$11,780,000 CITY OF PASADENA, CALIFORNIA ELECTRIC REVENUE REFUNDING BONDS, 2012A SERIES

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1 NEW ISSUE FULL BOOK-ENTRY ONLY Ratings: Fitch: AA S&P: AA- (See RATINGS herein) In the opinion of Fulbright & Jaworski L.L.P., Bond Counsel, under existing law interest on the 2012A Bonds is exempt from personal income taxes of the State of California and, assuming compliance with the tax covenants described herein, interest on the 2012A Bonds is excluded pursuant to section 103(a) of the Internal Revenue Code of 1986 from the gross income of the owners thereof for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax. See TAX MATTERS herein for a description of certain other tax considerations. $11,780,000 CITY OF PASADENA, CALIFORNIA ELECTRIC REVENUE REFUNDING BONDS, 2012A SERIES Dated: Date of Delivery Due: June 1, as shown on the inside cover This cover page contains certain information for general reference only. It is not intended to be a summary of the security or terms of this issue. Investors are advised to read the entire Official Statement to obtain information essential to the making of an informed investment decision. Capitalized terms used on this cover page not otherwise defined shall have the meanings set forth herein. The $11,780,000 aggregate principal amount of City of Pasadena, California Electric Revenue Refunding Bonds, 2012A Series (the 2012A Bonds ) is being issued for the purpose of providing moneys to (i) refund a portion of the City s outstanding Electric Revenue Bonds, 2002 Series (the Refunded 2002 Bonds ), (ii) refund a portion of the City s outstanding Electric Revenue Bonds, 2003 Series (the Refunded 2003 Bonds and, together with the Refunded 2002 Bonds, the Refunded Bonds ), (iii) fund a deposit to the Parity Reserve Fund and (iv) pay the costs of issuance of the 2012A Bonds. See PLAN OF REFUNDING herein. The 2012A Bonds are being issued pursuant to an Electric Revenue Bond Fiscal Agent Agreement, dated as of August 1, 1998, by and between the City of Pasadena, California (the City ) and The Bank of New York Mellon Trust Company, N.A., as successor fiscal agent (the Fiscal Agent ), as amended and supplemented, including as amended and supplemented by a Seventh Supplement to Electric Revenue Bond Fiscal Agent Agreement, dated as of October 1, 2012, by and between the City and the Fiscal Agent (collectively, the Fiscal Agent Agreement ). The 2012A Bonds are being issued in fully registered form, and, when issued, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ( DTC ). DTC will act as securities depository of the 2012A Bonds. Beneficial ownership interests in the 2012A Bonds may be purchased in bookentry form only in denominations of $5,000 principal amount or any integral multiple thereof. Interest on the 2012A Bonds will be payable semiannually on June 1 and December 1 of each year, commencing December 1, Payments of principal of, premium, if any, and interest on, the 2012A Bonds will be paid by the Fiscal Agent to DTC, which is obligated in turn to remit such principal, premium, if any, and interest to its participants for subsequent disbursement to the beneficial owners of the 2012A Bonds. The 2012A Bonds are not subject to redemption prior to maturity. The 2012A Bonds are an obligation payable only from the Net Income of the Electric System in the Light and Power Fund of the City and certain other funds as provided in the Fiscal Agent Agreement. The 2012A Bonds are secured by a pledge of and lien upon Net Income of the Electric System on a parity with other obligations of the Electric System payable from Net Income of the Electric System and issued from time to time pursuant to the terms of the Fiscal Agent Agreement. Upon the issuance of the 2012A Bonds and the refunding of the Refunded Bonds, in addition to the 2012A Bonds, the City will have $128,475,000 principal amount of parity obligations outstanding payable from Net Income of the Electric System pursuant to the terms of the Fiscal Agent Agreement. The general fund of the City is not liable for the payment of any 2012A Bonds, any premium thereon upon redemption prior to maturity or their interest, nor is the credit or taxing power of the City pledged for the payment of any 2012A Bonds, any premium thereon upon redemption prior to maturity or their interest. The Owner of any 2012A Bond shall not compel the exercise of the taxing power by the City or the forfeiture of any of its property. The principal of and interest on any 2012A Bonds and any premiums upon the redemption of any thereof prior to maturity are not a debt of the City nor a legal or equitable pledge, charge, lien or encumbrance upon any of its property or upon any of its income, receipts or revenues, except the Net Income and other funds, security or assets which are pledged to the payment of the 2012A Bonds, interest thereon and any premiums upon redemption pursuant to the Fiscal Agent Agreement. The 2012A Bonds were sold to Citigroup Global Markets Inc. (the Initial Purchaser ) pursuant to competitive bidding on September 24, The 2012A Bonds will be offered when, as and if issued, sold and received by the Initial Purchaser, subject to the approval of Fulbright & Jaworski L.L.P., Los Angeles, California, Bond Counsel, and certain other conditions. Public Resources Advisory Group, Los Angeles, California, is serving as Financial Advisor to the City in connection with the issuance of the 2012A Bonds. Certain legal matters will be passed upon for the City by Fulbright & Jaworski L.L.P., Los Angeles, California, Disclosure Counsel, and by Michele Beal Bagneris, City Attorney of the City. It is anticipated that the 2012A Bonds in definitive form will be available for delivery to DTC in New York, New York by Fast Automated Securities Transfer (FAST) on or about October 4, September 24, 2012

2 $11,780,000 CITY OF PASADENA, CALIFORNIA ELECTRIC REVENUE REFUNDING BONDS, 2012A SERIES MATURITY SCHEDULE Maturity Date (June 1) Principal Amount Interest Rate Yield CUSIP $3,830, % 0.22% NG , NH , NJ , NK , NL , NM , NN , NP , NQ ,835, NR2 CUSIP is a registered trademark of The American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, managed by Standard & Poor s Financial Services LLC on behalf of The American Bankers Association. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. None of the City, PWP or the Initial Purchaser shall be responsible for the selection or correctness of the CUSIP numbers set forth herein.

3 CITY OF PASADENA CITY COUNCIL Bill Bogaard, Mayor Margaret McAustin, Vice-Mayor Victor M. Gordo, Council Member Chris Holden, Council Member Steven G. Madison, Council Member Gene Masuda, Council Member Jacque Robinson, Council Member Terry Tornek, Council Member CITY STAFF Michael J. Beck, City Manager Andrew Green, Director of Finance Vicken Erganian, Treasurer and Deputy Director of Finance CITY ATTORNEY Michele Beal Bagneris PASADENA WATER AND POWER STAFF Phyllis E. Currie, General Manager Eric Klinkner, Assistant General Manager Shari M. Thomas, Assistant General Manager for Finance, Administration and Customer Service Gurcharan Bawa, Assistant General Manager for Power Supply Joe Awad, Assistant General Manager for Power Delivery Shan Kwan, Assistant General Manager for Water Delivery FINANCIAL ADVISOR Public Resources Advisory Group Los Angeles, California BOND COUNSEL AND DISCLOSURE COUNSEL Fulbright & Jaworski L.L.P. Los Angeles, California FISCAL AGENT The Bank of New York Mellon Trust Company, N.A. Los Angeles, California VERIFICATION AGENT Causey Demgen & Moore Inc. Denver, Colorado INDEPENDENT AUDITOR Brown Armstrong Accountancy Corporation Pasadena, California

4 No dealer, broker, salesperson or other person has been authorized by the City to give any information or to make any representations, 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 any of the foregoing. 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 2012A Bonds in any jurisdiction in which such offer, solicitation or sale would be unlawful. This Official Statement is not to be construed as a contract with the purchasers of the 2012A Bonds. Statements contained in this Official Statement involving any estimates, forecasts or matters of opinion, whether or not expressly so stated, are intended solely as such and not as a representation of fact. The information set forth herein has been furnished by the City and other sources which are believed to be reliable, but is not guaranteed as to accuracy or completeness. The information and expressions of opinions herein are subject to change without notice and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the City or the Electric System since the date hereof. IN CONNECTION WITH THE OFFERING OF THE 2012A BONDS, THE INITIAL PURCHASER MAY OVER-ALLOT OR EFFECT TRANSACTIONS THAT MAY STABILIZE OR MAINTAIN THE MARKET PRICE OF SUCH 2012A 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 INITIAL PURCHASER IN CONNECTION WITH ANY REOFFERING MAY OFFER AND SELL THE 2012A BONDS TO CERTAIN DEALERS, INSTITUTIONAL INVESTORS AND OTHERS AT PRICES LOWER THAN THE PUBLIC OFFERING PRICES STATED ON THE INSIDE COVER PAGE HEREOF AND SUCH PUBLIC OFFERING PRICES MAY BE CHANGED FROM TIME TO TIME BY THE INITIAL PURCHASER. CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS IN THIS OFFICIAL STATEMENT Certain statements included or incorporated by reference in this Official Statement constitute forward-looking statements. Such statements are generally identifiable by the terminology used such as plan, expect, estimate, budget or other similar words. The achievement of certain results or other expectations contained in such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The City does not plan to issue any updates or revisions to those forwardlooking statements if or when its expectations or events, conditions or circumstances on which such statements are based occur.

5 TABLE OF CONTENTS Page INTRODUCTION... 1 Purpose... 1 Authority for Issuance... 1 The City... 1 Security and Sources of Payment for the 2012A Bonds... 2 Parity Reserve Fund... 2 Rate Covenant... 3 Other Matters... 3 PLAN OF REFUNDING... 3 ESTIMATED SOURCES AND USES OF FUNDS... 5 THE 2012A BONDS... 5 General... 5 No Redemption... 5 SECURITY AND SOURCES OF PAYMENT FOR THE 2012A BONDS... 5 General... 5 Rate Covenant... 6 The Light and Power Fund... 7 Parity Reserve Fund... 8 Additional Bonds Investment of Funds Limitations on Remedies PASADENA WATER AND POWER THE ELECTRIC SYSTEM OF PWP General Valuation of Electric System Facilities Power Supply Resources City-Owned Generating Facilities Joint Powers Agency Generation and Fuel Resources/Remote Ownership Interests Purchased Power Renewable Resources Fuel Supply Transmission Resources Inter-Utility Sales Transactions Interconnections and Distribution Facilities Employees Insurance Electric Rates and Charges Reserve Policies Customers, Energy Sales and Revenues Capital Requirements Indebtedness and Joint Agency Obligations Historical Operating Results and Debt Service Coverage Condensed Balance Sheet Electric System Initiatives i

6 TABLE OF CONTENTS (continued) RATE REGULATION DEVELOPMENTS IN THE CALIFORNIA ENERGY MARKETS Background; California Electric Market Deregulation City s Response to Market Deregulation Direct Access State Legislation Future Regulation Impact of Developments on the City OTHER FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY Federal Energy Legislation Environmental Issues Other Factors CONSTITUTIONAL LIMITATIONS ON GOVERNMENTAL SPENDING Articles XIIIC and XIIID of the State Constitution Proposition Other Initiatives RATINGS TAX MATTERS LITIGATION AUDITED FINANCIAL STATEMENTS FORWARD-LOOKING STATEMENTS VERIFICATION OF MATHEMATICAL COMPUTATIONS FINANCIAL ADVISOR CERTAIN LEGAL MATTERS PURCHASE AND REOFFERING CONTINUING DISCLOSURE EXECUTION AND DELIVERY Page APPENDIX A THE CITY OF PASADENA... A-1 APPENDIX B AUDITED FINANCIAL STATEMENTS OF PASADENA WATER AND POWER ENTERPRISE FUNDS FOR THE FISCAL YEAR ENDED JUNE 30, B-1 APPENDIX C BOOK-ENTRY SYSTEM... C-1 APPENDIX D SUMMARY OF CERTAIN PROVISIONS OF THE FISCAL AGENT AGREEMENT... D-1 APPENDIX E FORM OF CONTINUING DISCLOSURE AGREEMENT... E-1 APPENDIX F PROPOSED FORM OF OPINION OF BOND COUNSEL... F-1 ii

7 OFFICIAL STATEMENT $11,780,000 CITY OF PASADENA, CALIFORNIA ELECTRIC REVENUE REFUNDING BONDS, 2012A SERIES INTRODUCTION This Introduction is subject in all respects to the more complete information contained elsewhere in this Official Statement and the offering of the City of Pasadena, California Electric Revenue Refunding Bonds, 2012A Series to potential investors is made only by means of the entire Official Statement. Capitalized terms used in this Official Statement and not otherwise defined herein shall have the respective meanings assigned to them in the Fiscal Agent Agreement. Purpose The purpose of this Official Statement, which includes the cover page and Appendices hereto, is to set forth certain information in connection with the issuance and sale by the City of Pasadena, California (the City ) of $11,780,000 aggregate principal amount of its Electric Revenue Refunding Bonds, 2012A Series (the 2012A Bonds ). The 2012A Bonds are being issued for the purpose of providing moneys, together with certain other available funds, to (i) refund a portion of the City s outstanding Electric Revenue Bonds, 2002 Series (the Refunded 2002 Bonds ), (ii) refund a portion of the City s outstanding Electric Revenue Bonds, 2003 Series (the Refunded 2003 Bonds and, together with the Refunded 2002 Bonds, the Refunded Bonds ), (iii) fund a deposit to the Parity Reserve Fund and (iv) pay the costs of issuance of the 2012A Bonds. See PLAN OF REFUNDING. Authority for Issuance The 2012A Bonds are authorized and will be issued pursuant to Article XIV of the Charter of the City, as amended (the Charter ), an Ordinance adopted by the City Council of the City (the City Council ) on August 13, 2012, and an Electric Revenue Bond Fiscal Agent Agreement, dated as of August 1, 1998, by and between the City and The Bank of New York Mellon Trust Company, N.A. (successor to BNY Western Trust Company), as fiscal agent (the Fiscal Agent ), as amended and supplemented, including as amended and supplemented by a Seventh Supplement to Electric Revenue Bond Fiscal Agent Agreement, dated as of October 1, 2012, by and between the City and the Fiscal Agent (collectively, the Fiscal Agent Agreement ). All Electric Revenue Bonds issued pursuant to the Fiscal Agent Agreement are collectively referred to herein as the Bonds. The City The City is a charter city of the State of California (the State ), comprising approximately 23 square miles, located in Los Angeles County in the northwestern portion of the San Gabriel Valley. See APPENDIX A THE CITY OF PASADENA herein. The City owns and operates a municipal electric public utility (the Electric System ), established by the Charter. The Electric System is managed and controlled by Pasadena Water and Power ( PWP ) and supplies electricity to virtually all of the electric customers within the City limits. For the Fiscal Year ended June 30, 2012, the City estimates there were 64,151 customers of the Electric System, comprised of 55,497 residential customers, 8,651 commercial and industrial customers, and 3 street lighting and traffic signals customers, the total quantity of energy generated and purchased was 1,396,117 megawatt hours ( MWh ), and the peak demand was 307 megawatts ( MW ). 1

8 Security and Sources of Payment for the 2012A Bonds The 2012A Bonds are an obligation payable only from the Net Income of the Electric System in the Light and Power Fund of PWP (the Light and Power Fund ) and amounts in the Parity Reserve Fund as provided in the Fiscal Agent Agreement. The 2012A Bonds are secured by a pledge of and lien upon Net Income of the Electric System on a parity with other obligations of the Electric System issued from time to time pursuant to the terms of the Fiscal Agent Agreement payable from Net Income of the Electric System and a pledge of amounts in the Parity Reserve Fund. Upon the issuance of the 2012A Bonds and the refunding of the Refunded Bonds, in addition to the 2012A Bonds, the City will have outstanding $5,000 principal amount of its Electric Revenue/Refunding Bonds, 1998 Series (the 1998 Bonds ), $3,535,000 principal amount of its Electric Revenue Bonds, 2002 Series (such unrefunded portion being referred to as the 2002 Bonds ), $495,000 principal amount of its Electric Revenue Bonds, 2003 Series (such unrefunded portion being referred to as the 2003 Bonds ) $53,975,000 principal amount of its Electric Revenue Bonds, 2008 Series (the 2008 Bonds), $34,740,000 principal amount of its Electric Revenue Refunding Bonds, 2009 Series (the 2009 Bonds ) and $35,725,000 principal amount of its Electric Revenue Refunding Bonds, 2010A Series (the 2010A Bonds, and together with the 1998 Bonds, the unrefunded 2002 Bonds, the unrefunded 2003 Bonds, the 2008 Bonds and the 2009 Bonds, the Outstanding Bonds ). See SECURITY AND SOURCES OF PAYMENT FOR THE 2012A BONDS Parity Reserve Fund and Additional Bonds. The 2012A Bonds are limited obligations of the City and are not secured by a legal or equitable pledge of, or charge or lien upon, any property of the City or any of its income or receipts, except the Net Income of the Electric System. Neither the full faith and credit nor the taxing power of the City is pledged to the payment of the principal of, premium, if any, or interest on the 2012A Bonds. No tax or other source of funds, other than the Net Income of the Electric System, is pledged to pay the principal of, premium, if any, or interest on the 2012A Bonds. Neither the payment of the principal of, nor the interest on, the 2012A Bonds constitutes a debt, liability or obligation of the City for which the City is obligated to levy or pledge any form of taxation or for which it has levied or pledged any form of taxation. The general fund of the City (the General Fund ) is not liable for the payment of any 2012A Bonds, any premium thereon upon redemption prior to maturity or their interest, nor is the credit or taxing power of the City pledged for the payment of any 2012A Bonds, any premium thereon upon redemption prior to maturity or their interest. No Owner of any 2012A Bond shall compel the exercise of the taxing power by the City or the forfeiture of any of its property. The principal of and interest on any 2012A Bonds and any premiums upon the redemption of any thereof prior to maturity are not a debt of the City nor a legal or equitable pledge, charge, lien or encumbrance upon any of its property or upon any of its income, receipts or revenues, except the Net Income and other funds, security or assets which are pledged to the payment of the 2012A Bonds, interest thereon and any premiums upon redemption pursuant to the Fiscal Agent Agreement. Parity Reserve Fund Pursuant to Section 1413 of Article XIV of the Charter, the City has established the Parity Reserve Fund. The Parity Reserve Fund is required to be maintained in an amount equal to the Reserve Fund Requirement so long as any Bonds or Parity Obligations to be secured by the Parity Reserve Fund remain Outstanding. Amounts held in or credited to the Parity Reserve Fund are pledged to and may be used solely for payment of debt service on the Bonds or Parity Obligations secured thereby in the event that money in the Parity Obligation Payment Fund or any comparable fund established for the payment of principal and interest on the Parity Obligations secured thereby is insufficient therefor. See SECURITY AND SOURCES OF PAYMENT FOR THE 2012A BONDS Parity Reserve Fund. 2

9 Rate Covenant The City has covenanted in the Fiscal Agent Agreement to fix the rates for services furnished by the Electric System so as to provide Gross Revenues at least sufficient to pay, as the same become due, the principal of and interest on the Bonds, any Parity Obligations and all other obligations and indebtedness payable from the Light and Power Fund or from any fund derived therefrom, and also the necessary Maintenance and Operating Expenses, so that the Net Income of the Electric System will be at least equal to 1.10 times the amount necessary to pay principal and interest as the same become due on all Outstanding Bonds and Parity Obligations. See SECURITY AND SOURCES OF PAYMENT FOR THE 2012A BONDS Rate Covenant. Other Matters This Official Statement speaks only as of its date, and the information and expressions of opinions contained herein are subject to change without notice, and neither delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the City or the Electric System since the date hereof. This Official Statement, including any supplement or amendment hereto, is intended to be filed with the Municipal Securities Rulemaking Board through the Electronic Municipal Marketplace (EMMA) website. Forward looking statements in this Official Statement are subject to risks and uncertainties, including particularly those relating to competition and electric industry restructuring, and the economy of the City s service area. This Official Statement includes summaries of the terms of the 2012A Bonds, the Fiscal Agent Agreement, the Escrow Agreements, the Continuing Disclosure Agreement and certain contracts and other arrangements for the supply of capacity and energy. The summaries of and references to all documents, statutes, reports and other instruments referred to herein do not purport to be complete, comprehensive or definitive, and each such summary and reference is qualified in its entirety by reference to each document, statute, report or instrument. Copies of the Fiscal Agent Agreement, the Escrow Agreements and the Continuing Disclosure Agreement are available for inspection at the offices of the City in Pasadena, California, and will be available upon request and payment of duplication costs from the Fiscal Agent. Additional information regarding this Official Statement may be obtained by contacting the Fiscal Agent or the City of Pasadena. The City s address and telephone number for such purpose are as follows: City of Pasadena, 100 North Garfield Avenue, 3rd Floor, Pasadena, California , (626) , Attention: Director of Finance. PLAN OF REFUNDING The 2012A Bonds are being issued for the purpose of providing moneys, together with other available funds, to (i) refund the Refunded 2002 Bonds, being the $3,620,000 outstanding principal amount of 2002 Bonds maturing on June 1, 2013 and $2,000,000 principal amount of the $5,535,000 outstanding principal amount of 2002 Bonds maturing on June 1, 2022, (ii) refund the Refunded 2003 Bonds, being the $5,515,000 outstanding principal amount of 2003 Bonds maturing on June 1, 2014 through June 1, 2022, (iii) fund a deposit to the Parity Reserve Fund for the Bonds and (iv) pay the costs of issuance of the 2012A Bonds. Pursuant to an Escrow Agreement dated as of October 1, 2012 (the 2002 Bonds Escrow Agreement ), by and between the City and The Bank of New York Mellon Trust Company, N.A., as escrow agent (the Escrow Agent ), a portion of the proceeds of the 2012A Bonds, together with certain other available funds, will be deposited into an escrow fund and held as cash or applied to the purchase of certain federal securities ( Escrow Securities ), the principal of and interest on which, together with the 3

10 cash held in escrow fund, will be sufficient to redeem on the Refunded 2002 Bonds on November 5, 2012 at a redemption price equal to 100% of the principal amount thereof, together with accrued and unpaid interest thereon. Pursuant to an Escrow Agreement dated as of October 1, 2012 (the 2003 Bonds Escrow Agreement ), by and between the City and the Escrow Agent, a portion of the proceeds of the 2012A Bonds, together with certain other available funds, will be deposited into an escrow fund and applied to the purchase of Escrow Securities, the principal of and interest on which, together with the cash held in escrow fund, will be sufficient to pay interest to become due on the Refunded 2003 Bonds to and including June 1, 2013 and to redeem on June 1, 2013 the Refunded 2003 Bonds at a redemption price equal to 100% of the principal amount thereof. On the date of delivery of the 2012A Bonds, the City will receive a report from Causey Demgen & Moore Inc, certified public accountants, verifying the adequacy of (i) the mathematical computation concerning (a) the adequacy of the cash deposited and held in the escrow fund for the Refunded 2002 Bonds, together with the maturing principal amounts of and interest earned on the Escrow Securities to pay on November 5, 2012, the redemption price of the Refunded 2002 Bonds (i.e, 100% of the principal amount thereof), together with accrued and unpaid interest to such redemption date, interest due on the Refunded 2002 Bonds and (b) the adequacy of the cash deposited and held in the escrow fund for the Refunded 2003 Bonds, together with the maturing principal amounts of and interest earned on the Escrow Securities to pay interest to become due on the Refunded 2003 Bonds to and including June 1, 2013 and to redeem on June 1, 2013 the Refunded 2003 Bonds at a redemption price equal to 100% of the principal amount thereof, and (ii) the mathematical computations of the yield on the 2012A Bonds and the yield on the Escrow Securities purchased with a portion of the proceeds of the sale of the 2012A Bonds and other available funds of the City. See VERIFICATION OF MATHEMATICAL COMPUTATIONS. Upon such deposits, the Refunded 2002 Bonds and the Refunded 2003 Bonds will no longer be deemed to be outstanding under the Fiscal Agent Agreement, and all obligations of the City with respect to the Refunded 2002 Bonds and the Refunded 2003 Bonds shall cease and terminate, except for the obligation of the City to cause the amounts due on the Refunded 2002 Bonds and the Refunded 2003 Bonds to be paid from funds on deposit in the escrow fund. [Remainder of page intentionally left blank.] 4

11 ESTIMATED SOURCES AND USES OF FUNDS The estimated sources and uses of funds in connection with the 2012A Bonds are as follows: Sources: Principal Amount of 2012A Bonds $11,780,000 Plus Original Issue Premium 1,196,193 Total Sources $12,976,193 Uses: Deposit to Refunded 2002 Bonds Escrow Fund $ 5,722,335 Deposit to Refunded 2003 Bonds Escrow Fund 5,762,027 Deposit to Parity Reserve Fund 1,230,766 Deposit to Costs of Issuance Account (1) 224,071 Initial Purchaser s Discount 36,994 Total Uses $12,976,193 (1) Includes fees of Bond Counsel and Disclosure Counsel, the Fiscal Agent, the Escrow Agent and financial advisory fees, verification agent fees, rating agencies fees, printing costs and other miscellaneous expenses. General THE 2012A BONDS The 2012A Bonds will be dated their date of delivery and will bear interest from that date at the rates per annum and will mature on June 1 in the years set forth on the inside cover page of this Official Statement. Interest on the 2012A Bonds will be payable semiannually on June 1 and December 1, commencing December 1, 2012, and will be calculated on the basis of a 360-day year comprised of twelve 30-day months. The 2012A Bonds are being issued in fully registered form, and when issued, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ( DTC ). So long as Cede & Co. is the registered owner of the 2012A Bonds, references herein to the owners or registered owners shall mean Cede & Co., and not the beneficial owners of the 2012A Bonds. See APPENDIX C BOOK-ENTRY SYSTEM herein. No Redemption General The 2012A Bonds are not subject to redemption prior to maturity. SECURITY AND SOURCES OF PAYMENT FOR THE 2012A BONDS The Bonds are an obligation payable only from the Net Income of the Electric System in the Light and Power Fund and amounts in the Parity Reserve Fund as provided in the Fiscal Agent Agreement. The 2012A Bonds are secured by a pledge of and lien upon Net Income of the Electric System on a parity with other obligations of the Electric System payable from Net Income of the Electric System and issued from time to time pursuant to the Fiscal Agent Agreement, including the Outstanding Bonds, and a pledge of amounts in the Parity Reserve Fund. See Parity Reserve Fund and Additional Bonds below. 5

12 Net Income is defined in the Fiscal Agent Agreement as Gross Revenues less Maintenance and Operating Expenses. Gross Revenues means all revenues (as defined in Section of the Government Code of California, which include all charges received for and all other income and receipts derived by PWP from the operation of the Electric System or arising from the Electric System) received by PWP from the services, facilities, energy and distribution of electric energy by PWP, including (i) income from investments, and (ii) for the purposes of determining compliance with the rate covenant in the Fiscal Agent Agreement only, the amounts on deposit in the Stranded Investment Reserve or in any other unrestricted funds of the Electric System designated by the City Council by resolution (or by approval of a budget of the Light and Power Fund providing for such transfer) and available for the purpose of paying Maintenance and Operating Expenses and/or debt service on the Bonds and/or any Parity Obligations, but excepting therefrom (a) all reimbursement charges and deposits to secure service and (b) any charges collected by any person to amortize or otherwise relating to the payment of the uneconomic portion of costs associated with assets and obligations ( stranded costs ) of the Electric System or of any joint powers agency in which the City participates which the City has dedicated to the payment of obligations other than the Bonds or any Parity Obligations then outstanding, the payments of which obligations will be applied to or pledged to or otherwise set aside for the reduction or retirement of outstanding obligations of the City or any joint powers agency in which the City participates relating to such stranded costs of the City or of any such joint powers agency to the extent such stranded costs are attributable to, or the responsibility of, the City. Maintenance and Operating Expenses is defined in the Fiscal Agent Agreement to mean the amount required to pay the reasonable expenses of management, repair and other costs, of the nature of costs which have historically and customarily been accounted for as such, necessary to operate, maintain and preserve the Electric System in good repair and working order, including but not limited to, the cost of supply and transmission of electric energy under long-term contracts or otherwise and the expenses of conducting the Electric System, but excluding depreciation. Maintenance and Operating Expenses includes all amounts required to be paid by the City under contract with a joint powers agency for purchase of capacity, energy, transmission capability or any other commodities or services in connection with the foregoing, which contract requires payments by the City to be made thereunder to be treated as Maintenance and Operating Expenses. Certain of the City s obligations to joint powers agencies, including obligations with respect to bonds issued by such joint powers agencies, are payable by the City from the Light and Power Fund, prior to the Bonds and all Parity Obligations, as Maintenance and Operating Expenses. See TABLE 9 OUTSTANDING DEBT OF JOINT POWERS AGENCIES herein. The General Fund of the City is not liable for the payment of any Bonds, any premium thereon upon redemption prior to maturity or their interest, nor is the credit or taxing power of the City pledged for the payment of any Bonds, any premium thereon upon redemption prior to maturity or their interest. The Owner of any Bond shall not compel the exercise of the taxing power by the City or the forfeiture of any of its property. The principal of and interest on any Bonds and any premiums upon the redemption of any thereof prior to maturity are not a debt of the City nor a legal or equitable pledge, charge, lien or encumbrance upon any of its property or upon any of its income, receipts or revenues, except the Net Income and other funds, security or assets which are pledged to the payment of the Bonds, interest thereon and any premiums upon redemption pursuant to the Fiscal Agent Agreement. Rate Covenant The City has covenanted in the Fiscal Agent Agreement to fix the rates for services furnished by the Electric System so as to provide Gross Revenues at least sufficient to pay, as the same become due, the principal of and interest on the Bonds, including the Outstanding Bonds and Parity Obligations and all 6

13 other obligations and indebtedness payable from the Light and Power Fund (including the payment of any amounts owing to any provider of any surety bond, insurance policy or letter of credit with respect to the Bonds or any Parity Obligations, which amounts are payable from the Light and Power Fund) or from any fund derived therefrom, and also the necessary Maintenance and Operating Expenses, and shall be so fixed that the Net Income of the Electric System will be at least equal to 1.10 times the amount necessary to pay principal and interest (including mandatory sinking account redemption payments) as the same become due on all Bonds, including the Outstanding Bonds and Parity Obligations. The Light and Power Fund The Charter establishes the Light and Power Fund and permits the establishment by ordinance of such funds as the City Council may deem necessary to facilitate the issuance and sale of the bonds or for the protection or security of the owners of the bonds. Under the provisions of the Charter, all moneys and property received by the City in payment for electrical energy and for any service rendered in connection therewith, or from the sale, lease and other disposition of any property acquired with funds or property of the Electric System must be deposited in the Light and Power Fund. The Charter further provides that disbursement may be made directly from the Light and Power Fund for the following purposes: (a) the necessary or proper expenses of conducting the Electric System, the operation and maintenance of its works, plants and distributing systems; the acquisition and improvement of facilities; and the publishing of reports; (b) System; the payment of interest and principal on bonds issued for the purposes of the Electric (c) the formation of surplus or reserves for the future needs of the Electric System and for unforeseen emergencies; and (d) the repayment of advances made from other funds of the City. The City Council shall transfer moneys from the Light and Power Fund not to exceed 16% of gross income received during the preceding Fiscal Year and not exceeding net income to the City s General Fund from the Light and Power Fund each year as follows: (1) Pursuant to Section 1407 of the Charter, for the payment of principal and interest on the City s general obligation bonds wholly payable in such Fiscal Year or for municipal improvements, an amount equal to eight percent (8%) of the gross income of the Electric System received during the immediately preceding Fiscal Year from the sale of electric energy at rates and charges fixed by ordinance. The amount so transferred shall not exceed one-half of the net income of the Electric System as shown by the books of account of the power utility, after payment of the maintenance and operating expenses of the Electric System, the expense of conducting the power utility, depreciation and the principal, interest and premiums, if any, upon the redemption thereof, of Electric System revenue bonds. (2) Pursuant to Section 1408 of the Charter, in addition to the amounts transferred pursuant to Section 1407, an amount equal to eight percent (8%) of the gross income of the Electric System received during the immediately preceding Fiscal Year from the sale of electric energy at rates and charges fixed by ordinance. The amount so transferred shall not exceed one-half of the net income (as described in subparagraph (1) above) of the Electric System. The amount so transferred may be expended for any municipal purpose. 7

