract ). Pursuant to the State Water Supply Contract, the Agency originally had a Table A contract amount (the Table A Amount ) of 138,400 acre-feet of water from the SWP, which Table A Amount increased to 141,400 acre-feet commencing in 2000 as a result of a purchase of 3,000 acre-feet of Table A amount from another special district. The purchase of an additional 3,444 acre-feet in 2012 from other State Water Project Contractors increased the Agency s Table A amount to 144,844 acre-feet. Delivery of all or a portion of that amount is dependent upon a balancing of the requests made by all participants in the SWP. In years of low water supply, the Agency s request for delivery of water from DWR could be subject to deficiency clauses contained in the State Water Supply Contract, which could result in less than the full amount being delivered. See RISK FACTORS herein for information regarding possible interruption of deliveries of water from the SWP. The Agency was allocated 5% of its Table A Amount (or 7,242 acre-feet) in 2014 and was allocated 20% of its Table A Amount (or 28,968

27 acre-feet) in The Agency was able to meet demands in both of these years through use of SWP carryover water and new groundwater wells. As of March 17, 2016, the DWR has informed the Agency that it will be eligible to receive at least approximately 45% of its Table A Amount in 2016, although that amount could be higher. The Agency is pursuing water purchases from other sources in the event it anticipates needing additional supplies to satisfy requests submitted under the Water Service Agreements as well as utilizing the Agency s water bank capabilities. The State Water Supply Contract extends through the year 2035, or until all State bonds for the project are retired, if later. The final maturity of the 2016 Bonds occurs in 2037, and the Agency anticipates working with the State, and other SWP contractors, to extend the termination date of the State Water Supply Contract. The State Water Supply Contract is expected to be extended an additional 50 years until Under the State Water Supply Contract, the Agency makes annual fixed and variable payments to the State. The charges consist of the Delta Water Charge, which includes a capital cost component and a minimum operation, maintenance, power and replacement (OMP&R) component related to the conveyance facilities, and a transportation charge, which also includes capital cost and minimum and variable OMP&R components related to the transportation facilities. About July 1 of each year, DWR provides to the Agency a Statement of Charges detailing the charges payable by the Agency to DWR in the following calendar year. The charges comprise several components, reflecting the cost of supplying water to the Agency. These amounts are factored into the Agency s charges under the Water Service Agreements. If available from the Agency through the SWP, and if the customers request the Agency to obtain such water, the Agency may elect to receive surplus water in addition to its annual Table A Amount. If the Agency elects to receive such additional water, its payments will be increased in accordance with cost allocation principles as set forth in its contract with the Agency, and these costs will be passed through to the landowners requesting such surplus. The following table illustrates the historical Table A Amount of water delivery from the SWP to the Agency, and associated costs payable to the DWR pursuant to the State Water Supply Contract. 21

28 TABLE 4 ANTELOPE VALLEY-EAST KERN WATER AGENCY WATER SYSTEM HISTORICAL SWP DELIVERIES AND PAYMENTS (Calendar Year) Year Table A Amount (1) Actual Water (1) (2) Needed Actual Water (1) (3) Delivery Percent of Table A Amount (3) Annual Payment (4) ,844 31,102 (2) 14, % $2,195, ,844 17,403 17, ,912, ,844 50,842 50, ,242, ,844 77,672 77, ,476, ,400 94,046 94, ,845, ,400 58,220 58, ,905, ,400 54,015 (2) 47, ,274, ,400 56,821 (2) 49, ,410, ,400 80,384 80, ,801, ,400 81,250 81, ,359, ,400 60,401 60, ,479, ,400 62,227 62, ,963, ,400 61,164 61, ,977, ,400 59,808 59, ,005,946 (5) ,400 63,508 63, ,483, ,400 84,016 84, ,695, ,400 70,102 70, ,765, ,400 54,148 54, ,998, ,400 63,829 63, ,985, ,400 58,138 58, ,277, ,400 48,739 48, ,417, ,400 51,258 51, ,831, ,400 44,673 44, ,186, ,400 30,840 30, ,776, ,400 21,900 21, ,972, ,400 46,135 46, ,437,575 Source: Antelope Valley-East Kern Water Agency. (1) In acre-feet. (2) Since 1993, the amount delivered has been 100% of the customers demands except in 2008 and 2009 when the Agency s Water Shortage Contingency Plan was enacted by the Agency s Board of Directors and in In 2008 and 2009, the additional water came from the Tejon Ranch Corporation and in 2015 native groundwater sources were used. (3) Based on Table A Amount. Even though amount is less than Table A Amount, since 1993 amount received has been 100% of the amount requested by the Agency to meet its obligations under the Water Supply Agreements. (4) Variable cost only. Fixed costs are paid through levy of ad valorem property tax. (5) Increase reflects rise in variable costs of SWP water from $55 an acre-foot to as high as $148 per acre-foot (primarily due to energy costs). The Agency currently has one emergency inter-tie with the Palmdale Water District, which can supply up to 3 million gallons per day (mgd), and has begun collecting fees for capital improvement 22

29 projects that are related to water banking. Current storage capacity is 60 million gallons, all within reservoir tanks, which is sufficient to supply less than one day of deliveries. Antelope Valley Groundwater Adjudication In December of 2015, the Antelope Valley Groundwater Adjudication Case was settled in the California Superior Court via a stipulated judgment. The Judgment has been appealed, but immediately activates the creation of a five-member Watermaster Board of Directors to unanimously appoint the Antelope Valley Watermaster Engineer, an engineer responsible for monitoring the water basin to assure that no more water is pumped out than the basin can sustain without falling back into overdraft. The Watermaster Engineer can only be removed from the job by a 2/3 rds vote of the Board. The Agency and L.A. County Waterworks District No. 40 and a public water utility will each have one seat on the Board with two seats to be occupied by landowners. The Watermaster Engineer will have authority to assess parties who exceed pumping limits to pay for replacement water, which may come from a variety of sources, including the State Water Project. Public meetings on the Watermaster implementation have commenced and eventually monthly meetings are expected to establish rules, regulations, schedules and staffing for the Watermaster Board s advisory committees and sub-committees. Although there is a seven year-ramp-down period associated with this judgment, the Agency s customers are likely to need to utilize ever-increasing amounts of the Agency s SWP Table A water and the Agency will likely be called upon to increase imported supply along with water banking options in future years. At this time, it is not possible to evaluate the outcome of the appeal or the ultimate outcome or estimate the amount or range of the financial impact of such outcome. 23

30 Water Demand and Deliveries The Agency records the volume of water delivered by the Water System. Over the past ten calendar years, the Agency has delivered annually, on average, 46,572 acre-feet of water to its municipal and industrial customers. In the event the Agency is not able to deliver water to these customers, they would be required to rely on groundwater and other available markets, if any, for water. The average daily demand was 80 acre-feet in the most recent year (2015). The following table summarizes municipal and industrial water deliveries for the most recent ten years. TABLE 5 ANTELOPE VALLEY-EAST KERN WATER AGENCY WATER SYSTEM HISTORICAL MUNICIPAL AND INDUSTRIAL WATER DELIVERIES TO CUSTOMERS (1) (Calendar Year) Year Total Delivered (2) Percent of Ten Year Average Change Over Previous Year , % (17.0%) , (20.4) , (2.2) , , (14.7) , , (9.5) , (25.8) , (8.1) , Source: Antelope Valley-East Kern Water Agency. (1) In acre-feet. (2) Since 1993, the amount delivered has been 100% of the customers demands except in 2008 and 2009 when the Agency s Water Shortage Contingency Plan was enacted by the Agency s Board of Directors and in The Agency was still able to meet 100% of the demands in 2008 and 2009 through a purchase of 14,000 acre-feet from the Tejon Ranch Corporation and in 2015 when native groundwater sources were used. 24

31 Over the past ten calendar years, the Agency has delivered annually, on average, 14,299 acre-feet of water to its agricultural users. The following table summarizes agricultural water deliveries for the most recent ten calendar years. TABLE 6 ANTELOPE VALLEY-EAST KERN WATER AGENCY WATER SYSTEM HISTORICAL AGRICULTURAL WATER DELIVERIES TO CUSTOMERS (1) (Calendar Year) Year Total of Delivered (2) Percent of Ten Year Average (3) Change Over Previous Year , % (44.5%) , (57.3) , (78.5) , (28.3) , , , (50.1) , (78.5) , , Source: Antelope Valley-East Kern Water Agency. (1) In acre-feet. (2) Since 1993, the amount delivered has been 100% of the customers demands except in 2008 and 2009 when the Agency s Water Shortage Contingency Plan was enacted by the Agency s Board of Directors and in The Agency was still able to meet 100% of the demands in 2008 and 2009 through a purchase of 14,000 acre-feet from the Tejon Ranch Corporation and in 2015 when native groundwater sources were used. (3) For 2006, calculated as the average of years 1997 through 2001, and for 2007 through 2014 calculated as the average of the applicable year and (9) previous years. See Table 1 herein for a description of historical water sales. During Fiscal Year , municipal and industrial uses comprised 91% of total consumption while agricultural water uses constituted approximately 9% and during Fiscal Year , municipal and industrial uses comprised 97.7% of total consumption while agricultural water uses constituted approximately 2.3%. Based on anticipated population growth, the Agency estimates that water delivered by the Water System for the next four Fiscal Years will be as set forth in the following table. Actual water delivered for Fiscal Year 2015 is also set forth in the following table. Actual water deliveries may vary materially from those estimated below. 25

32 TABLE 7 ANTELOPE VALLEY-EAST KERN WATER AGENCY WATER SYSTEM ACTUAL AND PROJECTED ANNUAL WATER DELIVERY (1) (As of June 30) Year Municipal/Industrial Deliveries Agricultural Deliveries Total Percent Change 2015 (2) 29,294 1,808 31, ,759 1,898 32,657 5% ,297 1,993 34, ,912 2,093 36, ,608 2,198 37,806 5 Source: Antelope Valley-East Kern Water Agency. (1) In acre-feet. Because weather conditions cannot be predicted, the Agency projects an increase in water deliveries of 5% of the last completed fiscal year. (2) Actual Deliveries shown for Water Quality Compliance The Agency s potable water supply is currently treated/disinfected through a permit and under the control of the California State Department of Health Services (DHS). The kind and degree of water treatment which is also effected through the Water System is regulated, to a large extent, by the federal government. Clean water standards set forth in the Safe Drinking Water Act and the Environmental Protection Act continue to set standards for the operations of the Water System and to mandate its use of technology. In the event that the DHS or the federal government, either acting through the Environmental Protection Agency or by adoption of additional legislation, should impose stricter quality standards upon the Water System, its expenses would increase accordingly and rates and charges would have to be increased to offset those expenses. It is not possible to predict the direction which State and federal regulation will take with respect to water treatment. Water delivered for agricultural purposes is not treated. The Agency provides water through its Domestic-Agricultural Water Network (the DAWN Project ), the South-North Intertie Project and other facilities which distribute imported water from the SWP and local groundwater supplies for both (i) municipal and industrial and (ii) agricultural use through a 150+-mile distribution network. Primary facilities comprising the Water System, as of January 1, 2016, include four surface water treatment plants, two water banking/recovery facilities (includes 12 groundwater wells and 500+ acres of direct spreading ponds), one emergency well field (three groundwater wells), 11 water storage reservoirs with a total capacity of 60 million gallons, 7 water booster stations to move water to different elevations, approximately 150 miles of transmission and distribution mains and related control and telemetry systems. The operational headquarters of the Water System is located at the Quartz Hill Water Treatment Plant in Palmdale, California. The Quartz Hill Water Treatment Plant has an output capacity of 90 million gallons per day (mgd) of treated water, enough to serve the needs of 360,000 people. The Agency s water banking/groundwater well facilities have an output of 28 mgd, enough water to serve 112,000 consumers. The Eastside water treatment plant between Littlerock and Pearblossom has an output capacity of 10 mgd, and is capable of serving the needs of 40,000 people. The 14-mgd Rosamond water treatment plant was established to supplement the water needs of consumers in southeastern Kern County, an area that includes Rosamond, Mojave, California City, Edwards Air Force Base and Boron, and is capable of providing water for 56,000 people. The Acton water treatment plant is a 4-mgd facility 26

33 capable of serving 16,000 people. Water is pumped from the plant site on Barrel Springs Road, near Sierra Highway, to Vincent Hill Summit. From there it flows into a Los Angeles County Waterworks pipeline for transport to the Acton area. The total treatment capacity of all facilities could serve 584,000 consumers. By contrast, the Antelope Valley Groundwater adjudication has determined that the Native Safe Yield (amount of water that can be pumped annually without causing overdraft) is 110,000 acre-feet which could serve the needs of approximately 300,000 consumers. Water System Rates and Charges General. In accordance with California law, the Agency may, from time to time, fix, alter or change fixed monthly system access fees, commodity charges and other fees related to the Water System. Consequently, the Agency periodically reviews water rates. In accordance with California law, the Agency reviews such charges and fees to determine if they are sufficient to cover operation and maintenance costs, capital improvement expenditures and debt service requirements. Such charges and fees are set by the Agency for the services provided by the Water System after a public hearing is held, generally at the time of adoption of the annual budget. Neither the Agency nor the Water System is subject to the jurisdiction of, or regulation by, the California Public Utilities Commission or any other regulatory body in connection with the establishment of charges and fees related to the Water System. See RISK FACTORS Proposition 218 herein for a discussion of the treatment of the Agency s rates and charges in light of Proposition 218. The Agency staff annually determines the accuracy of the Water System rate structure after full consideration of expected operations, maintenance and capital costs. Pursuant to a resolution of the Agency adopted on September 8, 2015, the current rates and charges for water delivered within the Agency are as follows: TABLE 8 ANTELOPE VALLEY-EAST KERN WATER AGENCY WATER SYSTEM RATES AND CHARGES (1) (Effective January 1, 2016) Municipal & Industrial: Treated $ Untreated Agricultural: Aqueduct Pipeline Edwards Air Force Base 1, FPL Energy Solar Plant 1, Source: Antelope Valley-East Kern Water Agency. (1) Per acre-foot. For water service provided outside of the Agency limits (which service accounted for a negligible amount of total water deliveries in Fiscal Year ), the Agency charges such customers the actual cost of water, per acre-foot. 27

34 Capacity Charges The Agency collects a capacity charge, calculated on an equivalent dwelling unit basis and subject to a multiplier based on meter size, from new development to pay for capital facilities required to serve such customers. The Board may request an engineering study to determine if capacity charge increases are necessary. The capacity charges were increased in June, 2007, following such a study, and they are currently under review for additional increases. The capacity charges currently range from $4,575 to $7,387, depending on location of the units in the Agency s service area. Collection Procedures For its agricultural customers, the Agency issues a Memorandum of Water Service when a Water Service Agreement is signed. This document is recorded against the title of the property benefiting from the water service and allows the Agency to lien the property in the event of payment default. Municipal and industrial customers are billed on a monthly basis. The Agency has not historically had any major delinquencies. Outstanding Water System Indebtedness As of the date of issuance of the 2016 Bonds, the only indebtedness secured by Net Revenues will be the 2016 Bonds and the Installment Payments (see INTRODUCTION Security for the 2016 Bonds and REFUNDING PLAN herein). Insurance The Agency is a member of the Association of California Water Agencies Joint Powers Insurance Authority (the JPIA ), an intergovernmental risk sharing joint powers authority created to provide self-insurance programs for California water agencies. The JPIA arranges and administers programs of insurance for the pooling of self-insured losses, and purchases excess insurance coverage for its members. The JPIA began operations on October 1, 1979 and has continued without interruption since that time. As of June 30, 2015, the Agency limits and deductibles for liability, property, and worker s compensation programs of the JPIA are as follows: General and auto liability, public officials and employees errors and omissions with total risk financing self-insurance limits of $2,000,000, combined single limit per occurrence. The JPIA purchased additional excess coverage layers of $58,000,000 for general, auto and public officials liability, which increases the limits on the insurance coverage noted above. Property losses are paid at the replacement cost for buildings, fixed equipment and personal property on file, if replaced within two years after the loss, otherwise such losses are paid on an actual cash value basis, subject to a $25,000 deductible per loss. The JPIA purchased excess coverage for a combined total of $150,000,000 per occurrence. Boiler and machinery coverage for the replacement cost up to $150,000,000 per occurrence, subject to various deductibles depending on the type of equipment. 28

35 Workers Compensation insurance up to State statutory limits for all work-related injuries/illnesses covered by State law and employer s liability coverage up to $2,000,000. The JPIA is self-insured up to $2,000,000 and excess coverage has been purchased. Crime coverage up to $500,000 per loss, including public employee dishonesty, including public officials who are required by law to give bonds for the faithful performance of their service, forgery or alteration and computer fraud, subject to a $1,000 deductible. Historic Water Sales Revenues The following table shows the Agency s annual Water System Gross Revenues for the ten most recent Fiscal Years, excerpted from the Agency s audited financial statements. TABLE 9 ANTELOPE VALLEY-EAST KERN WATER AGENCY WATER SYSTEM HISTORIC WATER SALES GROSS REVENUES (As of June 30) Year Water Revenue %Change 2015 $22,609, % ,108,465 (1) (35.2) ,415, ,628,985 (2) ,053, ,066, ,937,152 (19.0) ,557,877 (13.0) ,441, ,888, Source: Antelope Valley-East Kern Water Agency. (1) The decline in 2014 was attributable to decreased water sales as a result of conservation during the drought. (2) Amount of $44,200 reclassified from Water Revenue to Other Revenues in June 30, 2013 audited financial statements. Property Tax Revenues The Agency receives a portion of the property taxes collected from within its service area for administration and general purposes. In Fiscal Year , the Agency s share of the countywide levy was approximately $24,441,225. The Agency levies property taxes to pay its contractual obligations to the State under the State Water Supply Contract. See RISK FACTORS Impact of State Budget above for a discussion of the impact of the recent shift of certain property tax revenues for Fiscal Year The Counties levy a 1% property tax on behalf of all taxing agencies in such County, including the Agency. The taxes collected are allocated to taxing agencies within such County, including the Agency, on the basis of a formula established by State law enacted in Under this formula, each 29

36 County and all other taxing entities receive a base year allocation plus an allocation on the basis of situs growth in assessed value (new construction, change of ownership, and inflation) prorated among the jurisdictions which serve the tax rate areas within which the growth occurs. Tax rate areas are specifically defined geographic areas which were developed to permit the levying of taxes for less than county-wide or less than city-wide special districts. The Agency s share of the property tax revenues in Fiscal Year is used to pay the State Water Supply Contract and the general obligation bonds under the State Water Supply Contract. There can be no assurance that the allocation formula currently established by State law will be continued in the future. If the formula is changed in the future it could have a material adverse effect on the receipt of property tax revenue of the Agency. Assessed Valuations and Tax Collections. The following table provides a record of secured assessed valuation and tax collections within the Agency and the amount the Agency received as its share of the 1% property tax during the ten most recent Fiscal Years. TABLE 10 ANTELOPE VALLEY-EAST KERN WATER AGENCY WATER SYSTEM SECURED ASSESSED VALUATION AND TAX COLLECTION (As of June 30) Total Secured Assessed Valuation Within Agency Property Tax Received by Agency (1) Fiscal Year Percent Change Percent Change $26,661,474, % $15,567,877 (2) N/A ,111,454, ,441, % ,393,420, ,003,698 (1.2) ,507,541,567 (1.3) 24,302, ,806,924, ,153, ,983,687,618 (10.1) 18,798,755 (16.2) ,215,181,258 (3.6) 22,441,783 (17.6) ,035,808, ,225, ,558,826, ,626, ,814,820, ,448, Source: Except as set forth below, Office of the County Auditor-Controller, Counties of Los Angeles, Kern and Ventura for Total Secured Assessed Valuation and for Property Tax Received by Agency. (1) Includes amounts collected to pay debt service on general obligation bonds and amounts due under the State Water Supply Contract. (2) Amount received as of February 29, The Agency is not aware of oil production facilities being located within the portion of the Agency s territory within Kern County or within any of the Agency s territory within Los Angeles County. 30

37 Unencumbered Reserves The following table illustrates the unencumbered reserves of the Agency for Fiscal Years through : Retirement Plan TABLE 11 ANTELOPE VALLEY-EAST KERN WATER AGENCY WATER SYSTEM UNENCUMBERED RESERVES (As of June 30) Fiscal Year Unencumbered Reserves Percent Change 2006 $89,595, ,443, ,804, ,030, ,420, ,895,689 (0.4) ,055,312 (2.6) ,553,414 (1.1) ,861,438 (2.6) ,667,199 (5.9) Source: Antelope Valley-East Kern Water Agency. The Agency does not participate in the California Public Employees Retirement Systems. Instead, all eligible full-time employees of the Agency are eligible to participate in a 401a and Thrift Defined Contribution Plan (the Plan ) sponsored by the Agency. The Agency pays 10% if the employee contributes 4% of the employee s base compensation into the Plan, and the employee can elect to contribute up to 50% of their compensation into the Plan. For the Fiscal Year ended June 30, 2015, the Agency s retirement contribution expenditures for full-time employees amounted to approximately $393,055, and for Fiscal Year , such expenditures are budgeted to be $399,170. The Governmental Accounting Standards Board (GASB) has issued Statement No. 45, Accounting and Financial Reporting by Employers for Post-Employment Benefits Other Than Pensions (GASB 45), which addresses how state and local governments must account for and report their obligations related to post-employment healthcare and other non-pension benefits (OPEB). GASB 45 requires that local governments account for and report the annual cost of OPEB and the outstanding obligations and commitments related to OPEB in essentially the same manner as they currently do for pensions. The Agency began implementation of GASB 45 for its Fiscal Year ending June 30, The Agency provides postretirement health care benefits (the Health Plan ) for retired Agency employees who retire after the age of 55 and have been employed by the Agency for a minimum of 10 years, along with certain employees on permanent disability and directors elected before 1995 and who have at least 12 years of service. For all qualifying employees, medical coverage upon retirement is extended to the employee, spouse and eligible dependents. The Agency s contribution to such costs range from 50% at 10 years of service, to 100% for 20 years. As of June 30, 2015, the Agency had over 63 (including 8 retirees) eligible participants in the Health Plan. The Agency currently finances the 31

38 Health Plan on a pay-as-you-go basis. For the Fiscal Year ended June 30, 2015, the Agency expended approximately $1,034,008 for these benefits, and for Fiscal Year , such expenditures are budgeted to be $985,000. Under GASB 45, however, such costs will be accounted for on an accrual basis. The retiree health benefits discussed above are the Agency s only OPEB. The Agency must report an annual OPEB cost based on actuarially determined amounts that, if paid on an ongoing basis, will provide sufficient resources to pay these benefits as they come due. Based on an actuarial study performed in 2014, the accrued liability was approximately $5.8 million, which is currently reflected as a liability on the Agency s statement of net position. Historic Operating Results The Agency uses an enterprise fund to account for its operations. The Governmental Accounting Standards Board ( GASB ) released Statement No. 34, which made changes in the annual financial statements for all governmental agencies in the United States. These requirements became effective with respect to the Agency s financial statements prepared for Fiscal Year The implementation of GASB Statement No. 34 had no impact on the financial statements of the Agency other than in classification of, and disclosures related to, financial statement amounts. The following table is a summary of audited operating results of the Water System for the last five fiscal years. The following summary of operating results is qualified in its entirety by reference to the Agency s audited financial statements, including the notes thereto. The Agency has not requested, and the Auditor has not performed, any post-audit review of the financial condition or operations of the Agency. 32

39 TABLE 12 ANTELOPE VALLEY-EAST KERN WATER AGENCY WATER SYSTEM HISTORIC OPERATING RESULTS (Fiscal Year Ended June 30) Operating Revenues: Charges for Services $22,053,700 $22,628,985 $26,415,955 $17,108,465 $22,609,895 Miscellaneous Total Operating Revenues $22,053,700 $22,628,985 $26,415,955 $17,108,465 $22,609,895 Operating Expenses: Operations (1) $9,432,414 $10,744,787 $11,317,041 $13,015,995 $12,485,889 Cost of Water 7,015,672 8,610,897 8,109,842 4,971,501 3,584,851 Depreciation 4,347,078 4,809,036 4,887,331 5,144,694 5,491,187 Total Operating Expenditures $20,795,164 $24,164,720 $24,314,214 $23,132,190 $21,561,927 Operating Income (loss) $1,258,536 ($1,535,735) $2,101,741 ($6,023,725) $1,047,968 Non-Operating Revenues (Expenses): Property Taxes $18,798,755 $20,153,331 $24,302,666 $24,003,698 $24,441,225 Investment Income 2,426,686 1,586, ,276 2,047, ,925 State Water Contract (16,644,861) (17,919,022) (19,083,117) (17,969,528) (18,463,002) Capacity Charges (2) 539, , , , ,396 Other 574, ,781 7,976,608 8,835, ,846 Total Non-Operating Revenues (Expenses) $5,694,108 $4,509,378 $14,857,393 $17,536,948 $8,199,122 Net Revenue $11,299,722 $7,782,679 $21,846,465 $16,657,917 $14,738,277 Debt Service Series 2007 A-1 $4,547,188 $4,545,588 $4,546,788 $4,545,588 $4,546,088 Series 2008 A-1 3,195,881 3,200,281 3,196,881 3,195,881 3,197,081 Series 2008 A-2 377, , , , ,509 Total Debt Service $8,120,634 $8,161,992 $8,088,913 $8,076,373 $7,997,678 Debt Service Coverage Remaining Revenues $3,179,088 ($379,313) $13,757,552 $8,581,544 $6,750,599 Source: Agency audited financial statements. (1) Includes pumping, treatment and transmission charges, administration costs and miscellaneous expenses. (2) Decreases reflect decrease in capacity charges and development growth. (3) Net Assets, Beginning of Year decreased in 2014 from the prior year Net Assets, End of Year due to a prior year audit adjustment to remove Unamortized Bond Issuance Costs from the Agency Balance Sheet. 33

40 Projected Operating Results and Debt Service Coverage The Agency s estimated projected operating results for the Water System for the Fiscal Years ending June 30, 2016 through June 30, 2020 are set forth below. 34