14 The amount transferred from the Light and Power Fund to the City s General Fund annually may be adjusted by the City Council as described in subparagraphs (1) and (2) above. The following table sets out the transfers from the Light and Power Fund to the City s General Fund for the five Fiscal Years through and the amount budgeted for the Fiscal Year TABLE 1 TRANSFERS TO THE GENERAL FUND (Dollar Amounts in Thousands) % of Prior Year Gross Income Fiscal Year Transfer Amount $11, % , , , , (1) 14, (1) As budgeted. Source: Finance and Administration Business Unit of PWP. In addition to the transfers authorized pursuant to Sections 1407 and 1408, the Charter provides that whenever the City Council determines that the surplus or reserve in the Light and Power Fund is in excess of reasonable future needs of the power utility, such excess may be appropriated for other municipal purposes, but only by ordinance approved by a two-thirds vote of the electors. The Charter also provides that any surplus or reserves in the Light and Power Fund may be temporarily used for other municipal purposes if there are insufficient funds in the City Treasury to pay the current expenses of the general government of the City before the collection of taxes levied in any Fiscal Year. Should moneys from said fund be used pending the receipt of taxes, the amount so used shall be repaid not later than February 15 of the same Fiscal Year. Parity Reserve Fund The Fiscal Agent Agreement establishes the Parity Reserve Fund to be held by the City pursuant to the Charter. The Parity Reserve Fund is required to be maintained in an amount equal to the Reserve Fund Requirement so long as any Bonds or Parity Obligations to be secured by the Parity Reserve Fund remain Outstanding. Upon the issuance of the 2012A Bonds, the Reserve Fund Requirement will be $9,978,146.38,which amount is on deposit in or credited to the Parity Reserve Fund. The term Reserve Fund Requirement is defined in the Fiscal Agent Agreement to mean, as of any date of determination and excluding therefrom any Parity Obligations for which no reserve fund is to be maintained or for which a separate reserve fund is to be maintained, the least of (a) ten percent (10%) of the initial offering price to the public of each Series of Bonds and Parity Obligations to be secured by the Parity Reserve Fund as determined under the Internal Revenue Code of 1986, as amended, or (b) the maximum Annual Debt Service on all Bonds and Parity Obligations to be secured by the Parity Reserve Fund, or (c) one hundred twenty-five percent (125%) of the Average Annual Debt Service on all Bonds and Parity Obligations to be secured by the Parity Reserve Fund, all as computed and determined by the City; provided that such requirement (or any portion thereof) may be provided by one or more policies of municipal bond insurance or surety bonds issued by a municipal bond insurer if the obligations insured by such insurer have ratings at the time of issuance of such policy equal to Aaa assigned by Moody s 8

15 Investors Service ( Moody s ) and AAA assigned by Standard & Poor s Ratings Services, a division of the McGraw-Hill Companies ( S&P ) (and if such insurance company is rated by A.M. Best & Company, such insurance company is rated in the highest rating category by A.M. Best & Company) or by a letter of credit issued by a bank or other institution if the obligations issued by such bank or other institution have ratings at the time of issuance of such letter of credit equal to Aa2 or higher assigned by Moody s or AA or higher assigned by Standard & Poor s. Amounts on deposit in or credited to the Parity Reserve Fund is pledged to, and shall be used solely for, the purpose of paying the principal of and interest on the Bonds, including the Outstanding Bonds, and Parity Obligations secured by the Parity Reserve Fund in the event that money in the Parity Obligation Payment Fund is insufficient therefor, and for that purpose money shall be transferred from the Parity Reserve Fund to the Parity Obligation Payment Fund. If and to the extent that the Parity Reserve Fund has been funded with a combination of cash and one or more surety bonds, insurance policies or letters of credit, except as provided below, all cash shall be used (including any investments purchased with such cash, which shall be liquidated and the proceeds thereof applied as required under the Fiscal Agent Agreement) prior to any drawing under a surety bond, insurance policy or letter of credit, and repayment of any amounts owing to any provider of such surety bond, insurance policy or letter of credit shall be made in accordance with the terms thereof prior to any replenishment of any such cash amounts. After first applying all cash and Investment Securities held in the Parity Reserve Fund to pay the principal of and interest on the Bonds and Parity Obligations secured by the Parity Reserve Fund when required, the City or the Fiscal Agent, as applicable shall, on a pro rata basis with respect to the portion of the Parity Reserve Fund held in the form of surety bonds, insurance policies and letters of credit (calculated by reference to the maximum amounts of such surety bonds, insurance policies and letters of credit), draw under each surety bond, insurance policy or letter of credit issued with respect to the Parity Reserve Fund, in a timely manner and pursuant to the terms of such surety bonds, insurance policy or letter of credit to the extent necessary in order to obtain sufficient funds on or prior to the date such funds are needed to pay the Bonds and Parity Obligations secured by the Parity Reserve Fund when due. Notwithstanding anything in the Fiscal Agent Agreement to the contrary, in the event a surety bond, insurance policy, letter of credit or cash deposit has been provided with respect to a specified Series of Bonds only, the Trustee shall draw on such insurance policy, surety bond or letter of credit in the amount equal to the pro rata amount of deficiency in the Parity Obligation Payment Fund allocable to such Series of Bonds at the same time that the Trustee applies any cash or Investment Securities held in the Parity Reserve Fund to the payment of the principal of and interest on any Bonds or Parity Obligations not so secured by such insurance policy, surety bond or letter of credit or with respect to which such cash deposit was not made. All amounts due and owing any provider of any such surety bond, insurance policy or letter of credit shall be paid in accordance therewith prior to any discharge of the Fiscal Agent Agreement pursuant to the defeasance of the Bonds. Amounts on deposit in the Parity Reserve Fund in excess of the Reserve Fund Requirement shall be withdrawn from the Parity Reserve Fund and transferred to the Light and Power Fund. Whenever money is transferred from the Parity Reserve Fund an equal amount of money shall be transferred to the Parity Reserve Fund from the first available money in the Light and Power Fund if required to bring the balance on deposit in the Parity Reserve Fund up to the Reserve Fund Requirement. Surety Bond Reserve Policy. In connection with the issuance of the 1998 Bonds, MBIA Insurance Corporation (now National Public Finance Guarantee Corporation) (the Reserve Insurer ) issued a surety bond (the Reserve Policy ) in an amount equal to the Reserve Fund Requirement for the 1998 Bonds. In connection with the issuance of the 2002 Bonds, the Reserve Insurer agreed to permit the Reserve Policy to also be applicable to the 2002 Bonds. The Reserve Policy provides that upon notice from the Fiscal Agent to the Reserve Insurer to the effect that insufficient amounts are on deposit in the Parity Obligation Payment Fund to pay the principal of (at maturity or pursuant to mandatory sinking account redemption requirements) and interest on the 1998 Bonds and/or the 2002 Bonds, the Reserve Insurer will promptly deposit with the Fiscal Agent an amount sufficient to pay the principal of and the 9

16 interest on the 1998 Bonds and/or the 2002 Bonds or the available amount of the Reserve Policy, whichever is less. The Fiscal Agent will use all available cash in the Reserve Fund prior to drawing on the Reserve Policy. Upon the later of: (i) three days after receipt by the Reserve Insurer of a Demand for Payment in the form attached to the Reserve Policy, duly executed by the Fiscal Agent; or (ii) the payment date of the 1998 Bonds and/or the 2002 Bonds as specified in the Demand for Payment presented by the Fiscal Agent to the Reserve Insurer, the Reserve Insurer will make a deposit of funds in an account with State Street Bank and Trust Company, N.A., in New York, New York, or its successor, sufficient for the payment to the Fiscal Agent, of amounts which are then due to the Fiscal Agent (as specified in the Demand for Payment) subject to the surety bond coverage. The surety bond coverage is the initial face amount of the Reserve Policy less the amount of any previous deposits by the Reserve Insurer with the Fiscal Agent which have not been reimbursed by the City. Upon the issuance of the 2012A Bonds, there will be on deposit in the Parity Reserve Fund, in addition to the Reserve Policy credited thereto, funds in the amount of $6,274, See Investment of Funds below for a discussion of permitted investments with respect to moneys held in the funds and accounts established pursuant to the Fiscal Agent Agreement, including the Parity Reserve Fund. Additional Bonds Upon the issuance of the 2012A Bonds, in addition to the 2012A Bonds, the City will have $128,475,000 of parity indebtedness outstanding, consisting of the Outstanding Bonds. The Fiscal Agent Agreement provides that (except for bonds issued under Article XIV of the Charter, or otherwise, to refund Bonds or Parity Obligations, payable from the Light and Power Fund issued under Article XIV of the Charter which may be issued at any time without meeting the test set forth below) no additional indebtedness of the City payable out of the Light and Power Fund on a parity with the Bonds and any Parity Obligations (collectively referred to in the Fiscal Agent Agreement as parity indebtedness ) shall be created or incurred unless: (1) The Net Income during any twelve (12) consecutive calendar months out of the immediately preceding eighteen (18) calendar month period, plus, at the option of the City, any or all of the items designated in paragraphs (a) and (b) below, shall have amounted to at least equal to one hundred ten percent (110%) of the aggregate of the (i) amount of interest to accrue and (ii) payments of principal required to be made in that one of the Fiscal Years ending thereafter in which such aggregate will be the greatest on all Bonds and such Parity Obligations to be Outstanding immediately subsequent to the incurring of such additional parity indebtedness, as certified by a Certificate of the City; or (2) The projected Net Income during the first complete Fiscal Year following issuance of such parity indebtedness when the improvements to the Electric System financed with the proceeds of the parity indebtedness shall be in operation, plus, at the option of the City, any or all of the items designated in paragraphs (a) and (b) below, shall have amounted to at least one hundred ten percent (110%) of the aggregate of the (i) amount of interest to accrue and (ii) payments of principal required to be made in that one of the Fiscal Years ending thereafter in which such aggregate will be the greatest on all Bonds and such Parity Obligations to be Outstanding immediately subsequent to the incurring of such additional parity indebtedness, as certified by a Certificate of the City. The items any or all of which may be added to such Net Income for the purpose of meeting either of the requirements set forth in clauses (1) or (2) above are the following: (a) An allowance for any increase in Net Income (including, without limitation, a reduction in Maintenance and Operating Expenses) which may arise from any additions to and extensions and 10

17 improvements of the Electric System to be made or acquired with the proceeds of such additional parity indebtedness or with the proceeds of bonds previously issued, and also for Net Income from any such additions, extensions or improvements which have been made or acquired with moneys from any source but which, during all or any part of such Fiscal Year or such twelve consecutive calendar month period out of the immediately preceding eighteen calendar month period, were not in service, all in an amount equal to the estimated additional average annual Net Income (or estimated average annual reduction in Maintenance and Operating Expenses) to be derived from such additions, extensions or improvements for the first thirty-six month period in which each addition, extension or improvement is respectively to be in operation, all as shown by the Certificate of the City. (b) An allowance for earnings arising from any increase in the charges made for the use of the Electric System which has become effective prior to the incurring of such additional parity indebtedness but which, during all or any part of such Fiscal Year or such twelve consecutive calendar month period out of the immediately preceding eighteen calendar month period, was not in effect, in an amount equal to the amount by which the Net Income would have been increased if such increase in charges had been in effect during the whole of such Fiscal Year or such twelve consecutive calendar month period out of the immediately preceding eighteen (18) calendar month period, as shown by the Certificate of the City. Nothing in the Fiscal Agent Agreement limits the ability of the City to issue or incur obligations which are junior or subordinate to the payment of the principal, premium, interest and reserve fund requirements for the Bonds and all Parity Obligations and which subordinated obligations are payable as to principal, premium, interest and reserve fund requirements, if any, only out of Net Income after the prior payment of all amounts then due and required to be paid or set aside under the Fiscal Agent Agreement from Net Income for principal, premium, interest and reserve fund requirements for the Bonds and all Parity Obligations, as the same become due and payable and at the times and in the manner as required in the Fiscal Agent Agreement or any documents providing for the issuance or incurrence of Parity Obligations. Investment of Funds All moneys held in the funds and accounts established pursuant to the Fiscal Agent Agreement will be invested solely in Investment Securities, which include: (i) any permissible investments of funds of the City as stated in its current investment policy and to the extent then permitted by law; (ii) a repurchase agreement with a state or nationally chartered bank or trust company or a national banking association or government bond dealer reporting to, trading with, and recognized as a primary dealer by the Federal Reserve Bank of New York, provided that the following conditions are satisfied: (1) The agreement is secured by any direct obligations of the United States of America (including obligations issued or held in book-entry form on the books of the United States Department of the Treasury) and obligations, the payment and principal of and interest on which are directly or indirectly guaranteed by the United States of America; (2) The underlying securities are required by the repurchase agreement to be held by a bank, trust company, or primary dealer having a combined capital and surplus of at least one hundred million dollars and which is independent of the issuer of the repurchase agreement; and 11

18 (3) The underlying securities are maintained at a market value, as determined on a market-to-market basis calculated at least weekly, of not less than 104% of the amount so invested; and (iii) an investment agreement or guaranteed investment contract with, or guaranteed by, a financial institution the long-term unsecured obligations of which are rated in the top two rating categories by Moody s and Standard & Poor s at the time of initial investment. For a discussion of the City s current investment policy, practices and investment portfolio see CITY FINANCIAL INFORMATION Investment Practices, Pooled Investment Portfolio and The Investment Policy in APPENDIX A THE CITY OF PASADENA. The City s investment policy may be changed at any time by the City Council (subject to the State law provisions relating to authorized investments). There can be no assurance, therefore, that the State law and/or the Investment Policy will not be amended in the future to allow for investments which are currently not permitted under State law or the Investment Policy or that the objectives of the City with respect to investments or its investment holdings at any point in time will not change. Limitations on Remedies The ability of the City to comply with its covenants under the Fiscal Agent Agreement and to generate Net Income of the Electric System sufficient to pay principal of and interest on the 2012A Bonds may be adversely affected by actions and events outside of the control of the City. Furthermore, any remedies available to the owners of the 2012A Bonds upon the occurrence of an event of default are in many respects dependent upon judicial actions which are often subject to discretion and delay and could prove both expensive and time consuming to obtain. The rights of the Owners of the 2012A Bonds are subject to the limitations on legal remedies against cities and other public agencies in the State. Additionally, enforceability of the rights and remedies of the Owners of the 2012A Bonds, and the obligations incurred by the City, 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 creditor s rights generally, now or hereafter in effect; equity 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 Constitution and the reasonable and necessary exercise, in certain exceptional situations, of the police powers inherent in the sovereignty of the State and its governmental bodies in the interest of serving a significant and legitimate public purpose. Bankruptcy proceedings, or the exercise of powers by the federal or State government, if initiated, could subject the Owners of the 2012A Bonds to judicial discretion and interpretation of their rights in bankruptcy or otherwise, and consequently may entail risks of delay, limitation or modification of their rights. PASADENA WATER AND POWER The City is a charter city of the State. Under the provisions of the California Constitution and Article XIV of the Charter, the City owns and operates both water and electric public utilities for the benefit of its residential and business community. PWP is under the management and control of the City Manager, subject to the powers and duties vested in the City Council, and is supervised by the General Manager who is responsible for design, construction, maintenance and operation of the water and electric utilities. PWP is responsible for the Electric System and the City s water system (the Water System ). In addition to the Electric System and the Water System divisions, PWP is organized into five separate business units. This structure allows for a higher level of accountability as well as the creation of individual cost centers and profit centers. This information is used for tracking costs and supplying detailed information in rate design decisions. These business units are briefly described as follows: 12

19 General Manager s Office-Customer Relations & Legislative Business Unit This Unit is part of the General Manager s Office and is responsible for customer relations, regulatory affairs, and strategic planning and long-term resources. This Unit is also responsible for environmental and legislative matters impacting the utility. Finance, Administration and Customer Service Business Unit This Unit develops and executes PWP s overall financial strategy and ensures its financial integrity. This Unit is responsible for the financial resources of PWP and for providing relevant information to the operating units for decision making purposes. This Unit plans and oversees the financial aspects, administrative support functions and all cross-functional operations and systems for PWP. The responsibilities of this Unit include the operating budget, capital budget and financing, financial analysis and planning, financial management, administration, billing, call center, meter reading and customer care services, risk management, information systems and technology and materials management. Power Supply Business Unit This Unit is responsible for effectively managing PWP s energy portfolio, including power generation, long-term power contracts, short-term electric energy and ancillary services transactions and natural gas procurement to provide competitively-priced energy to PWP s electric customers. This Unit is also responsible for energy scheduling and load dispatch operations to ensure reliable delivery of electricity. Power Delivery Business Unit This Unit is responsible for the operation and maintenance of the local power distribution system to provide the safe and reliable delivery of electricity, and provides engineering and construction management services of the local power distribution and is responsible for implementing the Power Master Plan. This Unit is also responsible for the operations and maintenance of the City s fiber optic network. Water Delivery Business Unit This Unit is responsible for the procurement, production and delivery of water. This Unit operates and maintains the local water supply resources and distribution system. The following are biographical summaries of PWP s senior management: PHYLLIS E. CURRIE, General Manager. Ms. Currie joined PWP in 2001 as General Manager. She previously worked for the City of Los Angeles for 32 years in various capacities. Prior to coming to PWP, she was, and had been for seven years, Chief Financial Officer for the Los Angeles Department of Water and Power ( LADWP ) where she managed its financial affairs, including LADWP s joint ventures and partnerships, such as the Southern California Public Power Authority (SCPPA) and the Intermountain Power Agency (IPA) in Utah. She led the development of financial strategies to position LADWP to compete in a deregulated industry. From 1984 to 1992, she was Assistant City Administrative Officer overseeing development of the annual operating and capital budgets, including debt finance. Ms. Currie earned a bachelor of arts degree in Political Science and a master s degree in Business Administration from the University of California at Los Angeles. She also completed the Program for Senior Executives in State and Local Government at the John F. Kennedy School of Government at Harvard University. She is currently serving as the Chair of the American Public Power Association. ERIC KLINKNER, Assistant General Manager. Mr. Klinkner has been with PWP since He served as PWP s manager of power resources and Business Unit Director for Power Supply and was appointed to his present position in August In his current position, he is responsible for regulatory affairs, strategic planning and long-term resource and environmental issues. Mr. Klinkner is also responsible for legislative issues impacting PWP. Mr. Klinkner previously worked at LADWP where he 13

20 started in power resource planning. He has a master s degree in mechanical engineering from California State University-Northridge and is a state registered professional engineer. SHARI M. THOMAS, Assistant General Manager for Finance, Administration and Customer Service. Ms. Thomas joined PWP in January She began her career with the City of Pasadena in 2002 as the Deputy Director of Finance. She previously worked for the City of Riverside for nearly 15 years in various financial positions. Ms. Thomas is currently responsible for financial planning and budgeting, cost of service analysis and rate setting, information technology for PWP and customer service. She completed her bachelor of science degree with majors in Accounting and Finance in Minnesota and has also completed the University of Wisconsin s Advanced Governmental Finance Institute. GURCHARAN BAWA, Assistant General Manager for Power Supply. Mr. Bawa has been with Pasadena Water and Power for 17 years working in the Power Production field managing regulatory and environmental issues. He most recently has been responsible for evaluating renewable energy resources and incorporating these assets into Pasadena s overall energy resource portfolio. He received his Mechanical Engineering degree from S.V.R. College of Engineering and Technology, Surat, India. He is a licensed Professional Engineer in the State of California. JOE AWAD, Assistant General Manager for Power Delivery. Mr. Awad joined PWP in July 1998 as the Customer Service Manager. He is currently responsible for managing the power engineering program for capital improvement and maintenance programs at PWP. He worked for 18 years for LADWP in engineering, marketing and customer service functions. Mr. Awad obtained his master s degree in Mechanical Engineering from the University of Michigan and is a Certified Professional Engineer in the State of California. SHAN KWAN, Assistant General Manager for Water Delivery. Mr. Kwan has been with PWP since Prior to his appointment as Assistant General Manager for Water Delivery, Mr. Kwan was a principal engineer in the Water System. He worked in water distribution, plant and facilities, quality and supply and resource planning. Prior to his employment with PWP, he was a construction inspector for Caltrans. Mr. Kwan holds a bachelor s degree in civil engineering from University of California at Los Angeles and a master s degree in business administration from Claremont Graduate University. General THE ELECTRIC SYSTEM OF PWP The Electric System of PWP began generating its own electric energy and distributing power in Electric service was previously supplied by Edison Electric Company, predecessor to Southern California Edison Company ( SCE ). PWP has continued to expand its electric distribution system to meet the demands of its residential, commercial, industrial and public sector customers. The Electric System provides service to virtually all of the electric customers within the limits of the City. For the Fiscal Year ended June 30, 2012, the customer base was comprised of 55,497 residential customers, 8,651 commercial and industrial customers, and 3 street lighting and traffic signals customers. The service area is approximately 23 square miles, with a current estimated population of approximately 139,222. The Electric System includes generation, transmission and distribution facilities. The City also purchases power and transmission service from others. The Electric System s current 375 MW resource mix includes 175 MW of local steam and gas turbines, 15 MW small hydroelectric (Azusa Hydroelectric) and 185 MW of long-term purchase contracts (remote generation) from a variety of sources including hydroelectric, coal and nuclear generating units. Although these resources are more than sufficient to 14

21 meet the City s loads, a portion of the Electric System s energy supply is purchased when it is more economical, on the wholesale hourly, daily and month-ahead spot markets. See Purchased Power Bilateral (Spot Market) Energy Purchases. Legislation affecting the electric utility industry is routinely introduced or enacted by the federal government and the California Legislature. Most recently, the enacted bills regulate greenhouse gas emissions and provide for greater investment in energy-efficiency and environmentally friendly generation alternatives through more stringent renewable resource portfolio standards. PWP s generation and transmission facilities and planning are implemented in accordance with existing law and in response to pending legislation. See DEVELOPMENTS IN THE CALIFORNIA ENERGY MARKETS and OTHER FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY. Valuation of Electric System Facilities The following table sets forth the valuation of the Electric System facilities during the five Fiscal Years shown. TABLE 2 ELECTRIC SYSTEM FACILITIES Fiscal Year Ended June 30, (1) Utility Plant $512,909,436 $534,697,206 $568,879,517 $569,017,087 $588,156,646 Less Accumulated Depreciation (249,283,033) (264,808,429) (281,561,663) (286,950,419) (303,458,877) Construction in Progress 34,036,325 46,884,402 58,287,645 70,442,021 70,442,021 Total Facilities $297,662,728 $316,773,179 $345,605,499 $352,508,689 $355,139,790 (1) Preliminary data; projected for Fiscal Year year-end based on information as of May 31, Source: Finance and Administration Business Unit of PWP. Power Supply Resources The Electric System increased its power production for several consecutive years primarily as a result of increased energy sales to the California Independent System Operator ( ISO ) and also to meet moderately increasing energy demand. In Fiscal Year , PWP generated approximately 148 GWh from its local resources and purchased approximately 1,248 GWh from long-term contracts and the spot market. PWP s total supply increased by 0.22% in Fiscal Year compared to the prior year. The system peak demand in Fiscal Year was 307 MW. 15

22 The following table sets forth the total power generated and purchased and peak demand during the five Fiscal Years shown. TABLE 3 TOTAL POWER GENERATED AND PURCHASED: PEAK DEMAND (MWh) Fiscal Year Ended June 30, (1) Generated 86, , , , ,749 Purchased 1,526,635 1,429,363 1,295,905 1,286,858 1,248,368 Total Supply 1,613,533 1,548,919 1,419,662 1,393,005 1,396,117 Sales and Losses (323,420) (263,288) (186,966) (194,491) (228,681) Net System Load 1,290,113 1,285,631 1,232,696 1,198,514 1,167,436 System Peak Demand (MW) (1) Preliminary data; projected for Fiscal Year year-end based on information as of May 31, Source: Finance and Administration Business Unit of PWP. The following table sets forth information concerning the City s power supply resources and the energy supplied by each resource during the Fiscal Year ended June 30, TABLE 4 POWER SUPPLY RESOURCES Name-plate Capacity (MW) Rated Capacity (MW) (1) Actual Energy (GWh) (2) Percent of Total Energy Source Pasadena-Owned Generating Facilities: Steam (Broadway) % Combustion Turbines (Glenarm) Steam (Broadway) Green BioMethane Combustion Turbines (Glenarm) Green BioMethane Hydroelectric (Azusa) Joint Power Agency/Remote Ownership Interests: Intermountain Power Project (IPP) Palo Verde Nuclear Gen. Station (SCPPA) Magnolia Power Project (SCPPA) Magnolia Power Project (SCPPA) Green BioMethane Hoover Project Green Power Purchased Power (3) Bonneville Power Administration Contract Market Total 347 1, % Wholesale Sales and Losses -- N/A (228.7) (16.38) Net System Load -- N/A 1, % Source: Finance and Administration Business Unit of PWP. (1) Rated net capacities as of June 30, For Broadway and Glenarm ISO rated, for all others maximum contractual entitlement during summer peak. (2) (3) Preliminary data; gigawatt hours provided during the twelve-month period ended June 30, Entitlements, firm allocations and contract amounts. 16

23 City-Owned Generating Facilities The Electric System s resource mix includes local steam and gas turbines, a hydroelectric plant and long-term purchase contracts from a variety of sources including hydroelectric, gas-fired, coal and nuclear generating units. In recent years, PWP has developed programs in response to regional power shortages, energy price volatility, and stricter emissions control requirements adopted by the South Coast Air Quality Management District ( SCAQMD ). Currently, PWP owns and operates one natural gas steam generating unit at the Broadway facility, and four gas-fired combustion turbines ( GTs ) located at the adjacent Glenarm facility. In addition to the Broadway and Glenarm facilities, the City owns the Azusa Hydroelectric Plant, which is interconnected to the SCE power distribution system. Each of these resources is more fully described below. Broadway Power Plant. There is one steam generating unit located at this facility (Broadway 3). This unit is connected to the ISO control center via remote intelligent gateway and is certified to provide spin, non-spin, and replacement reserves. Due to system constraints and the age of the Broadway 3 generator, the City is considering the replacement of this unit with more efficient, cleaner, and reliable generation in or around The City is in the process of completing the environmental studies and obtaining the necessary permits for a new 65 net MW (71 gross MW) combined-cycle plant to replace the Broadway Steam Unit 3. The current Broadway 3 generator is expected to remain in service until about The replacement generation for the Broadway 3 generator is anticipated to be a natural gas turbine combined cycle unit with the same capacity. Glenarm Power Plant. The Glenarm Power Plant includes two 23 MW (rated net output) gasfired combustion turbines designated as Glenarm 1 and 2 generators (GT1 and GT2). Historically, operation of these units was limited to high peak or emergency conditions. In the past few years, these units were retrofitted to improve their reliability. However, due to the ages of the Glenarm 1 and 2 generators, the City is considering upgrading the generators to extend their operating lives for the next 20 years. On May 4, 2010, the power turbine in one of the Glenarm units, GT1, was severely damaged by mechanical failure and a subsequent fire. The incident destroyed the power turbine and severely damaged the enclosure. There were no injuries to PWP personnel. GT1 was commissioned in 1975 and retrofitted with air emission control systems in It has generally been operated in a range of about 22.5 MW, but is designed and permitted to run at a maximum peak load of up to 30.5 MW. The unit had been operated on a limited basis during high peak periods or emergency conditions to meet reliability. Investigations and inspections of GT1 that have been completed since the incident indicate that the unit can be repaired. An agreement has been reached with the insurance provider(s) to reimburse PWP for the costs to repair the unit to its pre-incident operational condition. Construction is expected to be completed during Fiscal Year PWP is conducting ongoing investigations with the insurance provider(s) to collect additional information and complete the analysis of potential business losses and additional costs incurred for energy to replace that generated by GT1. PWP is considering various shortterm options to replace the energy and capacity provided by GT1 until such time the unit can be repaired. 17

24 The Glenarm Power Plant also includes two 45 MW simple-cycle combustion turbines located on PWP s Glenarm property (adjacent to Broadway) and designated as Gas Turbine Unit 3 and Unit 4 (GT3 and GT4). GT3 and GT4 turbines were added as part of PWP s Local Generation Repowering Project, and provide higher efficiency, superior operational flexibility, and 98% reduction in NOx emission rates. These units are primarily scheduled to economically meet PWP s intermediate and peaking loads. Excess capacity, operating under the ISO Participating Generator Agreement, provides ancillary services and energy to the California ISO market. See Inter-Utility Sales Transactions California ISO- Participating Generator Agreement. When imports are limited due to tie-line outages, or when loads reach about 200 MW, at least one unit is put on line for reliability purposes. Due to their relatively high cost of generation, utilization of these units is typically limited to periods when energy and ancillary service prices are economically favorable to support such utilization. The value provided by these units is in their optionality. Optionality refers to the ability to quickly adjust operating levels to changing market and load conditions. Due to system constraints, the City will need to maintain at least 200 MW of generation at its Broadway and Glenarm plants site. Azusa Hydroelectric Plant. The Azusa Hydroelectric Plant is a 3 MW hydroelectric plant located in the San Gabriel River Basin. The Azusa Hydroelectric Plant is interconnected to the SCE power distribution system. Energy is accumulated and delivered to the City by SCE through an agreement which provides for deliveries at rates up to 15 MW. The Azusa Hydroelectric Plant has historically delivered approximately 10 gigawatt hours ( GWh ) of energy to the City annually. In 2003, extensive blockage of, and damage to the plant s conduit system was discovered, requiring the plant to be taken out of service. Repair and restoration of the plant was completed in 2004 and the plant returned to full service. However, deliveries in recent years have decreased to minimal volumes due to adverse water flow conditions. Joint Powers Agency Generation and Fuel Resources/Remote Ownership Interests General The City has purchased ownership interests in the Intermountain Power Project ( IPP ) of the Intermountain Power Agency, a political subdivision of the State of Utah ( IPA ). In addition, the City and other public agencies in Southern California are members of the Southern California Public Power Authority ( SCPPA ), a joint powers agency created for planning, financing, developing, acquiring, constructing, operating and maintaining electric generating and transmission projects for participation by some or all of its members. The City is a participant in the SCPPA portion of the Palo Verde Nuclear Generating Station ( PVNGS ), in the SCPPA Magnolia Power Project, in the SCPPA Milford Wind Corridor Phase I Project and in the SCPPA Prepaid Natural Gas Project. The City also has a remote ownership interest in the Hoover Hydroelectric Project and, through SCPPA, a Natural Gas Project relating to natural gas fields located in Wyoming and Texas. In most cases, staff unrelated to the City s bargaining units provide operating, maintenance, engineering, energy management and administrative services for such projects. Labor and related costs are charged to the related joint powers agency or other public agency. The City is informed that labor agreements are in place with each respective bargaining group but cannot give any assurances as to future agreements or the status of negotiations. Each of these resources is briefly described below. 18

25 Intermountain Power Agency The following information has been obtained from the IPA and sources that the City believes to be reliable, but the City takes no responsibility for the accuracy thereof. IPA Intermountain Power Project Interest. The purpose of the IPA is to provide for the financing, construction and operation of the IPP. The City has entered into certain power purchase contracts with the IPA and others to purchase certain entitlements of IPP and related facilities. The IPP consists of (a) a two unit, 1,800 MW net coal-fired, steam electric generation station and a switchyard located near Lynndyl, Utah; (b) the Southern Transmission System (see Transmission Resources below); (c) two 50-mile 345 kilovolt alternate current ( kv AC ) transmission lines from the generation station to a switchyard in the vicinity of Mona, Utah and a 144-mile 230 kv AC transmission line from the generation station to a switchyard near Ely, Nevada (collectively, the Northern Transmission System ); (d) a railcar service center; (e) a microwave communications system; and (f) certain water rights and coal supplies. There are 36 utilities (collectively, the IPP Purchasers ) that purchase the output of the IPP Generating Station, consisting of the City, and the California cities of Los Angeles, Anaheim, Burbank, Glendale and Riverside (the IPP California Participants ), PacifiCorp (which merged with Scottish Power), as successor to the obligations of Utah Power & Light Company, 22 members of IPA and Heber Light & Power Company, and six rural electric cooperatives serving loads in the States of Utah, Arizona, Colorado, Nevada and Wyoming. The IPP Generating Station is operated by the LADWP. The City has two separate contracts with the IPA and certain Utah participants (the power sales entitlement contract and the excess sales contract, respectively, as further described below) which currently provide the City with a 108 MW (6%) entitlement in the facility. After accounting for transmission losses, the City receives approximately 103 MW of generating capacity. Approximately 750 GWh of energy are delivered to the City from IPP each year. See TABLE 4 POWER SUPPLY RESOURCES. Transmission of the output from IPP to the City and the other IPP California Participants is provided by the Southern Transmission System (see Transmission Resources below). IPP has been financed entirely with debt issued by IPA, of which approximately $2.2 billion principal amount was outstanding as of July 15, 2012, with a final maturity date of June 30, Debt service, net of projected investment earnings, constitutes in excess of 50% of IPA s total annual costs of owning, operating and maintaining IPP and is the major factor in IPP s power and energy costs. PWP is currently responsible for approximately $131.4 million principal amount or 6.00% of the IPA IPP outstanding debt. See TABLE 9 OUTSTANDING DEBT OF JOINT POWERS AGENCIES herein for details of the City s share of this debt. See also Reserve Policies below for information regarding certain actions taken by the City with respect to its share of IPP debt service. Details of the contracts relating to the IPP are as follows: Power Sales Entitlement. The City has contracted with IPA to purchase a 79 MW (4.409%) entitlement of the IPP plant. This contract obligates the City to pay its proportional share of the plant costs (including debt and other fixed expenses), regardless of the amount of energy scheduled to the City, for the life of the IPP bonds. Originally, the City had an entitlement contract with IPA and a layoff which it entered into on February 1, 1983 with Scottish Power (now PacifiCorp as noted above), whereby the City purchased a 16 MW share from Scottish Power, which allocation was subsequently increased to 18 MW. Thereafter, in 1991, the layoff contract and the power sales entitlement contract with IPA were 19

26 combined into one contract resulting in the City s current 79 MW capacity entitlement. The term of the combined contract extends until all bonds issued by IPA to finance the IPP are retired. Excess Sales Contract. The City and the cities of Burbank and Glendale and LADWP (the California Excess Sales Purchasers ) contracted with 27 sellers (the Utah Participants ) and IPA (acting as agent for the sellers) to purchase a 273 MW (17.057%) entitlement of the IPP plant which was deemed in excess of the sellers needs. The California Excess Sales Purchasers agreed to split the excess among themselves in proportion to their original entitlements. The City s current share of the excess is 29 MW (7.556%). This contract also provides for access to the Northern Transmission System, which was built with IPA funds in order to deliver power from the IPP to the Utah Participants. The term of this contract extends until the IPA bonds are defeased or the sellers load requirements meet certain specified conditions; however, the Utah Participants have the unilateral right to recall their original entitlements at any time. IPP Coal Requirement. The annual coal requirement for the IPP Generating Station is approximately 6 million tons. On September 29, 2010, IPA closed the sale of its 50% undivided interest in the West Ridge Mine in Carbon County, Utah and its 50% undivided interest in the Crandall Canyon Mine in Emery County, Utah to its longtime co-owner, Andalex Resources, Inc. Combined, these two mines have supplied IPP with approximately 20% of its annual coal requirements since Instead of having an ownership interest, IPP now receives approximately 20% of its annual coal supply from a lifeof-mine coal supply agreement with the operator of the West Ridge Mine. LADWP manages several long-term coal supply agreements that can provide in excess of 70% of the coal requirements for the IPP. Spot market and opportunity purchases provide the balance of the fuel requirements for the facility. LADWP reports that it has determined that coal presently under contract is sufficient, with the exercise of available options, to meet the IPP s annual coal requirements through 2015, with lesser amounts of coal under contract for an additional two years thereafter. Additional coal will be purchased through a combination of long-term and spot contracts. The average cost of coal delivered to the IPP Generating Station in Fiscal Year was approximately $38.02 per ton. During the prior Fiscal Year, the average cost of coal delivered was approximately $36.34 per ton. LADWP has reported that it expects the costs to fulfill IPP s annual coal supply requirements after 2015 will be higher than its current contract costs due to the continual turnover of mining properties in Utah, difficult mining conditions at the remaining mines, increased mining costs due to regulatory oversight, and the continued increase in rail transportation costs, among other things. To be able to continue to operate the IPP in the event of a coal supply disruption, IPA attempts to maintain a coal stockpile at the IPP Generating Station that is sufficient to operate the plant at the IPP s current plant capacity factors for a minimum of 60 days. Transportation of coal to the IPP Generating Station is provided primarily by rail under agreements between IPA and the Utah Railway and the Union Pacific Railroad companies, and the coal is transported in IPA-owned railcars. Coal can also be transported, to some extent, in commercial trucks. IPP Water Supply. IPA owns off-site water rights that yield approximately 45,000 acre-feet per year. This amount exceeds the annual water requirements of the IPP Generating Station and the Intermountain Converter Station. A reservoir at the IPP Generating Station, in combination with groundwater wells, can provide sufficient water to operate for approximately three months at average plant loads. Permits, Licenses and Approvals. According to the IPA, the IPP has been designed, constructed and operated in compliance with all applicable federal, state and local regulations, codes, standards and laws, and all principal permits, licenses and approvals required to construct and operate the IPP have been acquired, including permits relating to air quality and rights-of-way on federally-owned land. 20

27 Emissions. The IPP Generating Station s boiler and flue-gas cleaning facilities have been designed and constructed to meet applicable federal and state emission regulations. The boilers have been designed to meet stringent regulatory emission limits for oxides of nitrogen. The flue-gas desulfurization equipment (scrubber) for each unit consists of a wet scrubber system using a limestone reagent designed and constructed to remove at least 90% of the sulfur dioxide before discharge to the atmosphere from a chimney 710 feet in height. The flue-gas particulate control (baghouse) equipment for each unit consists of three modular fabric filters utilizing reverse air for cleaning. The equipment has been designed and constructed to remove at least 99.75% of the particulate material. Waste Management. Substantial federal, state and local legislation and regulations regarding various aspects of waste management are in effect. Federal laws as set forth in acts such as the Federal Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act, impose strict liability for cleanup costs and damages regardless of time or location on generators, transporters, storers and disposers of hazardous waste. Many day-to-day activities connected with the generation and transmission of electricity generate both non-hazardous and hazardous wastes. Intermountain Power Service Corporation, under the direction of LADWP, has established a waste management plan for the IPP. The plan is designed to assure that the IPP s present and future operations conform to applicable waste disposal regulations. LADWP has also assessed IPP properties for potential liability arising from past, latent contamination. LADWP has indicated that its waste management program complies with all federal, state and local statutes and guidelines and all applicable permit requirements. Operating Experience. The IPP facilities have operated to date with a high degree of availability, exceeding the average of coal-fired generating units of comparable size. During the Fiscal Year ended June 30, 2011, the IPP operated at a net capacity factor of 74.0%. During the Fiscal Year ended June 30, 2011, IPP Units 1 and 2 were down for maintenance during the upgrade of the Southern Transmission System (see Transmission Resources below); two major outages of six weeks per unit were conducted during this Fiscal Year. During the Fiscal Year ended June 30, 2012, the IPP operated at a net capacity factor of 68.3%. In the Fiscal Year ended June 30, 2012, the IPP Generating Station provided 590,799 MWh of energy to the City at an average cost for delivered power of $47 per MWh (excluding transmission costs). Unit 1 had a connector failure on December 28, This caused additional internal damage to the stator and the rotor. Repairs on the generator were completed one month ahead of schedule and the unit was returned to service on May 29, Unit 2 was inspected for possible similar problems and repairs have been made which allowed Unit 2 to return to full operation after one week. Replacement energy purchased by the City during the IPP outage during such fiscal year was procured at comparable cost. Southern California Public Power Authority The following information has been obtained from SCPPA and sources that the City believes to be reliable, but the City takes no responsibility for the accuracy thereof. SCPPA Palo Verde Nuclear Generating Station ( PVNGS ) Interest. The City has contracted with SCPPA for a 9.9 MW (4.4%) entitlement of 225 MW SCPPA PVNGS Interest (as defined herein). This resource provides the City with approximately GWh of baseload energy annually. The City has entered into a power sales agreement with SCPPA which obligates the City to pay the cost of its share of capacity and energy on a take-or-pay basis. For the Fiscal Year ended June 30, 2012, PVNGS provided an estimated 82,517 MWh of energy to the City at an average cost for delivered power of approximately $60.00 per MWh. SCPPA has issued bonds for PVNGS of which $58,440,000 aggregate principal amount was outstanding as of July 15, SCPPA has undertaken certain actions, including 21

28 collections of amounts in excess of operating and maintenance expenses and current debt service on its bonds for PVNGS to reduce the cost of power from this project. The City, as well as the Cities of Azusa, Banning, Burbank, Colton, Glendale, Los Angeles, Riverside and Vernon and the Imperial Irrigation District ( IID ) are PVNGS project participants. The SCPPA PVNGS Interest consists of a 5.91% ownership interest in the Palo Verde Nuclear Generating Station, Units 1, 2 and 3, and certain associated facilities and contractual rights relating thereto, a 5.44% ownership interest in the Arizona Nuclear Power Project ( ANPP ) High Voltage Switchyard and contractual rights relating thereto and a 6.55% share of the rights to use certain portions of the Arizona Nuclear Power Project Valley Transmission System. PVNGS is located on an approximately 4,000-acre site about 50 miles west of Phoenix, Arizona. PVNGS consists of three nuclear electric generating units (numbered 1, 2 and 3), with a design electrical rating of 1,333 MWs (unit 1), 1,336 MWs (unit 2) and 1,334 MWs (unit 3) and a dependable capacity of 1,311 MWs (unit 1), 1,314 MWs (unit 2) and 1,312 MWs (unit 3). PVNGS s combined design capacity is 4,003 MWs and its combined dependable capacity is 3,937 MWs. PVNGS Units 1, 2 and 3 achieved firm operation in January 1986, September 1986 and December 1987, respectively. Each PVNGS generating unit has been operating under 40-year Full-Power Operating Licenses granted by the Nuclear Regulatory Commission (the NRC ). In April 2011, the NRC approved PVNGS s license renewal application, allowing the three units to extend operation for an additional 20 years until 2045, 2046 and 2047, respectively. Arizona Public Service Company ( APS ) is the operating agent for PVNGS. Transmission is accomplished through agreements with Salt River Project Agricultural Improvement and Power District ( Salt River Project ), LADWP and SCE. In 1997 SCPPA began taking steps designed to accelerate the payment of all fixed rate bonds relating to PVNGS. Such steps consisted primarily of refunding certain outstanding bonds for savings and accelerating payments by the PVNGS project participants on the bonds issued by SCPPA for PVNGS. The restructuring plan has resulted in substantial savings to the City, and the delivered cost of energy produced by PVNGS decreased significantly on July 1, See Indebtedness and Joint Agency Obligations below and TABLE 9 OUTSTANDING DEBT OF JOINT POWERS AGENCIES. Following the March 2011 earthquake and tsunami in Japan, Japan s Fukushima Daiichi nuclear power plant suffered a major nuclear event. The location of PVNGS, as well as certain other characteristics, make the occurrence of a similar event at PVNGS highly unlikely. PVNGS is located in a desert region, hundreds of miles from the nearest ocean, and remote from the risk of tsunami. According to the Arizona state geological survey (Spring 2000), the site of PVNGS is considered a low earthquake hazard area in Arizona. The nearest fault line is located 72 miles away at its closest point. The San Andreas Fault in California is 120 miles from the PVNGS site at its closest point. The plant was designed to withstand a nearby earthquake with an 8.0 magnitude. According to APS, another distinguishing feature of PVNGS is that PVNGS utilizes pressurized water reactors (as contrasted to the boiling water reactors utilized at the Fukushima Daiichi plant), which have a larger, stronger containment structure to better isolate the radioactive water. In addition, APS has indicated that PVNGS has multiple levels of backup safety systems that are physically separated to provide additional margins of reliability (which was not the case in Japan), including multiple sources of back-up power. Finally, PVNGS maintains sufficient water on site (with a total stored site capacity of more than three billion gallons) to provide cooling for the PVNGS for approximately one year. In response to the Japan catastrophe, the nuclear industry and regulators have been working to understand the events that damaged the reactors and spent fuel storage pools and whether any changes might be necessary at nuclear plants in the United States. The NRC conducted special stress test reviews of nuclear power plants in the United States, including PVNGS. The focus of the inspection was on the 22

29 licensee s capability to mitigate conditions that result from beyond design basis events, station electrical blackout and internal and external flooding events and to perform walkdowns and inspections of equipment important to mitigate fire and flood events during and after an earthquake. Although the NRC is still evaluating the inspection results, no material concerns have been identified relating to PVNGS. Magnolia Power Project. The City is a participant in the Magnolia Power Project, a gas-fired generating facility with a nominally rated net capacity of 242 MW and auxiliary facilities located in Burbank, California. Through a contract with SCPPA, the City is entitled to a 6.1% (15.5 MW base capacity and about 19 MW peaking capacity) entitlement in the project through a long-term power purchase agreement with SCPPA. SCPPA has entered into power sales agreements with the City and the Cities of Anaheim, Burbank, Cerritos, Colton, Glendale and Pasadena pursuant to which SCPPA has sold 100% of its entitlement to capacity and energy in the Magnolia Project to such participants on a take-orpay basis. The Magnolia Power Project commenced commercial operation on September 22, SCPPA issued bonds to finance the construction of the Magnolia Power Project, of which $352,700,000 aggregate principal amount was outstanding as of July 15, 2012 (of which $12,440,000 relates exclusively to the City of Cerritos). PWP has entered into a power sales agreement with SCPPA for an approximate 6.1% participation share in the Magnolia Power Project and is therefore responsible for 6.1% of the costs of the Magnolia Power Project. Prepaid Natural Gas Project. In 2007, SCPPA undertook the Prepaid Natural Gas Project, in which the City is a participant. The Prepaid Natural Gas Project provides, through Gas Sales Agreements with the participants in the Prepaid Natural Gas Project, for a secure and long-term supply of natural gas. The original agreement provided the City with a supply of approximately 2,000 MMBtu daily or 730,000 MMBtu annually at a discounted price below spot market price (the SoCal Index) for a 30-year term. The projected discount of approximately 90 cents per MMBtu was expected to result in savings of approximately $657,000 annually, or approximately $19.7 million over the 30 year term. On October 22, 2009, the Gas Sales Agreement with SCPPA was restructured to provide an acceleration of a portion of the long-term savings over the next three years, reduce the remaining volumes of gas to be delivered and shorten the overall duration of the agreement. The restructured agreement provides additional savings of approximately $2,700,000 through 2012 with the remainder to be realized over the new term of the transaction. Total expected savings from the project are not impacted by the restructuring. The restructured agreement will terminate in 2035 compared to the original termination year of The volumes of gas to be delivered are reduced from approximately 2,000 MMBtu to 1,340 MMBtu daily at a projected discount of approximately 98 cents per MMBtu. As a result of this restructuring, approximately $165,000,000 worth of outstanding aggregate principal bonds were retired. As of July 15, 2012, SCPPA had outstanding $322,360,000 aggregate principal amount of bonds issued for the Prepaid Natural Gas Project. SCPPA will bill the City for actual quantities of natural gas delivered each month. PWP expects that these costs will be recovered through the energy charge component of the electric rates as they are incurred, just as costs for natural gas purchases are currently recovered. Milford Wind Corridor Phase I Project The City entered into a Power Sales Agreement with SCPPA for 2.5% (approximately 5 MW) of the output (including capacity, energy and associated environmental attributes) of Milford Wind Corridor Phase I Project, a MW nameplate capacity wind farm comprised of 97 wind turbines located near Milford, Utah. The facility is owned by Milford Wind Corridor Phase I, LLC, a limited liability company organized and existing under the laws of the State of Delaware. The facility went into commercial operation on November 16, Energy from the facility is delivered over an approximately 88-mile, 345 kv, transmission line extending from the wind generation site to the IPP Switchyard in Delta, Utah, an ownership interest in which transmission line, together with certain structures, facilities, equipment, fixtures, improvements and associated real and 23

30 personal property interests and other rights and interests necessary for the ownership and operation of the generation facility and the sale of power therefrom, comprise a part of the Milford facility. The City is able to accept the delivered facility energy utilizing its capacity rights in the IPP Switchyard that are provided under agreements relating to the IPP. The facility energy is then delivered over the Southern Transmission System of IPP to the Adelanto or Marketplace terminal in California utilizing the City s capacity rights in the IPP Southern Transmission System and other transmission systems. See Transmission Resources Existing Transmission Resources Southern Transmission System below. The facility energy delivered at Adelanto or Marketplace is then transmitted to the City under certain transmission arrangements between LADWP or the ISO and the City and certain transmission arrangements between the City and Southern California Edison Company. As of July 15, 2012, SCPPA has outstanding $221,780,000 aggregate principal amount of bonds issued primarily for the purpose of prepaying for a guaranteed annual quantity of energy from the facility for approximately 20 years. See also Renewable Resources Current Renewable Projects below. Remote Ownership Interests Hoover Hydroelectric Project Interest. The City has a 20 MW capacity entitlement from the generating units at the hydroelectric power plant of the Hoover Dam (the Hoover Project ), located approximately 25 miles from Las Vegas, Nevada. Modern insulation technology has made it possible to uprate the nameplate capacity of existing generators (the Hoover Uprating Project ). The Hoover Uprating Project consists principally of the uprating of the capacity of 17 generating units at the Hoover Project. The City, as well as the Cities of Anaheim, Azusa, Banning, Burbank, Colton, Glendale, Riverside and Vernon have obtained entitlements totaling 127 MW of capacity and approximately 143,000 megawatt-hours ( MWh ) of allocated energy annually from the Hoover Uprating Project. In 1987, to reflect these entitlements, these cities entered into contracts with the United States Bureau of Reclamation (the Bureau ) providing for the advancement of funds for the uprating and with the Western Area Power Administration ( Western ) for the purchase of power from the Hoover Project. The City s capacity entitlement is comprised of an 11 MW renewal and 9 MW resulting from the uprating. The actual capacity available from the Hoover Project varies, depending on maintenance scheduling and other outages. Under normal hydrologic conditions, the City receives approximately 60 GWh of annual energy deliveries. In the Fiscal Year ended June 30, 2012, the Hoover Project provided 55,155 GWh of energy to the City at an average cost for delivered power of $15 per MWh. Natural Gas Project. The Natural Gas Project includes SCPPA s leasehold interests in (i) certain natural gas resources, reserves, fields, wells and related facilities located near Pinedale, Wyoming and (ii) certain natural gas resources, reserves, fields, wells and related facilities in (or near) the Barnett Shale geological formation in Texas. The capital costs of the entitlement shares purchased by certain participants were financed through SCPPA by the issuance of project revenue bonds. The City and the City of Glendale contributed capital to SCPPA for the payment of their respective shares of the capital costs of the Natural Gas Project. SCPPA has sold the entire production capacity of its member-related leasehold interests, on a take-or-pay basis (with the City and the City of Glendale having no obligation to pay any debt service). As of February 2012, the City does not take physical delivery of gas from the natural gas resources. Currently, the City receives proceeds from the sale of the gas at the production facilities. However, the City s agreement for sale of the gas can be rescinded at any time. Purchased Power In addition to City-owned resources and interests in the joint-venture generation projects, the City has long-term contractual arrangements for Electric System firm purchases, as well as enabling agreements, including Western Systems Power Pool ( WSPP ) membership, which allow short-term 24

31 power transactions in markets throughout the Western United States and Canada. Each of these resources is briefly described below. Bonneville Power Administration Purchase Exchange Contract. The City executed a 20-year seasonal capacity for energy exchange agreement with the Bonneville Power Administration ( BPA ) in May 1995 for up to an additional 15 MW of firm capacity (and attendant energy) in the summer. BPA provides 15 MW of firm capacity and approximately 15 GWh of peak hour energy from May through September. Under the terms of the agreement, the City returns approximately 30 GWh of off-peak, nonfirm energy from September through March. This contract provides capacity to the City through Fiscal Year Renewable Resource Purchases. The City has also entered into certain power purchase agreements in furtherance of its adopted renewable resource portfolio standard. See Renewable Resources below. Bilateral (Spot Market) Energy Purchases. Approximately 15-30% of PWP s annual energy needs are met through economic purchases of spot market power through short-term bilateral transactions. These transactions, which range in duration from one hour to one year, are made pursuant to the WSPP, of which the City has been a member since The WSPP is governed by a master enabling agreement with over 175 member utilities and power marketers that allows short-term transactions of one year or less for capacity, energy or transmission at negotiated market prices. This agreement replaced several obsolete agreements with individual utilities that typically had rate requirements above market price, while simultaneously providing access by the City to a much larger, growing market for bulk power transactions. In addition, this agreement allows for the purchase of firm capacity to meet spinning reserve requirements, providing the City with potential additional savings. In the event of excess electric and gas commodity and transmission capacity, the City enters into short-term bilateral sales transactions in order to offset costs. Renewable Resources General On October 13, 2003, the City Council adopted a renewable portfolio standard (the RPS ) for PWP. The City Council adopted a revised RPS on March 16, The revised RPS calls for the addition of cost-effective renewable resources to meet 15% of the City s retail electric energy needs by 2010 through a combination of long-term and short-term power purchases, 33% by 2015 and 40% by On September 18, 2006 the City adopted the United Nations Urban Environmental Accords ( UEA ) and endorsed the U.S. Mayors Climate Protection Agreement. One of the City s goals under the UEA is to reduce greenhouse gas ( GHG ) emissions to 7% below 1990 levels by The City also fully supports and actively strives to fulfill the principles of environmental laws passed by the State legislature in recent years: For additional information regarding such legislation (certain of which is referred to below), see DEVELOPMENTS IN THE CALIFORNIA ENERGY MARKETS State Legislation. In 2006, the City adopted its energy efficiency ( EE ) and demand reduction ( DR ) program goals to reduce forecast peak demand in 2012 by 10% and forecast annual energy consumption in 2016 by 13.3% in accordance with the City s UEA goals and Assembly Bill Shortly thereafter, the City adopted solar photovoltaic ( PV ) incentive program, with the goal of installing 14 MWs of customer owned PV systems in ten years and assist the City in meeting certain UEA goals. Relevant UEA policies include: (i) reduce GHG emissions 25% by 2030; (ii) reduce the City s system average peak electric load by 10% by 2012; and (iii) increase the use of renewable energy to meet 10% of the City s peak electric 25

32 load by The EE and DR program supports three of the City s UEA goals (Renewable Energy, Energy Efficiency, and Climate Change). The program goals will also help PWP meet the goals of two other state laws, including Assembly Bill 32 and Senate Bill PWP is currently on target to meet its EE and DR goals. In 2007, the City Council approved an ordinance creating a commission advisory to the City Council known as the Environmental Advisory Commission (the EAC ). The EAC holds monthly open meetings to the public and serves as a forum for the discussion of environmental issues with local, regional, and global impacts. Its nine commissioners include seven appointed by the City Council, one appointed by the mayor, and one appointed by the mayor from persons recommended by the seven Council members. PWP will provide Fiscal Year results to the EAC by October of each year, such reports having commenced in October 2007 for Fiscal Year In addition, EE, DR, and PV technologies, avoided costs, and program potential were reviewed as part of the independent review of the Integrated Resource Plan (described below). Integrated Resource Plan On March 16, 2009, the City Council approved the 2009 Integrated Resource Plan for PWP, a 20- year strategic power resource plan that establishes broad objectives and an overall direction for future policy, program and procurement decisions with respect to PWP s power supply resource portfolio. The 2009 Integrated Resource Plan identifies PWP s preferred resource mix for satisfying its electric power requirements, consisting of energy efficiency, demand side management resources, renewable resources and other supply side resources over the 20-year planning horizon. Implementation of the identified preferred resource mix would include: (i) reducing PWP s reliance on its existing coal resources (IPP), (ii) replacing the aging steam generating unit at the Broadway generating facility and replacing it with a comparably sized new combined cycle plant, (iii) upgrading the existing Glenarm generating units in order to extend their operating lives, (iv) implementation of additional energy efficiency and load management programs, (v) increasing PWP s renewable resources consistent with the new RPS adopted by the City Council (see Renewable Resources General above), (vi) increasing PWP s customerowned photovoltaic installations, (vii) establishing a feed-in tariff program in order to procure additional qualifying renewable resources located within the City and (viii) achieving CO 2 emission reductions of 40% by The 2009 Integrated Resource Plan is based on certain assumptions and forecasts and therefore is expected to evolve as it is implemented over the plan s 20-year time frame. An update to the 2009 Integrated Resource Plan was approved by the City Council in March There were no significant changes made to the plan approved in 2009 although interim targets for acquiring renewable energy were adjusted (which provide a more linear schedule and replace the specific targets during given years as previously specified in the 2009 Integrated Resource Plan). Current Renewable Projects In order to meet the City s Renewable Portfolio Standard targets as described under Renewable Resources General above, the City will continue to procure additional renewable resources through SCPPA as well as independent negotiations with renewable resources providers. The following is a description of the City s current renewable projects: In addition to the long-term energy contracts described below, the City has entered into three bio-methane gas contracts for fuel to be burned in PWP local plants and Magnolia. Those contracts are described under Fuel Supply below. High Winds Wind Generation Facility. In 2003, the City Council of the City approved a 25-year power purchase agreement with PPM (now Iberdrola Renewables ( Iberdrola )) for the purchase of windpowered electrical energy associated with a 6 MW (or approximately 17,500 MWh per year) share of the High Winds wind generation facility. The High Winds Project provided the City with 2 MW of power in 26

33 2011. The High Winds Project is a MW wind generation facility located in Solano County, California. Iberdrola is responsible for scheduling the wind energy as it is produced at the High Winds Project into the California ISO. Iberdrola re-delivers the associated energy on a firm basis to a delivery point in Southern California, providing PWP with a constant, reliable source of energy. The wind generation contract is in compliance with Senate Bill 1078 and the RPS. The contract increases PWP s renewable energy to approximately 17.5 GWh per year. Landfill Gas Generator Projects. In 2004, the City Council of the City approved a 20-year power purchase agreement with Ameresco LLC for the purchase of 6.67 MW of landfill gas generated electrical energy at the Chiquita Canyon Landfill Gas to Electricity generator project located in Valencia, CA. The project began operation in 2010 and produced approximately 31,000 MWh in In 2006, the City Council of the City approved a 10-year power purchase agreement with Minnesota Methane (currently known as Fortistar Methane Group) for the purchase of 9.5 MW of landfill gas generated electrical energy at two separate locations, one in West Covina California, and the other at Tulare, California. These projects generated approximately 44,000 MWh of energy in Geothermal Project. In 2005, the City Council of the City approved a 25-year power purchase agreement with Ormat for the purchase of 2.1 MW of geothermal electrical energy (approximately 18,400 MWh per year). The Ormat geothermal project is located in the service area of IID in the Imperial Valley, California. The energy is delivered to the California ISO over the IID transmission system. Milford Wind Corridor Phase I Wind Generation Project. As described above, the City is a participant in SCPPA s Milford Wind Corridor Phase I Project, a MW wind generating facility located in Millard County, Utah and a power sales agreement with SCPPA for an approximately 5 MW (2.5%) share of the project. The project began commercial operation in November The project serves the goals established by the City s RPS for PWP and aids the City in achieving its environmental goals. This renewable resource helps PWP meet load without additional GHG emissions in alignment with Senate Bill 32 and Senate Bill Solar and Photovoltaic. PWP's solar program has been in existence since 1999 and has provided rebates to residential and nonresidential customers for the installation of grid-tied photovoltaic (PV) systems. Annual funding for legacy customer PV programs between averaged $100,000 and was focused on small residential systems due to the availability of state-funded incentives for systems larger than 30 kw. Typical residential PV systems range from 2-3 kw and provide 30%-80% of the customer's energy needs. Since 2008, the Pasadena Solar Initiative (PSI) program has offered incentives for PV systems up to 1 MW and provided 334 rebates to residential and 43 rebates to nonresidential customers. PWP's current incentives are based on either the expected performance (ranges from $1.40- $4.00 per watt) or actual performance (ranges from $ $0.632 per kwh). Energy Efficiency Programs. PWP currently offers a wide range of residential and business customer energy efficiency (EE) programs that are funded from PBC revenues. PWP's EE programs yielded over 12,000 MWh of energy savings per year and 2.1 MW of peak demand reduction in Fiscal Year , representing 84% and 64% of annual energy load and peak demand annual goals, respectively. Cumulatively, PWP s EE programs have saved 65,916 MWh and reduced peak load by 14.2 MW or 110% and 160% of the cumulative goals, respectively. Residential EE programs such as the Energy Star and Refrigerator Replacement Program are cost effective and very popular with residential customers. EE programs for nonresidential customers are composed of the Energy Efficiency Partnering (EEP) and the new Water and Energy Direct Install Program (WE-DIP) and have encouraged EE conservation through incentives and technology facilitation. 27

34 PWP leverages its PBC funding through joint action with SCPPA that is coordinated through the SCPPA Public Benefits Committee. This has been particularly effective in procuring cost-effective efficient appliances and program services and consulting. The SCPPA Public Benefits Committee meets monthly to share information, develop and compare programs, prepare requests for proposals, and assess pending and new legislation or regulations. Additional Projects. PWP is currently reviewing other potential options with respect to additional renewable resources, including possible biogas (bio-methane) fuel projects at certain of its power plants. PWP expects to procure additional renewable resources towards satisfying its RPS targets. With the inclusion of the above-described resources, it is expected that approximately 20% of PWP s energy portfolio was be supplied from renewable resources by December 31, Fuel Supply PWP s local generating units are primarily fueled by natural gas. PWP has firm transportation contracts to deliver about 4,000 MMBtu per day, which is approximately two thirds of the annual average daily consumption. Peak natural gas consumption can exceed 30,000 MMBtu per day. The Southern California Gas Company ( SCG ) provides intra-state delivery of PWP s natural gas supplies. Gas commodity is subject to reserve leaseholds and prepayment agreements as described herein, purchased on a term basis in forward markets, and also at monthly and daily index rates. During peak months, gas requirements in excess of firm capabilities and long-term supply contracts are purchased at the Southern California Citygate. PWP has access to Canadian gas via firm transportation on the Nova, Transcanada, and Pacific Gas & Electric ( PG&E ) expansion into the SCG system, netting about 3,989 MMBtu/day at Kern River Station in Kern County, California. In addition, the City is a participant in SCPPA s Natural Gas Project, consisting of leasehold interests in natural gas fields located in Wyoming and Texas, and its Prepaid Natural Gas Project Gas Sales Agreements which provide a supply at prices below spot market price through These supplies are expected to account for an average of approximately 1,940 MMBtu/day or approximately 33% of PWP s average daily natural gas consumption. The City is currently selling the gas produced by its interests in the SCPPA Natural Gas Project rather than utilizing it in energy production at the Magnolia Power Plant or its local generation. Such sale is rescindable at any time. See Joint Powers Agency Generation and Fuel Resources/Remote Ownership Interests Southern California Public Power Authority Prepaid Natural Gas Project and Remote Ownership Interests Natural Gas Project. The cost of natural gas has been volatile over recent years. The City is not able to determine or project what the future cost of natural gas will be. In 2011, the City entered into three bio-methane contracts with EDF Trading North America, LLC, WMRE of Ohio-American, LLC and Sequent Energy Management, L.P. The bio-methane will be burned at the Magnolia Power Plant as well as at the City s local generation in order to generate renewable energy. The volume of bio-methane expected to be delivered from these contracts is 739,125 MMBtu annually which equates to approximately 74,000 MWh annually or 6% of the City s energy portfolio for purposes of satisfying its RPS. Pending legislation regarding certain limitations as to the eligibility of bio-methane as a renewable resource may impact future requirements for PWP to obtain additional resources. See DEVELOPMENTS IN THE CALIFORNIA ENERGY MARKETS State Legislation Renewable Portfolio Standards. 28

35 Transmission Resources General In January 2005, the City became a Participating Transmission Owner ( PTO ) in the ISO and placed certain transmission facilities and entitlements to transmission service on certain facilities under the ISO s operational control. Pursuant to the ISO Tariff and applicable Federal Energy Regulatory Commission ( FERC ) precedent, FERC approved a Base Transmission Revenue requirement ( TRR ) and a Transmission Revenue Balancing Account Adjustment ( TRBAA ) for the City to recover the costs of these facilities and entitlements. The City has been filing annual updates to its TRBAA with FERC since becoming a PTO. The TRBAA is the mechanism by which transmission revenue credits associated with transmission service from the ISO are flowed through to transmission customers. The TRBAA amount is used as an offset to the Transmission Revenue Requirement of a Participating Transmission Owner. The TRBAA does not change the Base TRR nor does it flow through transmission cost increases to PTOs. Any change to the Base TRR requires that a petition must be filed with FERC. In August 2011, the City filed a petition with FERC to revise its Base TRR to recover the cost increases the City has been experiencing since FERC approved its initial Base TRR. In December 2011, FERC approved the City s petition and increased the City s TRR by approximately $2.0 million effective October 1, Existing Transmission Resources Transmission resources are an integral component of the City s plan to provide economical and reliable electric service to its customers. The City currently has several firm capacity transmission agreements to deliver over 200 MW of remote generation to the T.M. Goodrich Receiving Station in the City, and to provide access to major hubs of the western wholesale power market. The transmission network allows the City to obtain low-cost energy supplies when available, enable bulk sales and exchanges of energy during low-load periods, and take advantage of price differentials between various locations on the Western Electricity Coordinating Council ( WECC ) power grid through wheeling, arbitrage sales and energy swaps. Depending on the generation source, the energy is transmitted through a combination of the transmission resources listed in the following table. [Remainder of page intentionally left blank.] 29