41 TABLE 13 ANTELOPE VALLEY-EAST KERN WATER AGENCY WATER SYSTEM PROJECTED OPERATING RESULTS (Fiscal Year) Operating Revenues Charges for Services (1) $27,128,317 $28,484,733 $29,908,969 $31,404,418 $32,974,639 Miscellaneous Total Operating Revenues $27,128,317 $28,484,733 $29,908,969 $31,404,418 $32,974,639 Operating Expenses Operations (2) $13,632,347 $14,041,318 $14,462,556 $14,896,433 $15,343,327 Cost of Water (3) 5,037,546 5,188,672 5,344,333 5,504,663 5,669,802 Depreciation (4) 5,548,000 5,880,880 6,233,733 6,607,757 7,004,222 Total Operating Expenditures $24,217,893 $25,110,870 $26,040,622 $27,008,853 $28,017,351 Operating Income $2,910,424 $3,373,863 $3,868,347 $4,395,565 $4,957,288 Non-operating Revenues: Property Taxes (5) $25,389,382 $26,151,063 $26,935,595 $27,743,663 $28,575,973 Investment Income (6) 1,266,853 1,257,799 1,067, , ,554 Capacity Charges (7) 694, , , , ,000 Other Revenue 1,112,184 1,000,000 1,000,000 1,000,000 1,000,000 State Water Contract Payments (8) (23,378,295) (24,079,644) (24,802,033) (25,546,094) (26,312,477) Total Non-operating Revenues $5,084,124 $5,023,218 $4,894,826 $4,826,158 $4,888,050 Net Revenue $13,542,548 $14,277,961 $13,996,906 $15,829,480 $16,849,560 Debt Service (9) Series 2007A-1 $3,231,969 $1,913, Series 2008A-1 2,719,741 2,244,400 $2,246, Series 2008A-2 (10) 450, , ,000 $1,362,000 $1,365,000 Series ,187 3,417,600 4,992,600 7,234,600 7,239,400 Total Debt Service $6,847,897 $8,485,600 $8,149,000 $8,596,600 $8,604,400 Debt Service Coverage Remaining Revenues $6,694,651 $5,792,361 $5,847,906 $7,232,880 $8,245,160 Source: Antelope Valley-East Kern Water Agency. (1) Sales and service charges revenues are projected to increase 5% annually. Projected charges for services assume the projected water sales amounts listed in Table 7. (2) Operations expenses projected to increase 3% annually. (3) Cost of Water expense projected to increase 3% annually. (4) Depreciation projected to increase 6% annually. (5) Property taxes projected to increase by 3% annually. (6) Investment earnings on fund balance at assumed rate of 1.00%. (7) Projected at 95% of receipts in Fiscal Year (8) Projected to annually increase by 3%. (9) Excludes payments subordinate to the payment of principal of and interest on the 2016 Bonds and the payment of Installment Payments. (10) Projected debt service assumes interest rate of 2% in 2017 and 3% from 2018 to

42 Credit Facilities In connection with the issuance of the Series 2008A-2 Certificates of Participation, the Agency arranged for the issuance of an irrevocable direct-pay Letter of Credit in the amount of $45,000,000 (plus interest coverage). In connection with the issuance of the letter of credit, the Agency entered into a reimbursement agreement with Wells Fargo Bank, National Association (the Credit Issuer ). Unless extended at the option of the Credit Issuer, the letter of credit relating to the Series 2008A-2 Certificates of Participation expires May 1, If the Agency is unable to secure a replacement letter of credit prior to the expiration date, the Series 2008A-2 Certificates of Participation will be subject to mandatory tender for purchase by the owners thereof upon such expiration and the related letter of credit drawn upon to pay the purchase price of such tendered certificates of participation. Under the reimbursement agreement, the Agency is generally required to reimburse the Credit Issuer for any amounts paid by the Credit Issuer under the letter of credit on the same day the amount is paid. Amounts owed to the Credit Issuer bear interest at a specified rate. The Agency is also required to pay certain fees to the Credit Issuer, including establishment, facility, drawing and transfer fees, in addition to the Credit Issuer s costs, expenses and certain taxes. In the event that there is a drawing on any letter of credit to purchase any Series 2008A-2 Certificates of Participation which are tendered for purchase by the owners thereof, the reimbursement agreement generally provides that the Credit Issuer becomes the owner of such certificates of participation ( Bank Certificates ), and the Agency is required to repay such Bank Certificates immediately upon the purchase of such certificates of participation by the Credit Issuer, at an increased interest rate. The reimbursement agreement contains a number of covenants and agreements on the part of the Agency, and specify events of default, and remedies. Remedies of the Credit Issuer generally include the right to cause a mandatory tender of the Series 2008A-2 Certificates of Participation, as applicable. The obligations of the Agency pursuant to the reimbursement agreement constitutes a Parity Obligation of the Agency. RISK FACTORS The following factors, along with other information in this Official Statement, should be considered by potential investors in evaluating the risks in the purchase of the 2016 Bonds. Drought Conditions January 17, 2014, Governor State of Emergency Proclamation regarding Drought. On January 17, 2014, with California facing water shortfalls in the then driest year in recorded state history, Governor Edmund G. Brown Jr. proclaimed a State of Emergency and directed state officials to take all necessary actions to prepare for these drought conditions. In the State of Emergency declaration, Governor Brown directed state officials to assist farmers and communities that are economically impacted by dry conditions and to ensure the State can respond if Californians face drinking water shortages. The Governor also directed state agencies to use less water and hire more firefighters and initiated a greatly expanded water conservation public awareness. In addition, the proclamation gave state water officials more flexibility to manage supply throughout California under drought conditions. 36

43 The Governor s drought State of Emergency follows a series of actions the administration has taken to ensure that California is prepared for record dry conditions. In May 2013, Governor Brown issued an Executive Order to direct state water officials to expedite the review and processing of voluntary transfers of water and water rights. In December 2014, the Governor formed a Drought Task Force to review expected water allocations, California s preparedness for water scarcity and whether conditions merit a drought declaration. On April 1, 2015, for the first time in state history, the Governor directed the State Water Resources Control Board to implement mandatory water reductions in cities and towns across California to reduce water usage by 25 percent. This savings amounts to approximately 1.5 million acre-feet of water over the next nine months, or nearly as much as is currently in Lake Oroville. California set a new low water mark on April 1, 2015, with its early-april snowpack measurement. The statewide electronic reading of the snowpack's water content stood at 5 percent of the April 1st average. April 1, 2015 s content was only 1.4 inches, or 5 percent of the 28-inch average. The lowest previous reading since 1950 was 25 percent of average, so Water Year 2015 is the driest winter in California's written record. The implementation of mandatory water reductions is ongoing. under any mandatory water use reduction directives. The Agency is currently not Local weather conditions have only a slight impact on water demands on the Agency. Wet years may see a slight decrease in demands while dry years may increase demands by a similar amount. The severe droughts in recent years, and current status of such drought conditions, has caused a significant reduction in, and, in some cases, elimination of, the amount of water available from the SWP. Operational mandates for environmental protection of the Sacramento-San Joaquin River Delta (the source of water for the SWP) as imposed by federal and state regulatory agencies also impinge on the amount of water available for delivery to contractors. In the State Water Project Final Delivery Reliability Report 2015 (July 2015), the State Department of Water Resources predicts that, based on historical precipitation patterns and current level of demand, operating under these environmental mandates, based on an assumed 4,132 thousand acre-feet per year maximum capacity in the SWP, on average 62% of such maximum capacity can be met over the life of the SWP. The SWP is the source of 49% to 100% of water delivered by the Agency. As of February 24, 2016, SWP contractors are estimated to receive 30% of contracted water supplies from the SWP. Water System Demand There can be no assurance that the local demand for water service provided by the Water System will be maintained at levels described in this Official Statement under the heading THE WATER SYSTEM. Reduction in the level of demand could require an increase in rates or charges in order to produce Net Revenues sufficient to comply with the Agency 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 operation of the Water System. Water System Expenses There can be no assurance that Maintenance and Operation Costs of the Water System will be consistent with the levels described in this Official Statement. Changes in technology, new regulatory 37

44 requirements, increases in the cost of energy or other expenses would reduce Net Revenues, and could require substantial increases in rates or charges in order to comply with the rate covenant. Such rate increases could increase the likelihood of nonpayment, and could also decrease demand. Water Supply/Water Supply Shortages The Agency s principal sources of water are the SWP and local groundwater. The SWP is subject to drought conditions that in recent years have contributed to lower overall water deliveries to the Agency. While the Agency plans and manages its supplies to account for normal occurrences of drought conditions, recent drought conditions and court-ordered restrictions in connection with the SWP, including, but not limited to restrictions under the Federal and California Endangered Species Acts (the ESAs ), have placed additional limitations on the Agency s ability to obtain and deliver water supplies to its customers. See Environmental Considerations below. For additional information regarding the impact of current drought conditions on the Agency s water supply, see Drought Conditions above. The Agency may obtain supplies to meet demands during water supply shortages by, among other things, drawing on its stored SWP water and the Agency s local groundwater pumping rights. In regard to allocations amongst customers during dry periods, the Agency enacted a Water Shortage Contingency Plan as part of its 2005 Urban Water Management Plan. This plan relies on Agency law and customer use patterns over the prior two years. The listing of several fish species as threatened or endangered under the federal and/or California Endangered Species Acts affect SWP operations including by limiting the flexibility of the SWP. See Environmental Considerations below. The Agency cannot predict the ultimate outcome of any of the litigation or regulatory processes described above at this time or whether such outcome will result in any materially adverse impact on the operation of the Agency. See THE WATER SYSTEM Water Sources and Supply; Water Purchases herein. Economic Conditions Water use is affected by economic conditions, which has had an impact on all water purveyors in the Antelope Valley since the 2008 recession. Customer demands have decreased in light of home foreclosures, reduction in construction water demands and other recession related activities. The Agency has seen some of these impacts indirectly with demand for municipal and industrial imported water dropping from roughly 62,000 acre-feet in 2007 to 46,000 acre-feet in This demand remained relatively level until 2014 and 2015 when conservation related reductions have decreased municipal and industrial demands to 35,000 acre-feet and 29,000 acre-feet, respectively. As a byproduct of these reductions, the Agency has been able to participate in water banking/exchange/transfer opportunities. In 2011, the Agency did a same-owner transfer of 35,000 acre-feet and in 2014 did an exchange of 16,000 acre-feet with two different State Water Contractors. These combined to a gross benefit to the Agency of more than $14,000,000 in immediate and future cash benefits. Weather Conditions Local weather conditions have only a slight impact on water demands on the Agency. Wet years may see a slight decrease in demands while dry years may increase demands by a similar amount. Parity Obligations Although the Agency has covenanted not to issue additional obligations payable from Net Revenues senior to the Debt Service Payments, the Indenture permits the issuance by the Agency of 38

45 certain indebtedness which may have a lien upon the Net Revenues which is on a parity basis to the lien which secures the Debt Service Payments, if certain coverage tests are met (see SECURITY FOR THE 2016 BONDS - Limitations on Parity Obligations and Superior Obligations herein). These coverage tests involve, to some extent, projections of Net Revenues. If such indebtedness is issued or incurred, the debt service coverage for the 2016 Bonds will be diluted below what it otherwise would be subject to under the coverage tests. Moreover, there is no assurance that the assumptions which form the basis of such projections, if any, will be actually realized subsequent to the date of such projections. If such assumptions are not realized, the amount of future Net Revenues may be less than projected, and the actual amount of Net Revenues may be insufficient to provide for the payment of the Debt Service Payments and such additional indebtedness. Proposition 218 On November 5, 1996, the voters of the State 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 Agency 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 a repeal or reduction in Agency 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 Agency s ability to make Debt Service Payments could be adversely affected. In addition, while the matter is not free from doubt, Proposition 218 imposed restrictions on the levy of charges for property-related services. In July 2006 the California Supreme Court confirmed that a public agency s charges for ongoing water delivery are fees and charges within the meaning of Proposition 218. As a result, voters within the boundaries of the Agency could adopt an initiative measure that reduced or repealed water rates and charges levied by the Agency, although it is not clear (and has not been determined by State courts) whether such action would be enforceable where such fees and charges are pledged to the repayment of indebtedness. The Agency believes that its fees for water service will not be adversely affected by the application of the substantive or procedural requirements of Proposition 218, and that Proposition 218 would not have any immediate adverse effect on its ability to operate its Water System. However, there can be no assurance of the availability of remedies to protect fully the interest of the owners of the 2016 Bonds. In addition, Proposition 218 affects the levy of rates and charges of certain public agency customers of the Agency. Constitutional Limit on Appropriations, Fees and Charges If a portion of the Water System rates or connection charges were determined by a court to exceed the reasonable costs of providing service, any fee which the Agency charges may be considered to be a special tax, which under Articles XIIIA or XIIID of the California Constitution must be authorized by a two-thirds vote of the affected electorate. This requirement is applicable to the Agency s rates for service provided by the Water System. The reasonable cost of service provided by the Water System has been determined by the State Controller to include depreciation and allowance for the cost of capital improvements. In addition, the State courts have determined that fees such as connection fees (capacity charges) will not be special taxes if they approximate the reasonable cost of constructing Water System 39

46 improvements contemplated by the local agency imposing the fee. Such court determinations have been codified in the Government Code of the State of California (Section et seq.). Under Article XIIIB of the California Constitution, state and local government entities have an annual appropriations limit which limits their ability to spend certain moneys called appropriations subject to limitation, which consists of tax revenues, certain state subventions and certain other moneys, including user charges to the extent they exceed the costs reasonably borne by the entity in providing the service for which it is levying the charge. In general terms, the appropriations limit is to be based on certain Fiscal Year expenditures, and is to be adjusted annually to reflect changes in the consumer price index, population and services provided by these entities. Among other provisions of Article XIIIB, if an entity s revenues in any year exceed the amount permitted to be spent, the excess would have to be returned by revising tax rates or fee schedules over the subsequent two years. The Agency is of the opinion that the rates and use charges imposed by the Agency in connection with the Water System do not exceed the costs it reasonably bears in providing such services. Limited Recourse on Default If the Agency defaults on its obligation to make Debt Service Payments, the Trustee has the right to accelerate the total unpaid principal amounts of the Debt Service Payments. However, in the event of a default and such acceleration, there can be no assurance that the Agency will have sufficient Net Revenues to pay the accelerated Debt Service Payments. Limitations on Remedies Available; Bankruptcy The enforceability of the rights and remedies of the Owners and the obligations of the Agency 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; 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 and its governmental bodies in the interest of servicing a significant and legitimate public purpose. Bankruptcy proceedings, or the exercising of powers by the federal or State government, if initiated, could subject the Owners 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 Agency to pay the Debt Service Payments does not constitute an obligation of the Agency for which the Agency is obligated to levy or pledge any form of taxation or for which the Agency has levied or pledged any form of taxation. The obligation of the Agency to pay Debt Service Payments does not constitute a debt or indebtedness of any Agency, the State or any of its political subdivisions, within the meaning of any constitutional or statutory debt limitation or restriction. Change in Law In addition to the other limitations described herein, the State electorate or Legislature could adopt a constitutional or legislative property tax decrease or an initiative with the effect of reducing revenues payable to or collected by the Agency. There is no assurance that the State electorate or 40

47 Legislature will not at some future time approve additional limitations that could have the effect of reducing the Net Revenues and adversely affecting the security of the 2016 Bonds. Geologic, Topographic and Climatic Conditions The value of the Water System, and the ability to generate Revenues, is contingent upon the ability of the Agency to deliver water to its customers. The financial stability of the Agency can be adversely affected by a variety of factors, particularly those which may affect infrastructure and other public improvements and private improvements and the continued habitability and enjoyment of such private improvements. Such additional factors include, without limitation, geologic conditions (such as earthquakes), topographic conditions (such as earth movements and floods) and climatic conditions (such as droughts and tornadoes). The Agency is in an active geological area. With respect to drought conditions, see RISK FACTORS Drought Conditions January 17, 2014, Governor State of Emergency Proclamation regarding Drought. As noted therein, drought conditions have caused a significant reduction in, and in some case, elimination of, the amount of water available from the SWP. Engineering standards require that some of these factors be taken into account, to a limited extent, in the design of improvements, including the Water System. Some of these factors may also be taken into account, to a limited extent, in the design of other infrastructure and public improvements neither designed nor subject to design approval by the Agency. Design criteria in any of these circumstances are established upon the basis of a variety of considerations and may change, leaving previously-designed improvements unaffected by more stringent subsequently established criteria. In general, design criteria reflect a balance at the time of protection and the future costs of lack of protection, based in part upon a present perception of the probability that the condition will occur and the seriousness of the condition should it occur. Conditions may occur which may result in damage to improvements in varying degrees, and such damage may entail significant repair or replacement costs, and there can be no assurance that such repair or replacement will occur. Under any of these circumstances, the public and private improvements within the Agency in general may well depreciate or disappear, notwithstanding the establishment of design criteria for any such condition. Major portions of the SWP delivery system are located parallel to and near the San Andreas Fault and other faults. The SWP facilities are designed to withstand earthquakes without major damage. Inspections following the June 1992 Landers earthquake, a magnitude 6.5 earthquake on the same day near Big Bear City, and the October 17, 1987 magnitude 7.1 Loma Prieta earthquake in northern California did not reveal any damage to SWP facilities. The January 17, 1994 magnitude 6.7 earthquake centered in Northridge created slight damage to SWP facilities. Occurrence of other earthquakes could cause an interruption of deliveries of water to and from the Agency until repairs could be effected, thus possibly diminishing the value of the Water System and the amount of Revenues. Interruption of delivery of water for any reason will not alter the legal obligation of the Agency to pay Debt Service Payments. However, a reduction in availability of water could materially affect the Revenues. The Agency has constructed an emergency well field project (known as the Avenue H well field project) that will provide additional groundwater supplies in emergencies (4.5 mgd). Environmental Considerations Bay-Delta. Most of California s developed water supply flows into or is exported from the Sacramento-San Joaquin River Delta/San Francisco Bay Estuary (Delta). Human activity and changing environmental conditions coupled with a complex framework of federal and state laws administered by numerous agencies have made management of the Delta challenging. For example, the Agency s 41

48 imported and local supplies are subject to regulatory restrictions due to implementation of the federal Endangered Species Act ( ESA ). The listing of winter-run Chinook salmon in 1989 and delta smelt in 1993 resulted in pumping restrictions imposed on the state and federal water projects to protect these species. These pumping restrictions resulted in reduced deliveries from the SWP, compounding the shortages created by the on-going drought at the time. In 1993, the United States Environmental Protection Agency (the EPA ) also proposed to implement water quality standards for the Bay-Delta that would impose severe restrictions on the operation of the SWP. It was these circumstances that led to the historic Bay-Delta Accord in 1994, in which the state and federal governments, along with urban, agricultural and environmental interests, agreed to an interim set of ESA protection measures coupled with water supply certainty. The Accord laid the groundwork for the establishment of the CALFED Bay- Delta Program, which has been succeeded by a number of efforts, including the California Water Action Plan, the Delta Plan and the California Water Fix (See the below caption California Water Policy Framework ) to develop a long-term solution for conflicts in the Bay-Delta. The Agency cannot predict whether ongoing activities will result in a materially positive or adverse impact on the operation of the SWP pumps, the Agency s SWP supplies or reserves, or the Agency s deliveries to its customers. See THE WATER SYSTEM Water Sources and Supply; Water Purchases herein. Delta Reform Act. In November 2009, the State enacted the Delta Reform Act, which created the Delta Stewardship Council (the DSC ), to assume Bay-Delta management responsibilities in lieu of the California Bay-Delta Authority. Under the legislation, the DSC must work to achieve the coequal goals of providing a more reliable water supply for California and protecting, restoring and enhancing the Delta ecosystem. The legislation also mandates that the coequal goals be achieved in a manner that protects and enhances the unique cultural, recreational, natural resource and agricultural values of the Delta. The legislation required the DSC to adopt a comprehensive Delta Plan, which the DSC did in May Seven separate lawsuits were filed challenging the legality of the plan, and those remain pending as of the date of this Official Statement. The Delta Reform Act also reshaped the existing Delta Protection Commission (the DPC ) into a 15-member body primarily comprising local representatives from Bay-Delta communities. The legislation required the DPC to adopt a Bay-Delta economic sustainability plan, which the DPC completed in January The legislation also created a new Sacramento-San Joaquin Delta Conservancy (the Conservancy ) to engage in ecosystem restoration projects within the Bay-Delta and Suisun Marsh. The Conservancy is authorized to acquire conservation easements and to support efforts that advance the economic well-being of Bay-Delta residents. Finally, the legislation mandated that the State Water Resources Control Board ( SWRCB ) conduct informational hearings and issue a report regarding criteria for Bay-Delta outflows that would, in the SWRCB s opinion, protect and preserve public trust resources. In a report that was unanimously adopted in August 2010, the SWRCB concluded that substantially increased flows from rivers flowing into the Bay-Delta would be needed in the Delta ecosystem if fishery protection was the sole purpose for which its waters were put to beneficial use. Bay Delta Conservation Plan. The Bay Delta Conservation Plan (the BDCP ) is a long-term conservation strategy designed to improve the status of species and natural communities that the BDCP covers, and provide the basis for long-term permits under the federal Endangered Species Act and California Natural Community Conservation Planning Act for operation of the SWP and the federal Central Valley Project ( CVP ) (collectively, the Water Projects ). The goal of the plan is to improve 42

49 the reliability of Delta water supply, while also restoring aquatic habitat and fish populations. The BDCP is guided by a steering committee of local water agencies, environmental and conservation organizations, state and federal agencies and other interest groups. The State released a public draft of the BDCP in November 2013, and an accompanying Draft Environmental Impact Report/Environmental Impact Statement (the BDCP EIR/EIS ). The BDCP EIR/EIS was prepared to fulfill the requirements of the California Environmental Quality Act ( CEQA ) and the National Environmental Policy Act (NEPA). The draft BDCP EIR/EIS considers numerous alternatives and one no action alternative. The no action alternative describes future circumstances without implementation of the proposed BDCP actions, and represents continuation of the existing plans, policies, operations, and conditions that represent continuation of trends in nature. The other alternatives include various combinations of water conveyance configurations, capacities, operations, and habitat restoration, and their effects on biological resources, hydrology and the human environment. Under CEQA, the Preferred Alternative designated by DWR includes two 40-foot inside diameter tunnels to carry water 35 miles to the existing pumping plants in the south Delta. From there, water would be moved into existing aqueducts that supply much of the State. However, this alternative is subject to change as DWR receives and considers public and agency input on the environmental analysis. The Agency is unable to predict what the final Preferred Alternative will be, or the financial or operational impact of such Preferred Alternative. BDCP. Stakeholders with diverse interests have expressed varying degrees of dissatisfaction with the EcoRestore and California Water Fix. In 2015, the State separated the focus of the BDCP into two efforts: the California Eco Restore ( EcoRestore ) Project and the California Water Fix. California EcoRestore aims to accelerate and implement a comprehensive suite of habitat restoration actions to support the long-term health of the Bay-Delta s native fish and wildlife. California Water Fix focuses on protecting the State s water supplies from climate change through water system upgrades that protect against the impacts of sea level rise and earthquakes while improving river flows and reducing entrainment for threatened fish species. The Bay-Delta diversion facilities previously proposed in the BDCP are now captured within the California Water Fix effort. The State released the Recirculated Draft Environmental Impact Report ( RDEIR )/Supplemental Draft Environmental Impact Statement ( SDEIS ) on July 10, 2015, with comments due by August 31, On July 22, 2015, the comment period was extended to October 30, The RDEIR/SDEIS addresses the environmental impacts of the diversion facilities. The current estimated cost of the California Water Fix is approximately $15.8 billion. There can be no assurance that such projected costs will not increase as a result of revisions to the project, increases in construction or other costs related thereto. Any changes could be material and impact the costs of state and federal water supplies, and thereby impact the Agency s costs in connection with the State Water Project. The final Environmental Impact Report/Environmental Impact Statement for California Water Fix is expected to be available in mid DWR and the United States Bureau of Reclamation have filed a petition with the SWRCB to change certain of their water rights as a result of the proposed California Water Fix project. On October 30, 2015, the SWRCB issued public notices on such petition and a public hearing with respect thereto. The SWRCB currently expects the public hearing process to begin in April Impact of State Budget In the past, the State has experienced serious budgetary shortfalls. Fiscal Year ended with a small surplus, Fiscal Years and ended with larger surpluses, and Fiscal Year 43

50 is projected to end with a surplus. Information about the State budget is regularly available at various State-maintained websites. The Fiscal Year State budget and the Governor s proposed Fiscal Year State budget may be found at the website of the Department of Finance, under the heading California Budget. Additionally, an impartial analysis of the budget is posted by the Office of the Legislative Analyst at The information referred to is prepared by the respective State agency maintaining each website and not by the Agency, and the Agency takes no responsibility for the continued accuracy of the internet addresses or for the accuracy, completeness or timeliness of information posted there, and such information is not incorporated herein by these references. The Agency cannot predict what actions may be proposed or taken in the future by the State Legislature and the Governor to deal with changing State revenues and expenditures. Any such developments at the State level will most likely adversely affect local governments, including the Agency. However, the Agency does not currently anticipate any State budget problems which will materially adversely impact the operation of the Water System. Early Redemption of Premium 2016 Bonds 2016 Bonds, if any, purchased, whether at original issuance or otherwise, for an amount greater than their principal amount payable at maturity (or, in some cases, at their earlier call date) ( Premium 2016 Bonds ) will be treated for federal tax purposes as having amortizable premium. If such Premium 2016 Bonds are redeemed prior to maturity (or, in some cases, prior to a scheduled redemption date) as described herein under THE 2016 BONDS Redemption, not all of the amortized premium may be realized by the Owner. The Premium 2016 Bonds are treated as all other 2016 Bonds for purposes of selection for redemption prior to maturity as described herein. Secondary Market for 2016 Bonds There can be no guarantee that there will be a secondary market for the 2016 Bonds or, if a secondary market exists, that any 2016 Bonds can be sold for any particular price. Occasionally, because of general market conditions or because of adverse history or economic prospects connected with a particular issue, secondary marketing practices in connection with a particular issue are suspended or terminated. Additionally, prices of issues for which a market is being made will depend upon thenprevailing circumstances. Such prices could be substantially different from the original purchase price. Renewal of Credit Facilities As described herein in THE WATER SYSTEM - Credit Facilities, in connection with the Series 2008A-2 Certificates of Participation, the Agency has obtained a letters of credit, which currently expires in If the Agency is unable to secure replacement letters of credit before the letter of credit expires, the Series 2008A-2 Certificates of Participation will be subject to mandatory tender for purchase by the owners thereof upon such expiration and the letter of credit drawn upon to pay the purchase price of such tendered bonds. In such circumstances, the Agency is required to repay such tendered Series 2008A-2 Certificates of Participation immediately upon the purchase of such Series 2008A-2 Certificates of Participation by the Credit Issuer, at an increased interest rate. Loss of Tax Exemption As discussed in this Official Statement under the caption TAX MATTERS, interest on the 2016 Bonds could become includable in gross income for purposes of federal income taxation retroactive 44