36 TABLE 5 FIRM TRANSMISSION SERVICE AGREEMENTS Transmission Line Path Owner/Party Capacity Sylmar-T.M. Goodrich SCE/ISO (1) 336 MW Pacific-Northwest DC Intertie Pasadena 45 MW (2) Northern Trans. System (NTS) IPA/Utah 104 MW Southern Trans. System (STS) SCPPA 113 MW Adelanto-Sylmar LADWP 136 MW Mead-Phoenix SCPPA 33 MW Mead-Adelanto SCPPA 70 MW McCullough-Victorville Pasadena 25 MW Victorville-Sylmar LADWP 26 MW Hoover-Sylmar LADWP 26 MW Source: Power Supply Business Unit of PWP. (1) The ISO became the control area operator and scheduling agent for this line commencing with ISO operations. (2) The City owns 69 MW of transmission capacity in this line. Southern California Edison. The City has a transmission contract with SCE for rights to 200 MW of firm transfer capacity from LADWP s Sylmar Substation to the T. M. Goodrich Receiving Station in the City through SCE, as well as an interconnection agreement with SCE for interconnection of the T.M. Goodrich Receiving Station to the SCE system. Beginning on March 31, 1998, the ISO became the scheduling agent for the transmission contract. The City joined the ISO in 2005 as a Participating Transmission Owner in order to facilitate the transmission of resources without further contracting with the SCE power distribution system and as a PTO, the City continues to have full access to this transmission at the ISO tariff rate. A successor to the City s interconnection agreement with SCE for interconnection of the T.M. Goodrich Receiving Station to the SCE system was put into place on August 3, Pacific Northwest DC Intertie. Spanning 850 miles from Celilo in northern Oregon to Sylmar, California, the Pacific Northwest DC Intertie is a double-pole, ±500 kv transmission line. The Pacific Northwest DC Intertie conveys energy to the City from BPA and other Pacific Northwest utilities. PWP is entitled to 69 MW (2.25%) of the total 3,100 MW capacity of the southern portion (south of the point where the line crosses the Nevada-Oregon Border ( NOB ) of the Pacific Northwest DC Intertie). Because of the load diversity and excess hydroelectric energy in the spring, the Pacific Northwest DC Intertie provides the City many opportunities for energy imports. Northern Transmission System. The Northern Transmission System consists of two 50-mile long 345 kv AC transmission lines which connect the IPP to the Mona Substation in Utah and the Gonder Substation in Nevada. The City has entitlements of up to 104 MW of capacity on these transmission lines as a result of the IPP Excess Sales Contract with the Utah Participants. IPA allocates % of its outstanding debt to the Northern Transmission System. As of June 30, 2012 this allocation was approximately $77.0 million. The City s maximum share of this obligation is 7.6%. Southern Transmission System. The Southern Transmission System ( STS ) is a double-pole, ±500 kv DC transmission line spanning 488 miles from IPP in central Utah to the Adelanto Substation in Southern California, together with an AC/DC converter station at each end. It is operated and maintained by the LADWP under contract with IPA. In connection with its entitlement to the IPP, the City acquired a contractual entitlement to 141 MW (5.9%) of the total 2,400 MW capacity of the STS through a 30

37 transmission system contract with SCPPA. (As the result of an upgrade to the STS which was completed in December 2010, the capacity of the STS was increased from the previous 1,920 MW to 2,400 MW). The term of the City s contractual entitlement extends for the life of facility, or until all SCPPA bonds issued to finance the STS are defeased. As of July 15, 2012, SCPPA had outstanding $755,700,000 principal amount of its bonds issued to finance the STS (including the STS upgrade project). The City has entered into a transmission service contract with SCPPA which obligates the City to pay the cost of its share of the transfer capability on a take-or pay basis. Adelanto-Sylmar Transmission Line. The Adelanto-Sylmar Transmission Line is a continuation of the Southern Transmission System. The City has a contract with LADWP for 141 MW of transmission capacity from either Adelanto or Victorville to Sylmar. Mead-Phoenix Transmission Project. The Mead-Phoenix Transmission Project consists of a 256-mile, 500 kv AC transmission line, which was placed into commercial operation on April 15, 1996, extending between a southern terminus at the existing Westwing Substation (in the vicinity of Phoenix, Arizona) and a northern terminus at Marketplace Substation, a substation located approximately 17 miles southwest of Boulder City, Nevada. The line is looped through the new 500-kV switchyard constructed in the existing Mead Substation in southern Nevada with a transfer capability of 1,923 MW (as a result of certain upgrades completed in 2009). By connecting to Marketplace Substation, the Mead-Phoenix Transmission Project interconnects with the Mead-Adelanto Transmission Project (as described below) and with the existing McCullough Substation. The Mead-Phoenix Transmission Project is comprised of three project components. SCPPA has executed an ownership agreement providing it with an % member-related ownership share in the Westwing-Mead project component, a % member-related ownership share in the Mead Substation project component, and a % member-related ownership share in the Mead-Marketplace project component. Other owners of the line are Arizona Public Service Company, M-S-R Public Power Agency, Salt River Project and Startrans IO, L.L.C. The commercial operation date for the project was April 15, The City has entered into a transmission service contract with SCPPA which obligates the City to pay the cost of its share of the transfer capability (13.8%) on a take-or-pay basis. The term of this contract extends for the life of the facility, or until all SCPPA bonds issued to finance the project are defeased. As of July 15, 2012, SCPPA had outstanding $45,025,000 principal amount of its bonds issued to finance its interest in the Mead-Phoenix Transmission Project. Through its contract with SCPPA, the City is entitled to receive 33 MW of this line s 1,923 MW transfer capability. Mead-Adelanto Transmission Project. This arterial line consists of a 202- mile, 500 kv AC transmission line extending between a southwest terminus at the existing Adelanto Substation in southern California and a northeast terminus at Marketplace Substation, a substation located approximately 17 miles southwest of Boulder City, Nevada. By connecting to Marketplace Substation, the line interconnects with the Mead-Phoenix Transmission Project and the existing McCullough Substation in southern Nevada. The line has a transfer capability of 1,291 MW. SCPPA has executed an ownership agreement providing it with a total of a % member-related ownership share in the project. The other owners of the line are M-S-R Public Power Agency and Starwood Energy Infrastructure Fund, L.P. The commercial operation date for the project was April 15, 1996, which coincided with the completion of the Mead-Phoenix Transmission Project. The City has entered into a transmission system contract with SCPPA which obligates the City to pay the cost of its share of the transfer capability (8.6%) on a take-or-pay basis. The term of this contract extends for the life of the facility, or until all SCPPA bonds issued to finance the project are defeased. As of July 15, 2012, SCPPA had outstanding $147,415,000 principal amount of its bonds issued to finance its interest in the Mead-Adelanto Transmission Project. Through its contract with SCPPA, the City is entitled to 70 MW of this line s transfer capability. 31

38 McCullough-Victorville Transmission Line. The City acquired a 25 MW equity entitlement from LADWP in the 180-mile, 500 kv AC McCullough-Victorville No. 2 Transmission Line. Originally utilized to import the City s PVNGS power, this line provides a parallel path to the Mead-Adelanto transmission line into the critical Mead Substation. Victorville-Sylmar. The City contracts with LADWP for 26 MW of firm transmission service from the Victorville Substation to the Sylmar Substation as a continuation of the McCullough-Victorville Line. Hoover-Sylmar Transmission Agreements. The City has executed contracts for transmission service to transfer its Hoover renewal (11 MW), its uprate entitlement (9 MW), and an additional 6 MW for other uses concurrent with the terms of the Hoover entitlement. As a result of these contracts, the City s total Hoover transmission entitlement is 26 MW. Future Transmission Resources PWP has transmission resources throughout the west to deliver contractual and spot market supplies into the California ISO grid at the Sylmar interconnection with LADWP, about 10 miles from the City. All of PWP s external resources use this interconnection. PWP has 336 MW of transmission rights from Sylmar to the City under contract with SCE that provide firm Existing Transmission Contract rights under the ISO, which contract was renewed in August Following the contract expiration, PWP, as a Participating Transmission Owner, can continue to take delivery of this related energy by wheeling it through the ISO at the tariff rate. Inter-Utility Sales Transactions In addition to making market purchases when economical, PWP also sells excess electric and gas commodity and transmission capacity when the City does not need it. The City has entered into a number of long-term capacity sales, and energy schedulers and dispatchers also respond to opportunities to market excess power when conditions warrant. The additional net revenues from these transactions help keep electricity rates down by offsetting fixed energy costs. PWP s current inter-utility transactions are summarized as follows: California ISO Participating Generator Agreement. Under this agreement, the City sells capacity and energy from its local generation resources at Broadway and Glenarm into the California ISO s ancillary service markets on a day-ahead and hour-ahead basis. Due to the short-term nature of the market, these ancillary service capacity and energy revenues are extremely volatile and difficult to predict; however, it is estimated that they will range from approximately $3 million to $10 million in future years. Revenues were extraordinary in Fiscal Year as a result of regional power shortages experienced at that time, yielding more than $67 million in revenue. Some of these revenues were subject to litigation, and PWP had posted a net receivable of $12 million at June 30, In June 2011, settlement was reached regarding the litigation with the CAISO, resulting in payment to PWP of $17.3 million. The payment was received in July 2011, resulting in recognition of $5.3 million of non-operating revenue which included recognition of receivables previously written down and $300,000 of interest income. The remaining net receivable was reduced by $12 million. Proceeds of the settlement will be applied to current and future energy costs. Interconnections and Distribution Facilities PWP owns facilities for the distribution of electric power within the city limits of the City (approximately 23 square miles). These facilities include approximately 80 miles of 34 kv 32

39 subtransmission circuits, 370 miles of 17 kv distribution circuits, 296 miles of 4 kv distribution circuits, 3 receiving stations (including the T.M. Goodrich Receiving Station) and 11 distribution stations. The City s system experienced approximately 2.94 hours of outage time per customer during Fiscal Year Employees For Fiscal Year , the City had full-time equivalent employees for the Electric System. Most Electric System employees are represented either by the International Brotherhood of Electrical Workers, the International Union of Operating Engineers, the American Federation of State, County and Municipal Employees, the Pasadena Association of Clerical and Technical Employees or Pasadena Management Association in all matters pertaining to wages, benefits and working conditions. The current arrangements with these unions and/or associations, which are in the form of either a contract or a memorandum of understanding, either expired in 2012 or will expire through Expired contracts are currently under negotiation. See APPENDIX A THE CITY OF PASADENA Employee Relations. The Electric System s permanent employees are all covered by the California Public Employees Retirement System ( CalPERS ), administered by the State, to which contributions are made by both the City and the employees. CalPERS determines the actuarial methods and assumptions used with respect to assets administered by CalPERS (including the City s Plan assets) and makes the investment decisions with respect to such assets. For a description of such actuarial methods and assumptions (including the smoothing conventions used by CalPERS when setting employer contribution rates) and investments, see the comprehensive annual financial report of CalPERS available on its website at In the most current annual valuation report as of June 30, 2010, the actuarial staff of CalPERS reported an unfunded actuarial accrued liability of $137.8 million for the City s miscellaneous plan (in which all Electric System employees participate) as compared to an underfunding of $125.0 million the previous year. Based upon this report for June 30, 2010 from CalPERS staff, the City reported that the funded ratio for its CalPERS miscellaneous plan was 82.2% based upon an actuarial valuation of assets and 64.4% based upon the market value of plan assets. The City expects that its unfunded liability for CalPERS has increased since June 30, The City contributed 100% of its annual pension cost for the miscellaneous plan for the Fiscal Years ended June 30, 2009, June 30, 2010 and June 30, 2011 in the amount of $9,916,000, $10,459,000 and $10,346,000, respectively (an allocable portion of which contributions were paid by the Light & Power Fund). No assurances can be given that the required contributions (including those allocable to the Electric System) will not increase in future years. The Electric System s contributions represent a pro rata share of the City s total contribution described above, including the employees contribution that is paid by the Light & Power Fund, which is based on CalPERS actuarial determination as of July 1 of the current Fiscal Year. CalPERS does not provide data to participating organizations in such a manner so as to facilitate separate disclosure for the Light & Power Fund s share of the actuarial computed pension benefit obligation, the plan s net assets available for benefit obligation and the plan s net assets available for benefits. The Electric System employees represent approximately 15% of the full-time City employees. Other than the pension benefits from the applicable retirement system, the City does not provide medical or other post-retirement benefits to its employees. 33

40 The City of Pasadena provides a subsidy to retirees of the City who are members of CalPERS (as well as members of the Pasadena Fire and Police Pension System). Two different levels of subsidy toward the purchase of medical insurance from CalPERS under the Public Employees Medical and Hospital Care Act (PEMHCA) are offered. Benefit provisions are established and amended through negotiations between the City and the respective unions. The City s current contribution requirements have been established at the individual retiree levels of $ or $33.60 per month depending on bargaining unit membership and policy enacted by CalPERS pursuant to State Law. These minimum requirements are established by CalPERS and adjusted annually. The prior contribution requirements were $ or $27.00 per month depending on the bargaining unit or the unrepresented group the employee was a member of. The City has historically funded these post-retirement health care benefits on a pay-as-you-go basis. For the Fiscal Year ended June 30, 2011, the City s contributions totaled $416,176, representing 13.68% of the annual other postemployment benefit ( OPEB ) cost (expense), an allocable portion of which contributions were paid by the Light & Power Fund. The City s annual OPEB cost (expense) is calculated based on the annual required contribution (ARC) of the employer, an amount actuarially determined in accordance with the parameters of GASB Statement 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and to amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed thirty years. The Electric System is allocated its portion of the required contributions. As of June 30, 2011, the City s unfunded actuarial accrued OPEB liability for the Citywide post-retirement healthcare benefits (including the portion thereof allocable to Electric System employees) was $31,678,052. See APPENDIX A THE CITY OF PASADENA Employee Relations and Post- Retirement Medical Benefits. Further information regarding the City s participation in CalPERS and OPEB may also be found in the City s Comprehensive Annual Financial Report. Insurance The insurable property and facilities of the Electric System are covered under the City s general insurance policies. The City does not carry earthquake insurance on the property and facilities of the Electric System. For additional information on the City s insurance, see APPENDIX A THE CITY OF PASADENA Insurance. Electric Rates and Charges The City is obligated by its Charter and by its rate ordinance to establish rates and collect charges in an amount sufficient to meet its expenses of operation and maintenance and debt service requirements (with specific requirements as to priority and coverage). See SECURITY AND SOURCES OF PAYMENT FOR THE 2012A BONDS Rate Covenant. Electric rates are subject to approval by the City Council. Electric rates are not subject to regulation by the CPUC or by any other state agency. Although its rates are not subject to approval by any federal agency, the City is subject to certain ratemaking provisions of the federal Public Utility Regulatory Policies Act of 1978 ( PURPA ). The City believes that it is operating in compliance with PURPA. See RATE REGULATION. PWP s electric rate structure is unbundled into distribution, energy and transmission, does not allow cross subsidy among customer classes, is cost based, includes a 4.00% PBC rider, and includes variable components, which recover cost increases from customers associated with energy and transmission. The City provides no free electric service. The following table sets forth rates for each customer class as of June 30, 2008 through June 30,

41 TABLE 6 FIVE-YEAR HISTORY OF ELECTRIC RATES Dollars Per Kilowatt Hour Fiscal Year Ended June 30, Customer Class (1) Residential $ $ $ $ $ Small Commercial and Industrial Medium Commercial and Industrial Large Commercial and Industrial Street Lighting and Traffic Signals Note: Rates above include Public Benefit Charge. (1) Preliminary data; projected for Fiscal Year Source: Finance and Administration Business Unit of PWP. Electric rates have been generally stable over the past five years. PWP plans to change rates as necessary to reflect changes in purchase power costs, operating and capital costs. In July 2012, PWP increased the distribution and customer charge component of its electric rate to offset increased operational costs. This rate change represented an increase of approximately 2.3% in system average rates. Reserve Policies General During the past few years PWP has, in practice, had cash balances that exceeded 30 days of operating expenses on hand in accordance with reserve policies formalized in May 2006 as a matter of policy and not pursuant to any bond indenture or agreement. PWP was as of June 30, 2011, and currently is, in compliance with such policies. These funds represent moneys required for unanticipated operational expenses, as well as approved capital expenditures, unexpended public benefit fund moneys and reserves for energy and transmission cost increases. The following table sets forth actual reserves at May 31, 2012, for each fund. The actual balance of these reserves as of June 30, 2012 are not yet available. Reserve levels are calculated in accordance with PWP s reserve policy. Reserves (1) ($ million) Operating Reserve $ 29.8 Energy Reserve 26.5 Transmission Reserve 5.2 Contingency Reserve 0.5 Bond Service Reserve 5.1 PBC Reserve 2.3 General Fund Transfer Reserve 14.3 Stranded Investment Reserve 65.3 Capital Reserve 56.0 Total $205.0 (1) Based on information as of May 31, Source: Finance and Administration Business Unit of PWP. Operating Reserve. The operating reserve policy provides for 60 days of operations and maintenance expenses. The projected fund balance for June 30, 2012 is approximately $29.8 million in operating reserves. 35

42 Energy Reserve. The energy reserve account is available to mitigate energy cost volatility and unexpected plant outages, which have to be covered by power purchased in the energy markets. The reserve amount is driven mainly by a periodic assessment of PWP s load forecast, the amount of power required to be purchased in the energy markets to supplement power already secured through long-term commitments and past purchases, and the estimated near-term forecast of natural gas and power costs. Transmission Services Charge Reserve. This reserve account is a depository account for balancing costs and revenues associated with high-voltage transmission and related services. Contingency Reserve. The Contingency Reserve is designated for equipment replacement and/or emergency work due to natural disasters. Bond Service Reserve. This reserve is a depository account for bond debt service reserves funds held by the City for PWP bonds. Public Benefit Charge (PBC) Reserve. This reserve account is a depository account for balancing costs and revenues associated with the PBC Program and it is used exclusively to fund PBC related expenditures. General Fund Transfer Reserve. This reserve account is designated to provide funding to complete the General Fund transfer from the Light and Power Fund according to the schedule determined in the City Charter. The schedule provides for 75% of the transfer to be made in July of the succeeding fiscal year with the remaining 25% to be made upon delivery of the audited financial statements. Stranded Investment Reserve. The Stranded Investment Fund was established in 1997 to mitigate the difference between the costs associated long-term contracts with IPA and SCPPA, and the anticipated energy costs in a deregulated energy market. As of May 31, 2012, the Stranded Investment Reserve Fund balance was $65.3 million. This amount was reflected on the Statement of Net Assets for the Light and Power Fund as restricted cash. Capital Reserve. This reserve account is designated to fund the design and construction costs of near-term committed capital projects. PWP generally maintains a cash flow budget for key capital projects and ensures that it has on hand sufficient funds to cover its current year ongoing capital projects. Currently, PWP is utilizing the Capital Reserve to cover its pay-as-you-go portion of the financing required for its Power Distribution System Master Plan projects. [Remainder of page intentionally left blank.] 36

43 Customers, Energy Sales and Revenues The average number of customers, energy sales and revenues derived from sales, by classification of service, during the past five Fiscal Years, are listed below. TABLE 7 CUSTOMERS, ENERGY SALES AND REVENUES Fiscal Year Ended June 30, (1) Number of Customers Residential 54,378 54,826 55,206 55,302 55,497 Small Commercial & Industrial 7,475 7,724 7,602 7,600 7,645 Medium Commercial & Industrial Large Commercial & Industrial Public Street & Highway Lighting Total 62,885 63,583 63,838 63,947 64,151 Megawatt-hour Sales: Residential 338, , , , ,084 Small Commercial & Industrial 158, , , , ,686 Medium Commercial & 262, , , , ,815 Industrial Large Commercial & Industrial 462, , , , ,795 Public Street and Highway Lighting 16,288 16,267 16,272 15,640 15,598 Other (Misc) (7,212) 3,513 6,339 10,697 2,000 Total Retail Energy Sales 1,231,414 1,245,009 1,184,344 1,159,560 1,116,978 Wholesale Sales to Other Utilities 315, , , , ,681 Total Energy Sales 1,546,898 1,363,240 1,348,559 1,328,962 1,345,659 Revenues from Sale of Energy: Residential $ 47,163,611 $ 50,460,525 $ 48,241,972 $ 47,820,131 $ 47,554,670 Small Commercial & Industrial 21,001,083 22,256,838 21,139,933 21,110,914 21,980,388 Medium Commercial & 32,957,566 34,668,843 33,463,025 34,382,208 36,078,838 Industrial Large Commercial & Industrial 54,846,816 58,897,519 54,319,205 53,243,579 48,886,422 Wholesale Sales to Other 8,150,682 10,774,433 7,250,765 7,198,514 8,777,798 Utilities Public Street & Highway 2,016,645 2,149,495 2,115,272 2,048,314 2,112,176 Lighting Other (2) 12,943,793 13,950,533 17,182,251 21,189,641 20,255,581 Total Energy Revenue $185,043,0397 $193,158,186 $183,712,423 $186,993,339 $185,645,873 (1) Preliminary data; projected for Fiscal Year year-end based on information as of May 31, (2) Other revenue includes PTO TRR revenues, Public Benefit Charge, unbilled revenue and miscellaneous governmental revenue. Source: Finance and Administration Business Unit of PWP. Within PWP, commercial and industrial customers are principally educational and healthcare institutions and office buildings, as well as a wide range of businesses. These businesses include postal service, engineering, telecommunications, healthcare, property development, insurance, office products and packaging and chemical products. No single commercial industrial customer currently accounts for more than 3% of total annual electrical sales revenue. The top 10 commercial and industrial customers typically represent approximately 13% of PWP s annual electric sales revenue. 37

44 Capital Requirements In March 2005, the City Council adopted the Power Master Plan which identified the infrastructure needs of the power distribution system and recommended system improvements over a 20-year planning period ( ). Following the adoption of the Power Master Plan, PWP engaged R.W. Beck to develop a detailed capital improvement project implementation and spending plan for the first six years of the Power Master Plan. This implementation and spending plan was completed in July The implementation and spending plan recommended that PWP make a capital investment of about $121.9 million in its power distribution system through This recommended capital investment was in addition to other planned capital projects of about $74.4 million over the same period and did not include any new investments for energy supply. Specifically, the implementation and spending plan requires PWP to augment the power distribution system capacity, install additional equipment and replace aging infrastructure. Over 17 specific projects were identified for the first six years of the Power Master Plan as well as associated resource requirements and costs. PWP made significant progress on these projects. The City expects routine capital requirements, including those contemplated by the Power Master Plan and those relating to the City s planned local gas-fired generation project repowering, for the next five Fiscal Years to aggregate approximately $322.5 million. It is expected that on average, approximately 35% of these improvements are expected to be funded through current revenues and the balance will be funded through the issuance of future financings. Indebtedness and Joint Agency Obligations TABLE 8 CAPITAL REQUIREMENTS (In Thousands) Fiscal Year Capital Requirements 2013 $ 69, , , , ,786 Total $322,486 Source: Finance and Administration Business Unit of PWP. Upon the issuance of the 2012A Bonds and the refunding of the Refunded 2002 Bonds and the Refunded 2003 Bonds, in addition to the 2012A Bonds, the City will have outstanding $128,475,000 aggregate principal amount of Bonds which are payable from the Light and Power Fund and secured by a pledge of the Net Income of the Electric System. See SECURITY AND SOURCES OF PAYMENT FOR THE 2012A BONDS. As previously discussed, the City participates in the SCPPA joint powers agency. SCPPA provides for the financing and construction of electric generating and transmission projects for participation by some or all of its members. The City is a participant in the following SCPPA projects: PVNGS, Hoover, Magnolia Power Project and Milford Wind Corridor Phase I Project, with respect to generation, and is a participant in the Mead-Phoenix Transmission Project, the Mead-Adelanto Transmission Project and the Southern Transmission System with respect to transmission. To the extent the City participates in projects developed by SCPPA, the Electric System is obligated for its 38

45 proportionate share of the cost of the particular project. See TABLE 9 OUTSTANDING DEBT OF JOINT POWERS AGENCIES. In 1997 SCPPA began taking steps designed to accelerate the payment of all fixed rate bonds relating to PVNGS. Such steps consisted primarily of refunding certain outstanding bonds for savings and accelerating payments by the PVNGS project participants on the bonds issued by SCPPA for PVNGS. The restructuring plan has resulted in substantial savings to the City, and the delivered cost of energy produced by PVNGS decreased significantly on July 1, In addition, the City has entered into certain power sales contracts with IPA and others for the delivery of electric power from IPP. The Electric System s share of IPP power is equal to 6.0% of the generation output of IPP, IPA s 1,660 MW coal-fueled generating station, located in central Utah. The contracts constitute an obligation of the Electric System to make payments solely from revenues from the Light and Power Fund. The power sales contracts also require the Electric System to pay certain minimum charges that are based on debt service requirements. Obligations of the City under the agreements with IPA and SCPPA constitute Maintenance and Operating Expenses of the City payable prior to any of the payments required to be made on the Bonds. Agreements between the City and SCPPA and the City and IPA (other than the agreement relating to SCPPA s Natural Gas Prepaid bonds) are on a take-or-pay basis, which requires payments to be made whether or not applicable projects are operating or operable, or whether the output from such projects is suspended, interfered with, reduced, curtailed or terminated in whole or in part. In addition, all of these agreements (other than the agreement relating to SCPPA s Natural Gas Prepaid bonds and the agreement relating to SCPPA s Natural Gas Project in which the City contributed its share of capital costs and did not participate in the related financing) contain step up provisions obligating the City to pay a share of the obligations of a defaulting participant. Such payments represent the Electric System s share of current and long-term obligations. Payment for these obligations will be made from operating revenues received during the year that payment is due. The City s participation and share of principal obligations (without giving effect to interest due on the obligations or any step up provisions) for each of the joint powers agency projects in which it participates are shown in the following table. [Remainder of page intentionally left blank.] 39

46 TABLE 9 OUTSTANDING DEBT OF JOINT POWERS AGENCIES As of July 15, 2012 (Dollars in Millions) City s Participation (1) City s Share of Outstanding Debt (2) Outstanding Debt IPA Intermountain Power Project (3) $2, % $ (3) SCPPA Palo Verde Project Southern Transmission System Mead-Adelanto Transmission Project (4) Mead-Phoenix Transmission Project (5) Magnolia Power Project (6) Milford Wind Corridor Phase I Project Natural Gas Prepaid (7) TOTAL $4, $ Sources: Finance and Administration Business Unit of PWP, SCPPA and IPA. (1) Participation obligation is subject to increase upon default of another project participant (other than with respect to SCPPA s Natural Gas Prepaid bonds). The City has no obligation for debt service costs (and no step-up obligation) in connection with SCPPA s Natural Gas Project. See Joint Powers Agency Generation and Fuel Resources/Remote Ownership Interests Remote Ownership Interests Natural Gas Project and Fuel Supply above. (2) (3) (4) (5) (6) (7) Excludes interest on the debt. Includes commercial paper, subordinate notes and full accreted value at maturity for all capital appreciation bonds. Includes IPP bonds defeased with funds provided by the City as described under Reserve Policies Stranded Investment Reserve above for which the City is the payee of a subordinate note receivable from IPA of approximately $57,110,000 outstanding as of July 15, On September 12, 2012, SCPPA refunded a portion of the outstanding Mead-Adelanto Transmission Project bonds. Following such refunding $ million principal amount of Mead-Adelanto Transmission Project bonds will be outstanding. On September 12, 2012, SCPPA refunded a portion of the outstanding Mead-Phoenix Transmission Project bonds. Following such refunding $44.90 million principal amount of Mead-Phoenix Transmission Project bonds will be outstanding. Excludes bonds relating solely to City of Cerritos. City payment obligation is with respect to actual quantity of natural gas delivered each month on a take-and-pay basis. Responsibility for bond repayment is non-recourse to the City. See Joint Powers Agency Generation and Fuel Resources/Remote Ownership Interests Southern California Public Power Authority Prepaid Natural Gas Project above. For the Fiscal Year ended June 30, 2012, the City s payments of debt service on its joint powers agency obligations aggregated approximately $30.5 million. As of July 15, 2012, a portion of the joint powers agency obligation debt service was variable rate debt. Unreimbursed draws under liquidity arrangements supporting joint powers agency variable rate debt obligations bear interest at rates well in excess of the current variable rate on such bonds. Moreover, in certain circumstances, the failure to reimburse draws on the liquidity agreements may result in the acceleration of scheduled payment of the principal of such variable rate joint powers agency obligations. There are currently no unreimbursed draws under such liquidity arrangements outstanding, although draws have on occasion been made as a result of market conditions during the last five years resulting in unremarketed variable rate bonds for certain periods. In addition, swap agreements entered into by the joint powers agencies in connection with certain of such obligations are subject to early termination under certain circumstances, in which event the joint powers agency could owe substantial termination payments to the applicable swap provider (an allocable portion of such payments the project participants would be obligated for). 40

47 Historical Operating Results and Debt Service Coverage The following table shows the historical operating results and debt service coverage during the past five Fiscal Years on PWP s parity obligations payable from PWP s Light and Power Fund. TABLE 10 HISTORICAL OPERATING RESULTS AND DEBT SERVICE COVERAGE (Dollar Amounts in Thousands) Fiscal Year Ended June 30, (1) Revenues: Base Rate Operating Revenues $ 54,091 $ 51,481 $ 51,457 $ 50,563 $ 49,856 Recovered Energy & Transmission Costs 103, , , , ,756 PTO TRR Revenues 8,340 7,298 11,343 12,229 13,771 Public Benefit Charge 3,407 7,194 6,842 6,660 6,478 Sales to Other Utilities 13,705 10,774 7,250 7,199 8,778 Other Operating Revenues 1, Total Operating Revenues $185,044 $193,158 $183,712 $186,993 $185,646 Expenses: Energy Costs Fuel Retail $ 12,958 $ 17,800 $ 9,182 $ 5,587 $ 7,641 Wholesale 1,307 1,667 4,575 4,166 4,084 Purchased Power Retail 82,309 78,575 76,655 89,490 88,980 Wholesale 8,189 3, Direct Operating Expenses 19,090 20,303 20,096 21,470 22,963 General and Administrative 16,650 24,294 23,453 21,494 22,990 (includes Commercial) Interest Expense 6,508 7,720 7,205 6,022 6,115 Depreciation 15,708 16,737 17,490 18,184 18,149 Total Expenses $162,719 $170,428 $158,730 $167,168 $171,393 Earnings from Operations $ 22,325 $ 22,730 $ 24,982 $ 19,825 $ 14,253 Non Operating Income 17,639 14,078 18,891 13,455 9,200 Net Income $ 39,964 $ 36,808 $ 43,873 $ 33,280 $ 23,453 Cash Flow and Debt Service Calculation Add Back Interest Expense $ 6,508 $ 7,720 $ 7,205 $ 6,022 $ 6,115 Add Back Depreciation 15,708 16,737 17,490 18,184 18,149 Available for Debt Service $ 62,180 $ 61,265 $ 68,568 $ 57,486 $ 47,717 Debt Service $ 13,713 $ 14,930 $ 13,071 $ 10,926 $ 14,062 Debt Service Coverage 4.53x 4.10x 5.25x 5.26x 3.39x Amount Available After Debt Service $ 48,467 $ 46,335 $ 55,497 $ 46,560 $ 33,655 (1) Preliminary data; projected for Fiscal Year year-end based on information as of May 31, Source: City of Pasadena Department of Finance. 41

48 Condensed Balance Sheet The following Condensed Balance Sheet has been prepared by the City. The information for the Fiscal Years ended June 30, 2008 through June 30, 2011 has been prepared based upon audited financial statements (except as noted) for the Fiscal Years shown. The information for the Fiscal Year ended June 30, 2012 is projected based upon unaudited preliminary information as of May 31, TABLE 11 CITY OF PASADENA ELECTRIC UTILITY FUND CONDENSED BALANCE SHEET (Dollar Amounts in Thousands) Fiscal Year Ended June 30, (1) Total Current & Non-Current Assets $136,078 $241,993 $258,497 $255,013 $258,384 Total Restricted Assets 198,714 84,843 69,400 68,582 70,343 Net Property, Plant and Equipment 297, , , , ,140 Total Assets $632,455 $643,609 $673,709 $676,104 $683,867 Total Current Liabilities 24,663 19,551 14,897 16,587 16,706 Net Long-Term Liabilities 167, , , , ,072 Net Assets $440,279 $464,165 $494,015 $514,298 $522,089 (1) Fiscal Year preliminary data; projected for Fiscal Year based on information as of May 31, Source: City of Pasadena Department of Finance. Electric System Initiatives In addressing the changing legal and business environment resulting from efforts to restructure the electric utility business in California the City undertook a number of strategic efforts to ensure that the Electric System remained competitive. Strategic efforts have been undertaken in the past several years to allow the Electric System to retain customers by maintaining high quality service and competitive rates. RATE REGULATION The City sets rates, fees and charges for electric service. The authority of the City to impose and collect rates and charges for electric power and energy sold and delivered is not subject to the general regulatory jurisdiction of the CPUC and presently neither the CPUC nor any other regulatory authority of the State of California nor the FERC approves such rates and charges. Although the retail rates of the City for electric service are not subject to approval by any federal agency, the City is subject to certain ratemaking provisions of the federal Public Utility Regulatory Policies Act of 1978 ( PURPA ) and Sections of the Federal Power Act ( FPA ). It is possible that future legislative and/or regulatory changes could subject the rates and/or service area of the City to the jurisdiction of the CPUC or to other limitations or requirements. FERC could potentially assert jurisdiction over rates of licensees of hydroelectric projects and customers of such licensees under Part I of the Federal Power Act ( Part I ), although it has not as a practical matter exercised or sought to exercise such jurisdiction to modify rates that would legitimately be charged. 42