51 to the date the 2016 Bonds were issued, as a result of future acts or omissions of the Agency in violation of its covenants in the Indenture. Should such an event of taxability occur, the 2016 Bonds are not subject to a special redemption and will remain outstanding until maturity or until redeemed under one of the other redemption provisions contained in the Indenture. Impact of Legislative Proposals, Clarifications of the Code and Court Decisions on Tax Exemption Future legislative proposals, if enacted into law, clarification of the Code or court decisions may cause interest on the 2016 Bonds to be subject, directly or indirectly, to federal income taxation or to be subject to or exempted from state income taxation, or otherwise prevent Beneficial Owners from realizing the full current benefit of the tax status of such interest. The introduction or enactment of any such future legislative proposals, clarification of the Code or court decisions may also affect the market price for, or marketability of, the 2016 Bonds. In 2013 and 2014, legislative changes were 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 2016 Bonds. Prospective purchasers of the 2016 Bonds should consult their own tax advisors regarding any pending or proposed federal or state tax legislation, regulations or litigation as to which Bond Counsel expresses no opinion. IRS Audit of Tax-Exempt Issues The IRS has initiated an expanded program for the auditing of tax-exempt issues, including both random and targeted audits. It is possible that the 2016 Bonds will be selected for audit by the IRS. It is also possible that the market value of the 2016 Bonds might be affected as a result of such an audit of the 2016 Bonds (or by an audit of similar obligations). UNDERWRITING The Agency has agreed to sell the 2016 Bonds to Wells Fargo Bank, National Association, as underwriter (the Underwriter ), and the Underwriter has agreed, subject to certain conditions, to purchase the 2016 Bonds at a purchase price of $85,192, (the principal amount of the 2016 Bonds, plus net original issue premium of $14,390,146.15, and less an Underwriter s discount of $287,606.78). The obligations of the Underwriter are subject to certain conditions precedent, and it will be obligated to purchase all such 2016 Bonds if any such 2016 Bonds are purchased. The Underwriter intends to offer the 2016 Bonds to the public initially at the prices and/or yield set forth on the cover page of this Official Statement, which prices or yields may subsequently change without any requirement of prior notice. The Underwriter reserves the right to join with dealers and other underwriters in offering the 2016 Bonds to the public. The Underwriter may offer and sell 2016 Bonds to certain dealers (including dealers depositing 2016 Bonds into investment trusts) at prices lower than the public offering prices, and such dealers may reallow any such discounts on sales to other dealers. In reoffering 2016 Bonds to the public, the Underwriter may overallocate or effect transactions which stabilize or maintain the market prices for 2016 Bonds at levels above those which might otherwise prevail. Such stabilization, if commenced, may be discontinued at any time. Wells Fargo Securities is the trade name for certain securities-related capital markets and investment banking services of Wells Fargo & Company and its subsidiaries, including Wells Fargo Bank, National Association. Wells Fargo Bank, National Association is serving as both Underwriter and Trustee/Paying Agent for the 2016 Bonds. 45

52 Wells Fargo Bank, National Association ( WFBNA ), the sole underwriter of the 2016 Bonds, has entered into an agreement (the Distribution Agreement ) with its affiliate, Wells Fargo Advisors, LLC ( WFA ), for the distribution of certain municipal securities offerings, including the 2016 Bonds. Pursuant to the Distribution Agreement, WFBNA will share a portion of its underwriting compensation, with respect to the 2016 Bonds, with WFA. WFBNA also utilizes the distribution capabilities of its affiliate, Wells Fargo Securities, LLC ( WFSLLC ), for the distribution of municipal securities offerings, including the 2016 Bonds. In connection with utilizing the distribution capabilities of WFSLLC, WFBNA pays a portion of WFSLLC s expenses based on its municipal securities transactions. WFBNA, WFSLLC and WFA are each wholly-owned subsidiaries of Wells Fargo & Company. LEGAL OPINIONS All legal matters in connection with the issuance of the 2016 Bonds are subject to the approval of James F. Anderson Law Firm, A Professional Corporation, Laguna Hills, California, Bond Counsel. A copy of the approving opinions of Bond Counsel will be provided to the registered owners of the 2016 Bonds, and the form of such opinions are attached hereto as APPENDIX D. Certain legal matters will be passed upon for the Agency by Brunick, McElhaney & Kennedy, A Professional Law Corporation, San Bernardino, California, its general counsel. The Underwriter is being represented by its counsel, Nossaman LLP, Irvine, California. TAX MATTERS General. In the opinion of James F. Anderson Law Firm, A Professional Corporation, Laguna Hills, California, Bond Counsel, 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 and agreements, interest on the 2016 Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 (the Code ) and is exempt from State of California personal income taxes. Bond Counsel is further of the opinion that interest on the 2016 Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes. However, Bond Counsel observes that interest on the 2016 Bonds is included in adjusted current earnings when calculating corporate alternative minimum taxable income. A complete copy of the proposed form of opinion of Bond Counsel is set forth in APPENDIX D hereto. The Code imposes various restrictions, conditions and requirements relating to the exclusion from gross income for federal income tax purposes of interest on obligations such as the 2016 Bonds. The Agency has made representations related to certain of these requirements and has covenanted to comply with certain restrictions designed to assure that interest on the 2016 Bonds will not be included in federal gross income. Inaccuracy of the representations or failure to comply with the covenants may result in interest on the 2016 Bonds being included in gross income for federal income tax purposes, possibly from the date of original issuance of the 2016 Bonds. The opinion of Bond Counsel assumes the accuracy of the representations and compliance with the covenants. Bond Counsel has not undertaken to determine (or to inform any person) whether any action taken (or not taken) or event occurring (or not occurring) after the date of issuance of the 2016 Bonds may adversely affect the value of, or the tax status of interest on, the 2016 Bonds. Should interest on the 2016 Bonds become includable in gross income for federal income tax purposes, the 2016 Bonds are not subject to early redemption as a result of such event and will remain outstanding until maturity or until otherwise redeemed in accordance with the Indenture. 46

53 To the extent the issue price of any maturity of the 2016 Bonds is less than the amount to be paid at maturity of such 2016 Bonds (excluding amounts stated to be interest and payable at least annually over the term of such 2016 Bonds), the difference constitutes original issue discount, the accrual of which, to the extent properly allocable to each owner thereof, is treated as interest on the 2016 Bonds that is excluded from gross income for federal income tax purposes and State of California personal income taxes. For this purpose, the issue price of a particular maturity of the 2016 Bonds is the first price at which a substantial amount of such maturity of the 2016 Bonds is sold to the public (excluding bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). The original issue discount with respect to any maturity of the 2016 Bonds accrues daily over the term to maturity of such 2016 Bonds on the basis of a constant interest rate compounded semiannually (with straight-line interpolations between compounding dates). The accruing original issue discount is added to the adjusted basis of such 2016 Bonds to determine taxable gain or loss upon disposition (including sale, redemption, or payment at maturity) of such 2016 Bonds. Owners of the 2016 Bonds should consult their own tax advisors with respect to the tax consequences of ownership of 2016 Bonds with original issue discount, including the treatment of purchasers who do not purchase such 2016 Bonds in the original offering to the public at the first price at which a substantial amount of such 2016 Bonds is sold to the public Bonds purchased, whether at original issuance or otherwise, for an amount greater than their principal amount payable at maturity (or, in some cases, at their earlier call date) ( Premium 2016 Bonds ) will be treated as having amortizable premium. No deduction is allowable for the amortizable premium in the case of obligations, like the Premium 2016 Bonds, the interest on which is excluded from gross income for federal income tax purposes. However, a purchaser s basis in a Premium 2016 Bond, and under Treasury Regulations, the amount of tax exempt interest received, will be reduced by the amount of amortizable premium properly allocable to such purchaser. Owners of Premium 2016 Bonds should consult their own tax advisors with respect to the proper treatment of amortizable premium in their particular circumstance. Certain requirements and procedures contained or referred to in the Indenture, the Tax 2016 Bond, and other relevant documents may be changed and certain actions (including, without limitation, defeasance of the 2016 Bonds) may be taken or omitted under the circumstances and subject to the terms and conditions set forth in such documents. Bond Counsel expresses no opinion as to any 2016 Bond or the interest thereon if any such change occurs or action is taken or omitted upon the advice or approval of counsel other than James F. Anderson Law Firm, A Professional Corporation. Although Bond Counsel is of the opinion that interest on the 2016 Bonds is excluded from gross income for federal income tax purposes and is exempt from State of California personal income taxes, the ownership or disposition of, or the accrual or receipt of interest on, the 2016 Bonds may otherwise affect an owner s federal or state tax liability. The nature and extent of these other tax consequences will depend upon the particular tax status of the owner of the 2016 Bond or such owner s other items of income or deduction. Bond Counsel expresses no opinion regarding any such other tax consequences. In addition, no assurance can be given that any pending or future legislation, including amendments to the Code, if enacted into law, or changes in interpretation of the Code, will not cause interest on the 2016 Bonds to be subject, directly or indirectly, to federal income taxation, or otherwise prevent owners of the 2016 Bonds from realizing the full current benefit of the tax status of such interest. Prospective purchases of the 2016 Bonds should consult their own tax advisors regarding any pending or proposed federal tax legislation. Further, no assurance can be given that the introduction or enactment of any such future legislation, or any action of the Internal Revenue Service ( IRS ), including but not limited to regulation, ruling or selection of the 2016 Bonds for audit examination, or the course or result 47

54 of any IRS examination of the 2016 Bonds, or obligations which present similar tax issues, will not affect the market price for the 2016 Bonds. Backup Withholding. Interest paid on tax-exempt obligations such as the 2016 Bonds is subject to information reporting to the Internal Revenue Service (the IRS ) in a manner similar to interest paid on taxable obligations. In addition, interest on the 2016 Bonds may be subject to backup withholding if such interest is paid to a registered owner that (a) fails to provide certain identifying information (such as the registered owner s taxpayer identification number) in the manner required by the IRS, or (b) has been identified by the IRS as being subject to backup withholding. LITIGATION There is no action, suit or proceeding known to be pending or threatened, restraining or enjoining the issuance or delivery of the 2016 Bonds, the Indenture or in any way contesting or affecting the validity of the foregoing or any proceedings of the Agency taken with respect to any of the foregoing. The Agency is not aware of any litigation pending or threatened questioning the existence or powers of the Agency or the ability of the Agency to pay principal of or interest on the 2016 Bonds. Although the Agency is subject to a number of lawsuits in the ordinary conduct of its affairs, there are no claims or actions, threatened or pending, which, if determined against the Agency, either individually or in the aggregate, would have a material adverse effect on the financial conditions of the Agency or the Revenue Fund. PROFESSIONAL FEES In connection with the issuance of the 2016 Bonds, fees payable to Bond Counsel, Disclosure Counsel, Underwriter s Counsel and the Trustee are contingent upon the issuance of the 2016 Bonds. RATINGS Standard & Poor s Ratings Services, a Standard & Poor s Financial Services LLC business ( S&P ) and Moody s Investors Service ( Moody s ) have assigned their municipal bond ratings of AA and A1, respectively, to the 2016 Bonds. The ratings reflect only the views of such organization, and an explanation of the significance of such ratings may be obtained from Standard & Poor s and Moody s. There is no assurance that either rating will continue for any given period of time or that it will not be revised downward or withdrawn entirely by such rating agency, if, in the judgment of such rating agency, circumstances so warrant. The Agency undertakes no responsibility to oppose any such revision or withdrawal. Any such downward revision or withdrawal of such ratings may have an adverse effect on the market price of the 2016 Bonds. The above ratings are not recommendations to buy, sell or hold the 2016 Bonds, and such ratings may be subject to revision or withdrawal at any time by the rating agencies. Any downward revision or withdrawal of any of the above ratings may have an adverse effect on the market price of the 2016 Bonds. 48

55 VERIFICATION OF MATHEMATICAL ACCURACY The sufficiency of the amounts on deposit in the Escrow Fund, together with realizable interest and earnings thereon, to refund the Refunded Prior Certificates, as described above, will be verified by Grant Thornton LLP, Minneapolis, Minnesota, as the verification agent (the Verification Agent ). Upon the issuance of the 2016 Bonds, the Verification Agent will deliver a report on the mathematical accuracy of certain computations contained in schedules provided to them on behalf of the Agency relating to the sufficiency of the amounts deposited under the Escrow Agreement to pay, when due, the principal components, whether at maturity or upon prior prepayment, interest with respect to and the prepayment premium requirements of the Refunded Prior Certificates. MISCELLANEOUS All of the descriptions of the California Government Codes, the other applicable legislation, the Indenture, the Water System, the Agency, agreements and other documents are made subject to the provisions of such legislation and documents respectively and do not purport to be complete statements of any or all of such provisions. Reference is hereby made to such documents on file with the Agency for further information in connection therewith. Any statements made in this Official Statement involving matters of opinion or estimates, whether or not so expressly stated, are set forth as such and not as representations of fact, and no representation is made that any of the estimates will be realized. The execution and delivery of this Official Statement has been duly authorized by the Agency. ANTELOPE VALLEY-EAST KERN WATER AGENCY By: /s/ R. Keith Dyas R. Keith Dyas, President 49

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57 APPENDIX A SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE The following summary discussion of selected features of the Indenture is made subject to all of the provisions of such documents. This summary discussion does not purport to be a complete statement of said provisions and prospective purchasers of the 2016 Bonds are referred to the complete texts of said documents, copies of which are available upon request sent to the Trustee upon the payment of a charge for copying, handling and mailing. DEFINITIONS 2007 Installment Payments means any payment due from the Agency to the Corporation under the Original Installment Sale Agreement. 2007A-1 Certificates means the Antelope Valley-East Kern Water Agency Certificates of Participation, Series 2007A-1 Certificates (Fixed Rate Certificates) originally executed and delivered in an aggregate principal amount of $75,000,000, of which $3,595,000 will remain outstanding upon issuance of the 2016 Bonds and $59,805,000 will be prepaid Certificates means the Antelope Valley-East Kern Water Agency Certificates of Participation Series 2008A-1 (Fixed Rate Certificates) and Series 2008A-2 Certificates (Variable Rate Certificates) Installment Payments means any payment due from the Agency to the Corporation under the First Supplemental Installment Sale Agreement. 2008A-1 Certificates means the Antelope Valley-East Kern Water Agency Certificates of Participation Series 2008A-1 (Fixed Rate Certificates) originally executed and delivered in an aggregate principal amount of $39,150,000, of which $6,230,000 will remain outstanding upon issuance of the 2016 Bonds and $20,960,000 will be prepaid Bonds means the Antelope Valley-East Kern Water Agency Water Revenue Refunding Bonds, Series Continuing Disclosure Certificate shall mean the certificate by that name, dated as of the Closing Date, from the Agency Tax Certificate means the Tax Certificate dated the Closing Date with respect to the 2016 Bonds by the Agency, as it may from time to time be amended and supplemented. Ad Valorem Taxes means, for any period, the ad valorem property taxes received by the Agency during such period pursuant to Article XIIIA of the California Constitution and Section 95 et seq. of the California Revenue and Taxation Code, including any such taxes levied to pay any voter approved general obligation indebtedness of the Agency. Additional Bonds means any Bonds issued thereunder in accordance with the provisions of the Indenture. Adjusted Annual Debt Service means, for any Fiscal Year or twelve (12) calendar month period, the Annual Debt Service for such Fiscal Year or twelve (12) calendar month period minus the A-1

58 amount of such Annual Debt Service paid from the proceeds of Parity Obligations or from any interest earnings on and releases of amounts on deposit in all Reserve Funds established in connection with Parity Obligations, as set forth in a Certificate of the Agency. Affiliate means any specified Person which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such specified Person. For purposes of this definition, control (including, with correlative meanings, the terms controlling, controlled by, and under common control with ), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person. Agency means the Antelope Valley-East Kern Water Agency, a municipal water agency, duly organized and existing under and by virtue of the laws of the State of California. Agent Member means a Depository System Participant. Annual Debt Service means, for any Fiscal Year or twelve (12) calendar month period, the Parity Payments required to be made under all Parity Obligations in such Fiscal Year or twelve (12) calendar month period. Assumed Interest Rate means the amount of interest calculated in accordance with the following provisions: Generally. Except as otherwise provided in subparagraph (b) below with respect to Variable Interest Rate Contracts, in subparagraph (c) below with respect to Obligations with respect to which a Payment Agreement is in force and in subparagraph (d) below with respect to Balloon Contracts, interest on any Obligation shall be calculated based on the actual amount of interest that is payable under such Obligation; provided, however, that if the amount of interest is being calculated based on the synthetic fixed rate under a Swap Agreement, utilization of the synthetic fixed rate under a Swap Agreement for purposes of performing any required calculations under the Installment Sale Agreement or Trust Agreement shall be permitted only if such documentation and the applicable Swap Agreement satisfy the requirements of Appendix B thereto entitled Swap Provider Guidelines; (a) Interest on Variable Interest Rate Contracts. Interest deemed to be payable on any Variable Interest Rate Contract for periods when the actual interest rate can be determined shall be the actual Variable Interest Rates and for periods when the actual interest rate cannot yet be determined shall be calculated on the assumption that the interest rate on such Variable Interest Rate Contract would be equal to (i) the average rate that accrued on such Variable Interest Rate Contract over the preceding 12 months, or (ii) if the Variable Interest Rate Contract has not been accruing interest at a variable rate for 12 months, 100% of the average rate of interest for The Bond Buyer Revenue Bond Index; (b) Interest on Obligations with respect to which a Payment Agreement is in Force. Interest deemed to be payable on any Obligation with respect to which a Payment Agreement is in force shall be based on the net economic effect on the Agency expected to be produced by the terms of such Obligation and such Payment Agreement, including but not limited to the effects that (i) such Obligation would, but for such Payment Agreement, be treated as an obligation bearing interest at a Variable Interest Rate instead shall be treated as an obligation bearing interest at a fixed interest rate, and (ii) such Obligation would, but for such Payment Agreement, be treated as an obligation bearing interest at a fixed interest rate instead shall be treated as an obligation bearing interest at a Variable Interest Rate; and accordingly, the amount of interest deemed to be payable on any Obligation with A-2

59 respect to which a Payment Agreement is in force shall be an amount equal to the amount of interest that would be payable at the rate or rates stated in such Obligation plus the Payment Agreement Payments minus the Payment Agreement Receipts, and for the purpose of calculating as nearly as practicable the Payment Agreement Receipts and the Payment Agreement Payments under such Obligation, the following assumptions shall be made: (i) Agency Obligated to Pay Net Variable Payments. If a Payment Agreement has been entered into by the Agency with respect to an Obligation resulting in the payment of a net variable interest rate with respect to such Obligation and Payment Agreement by the Agency, the interest rate on such Obligation for future periods when the actual interest rate cannot yet be determined shall be assumed (but only during the period the Payment Agreement is in effect) to be equal to the sum of (i) the fixed rate or rates stated in such Obligation, minus (ii) the fixed rate paid by the Qualified Counterparty to the Agency, plus (iii) the lesser of (A) the interest rate cap, if any, provided by a Qualified Counterparty with respect to such Payment Agreement (but only during the period that such interest rate cap is in effect) and (B) the applicable Variable Interest Rate calculated in accordance with paragraph (b) above; and (ii) Agency Obligated to Pay Net Fixed Payments. If a Payment Agreement has been entered into by the Agency with respect to an Obligation resulting in the payment of a net fixed interest rate with respect to such Obligation and Payment Agreement by the Agency, the interest on such Obligation shall be included in the calculation of Payments (but only during the period the Payment Agreement is in effect) by including for each Fiscal Year or twelve (12) calendar month period an amount equal to the amount of interest payable at the fixed interest rate pursuant to such Payment Agreement; (c) Interest on Balloon Contracts. If any outstanding Obligations constitute Balloon Contracts (and such Obligations do not constitute Short-Term Obligations excluded from the calculation of the Payment Agreement Payments pursuant to clause (e), below) or if Obligations proposed to be incurred would constitute Balloon Contracts (and such Obligations would not constitute Short-Term Obligations excluded from the calculation of the Payment Agreement Payments pursuant to clause (e), below), then such Balloon Contracts shall be treated as if the principal amount of such Obligations were amortized pursuant to any of the following mechanisms: (i) if an irrevocable commitment from a credit facility the provider of which is rated at least Pl by Moody s or -Al by S&P is in effect to pay the balloon debt when it comes due, then the terms of the contractual obligation to repay the credit facility may be used, (ii) if balloon debt is subject to prior amortization payments and the verification of timely installment payments are contained in the last audited financial statement of the Agency, then such amortization payments may be used, or (iii) amortization may be assumed on a level debt service basis over a twenty-year period at an interest rate based on the last published The Bond Buyer Revenue Bond Index. Notwithstanding the foregoing, the full amount of balloon debt shall be included in any debt service calculation if the calculation is made within 12 months of the actual maturity of such balloon debt and no credit facility exists; and (d) Credit for Accrued and Capitalized Interest. If amounts constituting accrued interest or capitalized interest have been deposited with the Trustee, then the interest payable from such amounts with respect to the Obligations shall be disregarded and not included in calculating Payments. Authorized Denomination means, (i) when payable with respect to the 2016 Bonds, denominations of $5,000 or any integral multiple thereof and (ii) when payable with respect to any other Series of Bonds, denominations as provided in the Supplemental Indenture pursuant to which such Series of Bonds is issued. A-3

60 Authorized Officer means the President, Vice-President, General Manager or any other duly authorized officer of the Agency. Balloon Contract means an Obligation 50% or more of the principal of which matures or is payable on the same date and which is not required by the instrument pursuant to which such Obligation was incurred to be amortized by payment, prepayment or redemption prior to such date. Bond Counsel means James F. Anderson Law Firm, A Professional Corporation, or any other attorney or firm of attorneys appointed by and acceptable to the Agency of nationally-recognized experience in the issuance of obligations the interest in which is excludable from gross income for federal income tax purposes under the Code. Bond Law means, the provisions of Articles 10 and 11, Chapter 3, Part 1, Division 2, Title 5 (commencing with Section 53570) of the California Government Code, as amended, and other provisions of State law permitting the issuance of Bonds by the Agency. Bond Year means the period from the Closing Date of a Series of Bonds through the next succeeding June 1, and thereafter the twelve-month period commencing on June 2 of each year through and including June 1 of the following year, or such other period as specified in the Supplemental Indenture pursuant to which such Series of Bonds is issued. Bonds mean a Series of Bonds issued pursuant to the Indenture, including the $71,090,000 aggregate principal amount of Antelope Valley-East Kern Water Agency Water Revenue Refunding Bonds, Series 2016 authorized thereby and at any time Outstanding thereunder that are issued under and pursuant to the Indenture thereof and Additional Bonds issued pursuant to a Supplemental Indenture pursuant to the provisions of the Indenture thereof. Business Day means a day other than a Saturday, a Sunday, a legal holiday in the State of California, a day on which the New York Stock Exchange is closed or banks in the city in which the corporate trust office of the Trustee is located are authorized or obligated by law or executive order to close. Cash Flow Certificate shall mean a written certificate executed by a Cash Flow Consultant. Cash Flow Consultant shall mean the Treasurer or General Manager of the Agency, an Independent Certified Public Accountant or a financial advisor retained by the Agency to provide financial advisory services with respect to the Indenture. Certificate of the Agency means an instrument in writing signed by an Authorized Officer. Closing Date, with respect to the 2016 Bonds, means April 14, 2016, and with respect to any other Series of Bonds, shall have the meaning given to such term in the Supplemental Indenture pursuant to which such Series of Bonds is issued. Code means the Internal Revenue Code of 1986, as amended. Each reference to a section of the Code therein shall be deemed to include the United States Treasury Regulations, including temporary and proposed regulations relating to such section which are applicable to the Bonds or the use of the proceeds thereof. A-4

61 Continuing Disclosure Certificate shall mean the certificate by that name, dated as of the Closing Date, from the Agency. Contract Resource Obligation means an obligation of the Agency, designated as a Contract Resource Obligation to make payments for Service or any other commodity or service to another person or entity. Corporation means the CSDA Finance Corporation, a nonprofit corporation duly organized and existing under and by virtue of the laws of the State of California. Costs of Issuance means with respect to any Series of Bonds, all items of expense directly or indirectly payable by or reimbursable to the Agency relating to the issuance of such Series of the Bonds and financing the Project, including but not limited to filing costs, settlement costs, printing costs, reproduction and binding costs, initial fees and charges of the Trustee and its counsel, financing discounts, legal fees and charges, financial and other professional consultant fees, costs of rating agencies for credit ratings, fees for issuance, transportation and safekeeping of Bonds, title insurance premiums, and charges and fees in connection with any of the foregoing. Costs of Issuance Fund means the fund of that name established by the Indenture thereof. Counsel means an attorney at law or a firm of attorneys (who may be an employee of or counsel to the Agency or the Trustee) duly admitted to the practice of law before the highest court of any state of the United States of America or of the District of Columbia. Coverage Requirement means, for any Fiscal Year or twelve (12) calendar month period, (i) an amount of Adjusted Annual Net Revenues which, together with available unrestricted cash reserves of the Agency, equals at least one hundred ten percent (110%) of the Adjusted Annual Debt Service for such Fiscal Year or twelve (12) calendar month period, and (ii) an amount of Net Revenues which equals one hundred per cent (100%) of all Payment Agreement Payments payable in such Fiscal Year or twelve (12) calendar month period; provided, that, for purposes of determining compliance with the Coverage Requirement, it shall be assumed that all Obligations accrue interest at the applicable Assumed Interest Rate. Date of Operation means, with respect to any uncompleted Project, the estimated date by which such Project will have been completed and, in the opinion of an Independent Engineer, will be ready for continuous and reliable operation by the Agency. Debt Service means, during any period of computation, the amount obtained for such period by totaling the following amount: (a) The principal amount of all Outstanding serial Bonds and Parity Obligations coming due and payable by their terms in such period (except to the extent that such principal has been fully capitalized and is invested in Federal Securities which mature at times and in such amounts as are necessary to pay the principal to which such amounts are pledged); (b) The minimum principal amount of all Outstanding term Bonds and Parity Obligations scheduled to be prepaid or redeemed by operation of mandatory sinking fund deposits in such period, together with any premium thereon (except to the extent that such principal has been fully capitalized and is invested in Federal Securities which mature at times and in such amounts as are necessary to pay the principal to which such amounts are pledged); and A-5

62 (c) The interest which would be due during such period on the aggregate principal amount of Bonds and Parity Obligations which would be Outstanding in such period if the Bonds or Parity Obligations are retired as scheduled (except to the extent that such interest has been fully capitalized and is invested in Federal Securities which mature at times and in such amounts as are necessary to pay the interest to which such amounts are pledged), but deducting and excluding from such aggregate amount the amount of interest on Bonds and Parity Obligations no longer Outstanding; provided that, whenever interest as described therein accrues at other than a fixed rate, such interest shall be assumed to be a rate equal to the greater of (i) the actual rate on the date of calculation, or if the Parity Obligations are not yet outstanding, the initial rate (if established and binding), (ii) if the Parity Obligations have been outstanding for at least twelve months, the average rate over the twelve months immediately preceding the date of calculation, and (iii) (x) if interest on the Parity Obligations is excludable from gross income under the applicable provisions of the Code, the most recently published The Bond Buyer Bond Revenue Index (or comparable index if no longer published) plus fifty (50) basis points, or (y) if interest is not so excludable, the interest rate on direct U.S. Treasury Obligations with comparable maturities, plus fifty (50) basis points. Depository means (a) initially, DTC, and (b) any other qualified securities depository acting as Depository pursuant to the Indenture thereof. Depository System Participant means any participant in the Depository s book entry system. DTC means the Depository Trust Company and its successors and assigns. Due Date means the tenth (10 th ) day before each Interest Payment Date. Escrow Agent means Wells Fargo Bank, National Association, as escrow agent under the Escrow Agreement/ Instructions. Escrow Agreement means the Escrow Agreement, dated as of April 1, 2016, by and between the Agency and Wells Fargo Bank, National Association as Escrow Agent. Event of Default means an event of default described in the Indenture thereof. Favorable Opinion of Bond Counsel means an opinion acceptable to the Agency addressed to the Agency and the Trustee, to the effect that as of such date the action proposed to be taken is authorized or permitted by this Indenture and will not result in the inclusion of interest on the applicable Series of the Bonds in gross income for federal income tax purposes. Federal Securities means (a) direct obligations (other than an obligation subject to variation in principal repayment) of the United States of America, (b) obligations fully and unconditionally guaranteed as to timely payment of the interest and principal by the United States of America, (c) obligations of any agency or instrumentality of the United States of America as to which the timely payment of the interest on and the principal of such obligations is backed by the full faith and credit of the United States of America, or (d) evidences of ownership of proportionate interests in future interest and principal payments on obligations described above held by a bank or trust company as custodian, under which the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor and the underlying government obligations are not available to any person claiming through the custodian or to whom the custodian may be obligated. A-6

63 Fiscal Year means the twelve calendar month period terminating on June 30 of each year, or any other annual accounting period hereafter selected and designated by the Agency as its Fiscal Year in accordance with applicable law. If the Fiscal Year of the Agency changes, the Agency shall provide written notice thereof to the Trustee. General Obligation Bonds means any outstanding general obligation bonds of the Agency for which the voters of the Agency have authorized the Agency to levy annual assessments unlimited as to rate or amount as a source of repayment for such bonds. Generally Accepted Accounting Principles means the uniform accounting and reporting procedures set forth in publications of the American Institute of Certified Public Accountants or its successor, or by any other generally accepted authority on such procedures, and includes, as applicable, the standards set forth by the Governmental Accounting Standards Board or its successor. Indenture means the Indenture of Trust, dated as of April 1, 2016, by and between the Trustee and the Agency, as originally executed and as it may from time to time be amended or supplemented in accordance with its terms. Independent Certified Public Accountant means any certified public accountant or firm of certified public accountants duly licensed and entitled to practice and practicing as such under the laws of the State, appointed and paid by the Agency, and each of whom: (1) is in fact independent and not under the domination of the Agency; (2) does not have a substantial financial interest, direct or indirect, in the operations of the Agency; and (3) is not connected with the Agency as a director, officer or employee of the Agency, but may be regularly retained to audit the accounting records of and make reports thereon to the Agency. Independent Engineer means any registered engineer or firm of registered engineers of national reputation generally recognized to be well qualified in engineering matters relating to water delivery and wastewater collection systems, appointed and paid by the Agency, and who or each of whom: (1) is in fact independent and not under the domination of the Agency; (2) does not have a substantial financial interest, direct or indirect, in the operations of the Agency; and (3) is not connected with the Agency as a director, officer or employee of the Agency, but may be regularly retained to make reports to the Agency. Information Service means the Electronic Municipal Market Access System of the Municipal Securities Rulemaking Board, and, in accordance with then-current guidelines of the Securities and Exchange Commission, such other addresses and/or such other information services providing information with respect to called bonds as the Agency may designate to the Trustee. Installment Sale Agreement means the Installment Sale Agreement, dated as of March 1, 2007, as originally executed, as supplemented by the First Supplemental Installment Sale Agreement, dated as of May 1, 2008, each by and between the Agency and the Corporation, as it may from time to time be amended and/or supplemented in accordance with the Installment Sale Agreement. A-7

64 Interest Payment Date means with respect to the 2016 Bonds, June 1 and December 1 of each year, commencing June 1, Issuing Document means the Indenture, any indenture, trust agreement or other document the obligations issued or delivered pursuant to which are secured in whole or in part by Payments; provided that, if a trustee is appointed under an Issuing Document, the trustee for all Parity Obligations shall be the Trustee. Law means the California Water Code, and all laws amendatory thereof or supplemental thereto. Maintenance and Operation Costs means, for any Fiscal Year or twelve (12) calendar month period, all reasonable and necessary costs paid or incurred by the Agency during such Fiscal Year or twelve (12) calendar month period for maintaining and operating the System, determined in accordance with Generally Accepted Accounting Principles, including the cost of purchased water, scheduled payments on Contract Resource Obligations, all reasonable expenses of management and repair and other expenses necessary to maintain and preserve the System in good repair and working order, all administrative costs of the Agency that are charged directly or apportioned to the operation of the System, such as salaries and wages of employees, overhead, taxes (if any), insurance premiums and payments into pension funds, and all other reasonable and necessary costs of the Agency or charges required to be paid by it to comply with the terms thereof or of any resolution authorizing the execution of any Supplemental Contract or of such Supplemental Contract, such as compensation, reimbursement and indemnification of the Trustee and fees and expenses of Independent Certified Public Accountants and Independent Engineers, but excluding in all cases depreciation, replacement and obsolescence charges or reserves therefor and amortization of intangibles. Maturity and Maturity Date mean (i) with respect to the 2016 Bonds, the dates specified in the Indenture thereof, and (ii) with respect to any other Series of Bonds, shall have the meaning given to such term in the Supplemental Indenture pursuant to which such Series of Bonds is issued. Maximum Annual Debt Service means the highest Annual Debt Service for the current and any future Fiscal Year through the final maturity date of all Outstanding Parity Obligations; provided, however, for purposes of such calculation, the interest on all Parity Obligations shall be computed at the applicable Assumed Interest Rate and with respect to the 2016 Bonds, the term Maximum Annual Debt Service means the largest annual Debt Service for any Bond Year, including the Bond Year the calculation is made. Moody s means Moody s Investors Service, Inc., a corporation organized and existing under the laws of the State of Delaware, its successors and assigns, and, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, the term Moody s shall be deemed to refer to any other nationally recognized securities rating agency which has been designated by the Agency by written notice to the Trustee. Net Proceeds means, when used with respect to any condemnation award or any insurance proceeds received with respect to the System, the amount of such condemnation award or insurance proceeds remaining after payment of all expenses (including attorneys fees) incurred in the collection of such award or proceeds. Net Revenues means, for any Fiscal Year or twelve (12) calendar month period, an amount equal to all of the Revenues received during such Fiscal Year or twelve (12) calendar month period less the Maintenance and Operation Costs during such Fiscal Year or twelve (12) calendar month period. A-8

65 Nominee means (a) initially, Cede & Co., as nominee of DTC, and (b) any other nominee of a Depository designated pursuant to the Indenture thereof. Notice Parties means the Agency and the Trustee. Obligation(s) means all Parity Obligations and all Subordinate Obligations. Opinion of Counsel means a written opinion of counsel of recognized national standing in the field of law relating to municipal obligations, retained by the Agency. Outstanding when used as of any particular time with reference to Bonds, means (subject to the provisions of Indenture) all Bonds except: (1) Bonds canceled by the Trustee; and (2) Bonds paid or deemed to have been paid within the meaning of the Indenture; (3) Bonds in lieu of or in substitution for which replacement Bonds shall have been issued thereunder and with respect to the Supplemental Contracts, all Supplemental Contracts the Payment Agreement Payments under which have not been paid or otherwise satisfied in accordance with their terms. Owner(s) or Owner of Bonds means the registered owner of any Outstanding Bonds. Payment Account means the account of that name established by the Trustee pursuant to the Indenture thereof. Parity Obligations means the Installment Sale Agreement, all Supplemental Contracts and Payment Agreements, the Parity Payments under which (other than Termination Payments) are secured by a senior lien on Net Revenues and are payable on a parity therefrom. Parity Payment Agreement means a Payment Agreement which is a Parity Obligation. Parity Payments means all debt service on bonds (including the 2016 Bonds) and all installment payments (including the 2007 Installment Payments and the 2008 Installment Payments) and other debt service payments scheduled to be paid by the Agency under all Parity Obligations. Parity Payments Date means the date on which any Parity Payments are due on a Parity Obligation. Participant means any entity which is recognized as a participant by DTC in the book-entry system of maintaining records with respect to Book-Entry Bonds. Payment Agreement means a written agreement for the purpose of managing or reducing the Agency s exposure to fluctuations in interest rates or for any other interest rate, investment, asset or liability managing purposes, entered into either on a current or forward basis by the Agency and a Qualified Counterparty as authorized under any applicable laws of the State in connection with, or incidental to, the entering into of any Obligation, that provides for an exchange of payments based on interest rates, ceilings or floors on such payments, options on such payments or any combination thereof, A-9

66 or any similar device. Payment Agreement includes any interest rate swap agreement, currency swap agreement, forward payment conversion agreement, future or contract entered into by the Agency with a Qualified Counterparty with respect to any Obligation providing for payment based on levels of, or changes in, interest rates, currency exchange rates, stock or other indices, or a contract entered into by the Agency with respect to any Obligation to exchange cash flows or a series of payments, or a contract entered into by the Agency with respect to any Obligation, including, without limitation, interest rate floors or caps, options, rates or calls, to hedge payment, currency, rate, spread or similar exposure or any similar contract entered into by the Agency with respect to any Obligation. Payment Agreement Payments means the amounts periodically required to be paid by the Agency to all Qualified Counterparties under all Payment Agreements. Payment Agreement Receipts means the amounts periodically required to be paid by all Qualified Counterparties to the Agency under all Payment Agreements. Payment Fund means the fund by that name established in the Indenture thereof. Permitted Encumbrances means, with respect to the System or any part thereof (a) liens for taxes or other governmental charges or levies not delinquent or that are being contested in good faith by the Agency, (b) covenants, easements, encumbrances, defects of title, reservations, restrictions and conditions existing at the time of execution of this Indenture, (c) defects, irregularities, encumbrances, easements, including easements for roads and public utilities and similar easements, rights-of-way, mineral conveyances, mineral reservations and clouds on title that do not materially impair the use of the property affected thereby for its intended purposes, (d) mechanics, workers, repairmen s, architects, engineers, surveyors, or carriers liens or other similar liens provided that the same shall be discharged in the ordinary course of business and without undue delay or the validity of the same shall be contested in good faith with any pending execution thereof appropriately stayed, (e) other liens, charges and encumbrances that, as set forth in a certificate of an Independent Engineer and in a written opinion of counsel to the Agency, copies of which are filed with the Trustee, do not materially impair the use of the System (for purposes thereof, counsel to the Agency may rely upon the certificate of the Independent Engineer as to whether such liens, charges and encumbrances prevent or materially impair the use of the System), and (f) encumbrances on property, plant and equipment comprising a part of the System to the extent permitted by the Indenture thereof. Permitted Investments means any of the following which at the time of investment are legal investments under the laws of the State of California for the moneys proposed to be invested therein (the Trustee is entitled to conclusively rely upon any direction of the Agency as a certification that such investment constitutes a Permitted Investment): 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, and CATS and TIGRS) 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): 1. U.S. Export-Import Bank (Eximbank) Direct obligations or fully guaranteed certificates of beneficial ownership A-10

67 2. Farmers Home Administration (FmHA) Certificates of Beneficial Ownership 3. Federal Financing Bank 4. Federal Housing Administration Debentures (FHA) 5. General Services Administration Participation Certificates 6. Government National Mortgage Association (GNMA or Ginnie Mae) GNMA - guaranteed mortgage-backed bonds GNMA - guaranteed pass-through obligations 7. U.S. Maritime Administration Guaranteed Title XI financing 8. U.S. Department of Housing and Urban Development (HUD) Project Notes Local Authority Bonds New Communities Debentures - U.S. government guaranteed debentures U.S. Public Housing Notes and Bonds - U.S. government guaranteed public housing notes and bonds C. Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following federal agencies which are not 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): 1. Federal Home Loan Bank System Senior debt obligations 2. Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) Participation Certificate Senior debt obligations 3. Freddie Mac (formerly Federal National Mortgage Association (FNMA) Mortgage-backed securities and senior debt obligations 4. Student Loan Marketing Association (SLMA or Sallie Mae) Senior debt obligations 5. Resolution Funding Corp. (REFCORP) obligations 6. Farm Credit System Consolidated system-wide bonds and notes D. Money market funds registered under the Federal Investment Company Act of 1940, whose shares are registered under the Federal Securities Act of 1933, and having at the time of purchase a rating by S&P of AAAm-G, AAA-m or AA-m and if rated by Moody s rated Aaa, Aal or Aa2, including funds for which the Trustee, its parent holding companies, if any, or any affiliates or subsidiaries of the Trustee provide investment advisory or other management services. A-11

68 E. Certificates of deposit secured at all times by collateral described in (A) and/or (B) above. Such certificates must be issued by commercial banks, savings and loan associations or mutual savings banks. 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 BIF and SAIF. G. Investment Agreements, including GIC s Forward Purchase Agreements. H. Commercial paper rated, at the time of purchase, Prime -1 by Moody s and A-1 or better by S&P. I. Bonds or notes issued by any state or municipality which are, at the time of purchase, rated by Moody s and S&P in one of the two highest rating categories assigned by such rating agencies. J. Federal funds or bankers acceptances with a maximum term of one year of any bank which, at the time of investment, has an unsecured, uninsured and unguaranteed obligation rating of Prime -1 or A3 or better by Moody s and A-l or A or better by S&P. K. The Local Agency Investment Fund of the State or any state administered pool investment fund in which the Agency is statutorily permitted or required to invest and investment pools of the County of Los Angeles or the County of Kern into which the Agency may lawfully invest its funds will be deemed a permitted investment. L. Repurchase Agreements ( Repos ) for 30 days or less must follow the following criteria. Repos provide for the transfer of securities from a dealer bank or securities firm (seller/borrower) to the Agency or the Trustee (buyer/lender), and the transfer of cash from the Agency or the Trustee to the dealer bank or securities firm with an agreement that the dealer bank or securities firm will repay the cash plus a yield to the Agency or the Trustee in exchange for the securities at a specified date. 1. Repos must be between the Agency or the Trustee and a dealer bank or securities firm. a. Primary dealers on the Federal Reserve reporting dealer list which are rated A or better by S&P and A2 or better by Moody s, or b. Banks rated A or better by S&P and A2 or better by Moody s. 2. The written repurchase agreement must include the following: a. Securities which are acceptable for transfer are: (1) Direct obligations of the United States of America referred to in clause (A) above, or (2) Obligations of federal agencies referred to in clause (B) above, or (3) Obligations of FNMA and FHLMC. A-12

69 b. The term of the Repos may be up to 30 days. c. The collateral must be delivered to the Agency, Trustee (if Trustee is not supplying the collateral) or third party acting as agent for the Trustee (if the Trustee is supplying the collateral) before/simultaneous with payment (perfection by possession of certificated securities). d. Valuation of Collateral. (1) the securities must be valued weekly, marked-to-market at current market price plus accrued interest. (2) The value of collateral must be equal to 104% of the amount of cash transferred by the Agency or the Trustee to the dealer bank or security firm under the Repo plus accrued interest. If the value of securities held as collateral slips below 104% of the value of the cash transferred by the Agency or the Trustee, then additional cash and/or acceptable securities must be transferred. If, however, the securities used as collateral are FNMA or FHLMC, then the value of collateral must equal 105%. (3) A legal opinion which must be delivered to the Agency and the Trustee that states that the Repo meets guidelines under state law for legal investment of public funds. Person means any individual, association, unincorporated organization, corporation, partnership, limited liability company, joint stock company, joint venture, business trust or a government or an agency or a political subdivision thereof, or any other entity (including any agency or political subdivision thereof). Policy Costs means with respect to a Series of Bonds, the costs as specified in the Supplemental Indenture pursuant to which such Series of Bonds is issued. Prepaid 2007A-1 Certificates means the $59,805,000 aggregate principal amount of Antelope Valley-East Kern Water Agency Certificates of Participation, Series 2007A-1 Certificates (Fixed Rate Certificates) maturing June 1, 2018 through June 1, 2024, June 1, 2027, June 1, 2032 and June 1, 2037, which will be prepaid with proceeds of the 2016 Bonds, leaving outstanding $3,595,000 aggregate principal amount of 2007A-1 Certificates maturing June 1, 2016 and June 1, 2017, outstanding. Prepaid 2008A-1 Certificates means the $20,960,000 aggregate principal amount of Antelope Valley-East Kern Water Agency Certificates of Participation, Series 2008A-1 Certificates (Fixed Rate Certificates) maturing June 1, 2019 through June 1, 2026, which will be prepaid with proceeds of the 2016 Bonds, leaving outstanding $6,230,000 aggregate principal amount of 2008A-1 Certificates maturing June 1, 2016 through June 1, 2018, outstanding. President means the President of the Board of Directors. Principal Payment Date means a date on which any principal installment of the Payment Agreement Payments is due and payable. Principal Payment Date means with respect to a Bond, the date on which the principal thereof becomes due and payable in accordance with the terms thereof and thereof, whether as a result of the maturity thereof or as a result of mandatory sinking fund redemption. A-13

70 Project means the Project described in the Installment Sale Agreement and any additions, betterments and improvements to the System designated by the Board of Directors in a Supplemental Contract as a designated Project, the acquisition and construction of which (together with the incidental costs and expenses related thereto) will be refinanced by the proceeds of the 2016 Bonds and financed or refinanced by the proceeds of any Supplemental Contract as provided therein. Project Accounts means collectively all the accounts established in the Project Fund by all the Supplemental Contracts to finance the acquisition and construction of all the Projects. Project Costs means the cost of any acquisition, construction, refinancing, improvement, repair, modification or delivery of any portion of the Project and related equipment, in accordance with the purchase order or contract therefor, including the costs of site preparation necessary for the installation of the Project. Project Costs also include administrative, engineering, legal, financial and other costs incurred by the Agency in connection with the acquisition, delivery and installation of the Project. Qualified Counterparty means a party (other than the Agency or a party related to the Agency) who is the other party to a Payment Agreement and (1) (a) who is rated at least equal to the ratings assigned by each of the Rating Agencies to the obligations secured by Parity Payments (without regard to any gradations within a rating category), but in no event less than a rating of A2 from Moody s and A from S&P, (b) whose senior debt obligations are rated at least equal to the ratings assigned by each of the Rating Agencies to the obligations secured by Parity Payments (without regard to any gradations within a rating category), or guaranteed by an entity so rated, (c) whose obligations under the Payment Agreement are guaranteed for the entire term of the Payment Agreement by a bond insurer or other institution which has been assigned a credit rating at least equal to the ratings assigned by each of the Rating Agencies to the obligations secured by Parity Payments (without regard to any gradations within a rating category), but in no event less than a rating of A2 from Moody s and A from S&P, or (d) whose obligations under the Payment Agreement are collateralized in such a manner as to obtain a rating at least equal to the ratings assigned by each of the Rating Agencies to the obligations secured by Parity Payments, and (2) who is otherwise qualified to act as the other party to a Payment Agreement under all applicable laws of the State. Rating Agency means Moody s, if Moody s is then rating the Bonds at the request of the Agency, and means S&P, if S&P is then rating the Bonds at the request of the Agency, and such other rating agency as shall then maintain a rating on the Bonds at the request of the Agency. Rating Category means any generic rating category of Moody s or S&P, without regard to any refinement of such category by plus or minus sign or by numerical or other qualifying designation. Rebate Fund means the fund by that name established and held by the Trustee pursuant to the Indenture thereof. Rebate Requirement has the meaning ascribed to such term in the Tax Certificate. Record Date means the 15th day of the calendar month preceding each Interest Payment Date, whether or not such day is a Business Day, and any date established by the Trustee pursuant to the Indenture as a Record Date for the payment of defaulted interest on the Bonds, if any. With respect to any payment of defaulted interest, a special record date shall be established in accordance with the provisions of the Indenture thereof. Redemption Account means the account of that name established by the Trustee pursuant to the Indenture thereof. A-14

71 Redemption Date means the date fixed for redemption of Bonds subject to redemption in any notice of redemption given in accordance with the terms thereof. Redemption Price means the aggregate amount of principal and premium, if any, of the Bonds upon the redemption thereof pursuant thereto. Registration Books means the records maintained by the Trustee for the registration of ownership and registration of transfer of the Bonds pursuant to the Indenture. Representation Letter means the Letter of Representations from the Agency to DTC, or any successor securities depository for any Series of Book-Entry Bonds, in which the Agency makes certain representations with respect to issues of its securities for deposit by DTC or such successor depository. Reserve Facility means a surety bond, an insurance policy (including a Reserve Policy) or an irrevocable letter of credit pursuant to which funds may be obtained by the Trustee on any date on which moneys are required to be withdrawn from the applicable Account in the Reserve Fund, provided, that such surety bond or insurance policy shall be issued by an insurance company or association authorized to do business in the State of California, the long-term unsecured obligations of which, at the time of delivery of such surety bond or policy, are rated at not less than the top two ratings categories by Moody s and S&P, and each letter of credit shall be issued by a financial institution authorized to do business in the State of California, the long-term unsecured obligations of which, at the time of delivery of such letter of credit, are rated not less than Aa by Moody s and not less than AA by S&P. Reserve Fund Credit Facility Costs means the repayment of draws, expenses and accrued interest or other similar costs payable in connection with a line of credit, letter of credit, insurance policy, surety bond or other credit source deposited with a trustee in connection with a Parity Obligation. Responsible Officer means any officer of the Trustee assigned by the Trustee to administer the trusts established thereunder. Revenue Fund means Antelope Valley-East Kern Water Agency Revenue Fund described in the Indenture. Revenues means, for any Fiscal Year or twelve (12) calendar month period, all income and revenue received or receivable by the Agency during such Fiscal Year or twelve (12) calendar month period from the ownership or operation of the System, determined in accordance with Generally Accepted Accounting Principles, together with all Ad Valorem Taxes, ad valorem assessments, standby charges, rates, fees and charges received by the Agency for the Service and the other services of the System and all proceeds of insurance covering business interruption loss relating to the System and all connection fees and charges payable to the Agency for the Service made available or provided by the System and all payments for the lease of property comprising a part of the System and all other income and revenue howsoever derived by the Agency from the ownership or operation of the System or arising from the System, and including all Payment Agreement Receipts, and including all income from the investment of amounts on deposit in the Revenue Fund and the Parity Obligation Payment Fund, but excluding in all cases (i) any proceeds of taxes (including Ad Valorem Taxes) and assessments levied and collected by or on behalf of the Agency for obligations that are payable solely from such taxes (including Ad Valorem Taxes) or assessments and not from any other Revenues, (ii) reserves, taxes or assessments specifically pledged to the payment of debt service with respect to notes, bonds or other obligations of the Agency and which reserves, taxes or assessments are not available for any other purposes of the Agency; (iii) any refundable deposits made to establish credit and any advances or contributions in aid of construction, and (iv) any income from the investment of amounts on deposit in the Project Fund. A-15

72 S&P means Standard & Poor s Ratings Services, its successors and assigns, and, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, the term Standard & Poor s or S&P shall be deemed to refer to any other nationally recognized securities rating agency which has been designated by the Agency by written notice to the Trustee. Securities Depositories means The Depository Trust Company, 55 Water Street, 50th Floor, New York, New York , Attention: Call Notification Department, Fax (212) ; and, in accordance with then-current guidelines of the Securities and Exchange Commission, such other addresses and/or such other securities depositories as the Agency may designate in writing to the Trustee. Series means (a) the 2016 Bonds, and (b) any Bonds identified as a separate Series of Bonds in the Supplemental Indenture pursuant to which such Bonds are issued. Service means the water delivery services, furnished and all other contractual services provided by the Agency, made available or provided by the System. Short-Term Obligations means Obligations having an original maturity of less than or equal to one year and which are not renewable at the option of the Agency for a term greater than one year beyond the date of original incurrence. State means the State of California. Subordinate Obligations means all Supplemental Contracts or Payment Agreements the Subordinate Payments under which (other than Termination Payments related to Subordinate Payment Agreements) are secured by the subordinate lien on Net Revenues created thereby and are payable on a parity therefrom. Subordinate Payment Agreements means a Payment Agreement which is a Subordinate Obligation. Subordinate Payments means all installment payments and other debt service payments scheduled to be paid by the Agency under all Subordinate Obligations. Supplemental Contracts means all installment purchase contracts supplemental thereto executed and entered into by the Agency and the Corporation or another entity under and pursuant thereto and pursuant to applicable law, as originally executed and entered into and as they may from time to time be amended or supplemented in accordance therewith and therewith. Supplemental Indenture means any supplemental Indenture amendatory of or supplemental to this Indenture, but only if and to the extent that such Supplemental Indenture is specifically authorized thereunder. System means all facilities for providing the water storage and delivery services and all other contractual services provided by the Agency now owned by the Agency and all other facilities acquired and constructed by the Agency and determined to be a part of the System, including reclamation of recycled water, together with all additions, betterments and improvements to such facilities or any part thereof hereafter acquired and constructed by the Agency. Tax Certificate means the Tax Certificate or other certificate relating to the requirements of Section 148 of the Code dated the Closing Date with respect to a Series of Bonds by the Agency, as it may from time to time be amended and supplemented. A-16