49 Under Sections 211, 211A, 212 and 213 of the FPA, FERC has the authority, under certain circumstances and pursuant to certain procedures, to order any utility (municipal or otherwise) to provide transmission access to others at FERC-approved rates. In addition, the Energy Policy Act of 2005 expanded FERC s jurisdiction to require municipal utilities that sell more than eight million MWhs of energy per year to pay refunds under certain circumstances for sales into organized markets. To date, it is unclear when, if ever, the City would meet this threshold requirement. The California Energy Commission (the CEC ) is authorized to evaluate rate policies for electric energy as related to the goals of the Energy Resources Conservation and Development Act and to make recommendations to the Governor, the Legislature and publicly owned electric utilities. DEVELOPMENTS IN THE CALIFORNIA ENERGY MARKETS Background; California Electric Market Deregulation In 1996, California partially deregulated its electric energy market. As a consequence of the partial deregulation, the California investor-owned utilities (the IOUs ) sold a large portion of their generation resources and began to purchase significant amounts of electricity. During 2000 and 2001, California experienced extreme fluctuations in the prices and supplies of natural gas and electricity in much of the State, the impacts of which are well documented. While there has been some progress in addressing these issues, uncertainty remains (including, for example, in the near term with respect to possible reliability challenges for San Diego and portions of the Los Angeles basin that may result from an extended outage at the San Onofre Nuclear Generating Station). As a result of the foregoing and other factors, no assurance can be given that measures undertaken during the last several years, together with measures to be taken in the future, will prevent the recurrence of shortages, price volatility or other energy problems that have adversely affected PWP and other California electric utilities in the past. City s Response to Market Deregulation Direct Access Following the dysfunction in the market and the energy crisis in 2000 and 2001, Assembly Bill 1X ( AB 1X ) was enacted to authorize the State to begin procuring power for the retail customers of the investor-owned utilities. AB 1X also required the CPUC to suspend the right of retail customers of purchase electricity from suppliers other than the State Department of Water Resources and the investorowned utilities. Pursuant to AB 1X, on March 21, 2002, the CPUC suspended direct access and customer choice programs for the retail customers of the California investor-owned utilities. However, in October 2009, California Senate Bill 695 ( SB 695 ) was signed into law, which deletes the existing suspension of direct access transactions for investor-owned utilities and instead requires the CPUC to authorize direct access transactions for nonresidential end-use customers subject to a phase-in schedule of not less than three years and not more than five years, and subject to an annual maximum allowable total kilowatt hour limit established for each investor-owned utility. On March 11, 2010, the CPUC approved a decision to implement the provisions of SB 695, setting the gigawatt direct access load limits for each of the three California investor-owned utilities and providing for a four year phase-in schedule beginning April 11, In April 1999, the City Council approved a Direct Access Phase-In Schedule, Direct Access Regulation No. 22, a non-bypassable generation related charge and amended the Light and Power Rate Ordinance to establish, among other things, the following two items: (1) a Direct Access Energy Credit, providing that those customers who choose to purchase their power from an energy supplier other than PWP will continue to pay the currently established electric rates, except for the energy supply component of the rate, and (2) a Direct Access Charge, providing that all customers who choose to participate in direct access will be required to pay all incremental and ongoing costs incurred by PWP to implement 43

50 direct access. The purpose of these actions was to allow PWP to collect any stranded costs which may arise as well as any ongoing incremental costs related to direct access from any customers who choose to leave PWP as a result of direct access. To date PWP has not lost any customers due to the implementation of direct access. State Legislation A number of bills affecting the electric utility industry have been introduced or enacted by the California Legislature in recent years. In general, these bills regulate greenhouse gas emissions and provide for greater investment in energy-efficiency and environmentally friendly generation alternatives through more stringent renewable resource portfolio standards. The following is a brief summary of certain of these bills. Greenhouse Gas Emissions. On June 1, 2005, then Governor Arnold Schwarzenegger signed Executive Order S-3-05, which placed an emphasis on efforts to reduce greenhouse gas emissions by establishing statewide greenhouse gas reduction targets. The targets are: (i) a reduction to 2000 emissions levels by 2010; (ii) a reduction to 1990 levels by 2020; and (iii) a reduction to 80% below 1990 levels by The Executive Order also called for the California Environmental Protection Agency to lead a multi-agency effort to examine the impacts of climate change on California and develop strategies and mitigation plans to achieve the targets. On April 25, 2006, then Governor Schwarzenegger also signed Executive Order S which directs the State to meet a 20% biomass utilization target within the renewable generation targets of 2010 and 2020 for the contribution to greenhouse gas emission reduction. Then Governor Schwarzenegger signed Assembly Bill 32, the Global Warming Solutions Act of 2006 (the GWSA ), which became effective as law on January 1, The GWSA prescribed a statewide cap on global warming pollution with a goal of returning to 1990 greenhouse gas emission levels by In addition, the GWSA establishes a mandatory reporting program for all IOUs, local publicly-owned electric utilities ( POUs ) and other load-serving entities (electric utilities providing energy to end-use customers) to inventory and report greenhouse gas emissions to the California Air Resources Board ( CARB ), requires CARB to adopt regulations for significant greenhouse gas emission sources (allowing CARB to design a cap-and-trade system) and gives CARB the authority to enforce such regulations beginning in On December 11, 2008, CARB adopted a scoping plan to reduce greenhouse gas emissions. The scoping plan set out a mixed approach of market structures, regulation, fees and voluntary measures. The scoping plan included a cap-and-trade system covering approximately 85% of all greenhouse gas emissions in California. In August 2011, CARB revised the scoping plan in response to litigation. The revised scoping plan continues to include a cap-and-trade system. On October 20, 2011, CARB adopted a regulation implementing a cap-and-trade system. The California Office of Administrative Law ( OAL ) approved the regulation on December 13, The cap-and-trade regulation became effective on January 1, 2012, and it provides for emission compliance obligations to begin on January 1, The cap-and-trade program covers sources accounting for 85% of California s greenhouse gas emissions, the largest program of its type in the United States. 44

51 The cap-and-trade program will be implemented in phases. The first phase of the program (January 1, 2013 to December 31, 2014) will introduce a hard emissions cap that covers emissions from electricity generators and large industrial sources emitting more than 25,000 metric tons of carbon dioxide-equivalent greenhouse gases ( CO 2 e ) per year. In 2015, the program will be expanded to cover emissions from transportation fuels, natural gas, propane and other fossil fuels. The cap will decline each year. The cap-and-trade program will include the distribution of carbon allowances. Each allowance will be equal to one metric ton of CO 2 e. As part of a transition process, initially, most of the carbon allowances will be distributed for free. Additional allowances will be auctioned quarterly, beginning in November Utilities can acquire more carbon allowances at these auctions. IOUs, as well as POUs that sell electricity into the ISO markets will be required to auction their allowances. They will then need to purchase allowances to meet their compliance obligations, and use any remaining proceeds from the sale of their allocated allowances for the benefit of their ratepayers. POUs that do not sell into the ISO markets have three options (which are not mutually exclusive) once their allocated allowances are distributed to them. They can (i) place allowances in their compliance accounts to meet compliance obligations for plants they operate directly, (ii) place allowances in the compliance account of a joint powers agency or public power utility that generates power on their behalf, and/or (iii) auction the allowances and use the proceeds to benefit their ratepayers. The cap-and-trade program will also allow covered entities to use offset credits for compliance purposes (not exceeding 8% of a covered entity s compliance obligation). Offsets can be generated by emission reduction projects in sectors that are not regulated under the cap-and-trade program. Approved project types include urban forest projects, reforestation projects, destruction of ozone-depleting substances, and livestock methane management projects. CARB is considering additional offset protocols, including emission reductions through changes to rice cultivation practices, and destruction of fugitive coal mine methane. These protocols may be approved in There are a number of issues remaining to be addressed prior to the start of emission compliance obligations in 2013, including linking the California cap-and-trade program to the equivalent program in Quebec, Canada (subject to the approval of Governor Brown pursuant to Senate Bill 1018), and developing and testing a trading and tracking computer system. CARB will work on these issues throughout Linking California s program to additional Canadian cap-and-trade programs may occur in 2013, as part of the Western Climate Initiative. The Western Climate Initiative is a regional effort consisting of California and four Canadian provinces (Quebec, British Columbia, Ontario and Manitoba), which is in the process of establishing a greenhouse gas reduction trading framework. In 2013, CARB may also consider changes to the cap-and-trade program s electricity sector provisions, including provisions relating to electricity imports and resource shuffling. The City is unable to predict at this time the full impact of the cap-and-trade program on the PWP electric utility or on the electric utility industry generally or whether any changes to the adopted program will be made. However, PWP could be adversely affected if the carbon emissions of its resource portfolio are in excess of the allowances administratively allocated to it and it is required to purchase allowances on the market to cover its emissions. In addition to the GWSA, Senate Bill 1368 also became effective as law on January 1, It provides for an emission performance standard, restricting new investments in baseload fossil fuel electric generating resources that exceed the rate of greenhouse gas emissions for existing combined-cycle natural gas baseload generation. SB 1368 allows the CEC to establish a regulatory framework to enforce the greenhouse gas emission performance standard for POUs such as PWP. The CPUC has a similar responsibility for the IOUs. The regulations promulgated by the CEC were approved by the Office of 45

52 Administrative Law on October 16, The CEC regulations prohibit any investment in baseload generation that does not meet the emission performance standard of 1,100 pounds of CO 2 per MWh of electricity produced, with limited exceptions for routine maintenance, requirements of pre-existing contractual commitments, or threat of significant financial harm. In December 2011, the CEC decided to undertake a review of these regulations to ensure there is adequate review of investments in facilities that do not meet the emission performance standard. On July 9, 2012, the CEC issued its Tentative Conclusions And Requests For Additional Information. The CEC concluded in this document that it may benefit from additional information about the decision-making processes of the POUs without imposing onerous financial and administrative burdens on POUs, that absent clear recommendations or guidance for further refining or defining the terms routine maintenance and designed and intended to extend the life utilized in the regulations or facts establishing POU misapplication of the EPS compliance requirements, there may be no basis for modifying the phrases or establishing additional criteria for a covered procurement, and that reevaluation of the applicability of EPS regulations has not been triggered by application of the provisions of the GWSA. Any future changes to these regulations pursuant to this review may impact PWP. Additionally, Assembly Bill 1925, signed by then Governor Schwarzenegger on September 26, 2006, requires the CEC to develop a cost-effective strategy for the geologic sequestration and management of industrial carbon dioxide. Energy Procurement and Efficiency Reporting. Senate Bill 1037 ( SB 1037 ) was signed by then Governor Schwarzenegger on September 29, It requires that each POU, including PWP, prior to procuring new energy generation resources, first acquire all available energy efficiency, demand reduction, and renewable resources that are cost-effective, reliable and feasible. SB 1037 also requires each POU to report annually to its customers and to the CEC its investment in energy efficiency and demand reduction programs. PWP has complied with such reporting requirements. Further, California Assembly Bill 2021 ( AB 2021 ), signed by then Governor Schwarzenegger on September 29, 2006, requires that the POUs establish, report, and explain the basis of the annual energy efficiency and demand reduction targets by June 1, 2007 and every three years thereafter for a tenyear horizon. PWP has complied with this reporting requirement under AB Future reporting requirements under AB 2021 include: (i) the identification of sources of funding for the investment in energy efficiency and demand reduction programs; (ii) the methodologies and input assumptions used to determine cost-effectiveness; and (iii) the results of an independent evaluation to measure and verify energy efficiency savings and demand reduction program impacts. The information obtained from the POUs is being used by the CEC to present the progress made by the POUs towards the State s goal of reducing electrical consumption by 10% within ten years and the greenhouse gas targets presented in Executive Order S In addition, the CEC will provide recommendations for improvement to assist each POU in achieving cost-effective, reliable, and feasible savings in conjunction with the established targets for reduction. Renewable Portfolio Standards. In September 2002, the California Legislature enacted and then Governor Gray Davis signed into law Senate Bill 1078 ( SB 1078 ). SB 1078 requires that the IOUs adopt an RPS to meet a minimum increase of 1% of retail energy sales needs each year from renewable resources and to meet a goal of 20% of their retail energy needs from renewable energy resources by the year SB 1078 also directed the State s POUs to implement and enforce an RPS that recognizes the intent of the Legislature to encourage development of renewable resources, taking into consideration the impact on a utility s rates, reliability, financial resources, and the goal of environmental improvement. On September 26, 2006, then Governor Schwarzenegger signed Senate Bill 107 ( SB 107 ) into law, which requires IOUs to have 20% of their electricity produced by renewable sources by 2010 and prescribes that POUs meet the intent of the legislation. On November 17, 2008, then Governor 46

53 Schwarzenegger signed Executive Order S Among other things, Executive Order S provides that the RPS target established for California shall require retail electricity sellers to serve 33% of their loads with eligible renewable energy resources by Since the implementation of SB 1078, the CPUC and the CEC have taken a number of actions designed to assist utilities in achieving the renewable energy goals set by the legislation. In order to help utilities overcome the challenges associated with meeting accelerated RPS goals, the CPUC and the CEC supported the implementation of a renewable energy certificate ( REC ) trading system. In parallel, pursuant to SB 1078, the CEC, collaboratively with the Western Governors Association and the WECC, established the Western Renewable Energy Generation Information System ( WREGIS ), to ensure the integrity of RECs and prevent the double counting of the certificates. The electronic tracking system became operational in Senate Bill X1 2 ( SBX1 2 ), the California Renewable Energy Resources Act, was signed into law by Governor Jerry Brown on April 12, SBX1 2 codifies the RPS target for retail electricity sellers to serve 33% of their loads with eligible renewable energy resources by 2020 as provided in Executive Order S As enacted, SBX1 2 makes the requirements of the RPS program applicable to POUs (rather than just prescribing that POUs meet the intent of the legislation as under previous statutes). However, the governing boards of POUs are responsible for implementing the requirements, rather than the CPUC, as is the case for the IOUs. In addition, certain enforcement authority with respect to POUs is given to the CEC and CARB, including authority to impose penalties. SBX1 2 requires each POU to adopt and implement a renewable energy resource procurement plan. The plan must require the utility to procure a minimum quantity of electricity products from eligible renewable energy resources, which may include RECs, as a specified percentage of total kilowatt hours sold to the utility s retail end-use customers to achieve the following targets: (i) an average of 20% for the period January 1, 2011 to December 31, 2013, inclusive; (ii) 25% by December 31, 2016; and (iii) 33% by December 31, 2020 and for all subsequent years. SBX1 2 grandfathers any facility approved by the governing board of a POU prior to June 1, 2010 for procurement to satisfy renewable energy procurement obligations adopted under prior law if the facility is a renewable electrical generation facility as defined in the bill (subject to certain restrictions). Renewable electrical generation facilities include certain out-of-state renewable energy generation facilities if the facility: (i) will not cause or contribute to any violation of a California environmental quality standard or requirement, (ii) participates in the accounting system to verify compliance with the RPS program requirements, and (iii) either (a) commenced initial commercial operation after January 1, 2005 or (b) either (x) the electricity is from incremental generation resulting from expansion or repowering of the facility or (y) electricity generated by the facility was procured by a retail seller or POU as of January 1, The percentage of a POU s RPS requirements that may be met with unbundled RECs from generating facilities outside California declines over time, beginning at 25% through 2013 and declining to a level of 10% in 2017 and beyond. The CEC is in the process of developing detailed rules to implement SBX1 2. In connection with the implementation of SBX1 2, the CEC is responsible for certifying electric generation facilities as eligible renewable energy resources for purposes of the RPS program and has adopted guidelines for this purpose that identify the requirements, conditions and process for certification of facilities as eligible renewable energy resources. The current guidelines identify bio-methane as an eligible renewable energy resource and allow power plants that use bio-methane to generate electricity to be certified as eligible to meet the RPS requirements. PWP currently holds three contracts for the delivery of bio-methane fuel. The contracts are intended for use in local generation plants to produce in-state renewable energy in compliance with SBX1-2 requirements. The City has obtained certification from the CEC to burn bio-methane in its local generation plants. 47

54 On March 28, 2012, the CEC suspended its previously adopted guidelines with respect to allowing electric generation facilities to be certified as eligible renewable energy resources if the facilities use bio-methane to generate electricity. However, the suspension does not affect power plants that have been certified as RPS-eligible by the CEC and permitted to use bio-methane as part of the certification, subject to certain limitations. Legislation concerning the RPS eligibility of bio-methane is currently pending in the California legislature. The outcome of which, may impact the degree to which PWP s existing bio-methane fuel contracts will meet the in-state definition, but is not expected to disqualify them completely from RPSeligibility. The outcome of this legislation may impact the bio-methane eligibility guidelines the CEC will put into place if and when the suspension is lifted and PWP s requirement for future resources to comply with the renewable portfolio mandate. Solar Power. On August 21, 2006, then Governor Schwarzenegger signed into law California Senate Bill 1 (also known as the California Solar Initiative ). This legislation requires POUs, including PWP, to establish a program supporting the stated goal of the legislation to install 3,000 MW of photovoltaic energy in California. POUs are also required to establish eligibility criteria in collaboration with the CEC for the funding of solar energy systems receiving ratepayer-funded incentives. The legislation gives a POU the choice of selecting an incentive based on the installed capacity, or based on the energy produced by the solar energy system, measured in kilowatt-hours. Incentives would be required to decrease at a minimum average rate of 7% per year. POUs also have to meet certain reporting requirements regarding the installed capacity, number of installed systems, number of applicants, amount of awarded incentives and the contribution toward the program s goals. PWP has established programs in accordance with the requirements of the California Solar Initiative. Future Regulation The electric industry is subject to continuing legislative and administrative reform. States routinely consider changes to the way in which they regulate the electric industry. Recently, both further deregulation and forms of additional regulation have been proposed for the industry, which has been highly regulated throughout its history. The City is unable to predict at this time the impact any such proposals will have on the operations and finances of the PWP electric utility or the electric utility industry generally. Impact of Developments on the City The effect of the developments in the California energy markets described above on the City cannot be fully ascertained at this time. Also, volatility in energy prices in California may return due to a variety of factors which affect both the supply and demand for electric energy in the western United States. These factors include, but are not limited to, the adequacy of generation resources to meet peak demands, the availability and cost of renewable energy, the impact of greenhouse gas emission legislation and regulations, fuel costs and availability, weather effects on customer demand, transmission congestion, the strength of the economy in California and surrounding states and levels of hydroelectric generation within the region (including the Pacific Northwest). See OTHER FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY. This price volatility may contribute to greater volatility in the Electric System s revenues from the sale (and purchase) of electric energy and, therefore, could materially affect the financial condition of the Electric System. 48

55 OTHER FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY Federal Energy Legislation Energy Policy Act of Under the federal Energy Policy Act of 2005 ( EPAct 2005 ), FERC was given refund authority over municipal utilities if they sell into short-term markets, like the ISO markets, and sell eight million MWhs or more of electric energy on an annual basis. In addition, FERC was given authority over the behavior of market participants. Under FERC s authority it can impose penalties on any seller for using a manipulative or deceptive device, including market manipulation, in connection with the purchase or sale of energy or of transmission service. EPAct 2005 authorizes FERC to issue permits to construct or modify transmission facilities located in a national interest electric transmission corridor if FERC determines that the statutory conditions are met. EPAct 2005 also requires the creation of an electric reliability organization ( ERO ) to establish and enforce, under FERC supervision, mandatory reliability standards to increase system reliability and minimize blackouts. Failure to comply with such mandatory standards exposes a utility to significant fines and penalties by the ERO. NERC Reliability Standards. EPAct 2005 required FERC to certify an ERO to develop mandatory and enforceable reliability standards, subject to FERC review and approval. The reliability standards apply to users, owners and operators of the Bulk-Power System, as more specifically set forth in each reliability standard. On February 3, 2006, FERC issued Order 672, which certified the North American Electric Reliability Corporation ( NERC ) as the ERO. Many reliability standards have since been approved by FERC. The ERO or the entities to which NERC has delegated enforcement authority through an agreement approved by FERC ( Regional Entities ), such as the WECC, may enforce the reliability standards, subject to FERC oversight, or FERC may independently enforce them. Potential monetary sanctions include fines of up to $1 million per violation per day. FERC Order 693 further provided the ERO and Regional Entities with the discretion necessary to assess penalties for such violations, while also having discretion to calculate a penalty without collecting the penalty if circumstances warrant. Other Legislation. Congress has considered and is considering numerous bills addressing United States energy policies and various environmental matters, including bills relating to energy supplies (such as a federal clean energy portfolio standard), global warming and water quality. Many of these bills, if enacted into law, could have a material impact on PWP and the electric utility industry generally. The impact that federal clean energy portfolio standard legislation will have on the electric utility industry and business generally, and on PWP, in particular, depends largely on the specific provisions of the legislation that ultimately become law. Some of the important factors to be addressed in any federal clean energy legislation include the clean energy targets and timelines, the list of fuel types accepted as clean energy, and whether or not existing clean energy sources can be used to meet the targets. The timeline and impact of any such legislation cannot be accurately assessed at this time, but it is expected that any such federal action will have a significant impact on fossil-fueled generation facilities. In light of the variety of issues affecting the utility sector, federal energy legislation in other areas such as reliability, transmission planning and cost allocation, operation of markets, environmental requirements and cybersecurity is also possible. However, the City is unable to predict the outcome or potential impacts of any possible legislation on the City and PWP at this time. 49

56 Environmental Issues General. Electric utilities are subject to continuing environmental regulation. Federal, state and local standards and procedures which regulate the environmental impact of electric utilities are subject to change. These changes may arise from continuing legislative, regulatory and judicial action regarding such standards and procedures. Consequently, there is no assurance that any PWP facility or project will remain subject to the laws and regulations currently in effect, will always be in compliance with future laws and regulations or will always be able to obtain all required operating permits. An inability to comply with environmental standards could result in additional capital expenditures, reduced operating levels or the shutdown of individual units not in compliance. In addition, increased environmental laws and regulations may create certain barriers to new facility development, may require modification of existing facilities and may result in additional costs for affected resources. Greenhouse Gas Regulations Under the Clean Air Act. The United States Environmental Protection Agency (the EPA ) has taken steps to regulate greenhouse gas emissions under existing law. In 2009, the EPA issued a final endangerment finding, in which it declared that the weight of scientific evidence requires a finding that six identified greenhouse gases, namely, carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride, cause global warming, and that global warming endangers public health and welfare. The final rule for the endangerment finding was published in the Federal Register on December 15, As a result of this finding, the EPA is authorized to issue regulations limiting carbon dioxide emissions from, among other things, stationary sources such as electric generating facilities, under the federal Clean Air Act. The Tailoring Rule, published in the Federal Register on June 3, 2010, states that greenhouse gas emissions will be regulated from large stationary sources, including electric generating facilities, if the sources emit more than the specified threshold levels of tons per year of CO 2 e. Large sources with the potential to emit in excess of the applicable threshold will be subject to the major source permitting requirements under the Clean Air Act. Permits would be required in order to construct, modify and operate facilities exceeding the emissions threshold. Examples of such permitting requirements include, but are not limited to, the application of Best Available Control Technology (known as BACT) for greenhouse gas emissions, and monitoring, reporting, and recordkeeping for greenhouse gases. The endangerment finding and the Tailoring Rule have been challenged in court, but were upheld on June 26, 2012, in a decision by the U.S. Court of Appeals for the District of Columbia Circuit in Coalition for Responsible Regulation, Inc., et al v. EPA. This decision may be appealed. On September 22, 2009, the EPA issued the final rule for mandatory monitoring and annual reporting of greenhouse gas emissions from various categories of facilities including fossil fuel suppliers, industrial gas suppliers, direct greenhouse gas emitters (such as electric generating facilities and industrial processes), and manufacturers of heavy-duty and off-road vehicles and engines. This rule does not require controls or limits on emissions, but required data collection to begin on January 1, PWP is complying with the data collection and reporting requirements to which it is subject. Such data collection and reporting lays the foundation for controlling and reducing greenhouse gas emissions in the future, whether by way of the EPA regulations under existing Clean Air Act authority or under a new climate change federal law. On December 23, 2010, the EPA announced two settlements with a number of states and environmental groups. The settlements commit the EPA to issuing regulations setting performance standards for greenhouse gas emissions from new, modified, and existing power plants. These standards are to be based on the best demonstrated control technology. On March 27, 2012, the EPA issued its proposed regulations setting performance standards for new power plants. As proposed, the performance standard will apply only to new power plants; it will not apply to existing, modified or reconstructed power plants. In addition, power plants that have been issued a Prevention of Significant Deterioration 50

57 permit and commence construction within one year will be exempted from application of the new performance standard. The proposed regulations would impose an emissions performance standard of 1,000 pounds of CO 2 per MWh of electricity produced (averaged over 12 months). (A power plant that uses coal or petroleum coke for fuel would, however, have the option of complying with an alternative annual standard of 1,800 pounds of CO 2 per MWh of electricity produced for 10 years, but would be required to install and operate a carbon capture and storage system thereafter and demonstrate after 30 years that it has emitted no more than 1,000 pounds of CO 2 per MWh of electricity produced on average over that time period). If finalized, this new performance standard would be the most stringent in the country (surpassing the emission performance standard of 1,100 pounds of CO 2 per MWh of electricity produced imposed by the CEC regulations in California as described under DEVELOPMENTS IN THE CALIFORNIA ENERGY MARKETS State Legislation Greenhouse Gas Emissions ). The public comment period regarding the proposed regulations ended on June 25, The EPA has indicated that it has not established any time frame for developing any new performance standard regulations applicable to existing power plants in the near term. On September 28, 2011, the EPA s Office of Inspector General issued a report concluding that the EPA should have followed a more rigorous peer review process in relation to the endangerment finding. The EPA disagreed with this conclusion. In addition, legislation has been introduced in the United States Congress that would repeal the EPA s endangerment finding or otherwise prevent the EPA from regulating greenhouse gases as air pollutants. The City is unable to predict the outcome of these legal and legislative challenges to the EPA s endangerment finding and subsequent rulemaking or the effect that any final rules promulgated by the EPA regulating greenhouse gas emissions from electric generating units and other stationary sources would have on PWP s Electric System. Air Quality National Ambient Air Quality Standards. The Clean Air Act requires that the EPA establish National Ambient Air Quality Standards ( NAAQS ) for certain air pollutants. When a NAAQS has been established, each state must identify areas in its state that do not meet the EPA standard (known as non-attainment areas ) and develop regulatory measures in its state implementation plan to reduce or control the emissions of that air pollutant in order to meet the applicable standard and become an attainment area. The EPA has recently proposed to increase the stringency of the NAAQS for particulate matter. A proposed rule revising the primary and secondary NAAQS for particulate matter was published in the Federal Register on June 29, On September 2, 2011, President Obama directed the EPA to withdraw its proposal to lower the NAAQS for ozone. As a result of this withdrawal, the EPA will now resume the process of issuing non-attainment designations for the ozone NAAQS. Even without lower standards, non-attainment areas for ozone are likely to be designated. These developments may result in stringent permitting processes for new sources of emissions and additional state restrictions on existing sources of emissions. Mercury and Air Toxics Standards. On December 16, 2011, the EPA signed a rule establishing new standards to reduce air pollution from coal- and oil-fired power plants under sections 111 (new source performance standards, or NSPS ) and 112 (toxics program) of the Clean Air Act. The final rule was published in the Federal Register on February 16, Under section 111 of the Clean Air Act, the NSPS revises the standards that new coal- and oil-fired power plants must meet for particulate matter, sulfur dioxide, and nitrogen oxides. Under section 112, the new toxics standards set limits on emissions of heavy metals, including mercury, arsenic, chromium, and nickel; and acid gases, including hydrochloric acid and hydrofluoric acid, from existing and new power plants larger than 25 megawatts that burn coal or oil. Power plants have up to four years to meet these standards. While many plants already meet some or all of these new standards, some plants will be required to install new equipment to 51

58 meet the standards. PWP purchases power from IPP, a coal-fired power station that may be affected by these new rules, and so PWP may be exposed to increased costs. Other Factors The electric utility industry in general has been, or in the future may be, affected by a number of other factors which could impact the financial condition and competitiveness of many electric utilities and the level of utilization of generating and transmission facilities. In addition to the factors discussed above, such factors include, among others, (a) effects of compliance with rapidly changing environmental, safety, licensing, regulatory and legislative requirements other than those described above (including those affecting nuclear power plants), (b) changes resulting from conservation and demandside management programs on the timing and use of electric energy, (c) changes resulting from a national energy policy, (d) effects of competition from other electric utilities (including increased competition resulting from a movement to allow direct access or from mergers, acquisitions, and strategic alliances of competing electric and natural gas utilities and from competitors transmitting less expensive electricity from much greater distances over an interconnected system) and new methods of, and new facilities for, producing low-cost electricity, (e) the repeal of certain federal statutes that would have the effect of increasing the competitiveness of many IOUs, (f) increased competition from independent power producers and marketers, brokers and federal power marketing agencies, (g) self-generation or distributed generation (such as microturbines and fuel cells) by industrial and commercial customers and others, (h) issues relating to the ability to issue tax-exempt obligations, including severe restrictions on the ability to sell to nongovernmental entities electricity from generation projects and transmission service from transmission line projects financed with outstanding tax-exempt obligations, (i) effects of inflation on the operating and maintenance costs of an electric utility and its facilities, (j) changes from projected future load requirements, (k) increases in costs and uncertain availability of capital, (l) shifts in the availability and relative costs of different fuels (including the cost of natural gas and nuclear fuel), (m) sudden and dramatic increases in the price of energy purchased on the open market that may occur in times of high peak demand in an area of the country experiencing such high peak demand, such as has occurred in California, (n) inadequate risk management procedures and practices with respect to, among other things, the purchase and sale of energy and transmission capacity, (o) other legislative changes, voter initiatives, referenda and statewide propositions, (p) effects of the changes in the economy, (q) effects of possible manipulation of the electric markets, (r) natural disasters or other physical calamities, including, but not limited to, earthquakes and floods and (s) changes to the climate. Any of these factors (as well as other factors) could have an adverse effect on the financial condition of any given electric utility and likely will affect individual utilities in different ways. The City is unable to predict what impact such factors will have on the business operations and financial condition of PWP, but the impact could be significant. This Official Statement includes a brief discussion of certain of these factors. This discussion does not purport to be comprehensive or definitive, and these matters are subject to change subsequent to the date hereof. Extensive information on the electric utility industry is available from the legislative and regulatory bodies and other sources in the public domain, and potential purchasers of the 2012A Bonds should obtain and review such information. CONSTITUTIONAL LIMITATIONS ON GOVERNMENTAL SPENDING Articles XIIIC and XIIID of the State Constitution Proposition 218, a State ballot initiative known as the Right to Vote on Taxes Act, was approved by the voters of the State on November 5, Proposition 218 added Articles XIIIC and XIIID to the State Constitution. Article XIIID creates additional requirements for the imposition by most local governments (including the City) of general taxes, special taxes, assessments and property-related 52