73 Termination Payments means any payments due and payable to a Qualified Counterparty in connection with the termination of a Payment Agreement. Transaction Documents means the Installment Sale Agreement, the Indenture and such other relevant operative documents and instruments necessary to delivery of a Series of Bonds or Parity Obligations. Trustee means Wells Fargo Bank, National Association, a national banking association duly organized and existing under and by virtue of the laws of the United States of America, or its successor or any other bank or trust company which may at any time be substituted in its place as provided in the Indenture. Trust Office means the corporate trust office of the Trustee currently located in Los Angeles, California, or such other office designated by the Trustee from time to time in a written notice filed with the Agency. Variable Interest Rate means any variable interest rate or rates to be paid under any Obligations, the method of computing which variable interest rate shall be as specified in the applicable Obligation, which Obligation shall also specify either (i) the payment period or periods or time or manner of determining such period or periods or time for which each value of such variable interest rate shall remain in effect, and (ii) the time or times based upon which any change in such variable interest rate shall become effective, and which variable interest rate may, without limitation, be based on the interest rate on certain bonds or may be based on interest rate, currency, commodity or other indices. Variable Interest Rate Contracts means, for any period of time, any Obligations that bear a Variable Interest Rate during such period, except that no Obligation shall be treated as a Variable Interest Rate Contract if the net economic effect of interest rates on any particular Payments or such Obligation and interest rates on any other Payments of the same Obligation, as set forth in such Obligation, or the net economic effect of a Payment Agreement with respect to any particular Payments, in either case is to produce obligations that bear interest at a fixed interest rate, and any Obligation with respect to which a Payment Agreement is in force shall be treated as a Variable Interest Rate Contract if the net economic effect of the Payment Agreement is to produce obligations that bear interest at a Variable Interest Rate. Verification shall have meaning set forth in the Indenture thereof. Written Request of the Agency means an instrument in writing signed by an Authorized Officer. FUNDS AND ACCOUNTS Establishment of Funds and Accounts. The Trustee shall establish and maintain special trust funds to be held by the Trustee called the Costs of Issuance Fund, the Payment Fund, including the Payment Account and the Redemption Account established therein, the Revenue Fund, the Parity Obligation Payment Fund, the Project Fund, including the Project Accounts established therein, the Reserve Fund, the Delivery Costs Fund and the Rebate Fund. In addition, in the event the Agency enters into a Swap Agreement, the Trustee shall establish a Swap Payment Fund. Moneys in the funds and accounts created under the Trust Agreement shall be used and applied only as required or permitted by the Trust Agreement. A-17

74 Deposit Debt Service Payments; Notice to Agency. All Debt Service Payments shall be paid directly by the Agency to the Trustee on the applicable Due Date. Such payments received by the Trustee shall be held in trust by the Trustee under the terms of the Indenture and shall be deposited by it as and when received in the applicable Account in the Payment Fund, which fund the Trustee hereby agrees to establish and maintain so long as any Bonds are Outstanding and which account the Trustee hereby agrees to establish and maintain so long as any Bonds are Outstanding. The Trustee shall send written notification to the Agency at least ten (10) days prior to each Interest Payment Date which notification will indicate the estimated Debt Service Payment due on the next succeeding Due Date, provided, however, that the failure of the Trustee to send such written notification to the Agency or any error in such notice shall not relieve the Agency of its obligation to make the then required Debt Service Payment in full on the related Due Date Payment Fund Within the Payment Fund, the Trustee shall establish a Payment Account and a Redemption Account with respect to the Bonds as provided in the Indenture or Supplemental Indenture providing for issuance of a Series of Bonds. With respect to the 2016 Bonds, the Trustee shall establish the 2016 Payment Account and the 2016 Redemption Account. Debt Service Payments received by the Agency and transferred to the Trustee shall be deposited by the Trustee in the 2016 Payment Account. Such payments shall be net of amounts already on deposit therein that are in excess of the amount required to accumulate therein pursuant to the Indenture. The Trustee shall transfer the money contained in the 2016 Payment Account and the 2016 Redemption Account at the following respective times in the following respective accounts in the following order of priority in the manner hereinafter provided, each of which accounts the Trustee thereby agrees to establish and maintain so long as any 2016 Bonds are Outstanding, and the money in each of such accounts shall be disbursed only for the purposes and uses thereafter authorized in the Indenture: (a) 2016 Payment Account. (i) (ii) (iii) Interest. On or before the fifth Business Day preceding each Interest Payment Date for each 2016 Bond, an amount which is equal to the amount to become due on such 2016 Bond on the next succeeding Interest Payment Date. Commencing on the fifth Business Day preceding June 1 of each year, an amount which, together with any moneys already on deposit with the Trustee and available to make such payment, is not less than the entire amount of the next succeeding principal becoming due on the 2016 Bonds on such date by maturity. All moneys in the 2016 Payment Account shall be used and withdrawn by the Trustee solely for the purpose of paying principal of and interest on the 2016 Bonds on each Interest Payment Date or mandatory redemption dates, as applicable (b) 2016 Redemption Account. The Trustee shall deposit in a separate Redemption Account amounts received from the Agency in connection with the Agency s exercise of its rights to optionally redeem 2016 Bonds pursuant to Indenture or pursuant to a Supplemental Indenture and any other amounts required to be deposited therein pursuant to the Indenture or pursuant to any Supplemental Indenture. The Trustee, on the optional redemption date specified in the certificate of the Agency filed with the Trustee at the time that any moneys to accomplish any such optional redemption are paid to the Trustee, shall deposit in the applicable Redemption Account the amount of such payment. All money in the Redemption Account relating to the 2016 Bonds shall be used and withdrawn by the Trustee solely for the purpose of paying the interest on, premium, A-18

75 if any, and principal of the 2016 Bonds to be optionally redeemed on their respective redemption dates. Use of Money in the Costs of Issuance Fund (a) The Trustee shall disburse funds from the Costs of Issuance Fund to pay Costs of Issuance only upon receipt of a signed certificate (stating the amount to be disbursed and the party or parties being paid) by the Authorized Officer of the Agency and accompanied by an invoice or statement for each such amount. (b) Upon payment of all Costs of Issuance, which shall be determined by a certificate to that effect by an Authorized Officer of the Agency delivered to the Trustee, or upon the date occurring four (4) months after the Closing Date, whichever occurs first, the Trustee shall transfer all funds remaining in the Costs of Issuance Fund to the Payment Fund, and the Costs of Issuance Fund shall thereupon be closed. Held in Trust The moneys and investments held by the Trustee in the Indenture are irrevocably held in trust for the benefit of the Owners, and for the purposes therein specified, and such moneys, and any income or interest earned thereon, shall be expended only as provided therein, and shall not be subject to levy or attachment or lien by or for the benefit of any creditor of the Trustee or the Agency. Commingling of Moneys in Funds The Trustee is directed by the Agency to commingle any of the funds held by it pursuant to the Indenture into a separate fund or funds for investment purposes only; provided, however, that all funds or accounts held by the Trustee thereunder shall be accounted for separately notwithstanding such commingling by the Trustee. Pledge of Net Revenues and Other Funds All of the Net Revenues and the moneys on deposit in the applicable Accounts in the Payment Fund are hereby irrevocably pledged to the punctual payment of the 2016 Bonds and such Net Revenues and funds shall not be used for any other purpose while any of the 2016 Bonds remain outstanding, except as provided therein, including the payment of Parity Obligations. This pledge shall constitute a first lien on the Net Revenues and such funds for the payment of principal of and interest on the 2016 Bonds and debt service on any Parity Obligations in accordance with the terms hereof and thereof. The Agency has previously established the Antelope Valley-East Kern Water Agency Revenue Fund, which fund the Agency hereby agrees to hold and maintain so long as any Debt Service Payments due thereunder shall be Outstanding. The Agency hereby irrevocably grants and pledges the Net Revenues first, to secure Parity Obligations and second, to secure Subordinate Obligations. Such lien and pledge shall constitute a first lien on Net Revenues. The Agency hereby represents and states that, it has not previously granted any lien or charge on any of the Net Revenues senior to the Debt Service Payments and Parity Obligations; provided, that out of Net Revenues there may be apportioned such sums for such purposes as are expressly permitted by the Indenture. All Parity Obligations shall be of equal rank without preference, priority or distinction of any Parity Obligations over any other Parity Obligations. Unless expressly stated to the contrary in a particular Subordinate Obligation, all Subordinate Obligations shall be of equal rank without preference, priority or distinction of any Subordinate Obligations over any other Subordinate Obligations. In order to carry out and effectuate the obligation of the Agency contained in the Indenture and in all Supplemental Contracts and Payment Agreements to pay the A-19

76 Payment Agreement Payments, the Agency agrees and covenants that all Revenues received by it shall be deposited when and as received in the Revenue Fund, and all money on deposit in the Revenue Fund shall be applied and used only in the following order as provided therein: (A) The Agency shall pay all Maintenance and Operation Costs (including amounts reasonably required to be set aside in contingency reserves for Maintenance and Operation Costs the payment of which is not then immediately required) from the Revenue Fund as they become due; and (B) On or before the fifth Business Day preceding the first day of each month, the Agency shall, from the remaining money then on deposit in the Revenue Fund, deposit in the Antelope Valley- East Kern Water Agency Parity Obligation Payment Fund, which fund the Agency hereby agrees to establish and to hold and maintain so long as any Parity Payments due thereunder shall be Outstanding the following amounts in the following order of priority: (1) a sum equal to (a) the principal of and interest on the 2016 Bonds, (b) the interest and principal payments becoming due and payable under all Supplemental Contracts that are Parity Obligations, plus (c) the net payments becoming due and payable on all Parity Payment Agreements (except any Termination Payments), plus (d) any other amounts due with respect to Parity Obligations (including any letter of credit and remarketing fees), in each case, during the next succeeding month; plus (2) all amounts due to make up any deficiency in the reserve funds for Parity Obligations in accordance with the provisions of the applicable Issuing Document, including all Reserve Fund Credit Facility Costs. From time to time, moneys on deposit in the Parity Obligation Payment Fund shall be transferred by the Agency to the Trustee or other third party payee thereof in accordance with the terms of the Parity Obligations to make and satisfy the Parity Payments due on the next applicable Payment Dates on such Parity Obligations. (C) After the payments contemplated by subparagraphs (A) and (B) above have been made, any amounts thereafter remaining in the Revenue Fund shall be used for the payment of the interest and principal payments becoming due and payable under all Supplemental Contracts that are Subordinate Obligations and the net payments becoming due and payable on all Subordinate Payment Agreements (except any Termination Payments) and any other amounts becoming due and payable with respect to Subordinate Obligations (including any letter of credit and remarketing fees and any other amounts becoming due and payable to make up any deficiency in the Reserve Funds for Subordinate Obligations, including all Reserve Fund Credit Facility Costs) and any Termination Payments on all Parity Payment Agreements; so long as the following conditions are met: and (1) all Maintenance and Operations Costs are being and have been paid and are then current; (2) all deposits and payments contemplated by subparagraphs (A) and (B) above shall have been made in full and no deficiency in any Reserve Fund for Parity Obligations shall exist and no Reserve Fund Credit Facility Costs shall be due and payable, and there shall have been paid, or segregated within the Revenue Fund, the amounts currently payable pursuant to subparagraphs (A) and (B) above. (D) After deposits contemplated by subparagraphs (A), (B) and (C) have been made, any amounts thereafter remaining in the Revenue Fund may be used for any lawful purpose, including, but not limited to (i) the acquisition and construction of improvements to the System, (ii) the prepayment of any other obligations of the Agency relating to the System, including payment of any Termination Payments on all Subordinate Payment Agreements or (iii) any other lawful purposes of the Agency. A-20

77 (E) Obligation Absolute. The, obligation of the Agency to make the Debt Service Payments, and payments of interest thereon, additional costs and other payments required to be made by it under Indenture, solely from Net Revenues, is absolute and unconditional, and until such time as the Debt Service Payments, and such other payments shall have been paid in full (or provision for the payment thereof shall have been made pursuant to the Indenture), the Agency shall not discontinue or suspend any Debt Service Payments, additional costs or other payments required to be made by it under the Indenture when due, whether or not the Project or any part thereof is operating or operable or has been completed, or its use is suspended, interfered with, reduced or curtailed or terminated in whole or in part, and such Debt Service Payments, additional costs and other payments shall not be subject to reduction whether by offset or otherwise and shall not be conditional upon the performance or nonperformance by any party of any agreement for any cause whatsoever. Receipt and Deposit of Debt Service Payments The Agency thereby transfers in trust, grants a security interest in and assigns to the Trustee, for the benefit of the Owners from time to time of the 2016 Bonds, all of the Debt Service Payments, and grants a security interest in and assigns to the Trustee for the benefit of the Owners from time to time of the 2016 Bonds, all of the Debt Service Payments. Such security interest and assignment is to the Trustee solely in its capacity as Trustee thereunder and not in its individual or personal capacity and is subject to the provisions of the Indenture. In acting pursuant to such security interest and assignment, the Trustee is entitled to all of the protections, limitations from liability and indemnities provided it thereunder. The Trustee shall be entitled to and shall collect and receive all of the Debt Service Payments. The Trustee also shall be entitled to and shall, subject to the provisions of the Indenture, take all steps, actions and proceedings which the Trustee determines to be reasonably necessary in its judgment to enforce, either jointly with the Agency or separately, all of the rights of the Agency and all of the obligations of the Agency under the Indenture. Liability of Agency Limited Notwithstanding anything contained therein, the Agency shall not be required to advance any moneys derived from any source of income other than Revenues legally available therefore and the other funds provided therein for the payment of the Debt Service Payments or for the performance of any agreements or covenants contained therein required to be performed by it. The Agency may, however, but shall not be required to, advance moneys for any such purpose so long as such moneys are derived from a source legally available for such purpose and may be legally used by the Agency for such purpose. The obligation of the Agency to pay principal of and interest on the 2016 Bonds and the other amounts due thereunder is a special obligation of the Agency payable solely from the moneys legally available therefore thereunder, and is not in excess of any constitutional or statutory debt. Rebate Fund (i) The Trustee shall establish and maintain a special fund designated the Rebate Fund. There shall be deposited in the Rebate Fund such amounts as are required to be deposited therein pursuant to the Tax Certificate, as specified in a Written Request of the Agency. All money at any time deposited in the Rebate Fund shall be held by the Trustee in trust, to the extent required to satisfy the Rebate Requirement, for payment to the United States of America. Notwithstanding defeasance of the Bonds pursuant to the Indenture thereof or anything to the contrary contained therein, all amounts required to be deposited into or on deposit in the Rebate Fund shall be governed exclusively by the Indenture and by the Tax Certificate (which is incorporated therein by reference). The Trustee shall be deemed conclusively to have complied with such provisions if it follows the written directions of the Agency, and shall have no liability or responsibility to enforce compliance by the Agency with the terms of the Tax Certificate. The A-21

78 Trustee may conclusively rely upon the Agency s determinations, calculations and certifications required by the Tax Certificate. The Trustee shall have no responsibility to independently make any calculation or determination or to review the Agency s calculations. (ii) Any funds remaining in the Rebate Fund after payment in full of all of the Bonds and after payment of any amounts described in the Indenture shall be withdrawn by the Trustee and remitted to the Agency. COVENANTS OF THE AGENCY AND THE TRUSTEE Compliance with Indenture; Compliance with Contracts The Agency will not suffer or permit any material default by it to occur thereunder, but will faithfully comply with, keep, observe and perform all the agreements, conditions, covenants and terms thereof required to be complied with, kept, observed and performed by it. The Agency will faithfully comply with, keep, observe and perform all the agreements, conditions, covenants and terms contained in the Indenture required to be complied with, kept, observed and performed by them and will enforce the Indenture against the other party thereto in accordance with its terms. Observance of Laws and Regulations The Agency will faithfully comply with, keep, observe and perform all valid and lawful obligations or regulations now or hereafter imposed on it by contract, or prescribed by any law of the United States of America or of the State of California, or by any officer, board or commission having jurisdiction or control, as a condition of the continued enjoyment of each and every franchise, right or privilege now owned or hereafter acquired by it, including its right to exist and carry on its respective businesses, to the end that such franchises, rights and privileges shall be maintained and preserved and shall not become abandoned, forfeited or in any manner impaired. Prosecution and Defense of Suits The Agency will promptly, upon request of the Trustee or any Owner, take such action from time to time as may be necessary or proper to remedy or cure any cloud upon or defect in the lien on the System or the Debt Service Payments or any part thereof, whether now existing or hereafter developing, will prosecute all actions, suits or other proceedings as may be appropriate for such purpose and to the extent permitted by law will indemnify and save the Trustee harmless from all cost, damage, expense or loss, including attorneys fees, which it may incur by reason of any such cloud, defect, action, suit or other proceeding. Accounting Records and Statements The Trustee will keep proper accounting records in which complete and correct entries shall be made of all transactions relating to the receipt, deposit and disbursement of Debt Service Payments, and such accounting records shall be available for inspection by the Agency or any Owner or his or her agent duly authorized in writing on any Business Day upon reasonable notice at reasonable hours and under reasonable conditions prescribed by the Trustee. So long as any Bonds are Outstanding, the Trustee will furnish each month to the Agency and any Owner who may so request in writing (at the expense of such Owner) a complete statement covering the receipts, deposits and disbursements of the applicable Debt Service Payments for the preceding monthly period; provided, that the Trustee shall not be obligated to deliver an accounting for any fund or account that (i) has a balance of zero, or (ii) has not had any activity since the last reporting date. A-22

79 Further Assurances Whenever and so often as requested to do so by the Trustee or any Owner, the Agency will promptly execute and deliver or cause to be executed and delivered all such other and further assurances, documents or instruments and promptly do or cause to be done all such other and further things as may be necessary or reasonably required in order to further and more fully vest in the Trustee and the Owners all advantages, benefits, interests, powers, privileges and rights conferred or intended to be conferred upon them by the Indenture. Against Encumbrances The Agency hereby covenants that there is no pledge of or lien on Net Revenues senior to the pledge and lien securing the Bonds. The Agency will not make any pledge of or place any additional lien on Net Revenues except Parity Obligations as permitted by the Indenture. (A) Except as may be authorized by a Parity Obligation, the Agency will not mortgage or otherwise encumber, pledge or place any charge upon the System or any part thereof, except for Permitted Encumbrances. The Agency shall discharge or cause to be discharged, or shall make adequate provision to satisfy and discharge, within 60 days after the same become due and payable, all lawful costs, expenses, liabilities and charges relating to the maintenance, repair, replacement or improvement of the properties constituting the System or the operation of the System and lawful claims and demands for labor, materials, supplies or other objects that might by law become a lien upon the System or Net Revenues if unpaid. Nothing contained in the Indenture shall require the Agency to pay or cause to be discharged, or make provision for the payment, satisfaction and discharge of, any lien, charge, cost, liability, claim or demand so long as the validity thereof is contested in good faith and by appropriate legal proceedings. (B) The Agency may incur obligations secured by a lien on rolling stock comprising a part of the System without limitation. Punctual Payment The Agency shall punctually pay or cause to be paid the principal of and interest on all the Bonds, in strict conformity with the terms of the Bonds and of the Indenture, according to the true intent and meaning thereof, but only out of the respective Debt Service Payments and other assets pledged for such payment as provided therein. Extension of Payment of Bonds The Agency shall not directly or indirectly extend or assent to the extension of the maturity of any Series of the Bonds or the time of payment of any claims for interest by the purchase of such Series of Bonds or by any other arrangement, and in case the maturity of any of the Bonds or the time of payment of any such claims for interest shall be extended, such 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 of the principal of all of the Bonds then Outstanding and of all claims for interest thereon which shall not have been so extended. Nothing in the Indenture shall be deemed to limit the right of the Agency to cause the issuance of Bonds for the purpose of refunding any Outstanding Bonds, and such issuance shall not be deemed to constitute an extension of maturity of the Bonds. A-23

80 Power to Issue Bonds and Make Pledge The Agency is duly authorized pursuant to law to cause the issuance of the Bonds and to enter into the Indenture and the Agency is duly authorized pursuant to law to pledge the Debt Service Payments and other assets purported to be pledged under the Indenture in the manner and to the extent provided therein. The Bonds and the provisions of the Indenture are and will be the legal, valid and binding special obligations in accordance with their terms, and the Agency and the Trustee shall at all times, subject to the provisions of the Indenture and to the extent permitted by law, defend, preserve and protect said pledge of the Debt Service Payments and other assets and all the rights of the Owners of Bonds of each Series under the Indenture against all claims and demands of all persons whomsoever. Payment of Claims The Agency will pay and discharge any and all lawful claims for labor, materials or supplies which, if unpaid, might become a lien on the applicable Debt Service Payments or any part thereof or on any funds in the control of the Agency or the Trustee prior or superior to the lien of the Bonds or which might impair the security of the Bonds; provided the Agency shall not be obligated to make such payment so long as the Agency contracts such payment in good faith. Additional Obligations The Agency covenants that the Agency will not, so long as any Bonds are outstanding, issue or incur any obligations payable from Net Revenues superior to the Debt Service Payments. The Agency may at any time execute any Parity Obligations (other than the Parity Obligations represented by the Indenture payable as provided therein); provided: (A) There shall be on file with the Agency either: (1) A Certificate of the Agency demonstrating that, during the last audited Fiscal Year or any consecutive twelve (12) calendar month period during the immediately preceding eighteen (18) calendar month period, the Adjusted Annual Net Revenues were at least equal to 110% of Maximum Annual Debt Service on all Outstanding Parity Obligations plus the Parity Obligations proposed to be executed; provided, that for the purpose of providing this Certificate, the Agency may adjust the foregoing Adjusted Annual Net Revenues to reflect: (a) An allowance for Net Revenues that would have been derived from each new user supply contract entered into with respect to the System that, during all or any part of such Fiscal Year or twelve (12) calendar month period, was not in existence, in an amount equal to the estimated additional Net Revenues that would have been derived from each such user supply contract if it had been made prior to the beginning of such Fiscal Year or twelve (12) calendar month period, as certified by an Engineer s Report or Independent Certified Public Accountant, and (b) An allowance for Net Revenues that would have been derived from any increase in the rates, fees and charges fixed and prescribed for Service which, during all or any part of such Fiscal Year or twelve (12) calendar month period, was not in effect, in an amount equal to the estimated additional Net Revenues that would have been derived from such increase in rates, fees and charges if it had been in effect prior to the beginning of such Fiscal Year or twelve (12) calendar month period as certified by an Engineer s Report or Independent Certified Public Accountant; or (2) An Engineer s Report stating that the estimated Adjusted Annual Net Revenues for each of the five (5) Fiscal Years next following the earlier of (i) the end of the period during which interest on A-24

81 the Parity Obligations proposed to be executed is to be capitalized or, if no interest is capitalized, the Fiscal Year in which the Parity Obligations proposed to be executed is authenticated or executed, or (ii) the date on which substantially all Projects financed with the Parity Obligations proposed to be executed or issued are expected to commence operations, will be at least equal to 110% of the Maximum Annual Debt Service for such period; provided, that for the purpose of providing this Engineer s Report, the Independent Engineer may adjust the foregoing estimated Adjusted Annual Net Revenues to reflect: (a) An allowance for Net Revenues that are estimated to be derived from any increase in the rates, fees and charges for Service in effect and being charged or from any increase in the rates, fees and charges for Service that are expected to be charged; and (b) An allowance for Net Revenues that are estimated to be derived from customers of the System anticipated to be served by the additions, betterments or improvements to the System to be financed by the Parity Obligations proposed to be executed together with any additional Supplemental Contracts expected to be executed and entered into during such five (5) year period. (B) Notwithstanding the foregoing, there shall be at least one times coverage of the Agency s obligations with respect to repayment of Policy Costs then due and owing. (C) Notwithstanding the foregoing provisions except as provided in the preceding paragraph (B), there shall be no limitations on the ability of the Agency to execute any Parity Obligations at any time to refund any outstanding Parity Obligations so long as the Annual Debt Service payable by the Agency for each Fiscal Year with respect to such refunding Parity Obligations is less than or equal to 105% of the Annual Debt Service for each corresponding Fiscal Year for such Parity Obligations being refunded. Subordinate Obligations The Agency may at any time execute any Subordinate Obligations payable as provided in the Indenture; provided that (i) no Event of Default under the Indenture has occurred and is continuing; (ii) that all Maintenance and Operation Costs are being and have been paid and are then current; (iii) all deposits and payments contemplated with respect to the 2016 Bonds and any Parity Obligations shall have been made in full and no deficiency in any Reserve Fund for any Parity Obligations shall exist and no Reserve Fund Credit Facility Costs shall be due and payable, and (iv) that, upon the issuance of such Subordinate Obligations, the Agency will continue to satisfy the test contained in paragraph (ii) of the definition of Coverage Requirement. Procedures for the Execution of Supplemental Contracts Before the execution of any Supplemental Contract, there shall first be delivered to the General Manager or the Finance Manager the following documents or money or securities: (A) (B) An executed counterpart of the Supplemental Contract; A Request of the Agency as to the delivery of such Supplemental Contract; (C) An opinion of counsel to the effect that the Supplemental Contract has been duly and lawfully executed and delivered by the Agency in accordance with the Law and therewith, is in full force and effect and is valid and binding upon the Agency and enforceable in accordance with its terms (except as enforcement may be limited by bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors rights, the application of A-25