59 fees and charges. Article XIIID explicitly exempts fees for the provision of electric service from the provisions of such article. Nevertheless, Proposition 218 could indirectly affect some California municipally-owned electric utilities. For example, to the extent Proposition 218 reduces a city s general fund revenues, that city could seek to increase the transfers from its electric utility to its general fund. Article XIIIC expressly extends the people s initiative power to reduce or repeal previouslyauthorized local taxes, assessments, and fees and charges. The terms fees and charges are not defined in Article XIIIC, although the California Supreme Court held in Bighorn-Desert View Water Agency v. Verjil, 39 Cal.4th 205 (2006), that the initiative power described in Article XIIIC may apply to a broader category of fees and charges than the property-related fees and charges governed by Article XIIID. Moreover, in the case of Bock v. City Council of Lompoc, 109 Cal.App.3d 52 (1980), the Court of Appeal determined that electric rates are subject to the initiative power. Thus, even electric service charges (which are expressly exempted from the provisions of Article XIIID) might be subject to the initiative provision of Article XIIIC, thereby subjecting such fees and charges imposed by the City to reduction by the electorate. The City believes that even if the electric rates of the City are subject to the initiative power, under Article XIIIC or otherwise, the electorate of the City would be precluded from reducing electric rates and charges in a manner adversely affecting the payment of the Series 2012A Bonds by virtue of the impairment of contracts clause of the United States and California Constitutions. Proposition 26 Proposition 26 was approved by the electorate at the November 2, 2010 election and amended California Constitution Articles XIIIA and XIIIC. The proposition imposes a two-thirds voter approval requirement for the imposition of fees and charges by the State. It also imposes a majority voter approval requirement on local governments with respect to fees and charges for general purposes, and a two-thirds voter approval requirement with respect to fees and charges for special purposes. Proposition 26, according to its supporters, is intended to prevent the circumvention of tax limitations imposed by the voters pursuant to Proposition 13, approved in 1978, and other measures through the use of non-tax fees and charges. Proposition 26 expressly excludes from its scope a charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable cost to the State or local government of providing the service or product to the payor. Proposition 26 may, however, be interpreted to limit fees and charges for electric utility services charged by governmental entities such as the City to preclude future transfers of electric utility generated funds to a local government s general fund, if applicable, and/or to require stricter standards for the allocation of costs among customer classes. The City is unable to predict at this time how Proposition 26 will be interpreted by the courts or what its ultimate impact will be. Other Initiatives Articles XIIIC and XIIID were adopted as measures that qualified for the ballot pursuant to California s initiative process. From time to time, including presently, other initiatives have been, and could be, proposed, and if qualified for the ballot, could be adopted affecting PWP s revenues or operations. Neither the nature and impact of these measures nor the likelihood of qualification for ballot or passage can be anticipated by the City. 53

60 RATINGS Fitch Ratings ( Fitch ) and Standard & Poor s Ratings Service, a Standard & Poor s Financial Services LLC business ( S&P ) have assigned their municipal bond ratings of AA and AA-, respectively, to the 2012A Bonds. Such ratings reflect only the views of such organizations and any desired explanation of the significance of such ratings may be obtained from the rating agency furnishing the same, at the following addresses: Fitch Ratings, One State Street Plaza, New York, New York 10004; S&P, 55 Water Street, New York, New York and Standard & Poor s, 55 Water Street, New York, New York Generally, a rating agency bases its rating on the information and materials furnished to it and on investigations, studies and assumptions of its own. There is no assurance that any of such ratings will continue for any given, period of time or that any of them will not be revised downward or withdrawn entirely by the respective rating agency, if in the judgment of such rating agency circumstances so warrant. Any such downward revision or withdrawal of such ratings may have an adverse effect on the 2012A Bonds. TAX MATTERS The Internal Revenue Code of 1986 (the Code ) imposes certain requirements that must be met subsequent to the issuance and delivery of the 2012A Bonds for interest thereon to be and remain excluded pursuant to section 103(a) of the Code from the gross income of the owners thereof for federal income tax purposes. Noncompliance with such requirements could cause the interest on the 2012A Bonds to be included in the gross income of the owners thereof for federal income tax purposes retroactive to the date of issue of the 2012A Bonds. The City has covenanted in the Fiscal Agent Agreement to comply with each applicable requirement of the Code necessary to maintain the exclusion of the interest on the 2012A Bonds from the gross income of the owners thereof for federal income tax purposes. In the opinion of Fulbright & Jaworski L.L.P., Bond Counsel, under existing law interest on the 2012A Bonds is exempt from personal income taxes of the State of California and, assuming compliance with the aforementioned covenant, interest on the 2012A Bonds is excluded pursuant to section 103(a) of the Code from the gross income of the owners thereof for federal income tax purposes. Bond Counsel is of the further opinion that under existing law, the 2012A Bonds are not specified private activity bonds within the meaning of section 57(a)(5) of the Code and, therefore, interest on the 2012A Bonds will not be treated as an item of tax preference for purposes of computing the alternative minimum tax imposed by section 55 of the Code. Receipt or accrual of interest on 2012A Bonds owned by a corporation may affect the computation of its alternative minimum taxable income. A corporation s alternative minimum taxable income is the basis on which the alternative minimum tax imposed by section 55 of the Code will be computed. In rendering the foregoing opinions, Bond Counsel will rely upon representations and certifications of the City made in a Tax Certificate dated the date of delivery of the 2012A Bonds pertaining to the use, expenditure, and investment of the proceeds of the 2012A Bonds. To the extent that a purchaser of a 2012A Bond acquires that 2012A Bond at a price in excess of its stated redemption price at maturity (within the meaning of section 1273(a)(2) of the Code), such excess will constitute bond premium under the Code. Section 171 of the Code, and the Treasury Regulations promulgated thereunder, provide generally that bond premium on a tax-exempt obligation must be amortized over the remaining term of the obligation (or a shorter period in the case of certain callable obligations); the amount of premium so amortized will reduce the owner s basis in such obligation for federal income tax purposes, but such amortized premium will not be deductible for federal income tax purposes. Such reduction in basis will increase the amount of any gain (or decrease the amount of any loss) to be recognized for federal income tax purposes upon a sale or other taxable disposition of the obligation. The amount of premium that is amortizable each year by a purchaser is 54

61 determined by using such purchaser s yield to maturity. The rate and timing of the amortization of the bond premium and the corresponding basis reduction may result in an owner realizing a taxable gain when its 2012A Bond is sold or disposed of for an amount equal to or in some circumstances even less than the original cost of the 2012A Bond to the owner. Purchasers of 2012A Bonds at a price that includes bond premium should consult their own tax advisors with respect to the computation and treatment of such bond premium, including, but not limited to, the calculation of gain or loss upon the sale, redemption, if applicable, or other disposition of the 2012A Bond. The excess, if any, of the stated redemption price at maturity of 2012A Bonds of a maturity over the initial offering price to the public of the 2012A Bonds of that maturity is original issue discount. Such original issue discount accruing on a 2012A Bond is treated as interest excluded to the same extent as would be stated interest on such 2012A Bond from the gross income of the owner thereof for federal income tax purposes and is exempt from California personal income tax. Original issue discount on any 2012A Bond purchased at such initial offering price and pursuant to such initial offering will accrue on a semiannual basis over the term of the 2012A Bond on the basis of a constant yield method and, within each semiannual period, will accrue on a ratable daily basis. The amount of original issue discount on such a 2012A Bond accruing during each period is added to the adjusted basis of such 2012A Bond to determine taxable gain upon disposition (including sale, redemption or payment on maturity) of such 2012A Bond. The Code includes certain provisions relating to the accrual of original issue discount in the case of purchasers of 2012A Bonds who purchase such 2012A Bonds other than at the initial offering price and pursuant to the initial offering. Persons considering purchasing a 2012A Bond of a maturity having original issue discount should consult their own tax advisors with respect to the tax consequences of ownership of 2012A Bonds with original issue discount. Bond Counsel has not undertaken to advise in the future whether any events after the date of issuance of the 2012A Bonds may affect the tax status of interest on the 2012A Bonds or the tax consequences of the ownership of the 2012A Bonds. No assurance can be given that pending or future legislation, or amendments to the Code, if enacted into law, or any proposed legislation or amendments to the Code, will not contain provisions that could directly or indirectly reduce the benefit of the exemption of interest on the 2012A Bonds from personal income taxation by the State of California or of the exclusion of the interest on the 2012A Bonds from the gross income of the owners thereof for federal income tax purposes. Furthermore, Bond Counsel expresses no opinion as to any federal, state or local tax law consequences with respect to the 2012A Bonds, or the interest thereon, if any action is taken with respect to the 2012A Bonds or the proceeds thereof upon the advice or approval of other bond counsel. Although Bond Counsel is of the opinion that interest on the 2012A Bonds is exempt from California personal income tax and that interest on the 2012A Bonds is excluded from the gross income of the owners thereof for federal income tax purposes, an owner s federal, state or local tax liability may otherwise be affected by the ownership or disposition of the 2012A Bonds. The nature and extent of these other tax consequences will depend upon the owner s other items of income or deduction. Without limiting the generality of the foregoing, prospective purchasers of the 2012A Bonds should be aware that (i) section 265 of the Code denies a deduction for interest on indebtedness incurred or continued to purchase or carry the 2012A Bonds and the Code contains additional limitations on interest deductions applicable to financial institutions that own tax-exempt obligations (such as the 2012A Bonds), (ii) with respect to insurance companies subject to the tax imposed by section 831 of the Code, section 832(b)(5)(B)(i) reduces the deduction for loss reserves by 15% of the sum of certain items, including interest on the 2012A Bonds, (iii) interest on the 2012A Bonds earned by certain foreign corporations doing business in the United States could be subject to a branch profits tax imposed by section 884 of the Code, (iv) passive investment income, including interest on the 2012A Bonds, may be subject to federal income taxation under section 1375 of the Code for Subchapter S corporations that have Subchapter C earnings and profits at the close of the taxable year if greater than 25% of the gross receipts of such 55

62 Subchapter S corporation is passive investment income, (v) section 86 of the Code requires recipients of certain Social Security and certain Railroad Retirement benefits to take into account, in determining the taxability of such benefits, receipts or accruals of interest on the 2012A Bonds, and (vi) under section 32(i) of the Code, receipt of investment income, including interest on the 2012A Bonds, may disqualify the recipient thereof from obtaining the earned income credit. Bond Counsel has expressed no opinion regarding any such other tax consequences. Bond Counsel s opinion is not a guarantee of a result, but represents its legal judgment based upon its review of existing statutes, regulations, published rulings and court decisions and the representations and covenants of the City described above. No ruling has been sought from the Internal Revenue Service (the Service ) with respect to the matters addressed in the opinion of Bond Counsel, and Bond Counsel s opinion is not binding on the Service. The Service has an ongoing program of auditing the tax-exempt status of the interest on municipal obligations. If an audit of the 2012A Bonds is commenced, under current procedures the Service is likely to treat the City as the taxpayer, and the owners would have no right to participate in the audit process. In responding to or defending an audit of the tax-exempt status of the interest on the 2012A Bonds, the City may have different or conflicting interests from the owners of the 2012A Bonds. Public awareness of any future audit of the 2012A Bonds could adversely affect the value and liquidity of the 2012A Bonds during the pendency of the audit, regardless of the ultimate outcome. Existing law may change so as to reduce or eliminate the benefit to holders of the 2012A Bonds of the exclusion of interest thereon from gross income for federal income tax purposes. Proposed legislative or administrative action, whether or not taken, could also affect the value and marketability of the 2012A Bonds. Prospective purchasers of the 2012A Bonds should consult with their own tax advisors with respect to any proposed changes in tax law. A copy of the form of opinion of Bond Counsel relating to the 2012A Bonds is included in APPENDIX F. LITIGATION There is no litigation or action of any nature now pending against the City or, to the knowledge of its respective officers, threatened, seeking to restrain or enjoin the issuance, sale, execution or delivery of the 2012A Bonds or in any way contesting or affecting the validity of the 2012A Bonds or any proceedings of the City taken with respect to the issuance or sale thereof, or the pledge or application of any moneys or security provided for the payment of the 2012A Bonds or the use of proceeds thereof. There is no litigation pending, or to the knowledge of the City, threatened, questioning the existence of the City or the title of the officers of the City to their respective offices. There is no litigation pending, or to the knowledge of the City, threatened, which materially questions or affects the financial condition of the Electric System. AUDITED FINANCIAL STATEMENTS The audited financial statements of the City s Water and Power Enterprise Funds, as of June 30, 2011 and for the year then ended are included in Appendix B to this Official Statement. A complete copy of the City s Comprehensive Annual Financial Report may be obtained from the City. There has been no material adverse change in the finances of the Electric System since June 30, The 2012A Bonds are revenue obligations of the City payable only from the Net Income of the Electric System in the Light and Power Fund. The financial statements of the City s Water and Power Enterprise Funds for the Fiscal Year ended June 30, 2011 have been audited by Brown Armstrong Accountancy Corporation, independent accountants (the Auditor ) as stated in their report appearing in Appendix B. 56

63 The Auditor has not updated its report or taken any action intended or likely to elicit information concerning the accuracy, completeness or fairness of the statements made in this Official Statement, and no opinion is expressed by Brown Armstrong Accountancy Corporation with respect to any event or transaction subsequent to their report dated December 29, FORWARD-LOOKING STATEMENTS The statements contained in this Official Statement and in the Appendices hereto, and in any other information provided by PWP or the City, that are not purely historical, are forward-looking statements, including statements regarding PWP or the City s expectations, hopes, intentions or strategies regarding the future. Prospective investors should not place undue reliance on forward-looking statements. All forward-looking statements included in this Official Statement are based on information available to PWP and the City on the date hereof, and PWP and the City assume no obligation to update any such forward-looking statements. It is important to note that PWP s actual results could differ materially from those in such forward-looking statements. The forward-looking statements herein are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers and competitors, and legislative, judicial and other governmental authorities and officials. Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of PWP and the City. Any of such assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Official Statement would prove to be accurate. VERIFICATION OF MATHEMATICAL COMPUTATIONS Causey Demgen & Moore Inc., Denver, Colorado, a firm of independent arbitrage consultants, will verify the accuracy of (i) the mathematical computation concerning (a) the adequacy of the cash deposited and held in the escrow fund for the Refunded 2002 Bonds, together with the maturing principal amounts of and interest earned on the Escrow Securities to pay on November 5, 2012, the redemption price of the Refunded 2002 Bonds (i.e, 100% of the principal amount thereof), together with accrued and unpaid interest to such redemption date, interest due on the Refunded 2002 Bonds and (b) the adequacy of the cash deposited and held in the escrow fund for the Refunded 2003 Bonds, together with the maturing principal amounts of and interest earned on the Escrow Securities to pay interest to become due on the Refunded 2003 Bonds to and including June 1, 2013 and to redeem on June 1, 2013 the Refunded 2003 Bonds at a redemption price equal to 100% of the principal amount thereof, and (ii) the mathematical computations of the yield on the 2012A Bonds and the yield on the Escrow Securities purchased with a portion of the proceeds of the sale of the 2012A Bonds and other available funds of the City, which will be used in part by Bond Counsel in concluding that the interest on the 2012A Bonds is excluded from gross income for federal income tax purposes under present laws, including applicable provisions of the Code, existing court rulings, regulations and Internal Revenue Service rulings. The report of such independent arbitrage consultants will include the statement that the scope of their engagement was limited to verifying the mathematical accuracy of the computations contained in such schedules provided to them and that they have no obligation to update their report because of events occurring, or data or information coming to their attention, subsequent to the date of their report. 57

64 FINANCIAL ADVISOR The City has retained Public Resources Advisory Group, Los Angeles, California, as financial advisor (the Financial Advisor ) in connection with the issuance of the 2012A Bonds. The Financial Advisor has not been engaged, nor has it undertaken, to audit, authenticate or otherwise verify the information set forth in this Official Statement, or any other related information available to the City, with respect to accuracy and completeness of disclosure of such information. The Financial Advisor has reviewed this Official Statement, but makes no guaranty, warranty or other representation respecting accuracy and completeness of the information contained in this Official Statement. CERTAIN LEGAL MATTERS The issuance of the 2012A Bonds is subject to the approving opinion of Fulbright & Jaworski L.L.P., Los Angeles, California, Bond Counsel. A complete copy of the proposed form of Bond Counsel opinion is contained in Appendix F. Bond Counsel will receive compensation from the City contingent upon the sale and delivery of the 2012A Bonds. Certain legal matters will be passed upon for the City by Fulbright & Jaworski L.L.P., Los Angeles, California, Disclosure Counsel, and by Michele Beal Bagneris, City Attorney of the City. PURCHASE AND REOFFERING Citigroup Global Markets Inc. (the Initial Purchaser ) purchased the 2012A Bonds from the City at a competitive sale at an aggregate purchase price of $12,939, (representing the aggregate principal amount of the 2012A Bonds, plus an original issue premium of $1,196,193.40, and less an Initial Purchaser s discount of $36,993.91). The public offering prices may be changed from time to time by the Initial Purchaser. The Initial Purchaser may offer and sell 2012A Bonds to certain dealers and others at prices lower than the offering prices shown on the inside cover page hereof. Citigroup Inc., parent company of the Initial Purchaser, has entered into a retail brokerage joint venture with Morgan Stanley. As part of the joint venture, the Initial Purchaser will distribute municipal securities to retail investors through the financial advisor network of a new broker-dealer, Morgan Stanley Smith Barney LLC. This distribution arrangement became effective on June 1, As part of this arrangement, the Initial Purchaser will compensate Morgan Stanley Smith Barney LLC for its selling efforts with respect to the 2012A Bonds. CONTINUING DISCLOSURE Pursuant to a Continuing Disclosure Agreement to be entered into simultaneously with the issuance of the 2012A Bonds (the Continuing Disclosure Agreement ) for the benefit of the holders of the 2012A Bonds with Digital Assurance Certification, L.L.C. ( DAC ), under which the City has designated DAC as Disclosure Dissemination Agent (the Disclosure Dissemination Agent ). Pursuant to the Continuing Disclosure Agreement, the City has covenanted for the benefit of the holders and beneficial owners of the 2012A Bonds to provide certain financial information and operating data relating to the City and the Electric System by not later than 185 days following the end of the City s Fiscal Year (which Fiscal Year presently ends on June 30) (the Annual Report ), commencing with the report for Fiscal Year , and to provide notices of the occurrence of certain enumerated events. The Annual Report will be filed by the City with the Municipal Securities Rulemaking Board ( MSRB ) through the MSRB s Electronic Municipal Market Access (EMMA) System. The notices of material events will be filed by the City with the MSRB. The specific nature of the information to be contained in the Annual Report and the notice of material events is set forth in APPENDIX E FORM OF CONTINUING DISCLOSURE AGREEMENT herein. These covenants have been made in order to assist the Initial 58

65 Purchaser in complying with S.E.C. Rule 15c2-12(b)(5) (the Rule ). The City has not failed to comply in the last five years in all material respects with any previous undertakings with regard to the Rule to provide annual reports or notices of material events. The City will reserve the right to amend the Continuing Disclosure Agreement, and to obtain the waiver of non-compliance with any provision of the Continuing Disclosure Agreement, if such amendment or waiver is supported by a written opinion of counsel expert in federal securities laws selected by the City to the effect that such amendment or waiver would not materially impair the interest of the holders of the 2012A Bond and would not, in and of itself, cause the Continuing Disclosure Agreement to violate the Rule if such amendment or waiver had been effective at the time of the primary offering of the 2012A Bonds, after taking into account any applicable amendments to or official interpretations of the Rule. The Disclosure Dissemination Agent has only the duties specified in the Continuing Disclosure Agreement. The Disclosure Dissemination Agent s obligation to deliver the information at the times and with the contents described in the Continuing Disclosure Agreement is limited to the extent the City has provided that information to the Disclosure Dissemination Agent as required by the Continuing Disclosure Agreement. The Disclosure Dissemination Agent has no duty with respect to the content of any disclosures or notice made pursuant to the terms of the Continuing Disclosure Agreement or duty or obligation to review or verify any information in the Annual Report, Audited Financial Statements, notice of Notice Event or Voluntary Report (all as defined in the Continuing Disclosure Agreement), or any other information, disclosure or notices provided to it by the City, and the Disclosure Dissemination Agent shall not be deemed to be acting in any fiduciary capacity for the City, the holders of the 2012A Bonds or any other party. The Disclosure Dissemination Agent has no responsibility for any failure to report to the Disclosure Dissemination Agent a Notice Event or a duty to determine the materiality thereof, as to determine or liability for failing to determine whether the City has complied with the Continuing Disclosure Agreement, and the Disclosure Dissemination Agent may conclusively rely upon certification of the City at all times. EXECUTION AND DELIVERY Included herein are brief summaries of the terms of the 2012A Bonds, the Fiscal Agent Agreement, the Continuing Disclosure Agreement and certain contracts and other arrangements for the supply of capacity and energy, which summaries do not purport to be complete or definitive, and reference is made to such documents and reports for full and complete statements of the contents thereof. Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract with the purchasers of the 2012A Bonds. The execution and delivery of this Official Statement have been duly authorized by the City. CITY OF PASADENA, CALIFORNIA By: /s/ Andrew Green Director of Finance 59

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67 APPENDIX A THE CITY OF PASADENA The economic and demographic information provided below is presented as general background data and has been collected from sources which the City deems to be reliable. The General Fund of the City is not liable for the payment of the 2012A Bonds, any premium thereon upon redemption prior to maturity or their interest, nor is the credit or taxing power of the City pledged for the payment of the 2012A Bonds, any premium thereon upon redemption prior to maturity or their interest. No Owner of any 2012A Bond shall compel the exercise of the taxing power by the City or the forfeiture of any of its property. The principal of and interest on any 2012A Bonds and any premiums upon redemption thereof prior to maturity are not a debt of the City nor a legal or equitable pledge, charge, lien or encumbrance upon any of its property or upon any of its income, receipts or revenues, except the Net Income of the Electric System in the Light and Power Fund and other funds which are pledged to the payment of the 2012A Bonds, interest thereon and any premiums upon redemption pursuant to the Fiscal Agent Agreement. General The City of Pasadena, California (the City ) was incorporated in 1886 and became a freeholder charter city in The City adopted its city manager form of government by amendments to the City Charter in The City Council is responsible for the administration of the City. The City covers nearly 23 square miles and is located in Los Angeles County in the northwestern portion of the San Gabriel Valley. The City is bounded on the west by the cities of Los Angeles, La Cañada and Glendale, on the south by South Pasadena and San Marino, on the east by Arcadia and Sierra Madre, and on the north by the unincorporated community of Altadena and the San Gabriel Mountains. In addition to general governmental services such as fire and safety, the City provides its approximately 150,000 residents with power, water and refuse services. The Southern California Gas Company supplies natural gas, and the County of Los Angeles provides sewage services. While the City consistently receives international recognition for the Rose Parade and Rose Bowl events, the City has achieved significant success in blending urban amenities with suburban neighborhoods. Engineering, finance and health care comprise the primary industry sectors. In addition, the academic and research pursuits of the California Institute of Technology, the Jet Propulsion Laboratory and the Art Center College of Design bring a unique combination of resources to the City. The City s downtown continues to serve as the corporate and entertainment center for the San Gabriel Valley s 1.8 million residents. City Council All powers of the City are vested in the City Council which is empowered to carry out the provisions of the City Charter and perform all duties and obligations of the City as imposed by State law. The City has an eight-member City Council comprised of members elected in seven City Council districts and a citywide elected mayor. Each Council Member and the Mayor are elected for four-year staggered terms. The Council Members elect the Vice-Mayor from their membership, who traditionally serves two consecutive one-year terms. The names, occupations and term expirations of the current members of the City Council are as follows: A-1

68 Name Occupation Term Expiration Bill Bogaard, Mayor Attorney May 2015 Jacque Robinson (District 1) Labor Community Organizer May 2015 Margaret McAustin (District 2) Asset Manager - Real Estate May 2015 Chris Holden (District 3) Commercial Real Estate Broker May 2013 Gene Masuda (District 4) Business Owner May 2015 Victor Gordo (District 5) Attorney May 2013 Steve Madison (District 6) Attorney May 2015 Terry Tornek (District 7) Real Estate Developer May 2013 City Staff Michael J. Beck, City Manager, has been the Pasadena City Manager since October His responsibilities include the overall operation of the City s government, including development of the annual operating and capital budget, which was over $776 million in Fiscal Year Mr. Beck also manages 14 departments within the City, including Pasadena Water and Power, full service police and fire departments, a Department of Health and Management of almost 2,000 employees. He is also a member of the Rose Bowl Operating Company. Mr. Beck s initiatives have included the development of a five-year fiscal program to resolve a General Fund deficit brought on by the recent economic downturn with cumulative savings of more than $150 million; streamlining the City s governmental functions and processes; increasing the use of technology to better serve residents; developing a financial solution to an unfunded liability in the closed Fire and Police Retirement System; creating a strategic investment plan to fund at least $100 million in renovations to public facilities; and implementing a strategic planning process for the City. In addition, he has provided leadership to Pasadena s General Plan update and the Rose Bowl Stadium renovation project. Prior to his service in Pasadena, Mr. Beck was Assistant City Manager for the City of Riverside, the largest city in Southern California s Inland Empire with a population of more than 300,000 and a nearly $1 billion operating budget. His responsibilities included oversight of Riverside Municipal Airport and the city departments of Community Development, Public Works, Public Utilities, and Parks, Recreation and Community Services. He developed the financial plan and implementation of the $1.8 billion Riverside Renaissance program 30 years of public infrastructure investment in just five years. Before working for the City of Riverside, he was Director of Economic Development and Real Estate Services for the University of California, Riverside, where he developed public/private partnerships to foster expansion of academic and research opportunities; and was instrumental in developing a regional economic development agenda that advanced managerial and technical job creation. He holds a Bachelor s Degree in Business Economics and a Master s Degree in Business Administration, both from the University of California, Riverside. Andrew Green, Director of Finance, joined the City in January His responsibilities include management of the financial affairs of the City and the Pasadena Community Development Commission, which include: preparation of the annual operating budget; preparation of the Comprehensive Annual Financial Report; purchasing; collections; workers compensation; general liability; payroll; employee benefits; information technology; internal audit; investments; debt management and financing of major City and Community Development Commission capital improvements. Prior to his current position, he served as the Finance Director for the City of Reno, Nevada; Director of Administrative Services and Director of Finance for the City of Rialto, California, where he also served as acting City Administrator on various occasions; and as the Director of Finance for the City of San Bernardino, California. Mr. Green received his MBA from the University of Phoenix in 2003 and his Bachelor of Arts degree in Accounting from the University of LaVerne (California) in He also holds an Associate s Degree in Business Administration from San Bernardino Valley College and a Certificate from the Accounting for Governmental and Non-Profit Organizations program at the University of California at Riverside, California. While in Reno, Nevada, Mr. Green was member of the Nevada Committee on Local A-2

69 Government Finance representing the Nevada League of Cities and a member of the Board of Directors of the Health Access of Washoe County Community Health Center organization, which provides healthcare to low-income residents in the Washoe County area of northern Nevada. Mr. Green has been a guest lecturer on governmental finance on a number of occasions for the University of California, San Bernardino s master s program. Mr. Green is also a member of numerous national and state municipal finance organizations. Michele Beal Bagneris, City Attorney, was named the Pasadena City Attorney in May, At that time, she was a shareholder in the law firm of Richards, Watson & Gershon, where she specialized in public law since joining the firm in Initially, while serving as City Attorney, she continued to practice law as a member of the law firm, advising public clients in a wide range of areas, including land use, general advisory matters, litigation, labor and employment, code enforcement and nuisance abatement matters. She also served as the City Attorney for the City of Monrovia from 1992 through September, 1999 when she became the in-house City Attorney for the City of Pasadena. She currently serves in that position and is also the City Prosecutor. As the City Attorney/City Prosecutor, she is responsible for managing all legal matters for the City, including supervision of in-house lawyers and any outside counsel engaged to advise the City. Ms. Bagneris received her bachelor s degree in International Relations from Stanford University in 1980 and her Juris Doctorate Degree in 1983 from Boalt Hall School of Law, University of California, Berkeley. She is active in professional and community organizations including President of the Los Angeles County Prosecutor s Association; past President of the League of California Cities City Attorney s Department; past President of the City Attorney s Association of Los Angeles County; and member of other legal and community organizations. She is admitted to practice law in the State of California, United States District Court and the U.S. Court of Appeals, Ninth Circuit. Population The following table presents a ten-year history of the population of the City since CITY OF PASADENA POPULATION For Years 2004 through 2012 Year (as of January 1) Population , , , , , , , , , ,222 Source: State of California, Department of Finance revised, based upon revision to the US Census information with 2010 benchmark. Updates to estimates for years 2002 through 2009 incorporating the 2010 census counts are not available. A-3

70 Education Total enrollment within the Pasadena Unified School District is shown below for the last ten fiscal years. PASADENA UNIFIED SCHOOL DISTRICT TOTAL ENROLLMENT (1) Fiscal Years 2003 through 2012 Fiscal Year Ended June 30 Total Enrollment , , , , , , , , , ,569 (2) Source: Pasadena Unified School District. (1) Includes students from the town of Sierra Madre and Altadena, an unincorporated area of the County of Los Angeles. (2) Projected. Employment No annual information is regularly compiled on employment and unemployment in the City alone. The following table shows employment, unemployment and labor force information for Los Angeles County for calendar years 2007 through 2011 and as of May 31, LOS ANGELES COUNTY EMPLOYMENT, UNEMPLOYMENT AND LABOR FORCE AVERAGES FOR CALENDAR YEARS 2007 THROUGH 2011 AND AS OF MAY 31, 2012 (in thousands) County Employment 4,714 4,515 4,329 4,272 4,302 4,340 County Unemployment County Civilian Labor Force 4,960 4,989 4,895 4,908 4,865 4,880 County Unemployment Rate 5.1% 9.5% 11.6% 13.0% 11.6% 11.1% State Unemployment Rate 5.4% 9.1% 11.4% 12.4% 11.1% 11.0% Source: State of California Employment Development Department. Current Labor Force and Industry Employment updated July, 2009, 2010; 2012 data as of May. Los Angeles-Long Beach Metropolitan Statistical Area. A-4

71 Major Employers Industry in the City is diversified. Some of the leading industries include higher education, research and development, health care, financial services and communications. The major employers within the City as of June 2012 are listed below. CITY OF PASADENA MAJOR EMPLOYERS 2012 Company Approximate Number of Employees Business Line California Institute of Technology-Jet Propulsion Laboratory 5,100 Aerospace Research California Institute of Technology-Campus 3,600 Education Huntington Memorial Hospital 3,300 Hospital Pasadena Unified School District 3,000 Education SBC/ATT 2,525 Communications Kaiser Permanente 2,000 Health Care The City of Pasadena 1,825 Government Pasadena City College 1,500 Education Bank of America 1,300 Financial Parsons Corporation 1,000 Engineering/Construction Art Center College of Design 810 Education The Langham Huntington Hotel (Ritz-Carlton) 584 Hotel Hathaway-Sycamores 550 Social Services Pacific Clinics Administration 550 Medical Clinics Avon Products 425 Cosmetics East West Bank 400 Financial Western Asset 400 Financial Rusnak Pasadena 300 Auto Dealer Source: Municipal Information Services, Pasadena Public Library and Pasadena Chamber of Commerce. Housing The following table presents a ten-year history of total available housing units within the City, from 2003 through A-5

72 CITY OF PASADENA HOUSING UNITS (1) For Fiscal Years 2003 through 2012 Fiscal Year Ended June 30 Housing Units , , , , , , , , , ,263 Source: City of Pasadena, Department of Planning and Permitting. (1) As of year end. Includes single family dwellings and multifamily units, including rental units and condominiums. Building Permit Activity The City s General Plan targets development in the City, providing for growth in employment and housing. Since 1992 (the year the General Plan was approved), there have been seven specific plan areas established and approved by the City Council for the following areas: North Lake, West Gateway, the South Fair Oaks, the East Pasadena, East Colorado, Fair Oaks/Orange Grove and the Central District. The Land Use and Mobility Elements of the General Plan were updated in 2004 at the same time the City s Zoning Code was updated. The following table shows the value of building permits issued in the City for the fiscal years 2008 through CITY OF PASADENA BUILDING PERMIT VALUATION AND PERMIT ACTIVITY Fiscal Years 2008 through 2012 (Valuation in Millions) Fiscal Year Ended June 30, Building Permit Valuations Nonresidential $ 98.2 $ 73.9 $ 50.8 $56.3 $ 92.5 Residential Residential New Construction Total $229.9 $149.7 $ 85.7 $ Number of Permits Issued Non Residential Residential 2,195 1,865 1,780 2,077 3,022 Residential New Construction Total 2,969 2,494 2,404 2,735 3,764 Source: City of Pasadena, Planning and Permitting Department. A-6