82 equitable principles, the exercise of judicial discretion in appropriate cases and the limitations on legal remedies against California water agencies in the State); (D) A Certificate of the Agency containing such statements as may be reasonably necessary to show compliance with the requirements thereof; and (E) Such further documents, money and securities as are required by the provisions thereof and the resolution, indenture, contract or other obligation providing for the issuance of the Obligation Arbitrage Covenants The Agency hereby covenants with the Owners of the Bonds that, notwithstanding any other provision of the Indenture, it will make no use of the proceeds of the Bonds which would cause the Bonds to be arbitrage bonds subject to federal income taxation by reason of Section 148 of the Code. The Agency shall take any and all actions necessary to assure that interest on the Bonds shall be excluded from gross income for federal income tax purposes and shall assure compliance with Section 148 of the Code, relating to the rebate of excess investment earnings, if any, to the federal government. The Agency will not take or omit to take any action or make any use of the proceeds of the Bonds or of any other moneys or property which would cause the Bonds to be private activity bonds within the meaning of Section 141 of the Code. The Agency agrees to comply with the covenants contained in, and instructions given pursuant to, the Tax Certificate provided to the Agency by James F. Anderson Law Firm, A Professional Corporation. The Trustee hereby covenants with the Owners of the Bonds that it will comply with the express provisions of the Indenture and will follow the written directions of the Agency and, notwithstanding anything to the contrary contained therein, so long as the Trustee shall have complied with the written instructions of the Agency, if any, with respect to making any rebate to the United States of America, the Trustee shall conclusively be deemed to have complied with its obligations thereunder and shall not be liable if the Bonds become arbitrage certificates. Rebate of Excess Investment Earnings to United States of America (a) Obligation to Calculate Excess Investment Earnings. The Agency shall calculate or cause to be calculated, and shall provide or cause to be provided written notice to the Trustee of, the excess investment earnings (as defined in the Code, Excess Investment Earnings ) at such times and in such manner as may be required pursuant to the Code. The Agency shall inform the Trustee how frequently calculations are to be made, and shall ensure that a copy of all such calculations is given promptly to the Trustee. (b) Rebate to United States of America. The Agency agrees to deposit with the Trustee, promptly upon the receipt of any calculations made pursuant to the preceding subsection (a), the amount of Excess Investment Earnings so calculated. The Trustee shall deposit all amounts paid to it for such purpose by the Agency in the Rebate Fund, which fund the Trustee thereby agrees to establish when required to deposit any funds therein and maintain so long as any Bonds are Outstanding. The Trustee shall pay to the United States of America from the amounts on deposit in the Rebate Fund such amounts as shall be identified pursuant to written notice filed with the Trustee by the Agency for such purpose from time to time. Payments to the United States of America shall be made to the address prescribed by the Tax Regulations as the same may be from time to time in effect with such reports and statements as may be prescribed by such Tax Regulations. Following payment in full to the United States of America of all amounts due and owing under this subsection (b) and under the Code, the Trustee shall withdraw from the Rebate Fund and transfer to the Agency all amounts remaining on deposit in the Rebate Fund. A-26

83 (c) Investment Transactions. The Agency shall assure that Excess Investment Earnings are not paid or disbursed except as required in the Indenture. To that end the Agency shall assure that investment transactions are on an arm s-length basis. In the event that Permitted Investments consist of certificates of deposit or investment contracts, investment in such Permitted Investments shall be made in accordance with the procedures described in the Tax Regulations. (d) Maintenance of Records. The Agency shall keep, and retain for a period of six (6) years following the retirement of the final Series of Bonds, records of the determinations made pursuant to the Indenture. (e) Engagement of Professional Services. In order to provide for the administration of this section, the Agency may provide for the employment of independent attorneys, accountants and consultants compensated on such reasonable basis as the Agency may deem appropriate. (f) Modification of this Section. Any of the provisions of the section Rebate of Excess Investment Earnings to United States of America of the Indenture may be amended, modified or deleted in any manner whatsoever in the event that the Agency shall cause to be filed with the Trustee written directions making such amendment, modification or deletion, which written directions are accompanied by a Favorable Opinion of Bond Counsel stating that such amendment, modification or deletion will not cause interest on the Bonds to be includable in gross income of the Owners of Bonds for federal income tax purposes. Books and Accounts; Financial Statements The Agency shall keep proper books of record and accounts, separate from all other records and accounts, in which complete and correct entries shall be made of all transactions relating to the Indenture. Said books shall, upon prior request, be subject to the inspection of the Trustee (who shall have no duty to inspect) or the Owners of not less than ten percent (10%) of the Outstanding Bonds, or their representatives authorized in writing, upon not less than two (2) Business Days prior notice to the Agency. The Agency will keep appropriate accounting records in which complete and correct entries shall be made of all transactions relating to the System and the Revenues and the Maintenance and Operation Costs, which records shall be available for inspection by the Trustee at reasonable hours and under reasonable conditions. The Agency shall cause its books and accounts to be audited annually by an independent certified public accountant or firm of certified public accountants, not more than two hundred and seventy (270) days after the close of each Fiscal Year, and shall make a copy of such report available for inspection by the Owners of Bonds at the office of the Agency and at the Trust Office of the Trustee. The Trustee shall not be required to review, and shall not be deemed to have notice of, the contents of the books and records of the Agency or any financial statement delivered to the Trustee under the Indenture, it being expressly understood that the Trustee shall only receive and hold such documents as repository for examination and copying by any Owner at such Owner s expense during business hours on Business Days. Payment of Taxes and Compliance with Governmental Regulations The Agency will pay and discharge all taxes, assessments and other governmental charges which may hereafter be lawfully imposed upon the System or any part thereof when the same shall become due. The Agency will duly observe and conform with all valid regulations and requirements A-27

84 of any governmental authority relative to the operation of the System or any part thereof, but the Agency 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. Amount of Rates, Fees and Charges The Agency will at all times fix, prescribe, revise and collect rates, fees and charges for the Service during each Fiscal Year which are reasonably fair and nondiscriminatory and which are estimated to yield Adjusted Annual Net Revenues for such Fiscal Year in an amount not less than the Coverage Requirement for such Fiscal Year. The Agency may make adjustments from time to time in such fees and charges and may make such classification thereof as it deems necessary, but shall not reduce the rates, fees and charges then in effect unless the Adjusted Annual Net Revenues from such reduced rates, fees and charges are estimated to be sufficient to meet the requirements of this paragraph. Collection of Rates, Fees and Charges The Agency will have in effect at all times rules and regulations requiring each consumer or customer located on any premises connected with the System to pay the rates, fees and charges applicable to the Service to such premises and providing for the billing thereof and for a due date and a delinquency date for each bill. The Agency will not permit any part of the System or any facility thereof to be used or taken advantage of free of charge by any corporation, firm or person, or by any public agency (including the United States of America, the State and any city, county, district, political subdivision, public corporation or agency of any thereof except under court order); provided, that the Agency may without charge use the System and, so long as no Event of Default exists thereunder, may waive or reduce rates, fees and charges for one or more customers and consumers so long as the total amount waived or reduced does not exceed 1% of Revenues collected in the most recent Fiscal Year and such waiver or reduction, upon implementation, will not cause the Agency to be in default of its covenant under the Indenture thereof. Maintenance and Operation of the System; Budgets The Agency will maintain and preserve the System in good repair and working order at all times and in accordance with sound engineering practices and will operate the System in an efficient and economical manner and will pay all Maintenance and Operation Costs as they become due and payable. The Agency will adopt and file with the Trustee, not later than 90 days after the start of each Fiscal Year, a budget approved by the Board of Directors setting forth the estimated Revenues and Maintenance and Operation Costs for the then current Fiscal Year; provided, that any such budget may be amended at any time during any Fiscal Year and such amended budget shall be filed by the Agency with the Trustee. Insurance The Agency will procure and maintain such insurance relating to the System which it shall deem advisable or necessary to protect its interests and the interests of the Trustee, which insurance shall afford protection in such amounts and against such risks as are usually covered in the State in connection with water systems comparable to the System; provided, that any 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 in the State comparable to the System and is, in the opinion of an independent accredited actuary, actuarially sound. All policies of insurance required to be maintained therein shall provide that the Trustee shall be given thirty (30) days written notice of any intended cancellation thereof or reduction of coverage provided thereby. A-28

85 Eminent Domain and Insurance Proceeds If all or any part of the System shall be taken by eminent domain proceedings, or if the Agency receives any insurance proceeds resulting from a casualty loss to the System, the Net Proceeds thereof, at the option of the Agency, shall be applied either to the prepayment of the Payment Agreement Payments or to acquire and construct additions, betterments or improvements to the System to replace the condemned or destroyed portion of the System. Sale or Other Disposition of Property The Agency will only sell, transfer or otherwise dispose of any of the facilities of the System or any real or personal property comprising a part of the System consistent with one or more of the following limitations: (A) The Agency, in its discretion, may carry out such a sale, transfer or other disposition (each, as used in this section Sale or Other Disposition of Property, a transfer ) if the facilities or property of the System transferred are not material to the operation of the System, or shall have become unserviceable, inadequate, obsolete or unfit to be used in the operation of the System, or are no longer necessary, material or useful to the operation of the System; or (B) The Agency, in its discretion, may carry out such a transfer if the aggregate depreciated cost value of the facilities or property of the System transferred in any one Fiscal Year comprises no more than ten percent (10%) of the total assets of the System; or (C) The Agency, in its discretion, may carry out such a transfer if the Agency receives from the transferee an amount equal to the fair market value of the facilities or property of the System transferred (as used in this subparagraph, fair market value means the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, with a willing buyer and a willing seller each acting prudently and knowledgeably and assuming that the price is not affected by coercion or undue stimulus) and if the proceeds of such transfer are used (i) to promptly prepay, or irrevocably set aside for the prepayment of, first the Parity Payments and, thereafter, the Subordinate Payments, and/or (ii) to provide for the cost of additions, betterments or improvements to the System; provided, that before any such transfer is made under this subparagraph, the Agency shall obtain an Engineer s Report that upon such transfer and the use of the proceeds thereof as proposed by the Agency, the remaining facilities or property of the System will retain their operational integrity and the estimated Adjusted Annual Net Revenues during each of the five (5) Fiscal Years next following the Fiscal Year in which the transfer is to occur will be at least equal to the estimated Coverage Requirement in each of such Fiscal Years, taking into account (w) the estimated reduction in Revenues resulting from such transfer, (x) the use of the proceeds of such transfer for the prepayment of first, the Parity Payments and thereafter, the Subordinate Payments, (y) the estimated additional Revenues from customers anticipated to be served by any additions, betterments or improvements to the System financed by the portion of the proceeds received from such transfer, and (z) any other adjustment permitted in the preparation of an Engineer s Report under the Indenture. Additional Covenants The Agency may provide additional covenants pursuant to any Obligations, including covenants relating to any credit support and/or liquidity support obtained for Obligations; provided, however, that such additional covenants do not materially and adversely affect the right of owners of outstanding Obligations. A-29

86 Further Assurances The Agency will adopt, deliver, execute and make any and all further assurances, instruments and resolutions as may be reasonably necessary or proper to carry out the intention or to facilitate the performance thereof. Continuing Disclosure to Owners Pursuant to the Continuing Disclosure Certificate, the Agency has undertaken all responsibility for compliance with continuing disclosure requirements with respect to the Bonds. Notwithstanding any other provision of the Indenture, failure of the Agency to comply with the Continuing Disclosure Certificate shall not be considered an Event of Default; provided, however, that (i) the Trustee may, at the written direction of any Participating Underwriter (as defined in the Continuing Disclosure Certificate), or the Owners of at least 25% aggregate principal amount of the applicable Series of Outstanding Bonds, but only to the extent it is indemnified for its fees and expenses (including those of its attorneys), or (ii) any Owner or beneficial owner of the applicable Series of Bonds may, take such actions as may be necessary and appropriate to compel performance, including seeking mandate or specific performance by court order. DEFAULT AND LIMITATIONS OF LIABILITY Events of Default One or more of the following shall constitute an Event of Default thereunder: (a) default shall be made in the due and punctual payment by the Agency of any payment of principal of or interest on the Bonds when and as the same shall become due and payable, whether at maturity as therein expressed, by proceedings for redemption or otherwise; (b) default shall be made by the Agency in the performance of any of the other agreements or covenants contained therein required to be performed by it, and such default shall have continued for a period of sixty (60) days after the Agency shall have been given notice in writing of such default by the Trustee; or (c) the Agency shall file a petition seeking arrangement or reorganization under 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 the consent of the Agency 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 Agency or of the whole or any substantial part of its property. The Trustee shall notify the Agency promptly of any default under the Indenture thereof. Upon the occurrence of an Event of Default thereunder, the Trustee may declare the principal of and interest on the applicable Series of Bonds immediately due and payable and such principal and interest shall thereupon be due and payable immediately. The Trustee shall apply amounts on deposit in the funds and accounts in accordance with the Indenture thereof. Immediately upon the declaration of acceleration pursuant to this section Events of Default, the Trustee shall mail notice thereof to the Owners of all Bonds of such Series Outstanding at their respective addresses set forth on the Registration Books. Such notice shall state the fact of such declaration and shall state that interest on such Bonds shall cease to accrue from and after the date which is five (5) Business Days following the date of such declaration. A-30

87 Neither the failure to receive any notice so mailed nor any defect therein shall affect the sufficiency of the proceedings for such declaration or the cessation of accrual of interest on such Bonds from and after the date of such cessation. This provision, however, is subject to the condition that, except with respect to an Event of Default under subsection (c) above, if at any time after such Outstanding principal of the Bonds of any Series and the accrued interest thereon shall have been so declared due and payable and before the acceleration date or the date of any judgment or decree for the payment of the money due shall have been obtained or entered, the Agency shall deposit with the Trustee a sum sufficient to pay such amount due prior to such date and the accrued interest thereon, with interest on such overdue payments at the rate on such Series of Bonds, and the reasonable fees and expenses of the Trustee, including those of its attorneys, and any and all other defaults known to the Agency (other than in the payment of such principal of such Series of Bonds and the accrued interest thereon 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 by written notice to the Agency, may rescind and annul such declaration and its consequences; but no such rescission and annulment shall extend to or shall affect any subsequent default or shall impair or exhaust any right or power consequent thereon. Other Remedies of the Trustee With respect to a Series of Bonds, the Trustee may: (a) by mandamus or other action or proceeding or suit at law or in equity enforce its rights against the Agency, or any board member, officer or employee thereof, and compel the Agency or any such board member, officer or employee to perform and carry out its or his or her duties under applicable law and the agreements and covenants contained therein required to be performed by it or him; (b) by suit in equity enjoin any acts or things which are unlawful or violate the rights of the Trustee or the Owners of applicable Series of Bonds thereunder; (c) intervene in judicial proceedings that affect the applicable Series of Bonds or the security therefor or thereunder; or (d) by suit in equity upon the happening of an Event of Default require the Agency and its officers and employees to account as the trustee of an express trust. Non-Waiver A waiver of any default or breach of duty or contract by the Trustee, or the Owners shall not affect any subsequent default or breach of duty or contract or impair any rights or remedies on any such subsequent default or breach of duty or contract. No delay or omission by the Trustee or the Owners to exercise any right or remedy accruing upon any default or breach of duty or contract shall impair any such right or shall be construed to be a waiver of any such default or breach of duty or contract or an acquiescence therein, and every right or remedy conferred upon the Trustee or the Owners by law or by the Indenture may be enforced and exercised from time to time and as often as shall be deemed expedient by the Trustee. If any action, proceeding or suit to enforce any right or to exercise any remedy is abandoned or determined adversely to the Trustee or the Owners, the Trustee, the Owners and the Agency shall be restored to their former positions, rights and remedies as if such action, proceeding or suit had not been brought or taken A-31

88 Remedies Not Exclusive No remedy therein conferred upon or reserved to the Trustee is intended to be exclusive of any other remedy, and each such remedy shall be cumulative and shall be in addition to every other remedy given thereunder or now or thereafter existing in law or in equity or by statute or otherwise and may be exercised without exhausting and without regard to any other remedy conferred by any other law. No Liability by the Trustee to the Owners Except for the duty of the Trustee to make payments of principal and redemption premiums, if any, of and interest on the Bonds of each Series from moneys received from the Agency, the Trustee will not have any obligation or liability to the Owners with respect to the payment when due of the principal of or interest on the Bonds of any Series, or with respect to the performance by the Agency of the other agreements and covenants required to be performed by it contained therein. Limitation on Owners Right to Bring Suit No Owner of any Series of Bonds shall have any right to institute any proceeding, judicial or otherwise, under or with respect to the Indenture, or for the appointment of a receiver or trustee or for any other remedy thereunder, at law or in equity, unless: (1) such Owner has previously given written notice to the Trustee of a continuing event of default; (2) the owners of not less than a majority in principal of the applicable Series of Bonds Outstanding shall have made written request to the Trustee to institute proceedings in respect of such event of default in its own name as Trustee thereunder; (3) such Owner or Owners have offered to the Trustee reasonable indemnity, satisfactory to the Trustee, against the costs, expenses and liabilities to be incurred in compliance with such request; and (4) the Trustee for sixty (60) days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding. It being understood and intended that no one or more Owners shall have any right in any manner whatever by virtue of, or by availing of, any provision of the Indenture to affect, disturb or prejudice the lien of the Indenture or the rights of any other Owners or to obtain or to seek to obtain priority or preference over any other Owners or to enforce any right under the Indenture, except in the manner therein provided and for the equal and ratable benefit of all Bonds and Parity Obligations. Notwithstanding the foregoing, the Owner of any Bond shall have the right which is absolute and unconditional to receive payment of interest on such Bond when due in accordance with the terms thereof and thereof and the principal of such Bond at the stated maturity thereof and to institute suit for the enforcement of any such payment in accordance with the provisions of the Indenture and such rights shall not be impaired without the consent of such Owner. Application of Funds Upon Default All moneys received by the Trustee or by any receiver pursuant to any right given or action taken under the provisions of the Indenture shall, after payment of the reasonable costs and fees of, and the reasonable fees, expenses, liabilities and advances incurred or made by the Trustee (including fees and expenses of its attorneys and advisors), be deposited in the applicable Payment Account and all moneys A-32

89 so deposited during the continuance of an Event of Default (other than moneys for the payment of Bonds which have previously matured or otherwise become payable prior to such Event of Default or for the payment of interest due prior to such Event of Default), together with all moneys in the funds and accounts maintained by the Trustee under the Indenture thereof, shall be applied as follows: (a) Unless the principal of all Bonds shall have become or shall have been declared due and payable, all such moneys shall be applied: First: To the payment to the persons entitled thereto of all installments of interest then due on the Bonds and any Parity Obligations, with interest on overdue installments, if lawful, at the rate per annum borne by the Bonds, in the order of the maturity of the installments of such interest, and, if the amount available shall not be sufficient to pay in full any particular installment of interest, then to the payment ratably according to the amounts due on such installment, to the persons entitled thereto without any discrimination or privilege; and Second: To the payment to the persons entitled thereto of the unpaid principal of any of the Bonds and any Parity Obligations which shall have become due (other than Bonds called for redemption for the payment of which moneys are held pursuant to the provisions of the Indenture), with interest on such Bonds at their rate from the respective dates upon which they became due, in the order of their due dates, and, if the amount available shall not be sufficient to pay in full Bonds and any Parity Obligations due on any particular date, together with such interest, then to the payment ratably, according to the amount of principal and interest due on such date, to the persons entitled thereto without any discrimination or privilege. (b) If the principal of all the Bonds shall have become due or shall have been declared due and payable, all such moneys shall be applied to the payment of the principal and interest then due and unpaid upon the Bonds, with interest on overdue interest and principal, as aforesaid, without preference or priority over interest or of interest over principal or of any installment of interest over any other installment of interest, or of any Bonds over any other Bonds or any Parity Obligations, ratably, according to the amounts due respectively for principal and interest, to the persons entitled thereto without any discrimination or privilege. Whenever the Trustee shall apply such moneys (which shall not include the application of moneys upon the occurrence of any acceleration pursuant to the provisions thereof), it shall fix the date (which shall be an Interest Payment Date unless it shall deem another date more suitable) upon which date such application is to commence and upon such date interest on the amounts of principal and interest to be paid on such date shall cease to accrue. The Trustee shall give such notice as it may deem appropriate of the deposit with it of any such moneys and of the fixing of any such date and of the special record date in accordance with the Indenture thereof. The Trustee shall not be required to make payment to the Owner of any unpaid Bond until such Bond shall be presented to the Trustee for appropriate endorsement or for cancellation if fully paid. THE TRUSTEE; REGISTRARS Trustee; Duties, Removal and Resignation By executing and delivering the Indenture, the Trustee accepts the duties and obligations of the Trustee provided therein, but only upon the terms and conditions set forth in the Indenture. The Agency or the Owners of a majority in aggregate principal amount of all Bonds Outstanding may, by thirty (30) days prior written request, remove the Trustee initially a party thereto, and any A-33

90 successor thereto, and in such event, or in the event the Trustee resigns, the Agency shall appoint a successor Trustee, but any such successor shall be a bank or trust company authorized to exercise corporate trust powers in good standing and doing business and having an office in Los Angeles or San Francisco, California, having (or if such bank or trust company is a member of a bank holding company system, its bank holding company shall have) a combined capital (exclusive of borrowed capital) and surplus of at least Fifty Million Dollars ($50,000,000) and subject to supervision or examination by federal or state authority. If such bank or trust company publishes a report of condition at least annually, pursuant to law or to the requirements of any supervising or examining authority above referred to, then for the purposes of this section Trustee; Duties, Removal and Resignation, the combined capital and surplus of such bank or trust company shall be deemed to be its combined capital and surplus as set forth in its most recent report of conditions so published. The Trustee may at any time resign by giving written notice to the Agency and by giving to the Owners of Bonds notice by mailing a notice of such resignation to their addresses appearing in the Bond Register. Upon receiving any such notice of resignation, the Agency shall promptly appoint a successor Trustee by an instrument in writing; provided, however, that in the event that the Agency does not appoint a successor Trustee within thirty (30) days following receipt of such notice of resignation, the resigning Trustee may petition at the expense of the Agency an appropriate court having jurisdiction to appoint a successor Trustee or to resign. Subject to the prior sentence, any resignation or removal of the Trustee shall not become effective until written acceptance of appointment by the successor Trustee under the Indenture. Any Trustee which shall resign or be removed pursuant to this section shall be entitled to compensation in accordance with the Indenture and to reimbursement for all reasonable and proper expenses and advances incurred and not previously reimbursed for its activities in connection with the Indenture and for any indemnification due pursuant to the Indenture and not previously paid. Any Trustee which resigns or is removed, upon payment of its unpaid compensation and expenses thereunder, shall fully discharge all the right, title and interest of the retiring Trustee and amounts on deposit thereunder and a Reserve Facility shall vest in said successor Trustee, and such retiring Trustee shall promptly pay over, assign and deliver to the successor Trustee any money or other property on deposit pursuant thereto then held by such Trustee, and deliver any and all records, or copies thereof, in respect of the Trustee which it may have. Compensation of the Trustee The Agency shall pay from time to time, upon receipt of a statement, to the Trustee reasonable compensation for the Trustee s services and shall reimburse the Trustee for all its reasonable advances and expenditures incurred by it in the exercise and performance of its powers and duties under the Indenture. The lien of the Trustee on amounts held by it under the Indenture for its services rendered under the Indenture shall be superior to the rights of the Owners of Bonds to receive scheduled payments of principal of and interest on the applicable Bonds; provided that the Trustee shall have no lien on moneys in the Redemption Account. To the extent permitted by law, the Agency shall hold harmless and indemnify the Trustee for all claims, damages, costs, expenses and liabilities incurred by or asserted against the Trustee in the performance of its duties under the Indenture or any related document, including any such reasonable claims, damages, costs, expenses and liabilities incurred in the course of defending itself against any claims or actions or enforcing any remedies under the Indenture or any related document. Any such indemnity shall not extend to any claims, damages, costs, expenses or liabilities adjudicated to have been caused by the negligence or willful misconduct of the Trustee. The indemnification of the Trustee under the Indenture shall extend to its directors, officers, employees and agents. The obligations of the Agency A-34

91 under this section Compensation of the Trustee shall survive the payment of the Bonds, the discharge of the Indenture and/or any resignation or removal of the Trustee. Protection to Trustee To the extent permitted by law, the Agency shall indemnify, protect and hold the Trustee harmless and the Trustee shall incur no liability for acting upon any notice, resolution, consent, order, certificate, report, certificate, facsimile transmission, electronic mail or other paper or document reasonably believed by it to be genuine and to have been signed or presented by the proper party or parties. The Trustee, in its discretion, may consult with counsel, who may be counsel to the Agency, with regard to legal questions, and the advice or opinion of such counsel, in the absence of negligence or willful misconduct on the part of the Trustee, shall be full and complete authorization and protection in respect of any action taken or suffered by it under the Indenture in good faith in accordance therewith. Whenever in the administration of its duties under the Indenture, the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action under the Indenture, such matter (unless other evidence in respect thereof be specifically prescribed in the Indenture) may, in the absence of negligence or misconduct on the part of the Trustee, be deemed to be conclusively proved and established by the certificate of an Authorized Officer of the Agency and such certificate shall be full warranty to the Trustee for any action taken or suffered under the provisions of the Indenture upon the faith thereof, but in its discretion the Trustee may, in lieu thereof (but shall not be obligated to), accept other evidence of such matter. The Trustee may in good faith buy, sell, own, hold and deal in any of the Bonds issued pursuant to the Indenture, and may join in any action which any Owner may be entitled to take with like effect as if the Trustee were not a party to the Indenture. The Trustee and its affiliates, either as sponsor, advisor, principal or agent, may also engage in or be interested in any financial or other transaction with the Agency, and may act as depository, trustee, or agent for any committee or body of Owners of Bonds or other obligations of the Agency as freely as if it were not Trustee under the Indenture. The recitals, statements and representations contained in the Indenture or in the Bonds, save only the Trustee s authentication of the Bonds, shall be taken and construed as made by and on the part of the Agency, and not by the Trustee, and the Trustee does not assume, and shall not have, any responsibility or obligation for the correctness of any thereof. The Trustee shall not be deemed to make any representations with respect to the security afforded by the Indenture. The Trustee may execute any of the trusts or powers thereof and perform the duties required of it under the Indenture by or through attorneys, agents, or receivers, and shall be entitled to advice of counsel concerning all matters of trust and its duty under the Indenture and shall not be liable for the default or misconduct of any such party appointed with due care. The Trustee shall be fully reimbursed by the Agency for reasonable expenses incurred in connection with the performance of its obligations under the Indenture. Upon any default by, or misconduct of, any agent, attorney or receiver appointed by the Trustee, the Trustee shall fully pursue all remedies available to it against such attorney, agent or receiver, and the proceeds of the exercise of such remedies shall be used to reimburse the Agency for any loss it may have suffered as a result of the default or misconduct of such agent, attorney or receiver. Before taking any remedial action thereunder, the Trustee may require that a satisfactory indemnity certificate or other indemnity satisfactory to the Trustee be furnished for the reimbursement of all reasonable expenses to which it may be put and to protect it against all liability which may be incurred in connection with the taking of such action, except liability which is adjudicated to have resulted from its negligence or willful misconduct; provided, however, the Trustee shall not seek such indemnity (i) prior A-35