73 Taxable Sales The following table indicates taxable transactions in the City by type of business from 2007 through CITY OF PASADENA TAXABLE TRANSACTIONS BY TYPE OF BUSINESS ($ in Millions) Twelve Month Periods Ended September 30 Type of Business Apparel Stores $ $ $ $ $ General Merchandise Stores Food Stores Eating & Drinking Places Home Furnishings & Appliances Bldg. Material & Farm Implements Auto Dealers & Auto Supplies Service Stations Other Retail Stores Retail Stores Total 2, , , , ,033.0 All Other Outlets Total All Outlets $3,151.9 $3,121.0 $2,723.3 $2,652.1 $2,693.9 Source: State Board of Equalization, City of Pasadena: MBIA MuniServices Company. Community Facilities The City has a central library and eight branch libraries, four community centers, 24 parks and 33 playgrounds. Other entertainment and cultural facilities include the Rose Bowl, the Norton Simon Museum, the Pacific Asia Museum, the Gamble House, the Wrigley Estate, California Institute of Technology, Beckman Auditorium, the Pasadena Civic Auditorium and the Pasadena Playhouse. The City has long enjoyed a reputation as a community rich in culture, traditions and quality of life. The City is also home to the Tournament of Roses, sponsors of the well-known New Year s Day Parade and Rose Bowl football game held in the City each January. Transportation The City is served by an extensive surface and air transportation network. Several major freeways make the City accessible to the entire Los Angeles Basin. The City is served by three commercial airports: Bob Hope Airport, located in nearby Burbank, is within 15 miles, Los Angeles International Airport is within 35 miles and Ontario International Airport is within 45 miles. Continental Trailways and Greyhound bus lines have local depots in the City. The City supplements the local Metropolitan Transit Authority and the Foothill Transit Authority bus routes with the Pasadena Area Rapid Transit Services ( ARTS ) bus services to expand the covered area. The ARTS buses provide convenient and nominal-fare transportation between many of the City s residential neighborhoods, retail, business and entertainment centers within the City. There are currently two ARTS routes that offer service seven days per week. In addition, the City provides Dial-A-Ride bus services for the elderly and disabled which is available for a nominal usage fee. A-7

74 The nearest port facilities are Los Angeles and Long Beach harbors which are approximately 30 and 35 miles away, respectively. The $1 billion Alameda Corridor East project, being undertaken by the Alameda Corridor East Construction Authority, consists of safety upgrades, traffic signal control measures, road widening and grade separation projects to improve traffic conditions along the railroad facilities connecting the Ports of Los Angeles and Long Beach with the transcontinental rail network through the San Gabriel Valley, creating a faster more efficient method of distributing trade. In addition the Gold Line of the Metro Line light rail system runs from Union Station in the City of Los Angeles, through the City and terminates in the City of Sierra Madre. The Gold Line began operations in Employee Relations City employees are represented by various unions and labor relations have been generally amicable. The City has experienced no major strikes, work stoppages or other incidents. Currently, most City employees are represented by unions. Set forth below is a table indicating the various unions representing employees within the City. The number of employees represented by these unions as of June 30, 2012, and the dates on which the current labor agreements expire (there are no provisions for the reopening of wage or benefit levels prior to expiration) are set forth in the following table. CITY OF PASADENA EMPLOYEE UNION REPRESENTATION Name of Union Number of Employees Represented As of June 30, 2012 Expiration of Contract American Federation of State, County and Municipal Employees 273 July 2, 2013 International Brotherhood of Electrical Workers 107 June 30, 2013 International Union of Operating Engineers 25 March 27, 2012 (1) Service Employee International Union 24 April 26, 2013 Pasadena Association of Clerical and Technical Employees/Laborers International Union of North America 317 September 30, 2015 Pasadena Fire Fighters Association 143 August 25, 2011 (1) Pasadena Police Officers Association 182 April 24, 2013 Pasadena Police Sergeant Association 33 April 24, 2012 (1) Pasadena Fire Fighters Management Association 4 June 30, 2012 (1) Pasadena Management Association 451 March 17, 2014 (1) Currently being renegotiated. Source: City of Pasadena, Human Resources Department. In recent contract negotiations employees represented by Pasadena Management Association, Pasadena Association of Clerical and Technical Employees/Laborers and American Federation of State, County and Municipal Employees have agreed to pay the full 8% contribution to CalPERS (defined below), and employees represented by all other non-identified unions have agreed to pay 3.6% of the 8% required contribution. These concessions represent approximately $7 million in overall annual savings to the General Fund; 40% of these savings (approximately $2.8 million) accrues to the benefit of the General Fund. The City is currently negotiating with the safety employee unions to bear a portion the 9% contribution to CalPERS, which is currently entirely borne by the City. In addition most bargaining units have agreed to a zero cost-of-living increase on their contracts. A-8

75 Retirement Systems Pasadena Fire and Police Retirement System. Police and Fire personnel hired prior to July 1, 1977 were covered by the City s Fire & Police Retirement System ( FPRS ). FPRS was originally established by the City Charter in The system was closed on June 30, 1977 but continues to pay out benefits to retirees and their beneficiaries. FPRS covers all sworn fire and police personnel who were employed by the City prior to July 1, 1977, except those who elected to transfer to the California Public Employees Retirement System ( CalPERS ) either when the system closed to new members or in June FPRS is managed by a five-member retirement board. As of June 30, 2011, FPRS has an unfunded actuarial accrued liability of $73.47 million and had a funded ratio of 59.0%. For fiscal year 2011, the City s annual pension cost was $5,175,000 for FPRS. The City s required and actual fiscal year contributions were $13,582,000 and $8,036,000, respectively. The actuarial value of FPRS assets was determined using techniques that smooth the effects of short-term volatility in the market value of investments over a five-year period (smoothed market value). Under a supplemental contribution agreement between the City and FPRS, there is a specific funding plan whereby the City will provide supplemental payments to FPRS to ensure that all benefits will be paid. Copies of FPRS annual financial report may be obtained from the Department of Finance, 100 North Garfield Avenue, 3 rd Floor, Pasadena, California This annual financial report includes the required three-year trend information. In March 2011, the City Council approved a restructuring and refunding of outstanding pension obligation bonds relating to FPRS in order to address a mandatory tender of such bonds in 2015 and the issuance of new bonds up to a maximum amount of $65 million. On October 24, 2011, the City Council approved an Amended and Restated Contribution Agreement with the FPRS that sets the initial actuarial assumptions of 6% investment earnings rate and 3% inflation rate and authorized the issuance of not-toexceed $50 million pension obligation bonds to fund the system at 85% funding ratio. On March 29, 2012, the City issued $ million of taxable pension obligation bonds pursuant to such authorization. California Public Employees Retirement System. Almost all permanent City employees, except police and fire personnel employed prior to July 1, 1977, are members of CalPERS with respect to pension benefits. CalPERS is an agent multiple-employer plan public employee retirement system which acts as a common investment and administrative agent for participating public employers within the State of California. The plan provides retirement and disability benefits, annual cost-of-living adjustments and death benefits to plan members and their beneficiaries. CalPERS issues a separate publicly available financial report that includes financial statements and required supplemental information of participating public entities within the State of California. Copies of the CalPERS annual financial report may be obtained from the CalPERS Executive Office, Lincoln Plaza Complex, 400 Q Street, Sacramento, CA or at CalPERS is a contributory plan deriving funds from employer and employee contributions as well as earning from investments. Participants are required to contribute 8% (9% for safety employees) of their annual covered salary. The City makes the contributions required of City employees on their behalf and for their account, but is wholly or partially reimbursed by employees. Different employee bargaining groups have different reimbursement rates ranging from the full 8% to 3.6%. The City is also required to contribute at an actuarially determined rate. Benefit provisions and all other requirements are established by state statute or collective bargaining agreements with employee bargaining groups. A-9

76 Under GASB 27, an employer reports an annual pension cost ( APC ) equal to the annual required contribution ( ARC ) plus an adjustment for the cumulative difference between the APC and the employer s actual plan contributions for the year. The cumulative difference is called the net pension obligation. In order to calculate the dollar value of the ARC for in inclusion in the financial statements, the applicable contribution rate is multiplied by the payroll of the covered employees that were paid during the relevant period. The City contributed 100% of its annual pension cost for the Miscellaneous Plan for the Fiscal Years ended June 30, 2009, June 30, 2010 and June 30, 2011 in the amount of $9,916,000, $10,459,000 and $10,346,000, respectively. The ARC for the period July 1, 2012 to June 30, 2013 has been determined by an actuarial valuation of the plan as of June 30, The contribution rate indicated for the period is % of payroll for the safety plan and % of payroll for the Miscellaneous Plan. No assurances can be given that the contribution rates and the annual required contributions will not increase in future years. Among the assumptions used to determine the ARC include entry age actuarial cost method, an amortization method including a level percent of payroll over an average remaining period of 18 years for the Miscellaneous Plan, a 15-year smoothing methodology for asset valuation and an assumed investment return (net of administrative expenses) of 7.75% and an inflation rate of 3%. Initial unfunded liabilities are amortized over a closed period that depends on the plan s date of entry into CalPERS. Subsequent plan amendments are amortized as a level percentage of pay over a closed 20-year period. Gains and losses that occur in the operation of the plan are amortized over a rolling 30 year period, which results in an amortization of 6% of unamortized gains and losses each year. If the plan s accrued liability exceeds the actuarial value of plan assets, then the amortization period may not be lower than the payment calculated over a 30-year amortization period. On March 14, 2012, CalPERS gave approval to a one-quarter point reduction in its annual investment return forecast (from 7.75% to 7.5%). CalPERS has indicted that it would phase-in the impact of the adjustment over two years, to lessen the strain on local governments. This will increase the City s reported unfunded pension liability. There can be no assurances that CalPERS will not make additional changes in actuarial assumptions in the future. In the report received in October 2011 (being the most recent report available from CalPERS), as of June 30, 2010, the actuarial staff of CalPERS reported unfunded liability of $138.0 million for the City s miscellaneous employees as compared to an underfunding of $125 million the previous year and an unfunded liability of $66.6 million for safety employees compared to $68.7 million the previous year. Based upon this report for June 30, 2010 from CalPERS staff, the City reported that its CalPERS obligation had a funded ratio of was 82.2% based upon the actuarial value of plan assets (64.4% based upon the market value of plan assets) with respect to the City s miscellaneous employees and a funded ratio of 82.2% based upon the actuarial value of plan assets (64.7% based upon the market value of plan assets) for safety employees. The City provides pension benefits for employees not covered by CalPERS or FPRS through the Public Agency Retirement System (PARS), a defined contribution plan. In a defined contribution plan, benefits depend solely on amounts contributed to the plan plus investment earnings. Employees are eligible to participate from the date of employment. The plan agreement requires the City to contribute an amount equal to 4.0% of the employees earning and the covered employee contributes 3.5%. The City s payroll for employees covered by PARS for the fiscal year ended June 30, 2011 was $3,022,406. Both the City and the covered employees made the total required 7.5% contributions of $120,896 from the City and $105,784 from the covered employees. A-10

77 Funding Status of Plans. The tables below summarize the funded status of the City s retirement plans as of the most recent actuarial valuation dates. Additional information regarding the City s employee retirement plans, annual pension costs, the funding status thereof and significant accounting policies related thereto is set forth in Note 24 to the City s comprehensive annual financial report, which may be obtained from the City or at Valuation Date (June 30) Actuarial Accrued Liability (AAL) Entry Age City of Pasadena Retirement Plan Trend Information ($ in thousands) CalPERS - Miscellaneous Employees Actuarial Asset Value (Overfunded) Unfunded AAL Funded Ratio AVA Market Value Annual Covered Payroll (Overfunded) Unfunded AAL as a % of Covered Payroll 2005 $485,657 $463,019 $22, % 98.1% $ 86, % , ,180 38, , , ,717 46, , , ,068 59, , , , , , , , , , Source: CalPERS actuarial valuations through June 30, 2010 data is taken from annual valuation report dated October, Valuation Date (June 30) Actuarial Accrued Liability (AAL) Entry Age Actuarial Asset Value CalPERS - Safety Employees (Overfunded) Unfunded AAL Funded Ratio AVA Market Value Annual Covered Payroll (Overfunded) Unfunded AAL as a % of Covered Payroll 2005 $227,202 $190,415 $36, % 85.9% $33, % , ,753 35, , , ,041 47, , , ,817 54, , , ,880 68, , , ,056 66, , Source: CalPERS actuarial valuations through June 30, 2010 date is taken from annual valuation report dated October, A-11

78 Valuation Date (June 30) Actuarial Accrued Liability (AAL) Entry Age Actuarial Asset Value FPRS (Overfunded) Unfunded AAL Funded Ratio Annual Covered Payroll (Overfunded) Unfunded AAL as a % of Covered Payroll 2006 $184,852 $127,841 $57,011 69% % , ,137 51, , ,321 47, , ,551 58, N/A , ,740 56, N/A , ,811 73, N/A Source: FPRS actuarial valuations through June 30, Annual Payments to Retirement Plans by City ($ in Thousands) Fiscal Year Ended June 30 CalPERS Misc Employees CalPERS Safety Employees FPRS (2) 2005 $ 8,274 $11,030 $7, ,402 6,936 6, ,056 8,671 6, ,228 9,283 5, ,580 9,916 3, ,566 10,459 5, ,518 10,346 5, (1) 13,666 11,644 N/A (3) 2013 (1) 14,322 11,233 N/A (3) 2014 (1) 16,769 12,416 N/A (3) (1) (2) (3) Projected annual payment to retirement plan based on future contribution rates on CalPERS actuarial report dated October Annual pension cost does not include supplemental payments required to be made by the City pursuant to Amended Contribution Agreement with FPRS. Supplemental payments were $956,000 in 2009, $4,981,000 in 2010 and $8,036,000 in Projected FPRS contributions not available. Post-Retirement Medical Benefits (OPEB) Other than the pension benefits from the applicable retirement system, the City does not provide medical or other post-retirement benefits to its employees. The City of Pasadena provides a subsidy to retirees of the City who are members of CalPERS or FPRS. Two different levels of subsidy toward the purchase of medical insurance from CalPERS under the Public Employees Medical and Hospital Care Act (PEMHCA) are offered. Benefit provisions are established and amended through negotiations between the City and the respective unions. The City s current contribution requirements have been established at the individual retiree levels of $ or $33.60 per month depending on bargaining unit membership and policy enacted by CalPERS pursuant to State Law. These minimum requirements are established by CalPERS and adjusted annually. The prior contribution requirements were $ or $27.00 per month depending on the bargaining unit or the unrepresented group the employee was a member of. The City has historically funded these post-retirement health care benefits on a pay-as-you-go basis. For the Fiscal Year ended A-12

79 June 30, 2011, the City s contributions totaled $416,176 (representing 13.68% of the annual other postemployment benefit ( OPEB ) cost (expense)). The City s annual OPEB cost (expense) is calculated based on the annual required contribution (ARC) of the employer, an amount actuarially determined in accordance with the parameters of GASB Statement 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and to amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed thirty years. As of June 30, 2011, the City s unfunded actuarial accrued OPEB liability was $31,678,052. Insurance The City funds a self-insured and self-administered program for workers compensation claims exposures and general liability claims. On liability claims losses and expenses paid averaged about $1,568,328 per year for the past 10 years and, when existing reserves are added, averaged around $2,965,314 in liability exposure per year over the past 10 years. The City anticipates these expenses annually and includes funding for them in its operating budget. Since 2008 the City has carried a liability policy of $20 million excess of $5 million self-insurance retention. The amount of self-insured liability claim expenditures and remaining reserves with respect to claims made in each of the fiscal years ended June 30, 2002 through May 2012 are reflected in the following table: CITY OF PASADENA LIABILITY CLAIM EXPENDITURES AND REMAINING RESERVES Fiscal Years 2001 through 2012 (Unaudited) Remaining Fiscal Year (1) Reserves for Ended Unpaid June 30, Loss Paid Expense Paid Total Paid Claims (1) ,132,093 1,123,095 2,255, , ,976 1,047, ,619, ,655 1,961, ,190, ,493 3,818, ,046, ,675 1,921,941 25, , , , , , ,591 23, ,300 1,354,058 1,907,358 2,507, ,111, ,483 3,551, , ,926 24, ,433 1,510, ,820 10, ,991 3,003, , ,827 6,111,042 (1) Reserves reflect fiscal year in which claim occurred. Payments reflect money spent on all claims during a fiscal year. The City maintains commercial property insurance and boiler and machinery insurance on all City-owned buildings of an insurable nature (unless lease agreements require the occupant to carry such insurance) with current basic limits of $1 billion per occurrence per location subject to a $25,000 deductible. Exclusions include earthquake, corrosion, sabotage, terrorism, electronic data processing electronic erasure, asbestos and mold. There are various sub-limits and/or higher deductibles on specified types of properties. A-13

80 Budget Preparation and Approval Process CITY FINANCIAL INFORMATION No later than January of each year, the Mayor must present a thematic budget message for the upcoming fiscal year to the City Council and the community. The City Council must establish procedures whereby public suggestions and comments on the Mayor s budget proposals may be received and considered prior to the preparation and submission of budget requests by the City Departments to the City Manager. On or before the third Monday in May of each year, the City Manager must submit to the City Council the recommended balanced budget for the following fiscal year, as required by the City Charter. Also at this time, a public hearing is opened for residents and businesses to make any comments or suggestions regarding the recommended budget. Copies of the recommended budget are available for inspection by the public in the office of the City Clerk and at the City s libraries at least ten days prior to the hearing. At the conclusion of the public hearing, the City Council further considers the recommended budget and makes any revisions. On or before June 30, the City Council adopts a balanced budget with revisions, if any, by the affirmative vote of at least five members of the City Council. From the effective date of the budget, funds become appropriated to City Departments for the objects and purposes named. At any subsequent City Council meeting following the adoption of the budget, the City Council may amend or supplement the budget by motion adopted by the affirmative vote of a minimum of five members of the City Council. The Director of Finance prepares the City s financial statements and submits them to the City Council within four months after the close of each fiscal year. The City Council employs an independent certified public accounting firm to review the City s financial statements for conformity with generally accepted accounting principles for municipal governments and issues an opinion letter regarding the accuracy and fairness of the financial information presented in the City s Comprehensive Annual Financial Report. Budgetary Principles and Developments Budgetary Principles and Policies. In preparing the City s budget for fiscal year ending June 30, 2012, City staff was guided by certain principles and goals set by the City Council. Among them, staff was directed to match revenues with expenditures when developing a balanced operating budget, and minimize reliance on carry-forward fund balances from previous years to fund expenditures in future years. General Fund Cash Reserve Policy. Beginning in fiscal year 2011, the City instituted a policy to maintain an operating reserve within its General Fund which is targeted at 10% of the current year s appropriations. The current reserve is approximately $23.0 million. Under current City policy, only under emergency conditions does the City use the reserve fund. Cash reserves may be in the form of actual cash or investments and do not refer to any other form of current or long-term assets, such as receivables, inventory, equipment, etc. Fiscal Year 2013 Budget. The budget preparation process for fiscal year ending June 30, 2013 began in October In February and March 2012, the City Manager and the Department of Finance met with each department and operating company to review their estimated revenues, expenditures and A-14

81 budgetary requests for fiscal year ended June 30, Projected expenditures and revenues, managed savings, vacant positions, reorganizations, performance measures, performance targets, results statements, mission statements and new program requests were discussed at these meetings. Upon completion of the City Manager s review, the City Manager submitted the recommended operating budget to the City Council for a public hearing from which to obtain comments from the City s residents. The City Council adopted the budget for fiscal year ending June 30, 2013 on June 11, The General Fund portion of the appropriation budget for fiscal year ending June 30, 2013 is $215.7 million. Accounting Policies, Reports, and Audits The underlying accounting system of the City is organized and operated on the basis of separate funds, each of which is considered to be a separate accounting entity. The operations of each fund are accounted for with a separate set of self-balancing accounts that comprise its assets, liabilities, fund equity, revenues and expenditures or expenses, as appropriate. Fund accounting segregates funds according to their intended purpose and is used to aid management in demonstrating compliance with finance-related legal and contractual requirements. The minimum number of funds is maintained consistent with legal and contractual requirements. Capital assets (including infrastructure greater than $10,000) are capitalized and recorded at cost or at the estimated fair value of the assets at the time of acquisition where complete historical records have not been maintained. Contributed capital assets are valued at their estimated fair market value at the date of the contribution. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend the asset s life are not capitalized. Capital assets include public domain (infrastructure) general fixed assets consisting of certain improvements including roads, streets, sidewalks, medians and sewer and storm drains. The City s funds and capital assets are classified for reporting purpose as follows: Government Funds General Fund Special Revenue Funds Debt Services Funds Capital Projects Funds Proprietary Funds Enterprise Funds Internal Service Funds Fiduciary Funds Trust and Agency Funds Capital Assets Capital Assets used in the Operation of Governmental Funds The City follows the modified accrual method of accounting for governmental, expendable trusts and agency funds. Under the modified accrual method of accounting, revenues are susceptible to accrual when they become both measurable and available. Expenditures are recorded when a current liability is incurred. Liabilities are considered current when they are normally expected to be liquidated with expendable available financial resources. The proprietary, nonexpendable trust and pension trust funds are accounted for using the accrual method of accounting. The City s Director of Finance maintains the accounting system and records of accounts for all City funds. The City Charter requires an independent audit of the financial statements of all accounts of the City by an independent certified public accountant. All audits are reviewed by the Finance Committee of the City Council, which is comprised of four members of the City Council. A-15

82 General Fund Comparative Operating Budget The following table shows a three-year history of the City s Comparative Operating Budget. CITY OF PASADENA ADOPTED GENERAL FUND COMPARATIVE OPERATING BUDGET Fiscal Years 2011 through 2013 REQUIREMENTS Operating Expenditures $168,104,559 $169,404,258 $169,292,712 Capital Expenditures - - Debt Service 34,930,000 32,683,158 32,683,497 Transfers Out 14,122,093 13,755,839 13,679,864 TOTAL REQUIREMENTS $217,156,652 $215,843,255 $215,656,073 AVAILABLE FUNDS Revenues $193,635,968 $194,412,034 $196,583,525 Transfers In 1,906,741 1,071,762 1,921,300 Reserves Utility Contributions 16,167,840 15,490,972 17,317,177 TOTAL AVAILABLE FUNDS $220,264,507 $210,974,768 $215,822,002 Pursuant to City Charter Sections 1407 and 1408 the City makes annual transfers from the City s Water Fund (the Water Fund ) and from the City s Light and Power Fund (the Light and Power Fund ) to the General Fund. The amount transferred from the Water Fund is not to exceed 6% of gross income received during the preceding fiscal year and shall not exceed net income. This transfer may be used for any municipal purpose. The amount transferred from the Light and Power Fund is not to exceed 16% of gross income received during the preceding fiscal year and shall not exceed net income. Of the total 16% which may be transferred, up to 8% may be used for any municipal purpose and the remaining 8% is restricted for municipal improvements and bond redemption. Set forth below is a table indicating the amount transferred from the Light and Power fund and the Water Fund to the City s General Fund during each of the last four fiscal years and the amount budgeted for the current fiscal year, expressed in dollars and as a percentage of the prior year s gross income. A-16

83 CITY OF PASADENA TRANSFERS FROM THE LIGHT AND POWER FUND AND WATER FUND TO GENERAL FUND Fiscal Years 2009 through 2013 (Dollar Amounts in Thousands) Fiscal Year Ended June 30, 2009 (2) 2010 (2) (3) 2013 (4) Light and Power Fund Amount Transferred $12,722 $15,475 $12,742 $15,808 $14,308 Amount a Percentage of Prior Year s Gross Income (1) 8.0% 9.2% 8.0% 10.0% 9.0% Water Fund Amount Transferred $2,332 $2,526 $25,464 $3,395 $3,009 As a Percentage of Prior Year s Gross Income (1) 6.0% 6.0% 6.0% 6.0% 6.0% (1) Reflects percentage of prior fiscal year s gross revenue of the Water Fund and the Light and Power Fund, respectively. (2) Includes Public Benefit Charge Contribution to City Hall Retrofit of $1.1 million. (3) Revised Budget. (4) Adopted Budget. Tax Revenue Sources The City relies on a number of revenue sources that could be reduced or eliminated by State legislation, including, among others, sales and use taxes, property taxes and motor vehicle license fees. The State has in prior years experienced budgetary difficulties and has balanced its budget by requiring local political subdivisions to fund certain costs previously borne by the State. For example, on March 2, 2004, California voters approved Proposition 57, a bond act authorizing the issuance of up to $15.0 billion of economic recovery bonds to fund the accumulated State budget deficit. These bonds (issued in an aggregate amount of $14.2 billion) are secured by a pledge of revenues from an increase in the State s share of the sales and use tax of one-quarter cent. The share of the tax allocated to local governments as reduced by the same amount and, in exchange, local governments now receive an increased share of the local property tax (and K-12 school districts and community colleges receive a reduced share) until the economic recovery bonds are repaid. Although the final maturity of the economic recovery bonds is in 2023, they may be repaid by the State in advance of that date. All education agency property tax reductions are offset by increased State aid. This shift in revenues between the State and local governments is known as the Triple Flip. As a result of a separate action, the State now supplements the City s property tax by an amount intended to backfill a portion of motor vehicle license fees ( VLF ) lost as a result of the State s reduction in the fee s rate. These various reallocations have affected the timing of the receipt of the impacted revenues. The State s fiscal year budget act also included a diversion of a portion of the share of property tax revenues allocated by the State to cities, counties and local agencies. Constitutional amendment Proposition 1A, passed by statewide voters in 2004, and Proposition 22 passed by voters in 2010 limits the State s ability to divert or borrow these revenues in the future. taxes. Listed below is a historical summary of the City s five largest revenue sources resulting from A-17

84 CITY OF PASADENA GENERAL TAX REVENUES Fiscal Years 2006 through 2011 (in Thousands) Fiscal Year Ended June 30, Tax Property (1) $ 51,116 $ 61,763 $ 63,449 $ 69,062 $ 68,353 $70,803 Sales 33,992 34,634 36,519 32,913 28,949 30,301 Utility Users 26,766 28,063 29,640 31,162 29,520 29,355 Street Light & Traffic Signal 5,480 6,352 6,779 7,051 6,565 6,675 Transient Occupancy 10,246 10,358 10,731 8,987 8,406 9,088 Total $127,600 $141,170 $147,818 $149,175 $141,793 $146,222 (1) Includes assessments. Source: City of Pasadena, Comprehensive Annual Financial Report. Property taxes are levied for each fiscal year on taxable real and personal property which is situated in the City as of the preceding March 1. For assessment and collection purposes, property is classified either as secured or unsecured and is listed accordingly on separate parts of the assessment roll. The secured roll is that part of the assessment roll containing State-assessed public utilities property and property the taxes on which a lien on real property is sufficient, in the opinion of the County Assessor, to secure payment of the taxes. Other property is assessed on the unsecured roll. Property taxes on the secured roll are due in two installments, on November 1 and February 1 of the fiscal year. If unpaid, such taxes become delinquent on December 10 and April 10, respectively, and a 10% penalty attaches to any delinquent payment. If such taxes remain unpaid as of June 30 of the fiscal year in which the tax is levied, the property securing the taxes may only be redeemed by payment of the delinquent payment, plus a redemption penalty of 1½% per month from the original June 30 date to the time of redemption. If taxes are unpaid for a period of five years or more, the property is then subject to sale by the County Treasurer and Tax Collector, as provided by law. Property taxes on the unsecured roll are due as of the March 1 lien date and become delinquent, if unpaid, on August 31. A 10% penalty attaches to delinquent taxes on property of the unsecured roll, and an additional penalty of 1½% per month begins to accrue commencing on November 11 of the fiscal year. Collection of delinquent unsecured taxes is the responsibility of the County of Los Angeles which may utilize any of several means legally available to it. The tax roll for fiscal year ended June 30, 2011, reflected a total assessed valuation of approximately $20.9 billion for the City, of which $2.8 billion reflected the redevelopment project areas incremental assessed valuations of which the payable taxes are due to its redevelopment agency. Assessed net valuation for revenue purposes increased by approximately 1.13% for the fiscal year ended June 30, 2011, over the assessed net valuation for fiscal year ended June 30, 2010, and the compounded average annual increase between assessed valuation for the fiscal year ended June 30, 2000 and the fiscal year ended June 30, 2011 was approximately 7.5%. In 2011, the State of California enacted legislation commonly referred to as AB1X 26, which requires the dissolution of California redevelopment agencies and the dissolution and winding up of the operations of those agencies. The original effective date of AB1X 26 was stayed pending a challenge to its constitutionality brought before the California Supreme Court. In upholding AB1X 26 as constitutional on December 29, 2011, the California Supreme Court set February 1, 2012 as the effective A-18

85 date for and the date on which California redevelopment agencies were dissolved pursuant to pursuant to AB1X 26. AB1X 26 provides a framework for the dissolution and winding up of California redevelopment agencies and the management of the remaining obligations of the dissolved redevelopment agencies by their respective successor agencies and oversight boards to oversee those successor agencies. Pursuant to AB1X 26, tax increment will continue to flow to the payment of enforceable obligations (such as tax allocation bonds) of the dissolved redevelopment agencies. Fiscal Year Ended June 30 CITY OF PASADENA ASSESSED VALUATION OF TAXABLE PROPERTY Fiscal Years 2002 through 2012 (in thousands) Total Assessed Valuation Less PCDC (1) Increment Secured Valuations Homeowner Exemption Net Secured Valuations Unsecured Valuations Net Valuation 2002 $10,781,460 $(133,467) $10,647,993 $577,896 $11,225,889 $(1,386,579) $9,839, ,537,408 (132,466) 11,404, ,087 12,011,029 (1,552,121) 10,459, ,667,923 (131,710) 12,536, ,938 13,124,151 (1,786,002) 11,338, ,672,183 (134,055) 13,538, ,808 14,102,936 (1,946,336) 12,156, ,071,976 (134,404) 14,937, ,396 15,535,968 (2,097,532) 13,438, ,759,246 (133,112) 16,626, ,524 17,246,658 (2,522,337) 14,724, ,339,519 (134,380) 18,205, ,779 18,812,938 (2,405,375) 16,407, ,237,173 (136,262) 20,100, ,375 20,752,286 (2,799,791) 17,952, ,204,880 (138,630) 20,066, ,888 20,711,138 (2,828,387) 17,882, ,481,388 (138,275) 20,343, ,404 20,948,517 (2,829,885) 18,118, ,969,532 (137,842) 20,831, ,527 21,399,217 (2,988,477) 18,410,740 Source: Los Angeles County Auditor-Controller and California Municipal Statistics, Inc. (1) Pasadena Community Development Commission, the former redevelopment agency for the City. The following two tables reflect the typical property tax rate per $100 of assessed value in various jurisdictions and the ten largest secured taxpayers in the City. A-19

86 CITY OF PASADENA PROPERTY TAX RATES DIRECT AND OVERLAPPING GOVERNMENTS For Fiscal Years 2001 through 2011 (unaudited) City Debt Service* Los Angeles County General Pasadena School District Pasadena Comm. College District Flood Control District Metropolitan Water District Fiscal Year General City Total * In 2004, the City paid off its outstanding general obligation debt. Source: County of Los Angeles Tax Assessor and California Municipal Statistics, Inc. CITY OF PASADENA TOP TEN PROPERTY TAXPAYERS As of June 30, 2012 Property Owner Primary Land use June 30, 2012 Assessed Valuation % of Total Marangi Leonard M Les Hospital $ 488,979, Kaiser Foundation Health Plan Inc. Office Building 218,721, Paseo Colorado Holding LLC Shopping Center 192,186, Pacific Huntington Hotel Corp Office Building 145,584, Equity Office Properties Trust Office Building 127,400, Tishman Speyer Archstone Smith Apartments 119,279, SSR Paseo Colorado LLC Apartments 110,712, Wells Reit II Pasadena Corp Office Building 103,446, Pasadena Towers LLC Office Building 97,500, SPF 888 Walnut Pasadena LLC Office Building 89,600, Total principal property taxpayers gross assessed value $1,693,410, % Total city assessed value $21,399,216, % Source: MuniServices General Fund Comparative Financial Statements The following two tables describe the financial condition of the City s General Fund by showing a three-year history of the City s Comparative Balance Sheet and a three-year history of the City s Statement of Revenues, Expenditures and Changes in Fund Balances. A-20