92 to making payments on the Bonds, (ii) as a precondition to effecting a mandatory redemption of Bonds or (iii) as a precondition to acceleration of the Bonds as provided therein. The Trustee, prior to the occurrence of an Event of Default, and after the curing or waiving of all Events of Default which may have occurred, undertakes to perform only such duties as are specifically set forth therein and no implied duties shall be read into this 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 the Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use in the conduct of such person s own affairs. The Trustee shall not be deemed to have knowledge of an Event of Default (except in connection with a failure of the Agency to make Debt Service Payments when due) until a Responsible Officer has actual knowledge thereof, or until notified in writing of such Event of Default. The Trustee shall have no responsibility with respect to any information, statement, or recital in any official statement, offering memorandum or any other disclosure material prepared or distributed with respect to the Bonds. No provision of the Indenture or any other document related thereto shall require the Trustee to risk or advance its own funds or otherwise incur any financial liability in the performance of its duties or the exercise of its rights thereunder. agents. The immunities extended to the Trustee also extend to its directors, officers, employees and The Trustee shall not be liable for any action taken or not taken by it in accordance with the direction of a majority (or other percentage provided for therein) in aggregate principal amount of Bonds outstanding affected thereby relating to the exercise of any right, power or remedy available to the Trustee. The permissive right of the Trustee to do things enumerated in the Indenture shall not be construed as a duty. The Trustee shall not be considered in breach of or in default in its obligations thereunder 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 terrorists, acts of a government, acts of the other party, fires, floods, epidemics, quarantine restrictions, strikes (by employees other than employees of the Trustee), 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 project, malicious mischief, 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. Payment Limited All payments to be made by the Trustee under and pursuant to the Indenture shall be made only from the corpus, income and proceeds of the amounts on deposit pursuant thereto and only to the extent that the Trustee shall have received sufficient contribution, income and proceeds in accordance with the terms of the Indenture. Under no circumstances shall the Trustee be liable in its individual capacity for the obligations evidenced by the Bonds. A-36

93 Merger or Consolidation Any company into which the Trustee may be merged or converted or with which it may be consolidated or any company resulting from any merger, conversion or consolidation to which it shall be a party or any company to which the Trustee may sell or transfer all or substantially all of its corporate trust business, provided that such company shall be eligible under the Indenture thereof, shall be the successor to the Trustee without the execution or filing of any paper or further act, anything therein to the contrary notwithstanding. Funds and Accounts The Trustee may establish such funds and accounts as it reasonably deems necessary or appropriate to perform its obligations thereunder. AMENDMENT OF OR SUPPLEMENT TO INDENTURE Amendment or Supplement The Indenture and the rights and obligations of the Agency and of the Owners of the Bonds may be modified or amended by the Agency at any time by the execution of a supplemental Indenture and with the written consent of the Owners of a majority in aggregate principal of the applicable Bonds, as applicable, then Outstanding, exclusive of Bonds disqualified as provided in the Indenture thereof. Any such supplemental Indenture shall become effective upon receipt of the consent of the requisite number of Owners of Bonds. No such modification or amendment shall (1) extend the date for payment of any principal of any Bond, or reduce the interest rate thereon, or otherwise alter or impair the obligation of the Agency to pay the principal thereof, or interest thereon, or any premium payable on the redemption thereof, at the time and place and at the rate and in the currency provided therein, without the written consent of the Owner of such Bond, (2) permit the creation by the Agency of any mortgage, pledge or lien upon the Debt Service Payments superior to or on a parity with the pledge and lien created for the benefit of the Bonds (except as expressly permitted by the Indenture), (3) reduce the percentage of Bonds, required for the affirmative vote or written consent to an amendment or modification, or (4) modify any of the rights or obligations of the Trustee without its written consent thereto. The Indenture and the rights and obligations of the Agency, of the Trustee and the Owners of the Bonds may also be modified or amended from time to time and at any time by a supplemental Indenture which the Agency and the Trustee may enter into without the consent of any Owners of Bonds, if the Trustee determines that the provisions of such supplemental Indenture shall not materially adversely affect the interests of the Owners of the Bonds, including, without limitation, for any one or more of the following purposes: (a) to add to the covenants and agreements of the Agency other covenants and agreements thereafter to be observed, to pledge or assign additional security for a Series of Bonds (or any portion thereof, as applicable), or to surrender any right or power therein reserved to or conferred upon the Agency; (b) 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 Agency may deem necessary or desirable; A-37

94 (c) to provide for the issuance of one or more Series of Additional Bonds, and to provide the terms and conditions under which such Series of Additional Bonds may be issued, subject to and in accordance with the provisions the Indenture; (d) to modify, amend or supplement the Indenture in such manner as to permit the qualification thereof under the Trust Indenture Act of 1939, as amended, or any similar federal statute hereafter in effect, and to add such other terms, conditions and provisions as may be permitted by said act or similar federal statute; or (e) to make such additions, as may be necessary or desirable to assure exemption from federal income taxation of interest on any Series of Bonds. In the event of any such amendment or supplement, copies of such amendment or supplement and any other documents relating thereto shall be provided by the Agency to Moody s and S&P (provided such rating agencies are currently rating the Bonds) at least five (5) days prior to the effective date thereof. The Trustee shall be entitled to receive and may conclusively rely upon an opinion of counsel to the effect that any supplement or amendment is authorized or permitted by the terms thereof. Disqualified Bonds Bonds owned or held by or for the account of the Agency shall not be deemed Outstanding for the purpose of any consent or other action or any calculation of Outstanding Bonds provided in this paragraph, and shall not be entitled to consent to or take any other action provided in the Indenture, and the Trustee may adopt appropriate regulations to require each Owner, before his or her consent provided for therein shall be deemed effective, to reveal if the Bonds as to which such consent is given are disqualified as provided in this paragraph. Rights of Agency Any rating agency from which the Agency has requested a rating and which is then providing a rating on the Bonds shall be provided a notice of any such amendment or supplement at least fifteen (15) days prior to its execution and effectiveness. DEFEASANCE Defeasance Any Outstanding portion of any Series of Bonds shall be paid and discharged in any one or more of the following ways: (a) by paying or causing to be paid the principal of and interest on such Bonds Outstanding, as and when the same become due and payable; (b) by irrevocably depositing with the Trustee, in trust, at or before maturity and having given notice of redemption (which redemption date shall be the first available redemption date) money which, together with the amounts then on deposit in the funds and accounts established pursuant to the Indenture is fully sufficient to pay any such Bonds Outstanding to such redemption date (which redemption date shall be the first available redemption date); or (c) by irrevocably depositing with the Trustee, in trust, non-callable Federal Securities in such amount which (i) will, together with amounts then on deposit in the funds and accounts established pursuant to the Indenture (except amounts on deposit in the applicable Account in the Rebate Fund) be A-38

95 sufficient to pay and discharge the indebtedness on all such Bonds (including the principal of and interest on, and premium, if any, thereof) at or before their respective maturity dates, or (ii) as an Independent Certified Public Accountant shall certify to the Trustee, will, together with the interest to accrue thereon and moneys then on deposit in the funds and accounts established pursuant to the Indenture, be fully sufficient to pay and discharge the indebtedness on any such Bonds Outstanding (including all principal of and interest on and redemption premiums, if any) at or before their respective maturity dates; and if such Bonds are to be redeemed prior to the maturity thereof notice of such redemption shall have been given as in the Indenture provided or provision satisfactory to the Trustee shall have been made for the giving of such notice, then notwithstanding that any such Bonds shall not have been surrendered for payment, the pledge of the applicable Debt Service Payments and other funds provided for in the Indenture and all other obligations of the Agency under the Indenture with respect to all such Bonds Outstanding shall cease and terminate, except only the obligation of the Agency to pay or cause to be paid to the Owners of such Bonds not so surrendered and paid all sums due thereon, and thereafter such Debt Service Payments, as applicable, shall not be payable to the Trustee. Notice of such election shall be filed with the Trustee. In the event of a refunding as described in paragraph (c) (ii) above, (i) the Agency shall cause to be delivered, on the deposit date and upon any reinvestment of the defeasance amount, a report of Independent Certified Public Accountant verifying the sufficiency of the escrow established to pay such Bonds in full on the maturity or redemption date (the Verification ), (ii) the escrow instructions shall provide that (A) substitution of a Federal Securities shall not be permitted except with another Federal Securities and upon delivery of a new Verification and (B) reinvestment of a Federal Securities shall not be permitted except as contemplated by the original Verification or upon delivery of a new Verification, and (iii) there shall be delivered a Favorable Opinion of Bond Counsel to the effect that such Bonds are no longer Outstanding under the Indenture. Each Verification and defeasance opinion shall be addressed to the Agency, the Trustee, the escrow agent, if any, and any other parties as are deemed appropriate by the Agency at the time of such refunding. In the event a forward purchase agreement will be employed in the refunding, (i) the Verification shall expressly state that the adequacy of the escrow to accomplish the refunding relies solely on the initial escrowed investments and the maturing principal thereof and interest income thereon and does not assume performance under or compliance with the forward supply contract, and (ii) the applicable escrow agreement shall provide that in the event of any discrepancy or difference between the terms of the forward supply contract and the escrow agreement (or the Indenture, if no separate escrow agreement is utilized), the terms of the escrow agreement or Indenture shall be controlling. Notwithstanding that some Bonds may not have been surrendered for payment, all obligations of the Agency and the Trustee under the Indenture with respect to such defeased Bonds shall cease and terminate, except only the obligation of the Trustee to pay or cause to be paid to the Owners of such Bonds all sums due thereon and the obligation of the Agency to indemnify and pay the Trustee in accordance with the Indenture thereof. Any funds held by the Trustee, at the time of one of the events described above in subsections (a), (b) or (c), which are not required for the payment to be made to Owners, or for payments to be made to the Trustee, by the Agency shall be paid over to the Agency pursuant to written instruction from an Authorized Officer of the Agency and delivery of a certificate of an Independent Certified Public Accountant that such funds are not required to be paid to the Owners. If a forward supply contract is employed in connection with the defeasance of any of the Bonds, (i) the verification report relating to the defeasance of such Bonds shall expressly state that the adequacy of the escrow to accomplish the defeasance relies solely on the initial escrowed investments and the maturing principal thereof and interest income thereon and does not assume performance under or compliance with the forward supply contract, and (ii) the applicable escrow agreement shall provide that A-39

96 in the event of any discrepancy or difference between the terms of the forward supply contract and the escrow agreement, the terms of the escrow agreement shall be controlling. In connection with the defeasance of any Bonds, the Agency will not exercise any optional redemption of Bonds secured by an escrow agreement or any other redemption other than mandatory sinking fund redemption unless (i) the right to make any such redemption has been expressly reserved in the escrow agreement and such reservation has been disclosed in detail in the official statement for the refunding Obligations, and (ii) as a condition of any such redemption, there shall be provided to the Trustee a verification of an Independent Certified Public Accountant as to the sufficiency of escrow receipts without reinvestment to meet the escrow requirements remaining following such redemption. Unclaimed Moneys Anything contained therein to the contrary notwithstanding but subject to the escheat laws of the State, any money held by the Trustee in trust for the payment and discharge of the interest on or principal of such Bonds which remains unclaimed for the lesser of the period ending one day prior to the date such money would escheat to the State or two (2) years after the date when the payments due on such Bonds have become payable, if such money was held by the Trustee at such date, or for the lesser of the period ending one day prior to the date such money would escheat to the State or two (2) years after the date of deposit of such money if deposited with the Trustee after the date when the interest on and principal of such Bonds have become payable, the Trustee shall pay such amounts to the Agency as its absolute property free from trust, and the Trustee shall thereupon be released and discharged with respect thereto and the Owners shall look only to the Agency for interest on and principal of such Bonds; provided, however, that before being required to make any such payment to the Agency, the Trustee may, at the expense of the Agency, cause to be published once a week for two (2) successive weeks in a financial newspaper a notice that such money remains unclaimed and that after a date named in such notice, which date shall not be less than thirty (30) days after the date of the first publication of such notice, the balance of such money then unclaimed will be returned to the Agency. MISCELLANEOUS Waiver of Personal Liability No board member, officer or employee of the Agency shall be individually or personally liable for the payment of the interest on or principal of the Bonds, but nothing contained therein shall relieve any board member, officer or employee of the Agency from the performance of any official duty provided by any applicable provisions of law or thereby. Investments (a) Amounts on deposit in any fund or account created pursuant to the Indenture shall be invested in Permitted Investments which will, as nearly as practicable, mature on or before the dates when such money is anticipated to be needed for disbursement thereunder, in accordance with such written directions as the Agency may from time to time provide to the Trustee. Investment directions shall be received at least two (2) Business Days prior to the date of making the investment. If no such direction has been received by the Trustee in sufficient time, in the judgment of the Trustee to comply with such instructions the Trustee may invest such amounts in Permitted Investments of the type described in paragraph (D) of the definition thereof. The Trustee and any affiliates may act as sponsor, advisor, principal or agent in the acquisition or disposition of any such investment. The Trustee shall not be liable or responsible for any loss suffered in connection with any such investment made by it under the terms of and in accordance with this section Investments. The Trustee may sell or present for prepayment or A-40

97 redemption any obligations so purchased whenever it shall be necessary in order to provide moneys to meet any payment of the funds so invested, and the Trustee shall not be liable or responsible for any losses resulting from any such investment sold or presented for prepayment or redemption. The Agency acknowledges that to the extent regulations of the Comptroller of the Currency or other applicable regulatory entity grant the Agency the right to receive brokerage confirmations of security transactions as they occur, the Agency will not receive confirmations to the extent permitted by law. The Trustee will furnish the Agency periodic cash transaction statements which include detail for all investment transactions made by the Trustee thereunder. The Agency may receive confirmations at no additional cost upon written request. The Trustee may make any investments thereunder through its own certificate or investment department or trust investment department, or those of its parent or any affiliate. Date. (b) Valuation shall occur not less often than immediately prior to each Interest Payment (c) Except for investment agreements and repurchase agreements, if at any time after investment therein a Permitted Investment ceases to meet the criteria set forth in the definition of Permitted Investments and such obligation, aggregated with other non-conforming investments, exceeds ten percent (10%) of invested funds, such Permitted Investment shall be sold or liquidated. A-41

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99 APPENDIX B LOS ANGELES COUNTY WATER WORKS DISTRICT NO. 40 The following information regarding the Los Angeles County Water Works District No. 40 (the District ) has been obtained from the District or publicly available sources deemed reliable, and has not been provided by the Agency or the Underwriter. This information is included because it may be relevant to an informed evaluation of the security for the 2016 Bonds. However, no assurance can be given that the financial or operational status of the District will not change. This information should not be construed to suggest that in the event of a default an action against the District is an available remedy to the 2016 Bond owners. General; Service Area The various regions of the District were consolidated into a single District in 1993 for the purpose of operating a water system (the Water System ). The District s service area comprises primarily the City of Lancaster and portions of the City of Palmdale and surrounding unincorporated communities. The District currently incorporates an area of approximately 147,000 acres in Los Angeles County (the County ) and contains primarily residential and commercial development. In 2015, the District had a population of approximately 208,000 and served 56,700 retail water service connections. The District is governed by the five-member County of Los Angeles Board of Supervisors, elected for 4- year terms. The primary facilities comprising the Water System, as of January 1, 2016, include 49 groundwater wells, 60 storage tanks, 30 pump stations, approximately 800 miles of water transmission and distribution mains, and related control and telemetry systems. Approximately 77% of District retail water demand is from residential users, all of which are billed based on individually metered water usage, with the remainder billed on a flat rate. The District s Water System is under the direction of Adam Ariki, the Assistant Deputy Director of Waterworks Division, and is operated by a staff of 165 full-time employees. The following Table B-1 summarizes the operation of the Water System for the past six Fiscal Years. B-1

100 TABLE B-1 LOS ANGELES COUNTY WATERWORKS DISTRICT NO. 40 SUMMARY OF OPERATIONS (As of June 30) Water Purchased (1) 30,905 45,127 34,927 31,103 33,064 27,423 23,311 Water Production (1) 27,282 8,616 11,471 19,756 19,992 23,769 21,753 Total Potable Water Available 58,187 53,742 46,398 50,859 53,056 51,193 45,064 Potable Water Sold Retail (1) Potable Water Sold Wholesale (1) Potable Water Sold Total Change from previous year Number of Service Connections (2) Residential Commercial Industrial Government Other 50, ,904 52,400 2, ,935 48, , % 52,285 2, ,840 45, , % 51,809 2, ,385 47, , % 52,203 2, ,792 49, , % 52,571 2, ,137 47, , % 52,881 2, ,416 42, , % 53,110 2, ,680 Total Change from previous year -0.2% -0.8% 0.7% 0.6% 0.5% 0.5% Population (3) 204, , , , , , ,654 Source: Los Angeles County Water Works District No. 40. (1) In acre-feet. (2) Excludes temporary meters (e.g., for construction). (3) Estimated. B-2

101 Service Connections Service connections in the Water System range in diameter from 3/4-inch to 8-inches. Approximately 100% of the District s retail customers are metered. The following table presents a summary of projected service connections for the current Fiscal Year. The District estimates that connections will increase by approximately 5% each year for the next four years. TABLE B-2 LOS ANGELES COUNTY WATERWORKS DISTRICT NO. 40 ACTIVE WATER SERVICE CONNECTIONS (As of January 1, 2015) Category Connections Residential 53,110 Commercial 2,725 Industrial 68 Government 754 Irrigation/Other 23 Total 56,680 Source: Los Angeles County Waterworks District No. 40. Water Sources and Supply; Water Purchases The District obtains water from two principal sources: groundwater and imported water. Historical production from each water source is summarized in Table B-3. The District has 49 groundwater production wells to augment its imported supply, which generally produce between 10,000 and 20,000 acre-feet per year. The total production capacity of all water facilities is currently approximately 15.7 million gallons per day ( mgd ), which is approximately 34% of the current average daily usage for the District of 46.6 mgd. The recent peak day demand, which occurred July 9, 2014, was 70 mgd. In 2015, the District met approximately 48% of its annual domestic water demands from groundwater supplies, and the remaining 52% was obtained from imported supplies. TABLE B-3 LOS ANGELES COUNTY WATERWORKS DISTRICT NO. 40 SUMMARY OF WATER PRODUCTION BY SOURCE (Acre-feet) Fiscal Year (June 30) Wells Imported Total Production ,615 45,126 53, ,470 34,927 46, ,756 31,102 50, ,991 33,064 53, ,769 27,423 51, ,753 23,311 45,064 Source: Los Angeles County Waterworks District No. 40. B-3

102 The District s existing 65.5 million gallons of storage capacity provides 1.5 days (based on average daily use) of emergency supplies. The District also maintains interconnections with Quartz Hill Water District that could provide water in the event of an emergency. Water Demand and Deliveries The District records the volume of water delivered by it. Over the past six years, the District has delivered, on average, 50,028 acre-feet of potable water. The average daily demand is approximately 126 acre-feet. The following table summarizes treated water deliveries for the most recent six Fiscal Years and the projection for Fiscal Year Fiscal Year (ending June 30) TABLE B-4 LOS ANGELES COUNTY WATER WORKS DISTRICT NO. 40 HISTORIC POTABLE WATER DELIVERIES (Fiscal Year) Total of Delivered Percent of 6 Year Average Change Over Previous Year , % , % , , , , , (1) 29,000 Source: Los Angeles County Waterworks District No. 40. (1) Estimated. Water System Rates and Charges General. The District periodically reviews water rates to determine if they are sufficient to cover operation and maintenance costs, capital improvement expenditures and debt service requirements. Neither the District nor the Water System is subject to the jurisdiction of, or regulation by, the California Public Utilities Commission or any other regulatory body in connection with the establishment of charges and fees related to the Water System. Pursuant to a Resolution of the Board of Supervisors adopted on November 17, 2015, the current rates and charges for potable water delivered within the District were established for each area served by the District. The rate schedule is available at This Internet address is included for reference only and the information on such Internet site is not a part of this Official Statement or incorporated by reference into this Official Statement. No representation is made in this Official Statement as to the accuracy or adequacy of the information contained on any Internet site. B-4

103 Largest Customers The following are the ten largest potable water customers of the Water System based on estimated consumption as of June 30, These same ten customers are also the highest customers by revenue due to their volume of water use. The top ten potable water users accounted for approximately 9.25% of total water consumption in calendar year TABLE B-5 LOS ANGELES COUNTY WATERWORKS DISTRICT NO. 40 TEN LARGEST WATER CUSTOMERS (Calendar Year 2015) Customer Calendar Year 2015 Consumption (1) Percent of Total Consumption (2) City of Lancaster % Antelope Valley UHS District City of Palmdale California State Prison Sunset Ridge Apartments LA County ISD Antelope Valley JT JR College Dist Friendly Village Lancaster Estates Boulders at the Ranchi TOTALS 3, % Source: Los Angeles County Waterworks District No. 40. (1) In acre-feet. (2) Water sales in Calendar Year 2015 of approximately 35,973 acre-feet and water supplied of approximately 38,400 acre-feet. Impact of State Budget The State Budget does not affect the District s budget. See RISK FACTORS Impact of State Budget herein. Historic Operating Results The following tables provide a summary of operating results of the Water System for the last five Fiscal Years. The District has two main sources of funding: General Fund and Accumulative Capital Outlay Fund ( ACO Fund ). The General Fund revenues are primarily from water sales and are used to pay for the administration, operation and maintenance of the District s water system. The ACO Fund revenues are primarily from standby charges, surcharges, and capital improvement charges and are used to pay for the replacement and upgrade of old and undersized water system infrastructure. The following summary of operating results is qualified in their entirety by reference to the District s annual community report. B-5

104 TABLE B-6 LOS ANGELES COUNTY WATERWORKS DISTRICT NO. 40 GENERAL FUND HISTORIC OPERATING RESULTS (Fiscal Year Ended June 30) Operating Revenues Water sales $29,261,761 $30,137,558 $34,065,519 $37,485,926 $36,378,416 $36,384,215 Standby charges 0 1,328, Construction advances 123,764 86, , ,439 93,944 84,598 Connection charges 392, , , , , ,983 Federal & state grants , , ,024 3,673 Miscellaneous 517, ,217 1,138, , , ,337 Total operating revenues $30,295,740 $32,075,784 $35,640,137 $38,488,241 $37,754,170 $37,305,806 Operating Expenses Water purchases $12,643,300 $10,744,609 $12,373,686 $13,471,862 $10,625,000 $9,127,380 Water treatment 81,943 27, , ,526 53,382 15,963 General and admin. 4,713,758 5,567,731 5,922,538 5,461,848 5,767,431 8,471,210 Customer Accts. 2,957,449 2,927,530 2,869,810 2,933,218 2,982,201 3,345,587 Operation 8,115,878 10,577,201 6,963,687 7,791,531 7,528,642 7,863,309 Power 1,454,095 1,714,059 2,400,000 2,327,746 2,787,359 3,283,931 Other 6,874,916 6,648,851 4,872,836 4,624,743 4,582,815 4,762,531 Total operating expenses $36,841,339 $38,207,330 $35,766,909 $36,888,474 $34,326,830 $36,869,911 Operating income (loss) (6,545,599) (6,131,546) (126,772) 1,599,767 3,427, ,895 Non-operating Revenues (Expenses) Interest income $237,176 $113,117 $60,188 $57,447 $70,100 $93,985 Property taxes and in-lieu 693, , , , , ,856 ABx26 residual transfers , Disaster assistance 10,274 9, Equity and operating transfers in 0 0 2,000, ,214 0 Water system facility construction 0 (4,901) Total nonoperating rev./exp. $940,868 $716,912 $2,680,312 $720,995 $706,161 $800,841 Net income (Loss) (5,604,731) (5,414,633) 2,553,540 2,320,762 4,133,502 1,236,736 Fund balance, beginning $14,103,000 $1,376,000 $2,300,000 $6,654,000 $7,515,000 $13,854,000 Reserve for encumbrances (4,530,525) (2,005,055) (1,317,044) (739,062) (635,056) (594,991) Reserve L/T Adv to JT FD 0 0 (63,303) General Reserve & Designations (5,508,303) (2,100,303) 0 (2,102,000) 0 0 Accrued Revenues 173, , Prior year s encumbrances/reserves 2,742,655 10,038,034 3,180,807 1,380,347 2,841, ,056 Fund balance, Ending $1,376,031 $2,299,659 $6,654,000 $7,515,000 $13,854,000 $15,131,000 Source: District annual community reports. B-6

105 TABLE B-7 LOS ANGELES COUNTY WATERWORKS DISTRICT NO. 40 ACO Fund HISTORIC OPERATING RESULTS (Fiscal Year Ended June 30) Operating Revenues Facility surcharge $1,480,830 ($99,557) $1,772,887 $1,977,949 $3,304,617 $1,807,087 Standby charges 1,149,083 1,163,776 1,140,970 1,229,684 1,302,012 1,206,143 Capital & System Improvement charges 518, , , , , ,236 Water supply reliability charges 792, , , , , ,486 Grants 211, , Miscellaneous 28,566 2,159 1,860 2,284 27,500 2 Total Operating Revenues $4,180,956 $2,103,867 $4,654,124 $5,000,740 $5,519,388 $3,696,954 Operating Expenses Water system facility construction $10,403,771 $18,638,873 $3,709,578 $3,141,420 $6,310,131 $1,395,525 Capital improvements 8,927,636 (28,237) 1,543, , , ,077 Administrative support 0 790,529 (790,529) 590, Miscellaneous 26,066 26,470 26,109 25,524 25,407 42,371 Total Operating Expenses $19,357,473 $19,427,635 $4,488,400 $4,554,878 $6,814,539 $1,783,973 Operating Income/(Loss) (15,176,517) (17,323,768) 165, ,862 (1,295,151) 1,912,981 Non-Operating Revenues (Expenses) Interest income $531,468 $355,415 $160,264 $126,083 $107,155 $139,052 Property taxes 703, , , , , ,829 ABx26 residual transfers Operating transfers out 0 0 (2,000,000) 0 0 3,102,653 Total Non-Operating Revenues/(Expenses) $1,234,990 $995,535 ($1,209,595) $810,007 $829,055 $3,953,534 Net Income (Loss) (13,941,527) (16,328,233) (1,043,871) 1,255,869 (466,096) $5,866,517 Fund Balance, Beginning $10,828,000 $17,861,000 $12,030,000 $14,157,000 $10,315,000 $17,540,000 Reserve for encumbrances (14,592,253) (4,007,557) (2,858,007) (5,365,254) (347,767) (5,984,977) Reserve for L/T loans received (135,805) (104,500) (82,511) General reserve & Designations (1,543,000) (2,000,000) 0 (2,673,000) 0 0 Accrued revenues (25,768) 338, Prior year s encumbrances/reserves ,767 Fund Balance, Ending $17,860,968 $12,030,197 $14,157,000 $10,315,000 $17,540,000 $17,769,000 Source: District annual community reports. B-7

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107 APPENDIX C AUDITED FINANCIAL STATEMENTS OF THE AGENCY FOR FISCAL YEAR

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109 ANTELOPE V ALLEY-EAST KERN WATER AGENCY COUNTY OF LOS ANGELES PALMDALE, CALIFORNIA AUDITED FINANCIAL STATEMENTS JUNE 30, 2015 BURKEY COX EV A.NS & BRADFORD Accountancy Corporation 1058 West Avenue M-14, Suite B Palmdale, CA 93551

110 ANTELOPE VALLEY-EAST KERN WATER AGENCY HISTORY, ORGANIZATION AND BOARD OF DIRECTORS JUNE 30, 2015 HISTORY AND ORGA-l'iIZATION The Antelope Valley-East Kern Water Agency (A VEK) was granted its charter as regional water agency by the California State Legislarure in In 1962 AVEK signed a water supply contract with the State to assure delivery of imported water through the State Water Project which includes the California Aqueduct System. A VEK covers a land area of nearly 2,300 square miles. In addition to Northern Los Angeles and Eastern Kern Counties, the Agency's boundaries include a small portion ofvenrura County. The water agency consists of seven divisions, each represented by a director. staggered terms by voters in the divisions in which they live. Directors are elected to four year BOARD OF DIRECTORS MEMBER OFFICE TERM EXPIRES Keith Dyas (Division 2) George M. Lane (Division 4) Robert A. Parris (Division 5) Marlon Barnes (Division 6) Shelley Sorsabal (Division I) Frank S. Donato (Division 3) Neil Weisenberger (Division 7) President January 2019 Vice President January 2017 Director January 2019 Director January 2017 Director January 2019 Director January 2019 Director January 2017 GENERAL MANAGER Daniel Flory FINANCE MANAGER Teresa Yates

111 ANTELOPE VALLEY-EAST KERN WATER AGENCY JUNE 30, 2015 TABLE OF CONTENTS Page No. FINANCIAL INFORMATION Independent Auditors' Report IV[anagement's Discussion and Analysis BASIC FINANCLA.L STATEMENT Comparative Statements of Net Position Comparative Statements of Revenues, Expenses and Changes in Net Position Comparative Statements of Cash Flows Notes to Financial Statements REQUIRED SUPPLEMENTARY INFORMATION Other Post Employment Benefit Plan - Schedule of Funding Progress 31 OTHER SUPPLEMENTARY INFORMATION Schedule of Revenues and Expenses - Proprietary Fund Type - Budget and Actual 32 OTHER INDEPENDENT AUDITORS' REPORT Independent Auditors' Report on Internal Control Over Financial Reporting and on Compliance and Otber Matters Based on an Audit of Financial Statements Performed In Accordance v.~th Governm ent Auditing Standards 33-34

112 FINANCIAL INFORMATION

113 BURKEY COX EVANS & BRADFORD 1058 WEST AVE'" M-14. s.. B PAlMCAlE. CAUFOIlNIA TEl: (661) FAX: (661) ACCOUNTANCY CORPORATION 425 WESI DOJMMOND AVENLl SunE A RIDGECREST. CAUfOllN" TEl: (760) FAX: (760) AVENOA E""", S. IE 120 C ARlSBAD. CAlIfOTlNIA TEL: (760) FAX: (760) Scorr EVANS. CPA CFP talpa A. BAAoFQRD, CPA HAROLD W, MANNING. CPA W IUlAM C. G lloirlst. CPA DAN T. SIANAElD. CPA leslie C. NEWQUISt CPA JENNIFER M. EVANS. CPA KENNETH S. EVANS. CPA JANETTE HENRIQUEZ, CPA KYlE UNDAMAN. CPA AUSTIN M. Ref, CPA INDEPENDENT AUDITORS' REPORT Board of Directors Antelope Valley-East Kern Water Agency Palmdale, California Report on tlte Financial Statements \\le have audited the accompanying fmancial statements of the business-type activities of Antelope Valley-East Kern Water Agency (the Agency) as of and for the year ended June 30,2015, aud the related notes to the fmancial statements, which collectively comprise the Agency's basic financial statements as listed in the table of contents. A1al1agement's Responsibility for the Fina"cial Statements.tvfanagement is responsible for the preparation and fair presentation of these frnancial statements in accordance \I.lith accowlting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. A uditor's Responsibility Our responsibility is to express opinions on these financial statements based on our audi t. \Ve conducted our audit in accordance with auditing standards generally accepted in the United States of An)erica and the standards applicable to fmancial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the fmancial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the frnancia l statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's intemal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accoun~ ing estimates made by management, as well as evaluating the overall presentation of the financial statements MEMBER: AMERICAN INSTITUTE AND CALIFORNIA SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS

114 BURKEY Cox EVANS & BRADFORD ACCOUNTANCY CORPORATION Antelope Valley-East Kern Water Agency Page 2 V./e believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opiniolls In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the business-type activities of the Agency, as of June 30, 2015, and the respective changes in financial position and cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of An,enca. Other Matters Required SuppJementQJy Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis and other post employment benefit plan - schedule of funding progress and budgetary comparison information on pages 3-7 and be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of flllancial reporting for placing the basic fmancial statements in an appropriate operational, econonllc, or historical context. \Ve have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the infonnation and comparing the information for consistency \vith management's responses to our inquiries, the basic financial statements, and other knmvledge \ve obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our repon dated October 15, 2015, on our consideration of the Agency's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reponing and compliance and the results of that testing, and not to provide an opinion on internal control over fmancial reporting or on compliance. That report is an integral part of an audit perfomled in accordance with Government Auditing Standards in considering the Agency's in,temal control over financial reporting and compliance. BURKEY COX EVANS & BRADFORD Accountancy Corporation Palmdale, Califomia October 15,

115 MANAGEMENT'S DISCUSSION AND ANALYSIS

116 Antelope Valley-East Kern Water Agency Management's Discussion and Analysis For the Years Ended J une 30, 2015 a nd 2014 The following Management's Discussion and Analysis (MD&A) of activities and financial perforn1ance of the Antelope Valley-East Kern Water Agency provides an introduction to the fmancial statements of the Agency for the fiscal years ended June 30, 2015 and Readers are encouraged to consider the information presented here in conjunction with the basic fmancial statements and related notes, which follow this section. Required Financial Statements TI1is aru1ual report consists of a series of financial statements. The Statement of Net Position, Statement of Revenues and Expenses and Statement of Cash Flows provide infom1ation about the activities and perfonnance of the Agency using accounting methods sinj.ilar to those used by private sector companies through the application of a single enterprise fund. The Statement of Net Position includes all of the Agency's investment in resources (assets) and the obligations to creditors (liabilities). TI1is infon113tion provides for the evaluation of the capital stmcture of the Agency and assesses its liquidity and financial flexibility. All of the CUlTent year's revenues and expenses are accoll1ted for in the Statement of Revenues, Expenses and Changes in Net Position. This statement measures the success of the Agency's operations over the past year and can be used to detemj.ine if the Agency has successfully recovered all of its costs through its rates and other charges. The fina l required financial statement is the Statement of Cash Flows, which provides inforn1ation about the Agency's cash receipts, cash payments and net changes in cash resulting from operations, investing, non-capital financing, and capital and related fmancing activities and provides answers to such questions as where did the cash come from, what was cash used for, and what was the change in cash balance during the reporting period. Notes to the Financial Statem ents The notes provide additional information that is essential to a full understanding of the data provided in the financial statements. The notes to the fmancial statements can be found umnediately followu1g the basic fmancial statements. Finan cial Analysis of the Agency The main question asked about the Agency's finances is, " is the Agency better off or worse off as a result of this year's activities?" The Statement of Net Position and the Statement of Revenues, Expenses and Changes in Net Position report inforn1ation about the Agency in a way that helps answer tl1is question. These statements are prepared using the accmal basis of accounting, wl1ich is sin1ilar to the accounting used by most private sector companies. TI1is accoul1ting method reports all of the current year's revenues and expenses regardless of when the cash is received or paid. These two statements report the Agency's net position and changes to it. The Agency's net position, the difference between assets and liabilities, is one way to measure its health and fmancial position. Over tin1e, increases or decreases in the Agency's net position can be an indicator of whether its fmancial health is improving or detelioratu1g keeping in mind other factors such as econon1ic conditions, population growth and changes in govemment regulations. Information presented in these statements follows in a condensed fom1at. 3

117 Antelope VaUey-East Kern Water Agency Condensed Statements of Net Position J une 30,2015 and 2014 June 30,2015 J une 30,2014 Change Assets: Current Assets - E:t:~295,749 ~155,803,775 ($':,lq,026) ~~ Non-Current Assets =- 1 -,--, 70,~_ 167,101'-- -=3,""0"' 08= Capital Assets, Net of Accumulated Depreciation 283,046, ,621,324 13,425,45 7 Total Assets 4?9,5 12, ,592,200 3,9?O, Liabilities: ----, Current Liabilities 10,541,450 Long:.Term Liabilities 141,620,599 Total Liabilitie s 152,162,049 7,533, ,547, ,081,023 3,008,155 (3,927,129) (918,974). Net.- Position: -- -~ ~ - ~-. Inv-,,-,~ed inc::"pj~alassets, Net of Related De~ _ 22_!.,401,781 Unrestricte_d 55,948,809 Total Net Position. 277,350,590 Total Liabilities and Net Position $429,512,639 _ 206, 141,3~4 66,369, ,5 11, ,592,200 15,:<60/1.57 _ (10,421,045) 4,839,412 3,920,439 Total Assets of the Agency exceeded Total Liabilities by $277,350,590 and $272,5 11,178 as ofjune 30,2015 and The Agency remains highly liquid as Current Assets represented 34.1 % and 36.6% of Total Assets as of June 30, 2015 and The chaj1 to the right displays the nature of Agency Total Assets as of June 30,2015. Total Liabilities decreased by $9 18,974 from $153,081,023 as of June 30, 2014 to $152,162,049 as ofjune 30, The majority of the Agency's Net Position reflects its investment in Capital Assets which was 79.8% as of June 30, 2015 and 75.6% as of June 30, Total Net Position increased by $4,839,412 from $272,511,178 as of June 30, 2014 to $277,350,590 as of June 30, Total Assets as of June 30, % II Cash & Investments II Receivables Inventory II Net Fixed Assets II Other Non Current 4

118 Antelope Valley-East Kern Water Agency Condensed Statements of Revenues and Expenses June 30, 2015 and 2014 June 30,2015 June 30,2014 Change._..Qperating Revenu~. --,$,:::2=2,602.~ _ $17,108,46_5 ~ 5,501~lO._.Qperating.Expenses. 16,070,740 17,987,496 (1,916,756) ~..~N:..:T.:e.: t _:In::::c:::o:::m=e...:fr=o ::m:..:::o:.!p:.::e:..:r.:a:::: ti.:o.::n:::. s...::6:.::, 5::.:3::.:9-",lc::5:.::5~ (879,031) 7,418,186 ~ precia tion Expe'o.: 1S"'e::..- ~_-_O=!p:.::e:..:r.:a== ting~i=n=c:..:o:.::m=e Non-Operations: Tax Revenues _ E et Investment Eanling"' s Other Non-Operating Revenues _ Stat Water Contract.1:~~e~ Interest Expel1Se Net Income from Non-O_peration~ Change In Net Position Net Position, Beginning of Year Net Position, End of Year 5,491,187 5,144, ,493 1,047,968 (6,023,725) 7,071,693._--_._-_._-- 24,441,225 24,003, ,527..:c.9.c:c 8J", -,::.c 925 2,047,482 (1,061,557) 1,225,242 9,444,836 (8,219,594L y 8,,± J,002L 01,9692~~L ( 493,47~) (4,397,946) (4,630,913) 232,967 3,791,444 12,895,575 (9,104,131) 4,839,412 6,871,850 (2,032,438) 272,511, ,639,328 6,871,850 $277,350,590 $272,511,178 $4,839,412 Total Revenues as of June 30, % 1.0% 3.5% \I Water Sales Irrigation Sales B Water Exchanges Tax Revenues Net Investment Earnin gs II Capacity Charges Operating Revenues increased by $5,501,430 from $17,108,465 as of June 30,2014 to $22,609,895 as of June 30, Tax Revenue for the year ending June 30, 2015 differed only slightly from the previous year increasing by 1.8%. Due to the volatile investment market Net Investment Earnings for the year ending June 30, 2015 decreased by 51.8% from the prior year. II Other Non Operating Revenues 5

119 Total Expenses except for depreciation for the year ending June 30, 2015 decreased by 4.1 % from the prior year. Total Expenses were $38,931,688 for the year ending June 30, 2015 and $40,587,937 for the year ending June 30,2014. Depreciation Expense for the year ending June 30, 2015 increased by 6.7% from the prior year. Depreciation Expense for the year ending Jnne 30, 2015 was $5,491,187 and $5,144,694 for the prior year. The State Water Contract increased by $493,474 from a total of$17,969,528 for the year ending June 30, 2014 to $18,463,002 for the year ending June 30, Total Expenses as of June 30, % Water Purchases Pumping, Treatment & Distribution II Administration & General II State Water Contract 11.4% II Depreciation m Interest I'l Other Budget Analysis The ongoing drought in California has resulted in a reduced water supply from the State Water Project for 2015 as well as reduced water usage due to conservation efforts. As a result, water and irrigation sales decreased for the year ending June 30,2015 from the prior year, however, the Agency was able to enter into two water exchange transactions which allowed the Agency to meet it's budgeted sales. Operating Revenues were over budget for the year ending June 30, 2015 by $1,507,895 and Non Operating Revenues were under budget by $3,609,738. For the year ending June 30, 2015, Operating Expenses were under budget by $2,674,073, while Non Operating Expenses were under budget by $4,038,552. TIllS difference was mainly due to the Cost of Water on water purchased from the State Water Project being over budgeted by $2,190,599 and the State Water Contract being over budgeted by $3,738,498. Capital Asset Administration Total Agency Capital Assets as of June 30, 2015 were $359,902,909 before the consideration of depreciation. The Agency's additions to Capital Assets for the year ending June 30,2015 were $18,916,644. Ofthese additions, new construction in progress for the year totaled $18,286,345, additions to furniture and equipment totaled $538,735, additions to utility plant totaled $79,064 and new land acquisitions totaled $1 2,500. Several projects including the Westside Waterbank Phase 1, Electric Vehicle Charging Stations and the 20" and N Turnout were completed in the current year and transferred out of construction in progress. Total Capital Assets net of Accumulated Depreciation increased to $283,046,781 as of June 30, 2015 from $269,621,324 at June 30,

120 Debt Administration Changes in long-tenn debt amounts for the fiscal year ended June 30, 2015 were as follows: Long-Term Debt COP Series 2007 A-I COP Series?008 A-I COP Series 2008 A-2 Total Long-Term Debt Balance. ~n :!pa l Bala!;,ce._ June 30,2014 Additions Payments June 30, ,11Q,2< >02 45,000,000 $139,180,000 $0 $3,590,000 21,190,000 45,000,000 $135,590,000 Changes in long-term debt amounts for the fisca l year ended June 30, 2014 were as follows :!:-ong-t~nn D..."b.!.. COP Series 2007 A-I COP Series 2008 A-I COP Series 2008 A-2 Total Lo~g-.!:r:n_ Debt B alance Pl~nc:!p.!l:1 June 30,2013 Additions Payments $66 J 660,000 ~,590,009_ 30,955,000 1,845,000 45,000,000 $142,615,000 $0 $3,435, " Balance June 30, _- $65,Q?Wl ,110,000 45,000,000 $139,180,000 The Agency did not incur any new debt in the fiscal years ended June 30, 2015 and Principal payments for the year ending June 30, decreased Long-Tenn Debt by $3,590,000 and by $3,435,000 for the year ending June 30, In addition to the debt listed above, the Agency has also accrued Long-Term Debt to meet its Post Employment Benefit Obligation. As of June 30, 2015 tills amount was $5,920,016, which was an increase from June 30, 2014 of $131,840 when the balance was $5,788,176. Conditions Affecting Current Financial Position Management is unaware of any conditions that would have a significant impact on the Agency's financial position, net position, or operating results in futme periods. Requests for Information TIllS financial report is designed to provide the Agency's funding sources, customers, and other interested parties with an overview of the Agency's financial operations and financial condition. Should the reader have questions regarding the infom1ation included in tllls report or wish to request additional financial infom1ation, please contact the Agency's Finance Manager at 6500 W. Avenue N, Palmdale, Califomia

121 BASIC FINANCIAL STATEMENTS

122 ANTELOPE VALLEY-EAST KERN WATER AGENCY COMP ARA TIVE STATEMENTS OF NET POSITION JUNE 30, 2015 WITH COMPARATIVE INFORMATION AS OF JUNE 30, 2015 ENTERPRlSE FUND ASSETS JUNE 30, 2015 JUNE 30, 2014 CURRENT ASSETS Cash and Cash Equivalents $ Investments Receivables: Taxes Interest Services Other Inventory Deposits and Prepaid Expenses T olal Current Assets NON-CURRENT ASSETS Property, Plant and Equipment, Net of Accumulated Depreciation OTHER NON-CURRENT ASSETS Investments - Restricted Total Other Non-Current Assets Total Non-Current Assets Total Assets 5,405,399 $ 3,873, ,261, ,988,491 4,212,895 4,843, , ,175 3,885,959 4,076,336 53, ,865 4,5 10,739 4,510,739 3,573,395 3,437, ,295, ,803, ,046, ,621, , , , , ,216, ,788, ,512, ,592,200 LIABILITIES CURRENT LIABILITIES Accounts Paytble Accrued Liabilities Current Portion of Long-Terrn Debt Collections in Advance on Projects Compensated Absences Escheated Funds Tolal Current Liabilities LONG-TERM LIABILITIES Payable from Restricted Assets Post Employment Benefit Liability Certificates of Participation, Series 2007 A- I Certificates of Participation, Series 2008A- I Certificates of Participation, Series 2008A-2 Total Long-Term Liabilities Total Liabilities NET POSITION Invested in Capilal Assets, Net of Related Debt Uruestricted Total Net Position $ 4,739,015 2,519, , ,956 3,750,000 3,435, , , , ,172 42,155 42, ,541,450 7,533,295 3,860,583 4,014,552 5,920,016 5,788,176 61,645,000 63,480,000 25,195,000 27,265,000 45,000,000 45,000, ,620, ,547, , 162, ,081, ,40 1, ,141,324 55,948,809 66,369, ,350,590 $ 272,511,178 See accompanying notes to financial statemellts

123 ANTELOPE VALLEY-EAST KERN WATER AGENCY COMP ARA TIVE STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION FOR THE YEAR ENDED JUNE 30, 2015 WITH COMPARATIVE INFORMATION AS OF JUNE 30, 2014 OPERATING REVEl\'UES Water Sales $ Irrigation Sales Total Operating Revenues ENTERPRISE FUND JUNE 30, 2015 JUNE 30, ,892,317 $ 15,793,887 1,717,578 1,314,578 22,609,895 17,108,465 OPERATING EXPENSES Water Purchases Pumping Water Treatment Transmission and Distribution Customer Accounts Administration and General Groundv.'ater Sun'ey Conservation Depreciation Total Operating Expenses Operating Income (Loss) NON-OPERATING REVENUES Tax Revenues Net Investment Earnings Other Revenues Capacity Charges Total Non-Operating Revenues NON-OPERATING EXPENSES State Water Contract Interest Expense Total Non-Operating Expenses Non-Operating Income Increase (Decrease) in Net Position NET POSITION - BEGINNING OF YEAR NET POSITION - END OF YEAR $ 3,584,851 4,971,50 1 1,927,029 1,257,275 4,693,420 4,585, , , ,081,003 7,042,624 65, ,676 5,491,187 5,144,694 21,561,927 23,132,190 1,047,968 (6,0 23,725) 24,441,225 24,003, ,925 2,047, ,846 8,835, , ,286 26,652,392 35,496, ,463,002 17,969,528 4,397,946 4,630, ,860,948 22,600,44 1 3,791,444 12,895,575 4,839,412 6,871, ,51 1, ,639, ,350,590 $ 272,511,178 St::t: al:companying notes to flllancial statements

124 ANTELOPE VALLEY-EAST KERN WATER AGENCY COMPARATIVE STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 2015 WITH COMPARATIVE INFORMATION AS OF JUNE 30, 2014 CASH FLOWS FROM OPERATING ACTIVITIES Cash Received from Customers Cash Paid for Supplies to Suppliers Cash Paid to Employees Net Cash Provided (Used) by Operating Activities ENTERPRISE FUND JUNE 30, 2015 JUNE 30, 2014 $ 23,360, 165 (9,534,304) (3,847,658) 9,978,203 $ 19,6 15,028 (17,101,523) (1,715,838) 797,667 CASH FLOWS FROM NON-CAPITAL AND RELATED FINANCING ACTIVITIES Receipt of Property Taxes 25,072,311 Receipt of Capacity Charges and Other Revenue 1,225,242 Payment of State Water Contract (18,463,002) Net Cash Provided (Used) by Non-Capital and Related Financing Activities 7,834,551 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Acquisition of Property and Equipment (18,916,644) Principal Repayment of Bonds Payable (3,590,000) Payment of Restricted Debt and Projects (153,969) Net Cash Provided (Used) by Capital and Related Financing Activities (22,660,613) 24,761,282 9,444,836 (17,969,528) 16,236,590 (16,425,928) (3,435,000) 126,780 (19,734,148) CASH FLOWS FROM INVESTING ACTIVITIES Receipt of Interest and Investment Income Payment of Interest Expense Disposition oflnvestments Net Cash Provided (Used) by Investing Activities 1,054,578 (4,397,946) 9,723,6 16 6,380,248 2,060,389 (4,630,913) 3,612,100 1,041,576 Net Change in Cash and Cash Equivalents Cash and Cash Equivalents - Beginning Cash and Cash Equivalents - Ending $ 1,532,389 3,873,010 5,405,399 $ (1,658,315) 5,53 1,325 3,873,010 See accompanying notes to fmancial statements

125 ANTELOPE VALLEY-EAST KERN WATER AGENCY STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 2015 WITH COMPARATIVE INFORMATION AS OF JUNE 30, 2014 RECONCILIATION OF OPERATING INCOME (LOSS) TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES Operating Income (Loss) $ Adjustments to Reconcile Operating Income (Loss) to Net Cash Provided (Used) by Operating Activities: Depreciation Changes in Assets - (Increase)/Decrease in: Services Receivable Other Receivables Inventorf Deposits and Prepaid Expenses Changes in Liabilities - Increase/(Decrease) in: Account; Payable Accrued Liabilities Compensated Absences Collections in Advance on Projects Other Postemployment Benefit Obligations Net Cash Provided (Used) by Operating Activities $ ENTERPRISE FUND JUNE 30, 2015 JUNE 30, ,047,968 $ (6,023,725) 5,491,187 5,144, ,377 3,066, ,893 (559,893) (3,576) (136,217) 23 1,7 11 2,219,084 (3,303,309) 404,967 22,363 67, , 158 2, , ,840 1,956,510 9,978,203 $ 797,667 See accompanying notes to fmancial statements

126 NOTES TO THE FINANCIAL STATEMENTS

127 ANTELOPE VALLEY-EAST KERN WATER AGENCY NOTES TO FINANCIAL STATEMENTS JUNE 30, 2015 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Antelope Valley-East Kern Water Agency's (the Agency) financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) as applied to governmental units. The Governmental Accounting Standards Board (GAS B) is the accepted standard-setting body of establishing governmental accounting and financial reporting principles. The more significant of the Agency's accounting policies are described below. A. Description of the Reporting Entity The Antelope Valley-East Kern Water Agency was fornled by the California Legislature in 1959 to supply local water users, as a wholesaler, with water from the State \Vater Project. The Agency derives its powers from the Antelope Valley-East Kern Water Agency Law, as set forth in Section inclusive of Act 9095 of Water Uncodified Acts of the State of California. The Agency serves portions of Los Angeles, Kern and Ventura Counties. In evaluating how to defme the Agency, for financial repoliing purposes, management has considered all potential component units. The decision to include a potential component unit in the reporting entity was made by applying the criteria set forth in GAAP. The basic - but not the only - criterion for including a potential component unit within the reporting entity is the governing body's ability to exercise oversight responsibility. The most significant manifestation of this ability is fmancial interdependency. Other manifestations of the ability to exercise oversight responsibility include~ but are not limited to, the selection of governing authority, the designation of management, the ability to significantly influence operations and accountability for fiscal matters. The other criterion used to evaluate potential component units for inclusion or exclusion from the reporting entity is the existence of special financing relationships, regardless of whether the Agency is able to exercise oversight responsibilities. Based upon the application of these criteria the Agency has no potential component units. The Antelope Valley-East Kern Water Agency, for financial purposes, includes all funds relevant to the operations of the Agency. The Board of Directors has governance responsibilities over all activities related to the Agency. The District receives funding from local, county, state and federal govemment sources and must comply with the requirements of these funding source entities. However, the Agency is not included in any other governmental "reporting entity" as defined in Section 2100, Codification of Governmental Accounting and Financial Reporting Standards, since board members are elected by the public and have decision making authority, the power to designate management, the responsibility to significantly influence operations and primary accountability for fiscal matters. B. Basis of Accounting and Measurement Focus The Agency reports its activities as an enterprise fund, which is used to account for operations that are financed and operated in a manner similar to a private business enterprise, where the intent of the Agency is that the costs of providing \vater to its customers on a continuing basis be fmanced or recovered primarily through user charges from water sales and services. Revenues and expenses are recognized on the full accrual basis of accounting. Revenues are recognized in the accounting period in which they are earned and expenses are recognized in the period incurred, regardless of when the cash flows take place. Operating revenues, such as water sales and service fees, result from exchange transactions associated with the principal activities of the Agency. Exchange transactions are those in which each party receives and gives up essentially equal values. Non-operating revenues, such as grant funds and investment income, result from nollexchange transactions, in which, the Agency gives or receives value without directly receiving or giving value in exchange