87 CITY OF PASADENA GENERAL FUND COMPARATIVE BALANCE SHEETS Fiscal Years 2009 through 2011 As of June 30, Assets Cash and investments $48,512,851 $36,887,035 $27,561,067 Accounts receivable 17,135,513 21,367,164 17,132,926 Less allowance for uncollectible amounts (1,346,986) (3,624,251) Notes receivable 398, ,403 52,397 Due from other funds 4,781,495 4,794,116 8,582,519 Prepaids and other assets 25, ,380 26,833 Advances to other funds 15,878,806 14,476,596 15,332,198 Advances to component units 902, , ,740 Allowance uncollectible for long term receivables (8,151,520) (8,556,376) (10,000,845) Total assets $78,136,228 $67,307,451 $59,451,835 Liabilities and Fund Balances Liabilities: Accounts payable and accrued liabilities $11,565,569 $8,609,063 $8,062,810 Deposits 1,885,384 1,911,281 1,984,321 Due to other governments 28,787 83,291 50,234 Deferred revenue 4,273,445 3,526,629 2,789,463 Total liabilities $17,753,185 $14,130,264 $12,886,828 Fund Balances: Reserved for: Encumbrances $2,928,222 $113,113 N/A Notes receivable 398, ,403 N/A Prepaids and other assets 25, ,380 N/A Advances to other funds 8,629,910 6,755,604 N/A Unreserved: General Fund 48,401,466 45,180,687 N/A Total Fund balances $60,383,043 $53,177,187 N/A Total liabilities and fund balances $78,136,228 $67,307,451 N/A *Fund Balances: Nonspendable N/A N/A 52,397 Committed N/A N/A 39,320,899 Assigned N/A N/A 8,582,519 Unassigned N/A N/A (1,390,808) Total Fund balances N/A N/A 46,565,007 Total liabilities and fund balances N/A N/A $59,451,835 Source: City of Pasadena, Department of Finance * Fund balances are reported in the aggregate in the classifications defined by Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, which commenced for FY A-21

88 CITY OF PASADENA GENERAL FUND COMPARATIVE STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES Fiscal Years 2009 through 2011 Fiscal Year Ended June 30, Revenues: Taxes $119,771,602 $112,030,511 $113,809,641 Licenses and permits 2,360,182 2,640,177 2,471,544 Intergovernmental revenues 13,745,985 14,004,673 14,570,521 Charges for services 34,523,301 32,734,949 32,092,354 Fines and forfeits 8,844,377 5,135,244 6,362,032 Investment earnings 21,922,550 24,136,783 22,927,674 Net changes in fair value of investments 167, ,208 Rental income 1,425,723 1,010,973 1,073,420 Miscellaneous revenue 2,394,249 2,441,828 2,307,555 Total revenues $205,155,075 $194,413,346 $195,614,741 Expenditures: Current: General government $ 34,809,501 $ 36,864,197 $ 39,277,386 Public Safety 99,457,043 98,167,257 97,209,419 Transportation 26,337,739 22,370,798 23,026,269 Culture and leisure 14,228,573 13,288,417 13,783,967 Community development 9,990,270 9,531,323 8,104,996 Capital outlay -- 3,230,000 Total expenditures $184,823,126 $183,451,992 $181,402,037 Excess (deficiency) of revenues over (under) expenditures $ 20,331,949 $ 10,961,354 $ 14,212,704 Other financing sources (uses): Issuance of long-term debt $ 331,944 $ $ Transfers in 18,007,072 30,055,525 26,931,281 Transfers out (48,213,053) (48,222,735) (47,756,165) Total other financing sources (uses) (29,874,037) (18,167,210) (20,824,884) Change in fund balances (9,542,088) (7,205,856) (6,612,180) Fund balances at beginning of year, as restated 69,925,131 60,383,043 53,177,187 Fund balances at end of year $60,383,043 $53,177,187 $46,565,007 Source: City of Pasadena, Department of Finance Investment Practices General. The City Treasurer is responsible for investing City funds pursuant to an Investment Policy (the Investment Policy ) established by the City Council. The Treasurer invests temporarily idle cash for the City as part of a pooled investment program which combines general receipts with special funds for investment purposes. The City s accounting division then allocates interest earnings on a pro rata basis when the interest is earned and distributes interest receipts based on the previously established allocations. All funds of the City, other than bond proceeds, the investment assets of the Commission, the City s Capital Endowment Fund and the Stranded A-22

89 Investment Reserve Fund, are invested pursuant to this pooled investment program. Funds of the Commission are invested pursuant to the Investment Policy, but are kept separate from other City funds. The Treasurer does not invest funds of any other governmental entities as part of its pooled investment program. All bond proceeds are invested in accordance with the permitted investments described in the applicable trust indenture. Pooled Investment Portfolio. As of June 30, 2012, the funds invested pursuant to the pooled investment program had a market value of $335,314,524. The City Treasurer prices the pooled portfolio and all other funds and investments under management on a monthly basis. The market values are obtained from Interactive Data Corporation ( IDC ) and Bloomberg Financial Systems. The modified duration of the City s Pooled Investment Portfolio as of June 30, 2012 was 2.02 years. Of the investments on that date, approximately 28.69% had maturities of thirty days or less. The assets of the portfolio as of June 30, 2012 are shown in the following table: CITY OF PASADENA POOLED INVESTMENT PORTFOLIO Percentage of Total (1) Market Value Money Market Fund $ 47,292.01% Money Market Collateralized 41,738, Certificate of Deposit 1,744, LAIF 44,548, Municipal Bonds 42,325, Corporate Bonds 92,606, Mortgage Backed Securities/GNMAs Federal Agencies 102,746, Cash in Bank 8,624, Total 334,381, Accrued Interest Receivable 932,784 Grand Total 335,314,524 Source: City of Pasadena. (1) At market value. The Weighted Average Maturity of the above portfolio is 2.11 years. The Investment Policy. The City s treasury operations are managed according to the Investment Policy which sets forth permitted investment vehicles, liquidity parameters and maximum maturities. The Investment Policy is reviewed and authorized by the City Council on an annual basis. The City Council approved the Investment Policy for fiscal year ending June 30, 2012 on September 26, The Investment Policy establishes three primary objectives, in the following order of priority, for the City s investment activities. 1. Safety of Principal. The City will seek to preserve principal by mitigating credit risk and market risk (by structuring the portfolio so that securities mature at the same time as major cash outflows occur and by prohibiting the taking of short positions). 2. Liquidity. The City will maintain sufficient liquidity in the investment portfolio to enable the City to meet all operating requirements which might be reasonably anticipated and investments will be authorized only in securities that are actively traded in the secondary market. The City operates its own electric and water utility and bills monthly for these services. The utility billing program generates A-23

90 significant cash flow on a daily basis. Historical cash flow trends are compared to current cash flow requirements on an ongoing basis in an effort to ensure that the City s investment portfolio will remain sufficiently liquid to enable the City to meet all reasonably anticipated operating requirements. 3. Return on Investment. The City will design its investment portfolio to attain a market average rate of return through economic cycles and, whenever possible, consistent with risk limitations and prudent investment principles, to augment returns above the market average rate of return. The City s cash management system is designed to accurately monitor and forecast expenditures and revenues, thus enabling the City to invest funds to the fullest extent possible. The City attempts to earn the highest yield obtainable while keeping within the investment criteria established by the Investment Policy for the safety and liquidity of public funds. To meet its short-term cash flow needs, the City typically maintains an average investment balance of about $40 million in securities with a maturity of 30 days or less. Authorized Investments. Funds are invested only in those securities authorized by the various sections of the California Government Code and the City s Investment Policy, which include obligations of the United States Treasury, agencies of the United States Government, local and State bond issues, bankers acceptances, commercial paper of prime quality, certificates of deposit (both collateralized and negotiable), repurchase and reverse repurchase agreements, medium-term corporate bonds, shares of beneficial interest in diversified management companies (mutual funds), and asset-backed (including mortgage-related) and pass-through securities. The City does not invest funds in any security that could result in a zero interest accrual if held to maturity, and has no investments in derivative products such as interest rate swaps, futures, options or reverse purchase agreements in connection with its investments. The City has entered into interest rate swap agreements in connection with certain of its obligations. The City does not have any investments which are reverse repurchase agreements. A reverse repurchase agreement is a transaction in which a holder of securities, such as the City, sells the same to a third party and agrees to repurchase them at a later date. The proceeds received by the seller can in turn be invested in additional securities, thus producing leverage. The Government Code stipulates that no investments may be made in securities with maturities in excess of five years without express authority from the City s legislative body. The Government Code and the City s Investment Policy place various other restrictions on investment in and allocation of funds to various investment categories, including the following: The value of bankers acceptances, bills of exchange or time drafts drawn on and accepted by commercial banks may not exceed 40% of the City s portfolio book value as measured on the date of purchase and the days to maturity of such investments may not exceed 180 days. Commercial paper must be rated P1 and issued by U.S. corporations with assets greater than $500 million and a long-term debenture rating of A or better. The City is not permitted to purchase commercial paper that exceeds 270 days to maturity nor hold more than 10% of a corporation s outstanding commercial paper. The value of the City s holdings of commercial paper may not exceed 15% of the book value of the City s portfolio as measured on the date of purchase. A-24

91 The value of the City s holdings of negotiable certificates of deposits may not exceed 30% of the book value of the City s portfolio as measured on the date of purchase. The market value of the securities used as collateral for repurchase agreements may not be permitted to fall below 102% of the value of the repurchase agreement. Execution of a PSA Master Repurchase Agreement is required for all repurchase agreements transacted and the maturity of repurchase agreements may not exceed one year. The value of City s reverse repurchase agreement holdings may not exceed 20% of the book value of the City s portfolio as measured on the day of purchase. Reverse repurchase agreements may not exceed 92 days to maturity unless the agreement includes a written guarantee of minimum earnings for the entire period. Term reverse repurchase transactions in excess of 92 days are only permitted if the securities underlying the reverse are matched to the maturities of the reinvestments. No more than 25% of the City s investment portfolio may be invested in time deposits. Medium-term corporate bonds must be rated in a rating category of A or its equivalent or better by a nationally recognized rating service. The value of the City s holdings of medium-term corporate bonds is limited to 30% of the City s portfolio book value as measured on the date of purchase and no more than 5% of the cost value may be invested in bonds held by one corporation. The value of the City s mutual fund holdings may not exceed 20% of the City s portfolio book value as measured on the date of purchase. Any eligible mortgage pass-through security, collateralized mortgage obligation, mortgage-backed or other pay-through bond, equipment lease-backed certificate, consumer receivable pass-through certificate or consumer receivable-backed bond must be issued by an issuer having an A or higher rating for the issuer s debt as provided by a nationally recognized rating service and rated in a rating category of AA or its equivalent or better by a nationally recognized rating service. In addition, purchases of such securities may not exceed 20% of all of the City s surplus funds that may be invested in accordance with the foregoing investment guidelines and restrictions. None of the moneys on deposit in the City s investment portfolio is currently invested in leveraged products or inverse floating rate bonds. The City has no investments in outside investment pools except for the State s Local Agency Investment Fund (LAIF). The City does not have a practice of lending its portfolio s securities to others in return for a fee, although it is not prohibited from doing so. General Obligation Debt Under the City Charter, the City may not incur indebtedness by general obligation bonds which would in the aggregate exceed 15% of the total assessed valuation of all the real and personal property within the City subject to assessment for taxation for municipal purposes. In addition, no bonded indebtedness which will constitute a general obligation of the City may be created unless authorized by the affirmative vote of two-thirds of the electorate voting on such proposition at any election at which the question is submitted. Such bonds are secured by an ad valorem property tax assessed against the property owners of the City. The City currently has no general obligation debt outstanding. A-25

92 Estimated Direct and Overlapping Bonded Debt below. The estimated direct and overlapping bonded debt of the City as of June 30, 2012 is shown CITY OF PASADENA COMPUTATION OF DIRECT AND OVERLAPPING DEBT As of June 30, Assessed Valuation: $21,537,058,866 Redevelopment Incremental 2,853,254,803 Valuation: Adjusted Assessed Valuation: $18,683,804,069 DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable (1) Debt 06/30/12 Los Angeles County Flood Control District 2.158% $802,668 Metropolitan Water District ,036,206 Pasadena Area Community College District ,641,907 La Cañada Unified School District ,776 Pasadena Unified School District ,980,153 City of Pasadena Community Facilities District No ,685,00 Los Angeles County Improvement District No M ,807 Los Angeles County Regional Park and Open Space Assessment District ,436,694 TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $243,683,211 DIRECT AND OVERLAPPING GENERAL FUND OBLIGATION DEBT: Los Angeles County General Fund Obligations 2.013% $ 29,674,091 Los Angeles County Superintendent of Schools Certificates of Participation ,859 Los Angeles County Sanitation District Nos. 15, 16 & 17 Certificates of ,477,820 Participation Pasadena Area Community College District Certificates of Participation ,159 Pasadena Unified School District Certificates of Participation ,421,139 City of Pasadena General Fund Obligations ,496,708 City of Pasadena Pension Obligations ,687,765 TOTAL DIRECT AND OVERLAPPING GENERAL FUND DEBT $675,384,541 COMBINED TOTAL DEBT $918,731,618 (2) (1) Percentage of overlapping agency s assessed valuation located within the boundaries of the city. (2) Excludes tax and revenue anticipation notes, revenue, mortgage revenue and tax allocation bonds and nonbonded capital lease obligations. Ratios to Assessed Valuation: Total Direct and Overlapping Tax and Assessment Debt % Ratios to Adjusted Assessed Valuation: Combined Direct Debt ($632,184,473) % Combined Total Debt % STATE SCHOOL BUILDING AID REPAYABLE AS OF 6/30/12: $0 Source: MuniServices, LLC A-26

93 APPENDIX B AUDITED FINANCIAL STATEMENTS OF PASADENA WATER AND POWER ENTERPRISE FUNDS FOR THE FISCAL YEAR ENDED JUNE 30, 2011

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95 Building a Brighter Tomorrow A n n u a l R e p o r t

96 PWP Collects Top Awards Reliable Utility Honors PWP s outstanding record of reliability, safety, workforce development, and electric system improvement earned the prestigious Reliable Public Power Provider (RP3) designation from the American Public Power Association. PWP was one of only 82 utilities nationwide honored with this designation. Best Management Practices PWP has recently been lauded for being 100% compliant in pursuing best management practices for urban water efficiency. Far exceeding the goal of reducing water use by 20% by 2020, PWP documented that it had cut daily gallons-per-capita consumption by more than 26 percent (versus Pasadena s 10-year average) in Fiscal Year This positive review from the California Urban Water Conservation Council and the California Department of Water Resources enables PWP to continue to pursue state grant funding for water conservation programs and projects. Top 10 Solar Ranking PWP ranked #5 among U.S. municipal utilities in the Solar Electric Power Association s fourth annual Top 10 Utility Solar Rankings Report, released in June PWP earned the honor for solar systems installed in calendar year 2010, measured by total watts (22.3) per customer. By the same metric, PWP ranked #16 among all electric utilities nationwide. Innovative Programs The California Municipal Utilities Association presented PWP with a 2011 Community Service/Resource Efficiency Award for the innovative Outward & Upward program. The project trained students to provide oneon-one bilingual support to hard-to-reach residents and businesses, helping them apply for rebates to cut their water and power bills. Greening Our Community Staying green and clean is an ongoing priority for PWP, which received for the ninth consecutive year a Tree Line USA Award from the National Arbor Day Foundation/ National Association of State Foresters for protecting Pasadena s urban forest. PWP was recognized for its active power line clearance program, superior tree care techniques and crew training, community outreach, and promotion of shade trees for energy conservation. Pasadena Water and Power Services Water Service Area Population 161,259 Service Area Square Miles 26 Number of Miles of Water Mains 508 Number of Wells 16 Number of Reservoirs 14 Total Reservoir Capacity (gallons) 110,000,000 Number of Treatment Plants 1 Number of Booster Stations 19 Peak Day, in Acre Feet (Sept 2006) 147 Current Year Peak Day, in Acre Feet (Sept 2010) 115 Number of Services 38,067 Power Service Area Population 138,915 Service Area Square Miles 23 Number of Distribution Miles 665 Number of Transmission Miles 80 Number of Poles 11,313 Number of Receiving Stations 2 Number of Substations 13 Peak Day, in MWh (Sept 27, 2010) 320 Current Year Peak Day, in MWh (Sept 2010) 320 Number of Services 63,954

97 Pasadena Water and Power Annual Report 2011 Contents Inside Front Cover Inside Back Cover PWP Collects Top Awards Pasadena Water and Power Services A Message from General Manager Phyllis E. Currie Building a Brighter Tomorrow Legislative Impacts Energy Resources Update Water Resources Update Community Programs & Events Master Plan Update New Looks, New Tools Financial Section Independent Auditor s Report Water Enterprise Fund Management s Discussion and Analysis Power Enterprise Fund Management s Discussion and Analysis Basic Financial Statements Statement of Net Assets Statement of Revenues, Expenses and Changes in Net Assets Statement of Cash Flows Notes to Basic Financial Statements Supplementary Information Water System: Ten-Year Operations Summary Sales Comparison Water Data Power System: Ten-Year Operations Summary Sales Comparison Power Data Water and Power Systems: Pledged-Revenue Coverage Directory PASADENA WATER AND POWER ANNUAL REPORT

98 A Message from General Manager Phyllis E. Currie We believe that a model municipal utility serves its community best by capitalizing on the possibilities that come with change and turning them into assets for the future. Pasadena Water and Power (PWP) made investments in the future in Fiscal Year 2011 by augmenting local groundwater resources, taking steps to reach energy and water conservation targets, and reducing its energy footprint. Economic and regulatory realities coupled with reductions in demand for power and water made it necessary to work smarter and more efficiently with fewer resources. PWP consolidated services, reduced expenses, optimized infrastructure performance, and deployed technology to increase productivity. PWP remains on track to achieve its energy efficiency, renewable energy, and environmental targets including the Renewable Portfolio Standard (RPS) of 15 percent for calendar year In May 2011, PWP brought the Windsor Water Reservoir solar project online. This rooftop solar system reduces electricity costs for the Water Division and those savings will ultimately benefit water customers. It will also help PWP achieve multiple environmental and energy efficiency goals. During the year, the NASA-funded Monk Hill Water Treatment Plant in Pasadena came online, making a major contribution toward increasing Pasadena s potable water supply. Two of an eventual four wells began pumping treated perchlorate-free water that will reduce dependence on imported water and meet about 15 percent of Pasadena s water demand. Both the Water Integrated Resource Plan and the Urban Water Management Plan were approved by City Council during the fiscal year, and will work together to help PWP efficiently manage water resources for the long term. In addition, water customers continue to partner with PWP to make water conservation goals a reality as they reduced overall consumption for the fourth consecutive year. In February 2011, PWP completed and occupied its new, two-story LEED-certified field operations building. Designed as a leading model of sustainability with innovative energy, water efficiency, and conservation features such as natural lighting, drought-resistant landscaping, and a rainwater collection system, the building is also the new home of the Water Quality Lab and will serve as the City s Emergency Operations Center (EOC) in the event of a disaster. PWP generated revenues of over $234 million during the fiscal year and invested $20.5 million in infrastructure improvements to both the electrical and water systems, including projects to prepare for Smart Grid implementation and a disinfection facility at the new Monk Hill Water Treatment Plant. PWP also continued to benefit the City by contributing almost $16.6 million to the City s General Fund to support vital public services. PWP is proud to have earned the Reliable Public Power Provider designation and to be commended for best management practices for urban water efficiency. These awards go handin-hand with our ongoing commitment to deliver the most dependable water and power services today, and provide the leadership to create a brighter tomorrow. I sincerely appreciate the steadfast cooperation of the citizens and businesses of Pasadena, the leadership provided by City Council and City management throughout the year, and the commitment of PWP staff to deliver a consistently high level of customer service. Phyllis E. Currie, General Manager 2 PASADENA WATER AND POWER ANNUAL REPORT 2011

99 Building a Brighter Tomorrow For municipal utilities like Pasadena Water and Power (PWP), the realities of the current economic climate present a host of challenges that are accompanied by opportunities to take a fresh look at the goals and practices in place to support a future of sustainability and prosperity. Given the realities of budget constraints, decreasing revenues, and rising costs, the challenge is to work more efficiently with fewer resources, and to continue to be accountable to our customers by delivering the dependable water and power services that they have relied on for more than 100 years. PWP accepted this challenge and took the necessary steps to improve its operation by reducing expenses, deferring non-essential spending and capital improvements, and increasing productivity while operating with reduced staff. We found ways to optimize the reliability and performance of an increasingly complex utility infrastructure, implemented enterprise-wide technology solutions to maximize efficiency, and looked for opportunities to constantly improve our customer relationships. As always, we highly value and solicit stakeholder input in the decisions we make. PWP continued to set and achieve aggressive water conservation and energy efficiency targets in Fiscal Year 2011 and put plans in place for addressing long-term, sustainable power and water issues. We worked closely with our customers who made smart energy and water choices and we are grateful for their outstanding cooperation. To help customers make informed decisions about their energy use in the coming years, PWP took further action to prepare for Smart Grid deployment and recently completed a customer survey and business evaluation that will help identify advanced metering capabilities to deliver the best value to customers. PWP continues to address issues and challenges related to comprehensive deployment of this technology and will participate in a statewide project to see where the Utility stands in Smart Grid build-out in comparison with other municipal utilities. While there are many challenges facing municipal utilities today, PWP is focused on the possibilities that accompany change and the opportunities to build a brighter tomorrow. In Fiscal Year 2011, PWP continued to position itself to responsibly manage water and power resources and generate enterprisewide efficiencies. Achieved the Renewable Portfolio Standard of 15 percent in calendar year 2010, as well as additional key metrics recommended in the Power Integrated Resource Plan. Completed the water treatment plant at Monk Hill, which is fully operational and will significantly expand local groundwater supplies. Finalized and adopted the comprehensive Water Integrated Resource Plan (WIRP) that provides longterm strategies to meet future water demands. Also adopted the Urban Water Management Plan that works in concert with the goals of the WIRP. The new Monk Hill Water Treatment Plant. PWP is taking a fresh look at the possibilities and opportunities that accompany change Completed and connected the Windsor Water Reservoir rooftop solar system to the electric grid,reducing energy costs and generating clean power to meet multiple renewable energy goals. Made respective investments in water and power Master Plan projects for needed infrastructure improvements and repairs. Completed and occupied PWP s new LEED-certified field operations building, a model for sustainability and energy efficiency that also houses the Water Quality Lab and EOC. Continued to implement efficient Geographic Information System (GIS) technology solutions enterprise wide, allowing PWP to measure and analyze conservation program effectiveness, and provide field crews with powerful mobile mapping tools. Photo courtesy of Battelle and RC Foster Corp. PASADENA WATER AND POWER ANNUAL REPORT

100 Legislative Impacts In conjunction with other agencies involved in California s power and water industries, PWP tracked over 250 State bills in 2011 related to energy efficiency, renewable energy, electric vehicles, regulatory rates, water conservation, and public goods charges. Foremost of these bills are: SBX 1-2 Renewable Portfolio Standard. Passed in April 2011, the bill requires that 33 percent of public utility electric supply comes from renewable resources by While PWP s renewable goals are considerably more aggressive, the significant cost and overall scarcity of renewables will continue to create challenges for utilities. AB 1027 POU Utility Pole Access. Sponsored by the California Cable and Telecommunications Association, the bill requires that publicly owned utilities make appropriate space available on power poles and adopt a specified rate methodology to support cable television, telephone, and video service suppliers. For utilities like PWP, the results of this mandate are additional financial and administrative burdens without significant associated revenue. HR 470 Hoover Power Allocation Act of This Federal bill is designed to expand the availability of hydroelectric power to eligible entities that do not currently purchase Hoover Dam power. The passing of HR 470 would provide a fair and equitable reallocation to eligible entities and allow original investors such as PWP to maintain 95 percent of their allocations of this low-cost, low-emission hydropower for an additional 50 years. Hoover currently supplies Pasadena with approximately 6-8 percent of its energy. PWP continues to comply with AB 32, the Global Warming Solutions Act of 2006, which requires utilities to reduce greenhouse gas (GHG) emissions to 1990 levels by To achieve this goal, PWP is utilizing biomethane, a low GHG-emission fuel, and moving forward with plans to install a new high-efficiency generator. Integrated Resource Plan (IRP) Progress PWP is on track to implement the recommendations in power supply resources and delivery outlined in the comprehensive Power Integrated Resource Plan (IRP) adopted in The IRP provides a blueprint to ensure reliable and environmentally responsible electricity service, competitive rates, and energy independence through Several significant IRP metrics were achieved in calendar year 2010: 15% Renewable Portfolio Standard (RPS) 5% reduction in greenhouse gas (GHG) emissions 3 MW of solar photovoltaic installations (includes actual installations plus approved solar system applications for the 2010 calendar year) PWP is initiating efforts toward other IRP metrics including local gas-fired generation, coal power displacement, feed-in tariff for local renewable resources, peak load savings, and demand response. Renewable Energy Update PWP continues to add short- and long-term renewable energy resources to its portfolio to reduce dependence on fossil fuels and reduce GHG emissions. Recently enacted Senate Bill 2X established a new Renewable Portfolio Standard (RPS) beginning in Under this bill, contracts for electricity would require minimum/maximum quantities of renewable energy in three categories: renewable resources generated in California, energy from other sources to compensate for over- and under-generation from intermittent resources, and unbundled renewable energy credits (RECs). Not only has the price for renewable resources increased substantially, but very few California sources will have renewable energy for sale within the next 12 to 24 months. With demand outweighing supply, it will be an ongoing challenge for PWP to meet the required RPS standards at a reasonable cost. It will likely require investment in renewable attributes to meet the IRP renewable energy targets of 33 percent by 2015, and 40 percent by In 2011, PWP obtained City Council approval to begin Renewable Energy Credit (REC) trading. While rate impacts resulting from implementation of the IRP have been negligible thus far, ultimately each component of PWP s electric rates will be facing significant upward pressure in the coming years. Energy Resources Update Hydroelectric power generators at Hoover Dam. Legislative and regulatory uncertainties coupled with inadequate supplies and high costs of renewable energy pose major challenges for implementing a long-term energy plan. As PWP moves forward to achieve aggressive energy efficiency and conservation goals, we remain committed to reducing environmental impacts while delivering reliable and cost-effective power. Rate Component Public Benefits Charge Energy Transmission Distribution Rate Pressures Solar and energy efficiency programs Renewable resource acquisition Feed-in tariff Fuel and spot market energy costs GHG mitigation, credits/tax CAISO transmission rate Infrastructure replacement Smart Grid 4 PASADENA WATER AND POWER ANNUAL REPORT 2011

101 PWP Renewable Energy Portfolio Summary (GWh per year) Renewable Resources CY CY Current Contract Status Type Azusa Hydro 11 5 Online PWP Iberdrola Renewables (former PPM Solano Wind) Online PWP Fortistar Methane (former Minnesota Methane Landfill Gas) Online PWP Ormat Geothermal Ameresco Chiquita Canyon Landfill Gas Milford 1 Wind Glendale Landfill Gas (short term) EDF Biomethane Waste Management Biomethane Sequent Biomethane La Paz Solar Tower Shell Short Term (Q3) Short Term RECs Total Renewable Retail Sales % Renewable % IRP Renewable Target *Southern California Public Power Authority. **Pro-rated interim target , % 18.6%** , % 22.2%** Online Online Online Online Online Online PWP Expected Online 12/11 PWP Expected Online 2/15 SCPPA Online Online Next IRP goal: 33% by 2015 SCPPA* SCPPA SCPPA PWP PWP PWP PWP Solar panels at Windsor Reservoir. Windsor Solar Project Goes Online With the distinction as Pasadena s largest city-owned solar photovoltaic project to date, the innovative 564-kilowatt rooftop solar system at Windsor Water Reservoir in northwest Pasadena was connected to the municipal electric grid in May It is expected to generate 869,158 kilowatt hours of clean, renewable energy annually, equivalent to the power used by average Pasadena homes. The project will help achieve local and statewide environmental goals and fulfills four percent of the Pasadena Solar Initiative goal of installing 14,000 kilowatts of solar power in Pasadena by It also offsets 100 percent of the annual electricity consumed by the reservoir, reduces greenhouse gas emissions by over 760 tons, and saves approximately $17,000 in electric charges per year. GT-1 and Glenarm Repowering Project The timeline for repair of PWP s Gas Turbine Unit 1 (GT-1), which is currently inoperable due to a 2010 fire, is still undetermined. The GT-1 repowering is part of the larger Glenarm Power Plant Repowering Project, which includes the key IRP recommendation of replacing inefficient local generating units. Renewable projects in Fiscal Year 2011: The Ameresco Chiquita Canyon landfill gas-to-energy generation project came online and will supply approximately 50,000 MWh of renewable energy annually to Pasadena under a 20-year contract. PWP signed an agreement to participate in the La Paz Solar Energy Project expected to come online in 2015 and will purchase a 10 MW share of the solar output through the Southern California Public Power Authority (SCPPA). A new, extended agreement was secured with Resource Name/Type Southern California Edison (SCE) that increases the electric transfer capacity from 200 MW to 336 MW per hour and clearly specifies the terms and conditions under which SCE will transfer power from the Asuza Hydro Plant to Pasadena. CAISO Refund In mid 2011, PWP received settlement funds of over $17 million from the California Independent Systems Operator (CAISO) for outstanding net wholesale sales plus accrued interest to CAISO for the period Of the settlement funds, approximately $12 million was used to write down related CAISO accounts receivable, and about $5 million was recognized as wholesale net income in Fiscal Year LaPaz Ormat Geothermal Phase 2 UPC (Milford) Wind Chiquita Canyon LFG Ormat Geothermal Phase 1 Energy Price Comparison Energy Price by Calendar Year ($/MWh) Contract Execution Intermountain Power Project (IPP) Coal* (no carbon tax) Current offers under negotiations $72 ~ $110 per MWh with 1.5% annual escalators *Year 2011 Intermountain Power Agency (IPA) actuals; years 2012 and 2013 based on IPA budget; years 2015, 2020 and 2025 based on R.W. Beck's August 2010 IPP Power Cost Projections, which assumes an 88% capacity factor cost basis. PASADENA WATER AND POWER ANNUAL REPORT

102 to partner with the community to save water. As a result, water consumption in Fiscal Year 2011 was the lowest in over 18 years. PWP s Water Conservation Plan of 2009 and the WIRP work concurrently to promote water-saving measures and maximize water supplies. To help residential and commercial customers better manage their water use, PWP offers programs with enhanced incentives for water-saving devices and conducts landscaping and irrigation audits to provide watering recommendations based on a new statewide standard for irrigation efficiency. Water Conservation Continues Water conservation is a PWP priority. Through proactive measures PWP is positioning itself as a model water agency by creating a comprehensive approach and action plan to ensure adequate water supplies for Pasadena s future generations. While the challenges are ongoing rising water costs, reduced water allocations, prolonged droughts, low groundwater levels, and reliance on imported water that supplies about 65 percent of Pasadena s water needs PWP and its customers are working together to better manage water use. Water IRP Approved To proactively address critical water supply challenges, PWP developed the Water Integrated Resource Plan (WIRP), which was adopted by City Council in January It serves as a longterm resource strategy that reflects community values and adapts to changing conditions. The WIRP was developed using an open, participatory planning process with input from a stakeholder advisory committee and the public. This collaboration of efforts helped determine objectives and metrics used to evaluate a series of alternatives to meet future water demands. Urban Water Management Plan Approved The WIRP is the basis of Pasadena s 2010 Urban Water Management Plan (UWMP), which was adopted by City Council in June The Plan expands on the WIRP with the inclusion of water use targets, supply reliability planning, water shortage contingency planning, and demand management measures. Water Conservation Continues PWP customers continued the recent trend of reducing citywide water use. The current economic climate, as well as an effective combination of programs and practices that support water conservation, continue to work together to reduce water demand. Through a wide array of customer outreach efforts that include new online educational resources and classes for improving water efficiency, the successful launch of a turf replacement incentive program, and rainwater harvesting workshops, PWP continues Monk Hill Wells Back in Operation The long-awaited opening of the NASA-funded Monk Hill Water Treatment Plant and disinfection facility put two PWP wells back into service in Fiscal Year 2011, with two additional wells expected to be online in the near future. The Plant, which started construction in 2009, began a test run in March 2011 and was fully operational by July. It can treat up to 7,000 gallons of groundwater per minute, and will satisfy approximately 15 percent of Pasadena's overall water demand. The project also restored the Monk Hill Basin s aquifer, which runs below Hahamongna Watershed Park in the Arroyo Seco. NASA assumed responsibility for constructing the $8.5 million plant that treats groundwater contaminated more than 50 years ago by perchlorate and other volatile chemicals at the NASA/Jet Propulsion Laboratory. An extensive program to monitor water samples will ensure the safety of the Monk Hill well water. Citywide Water Consumption Since the comprehensive Water Conservation Plan was adopted in 2009, PWP and its customers are on track to not only meet but exceed the initial Urban Environmental Accords water conservation target of 10% reduction in water consumption by 2015, and 20% reduction by Citywide* Water Consumption in Fiscal Year % less than FY % less than FY % less than FY 2008 Customers save water to avoid critical shortage Water customers helped save the day when the Metropolitan Water District shut down a major pipeline for 10 1/2 days in March 2011 to make a seismic upgrade retrofit. Faced with a 40 percent cut in water supply and limited reserves and groundwater supply to meet demand PWP s major outreach and planning efforts to conserve water during this critical period motivated customers to adhere to temporary bans on all outdoor watering. PWP customers came through by cutting water use 39.4 percent, or 96 million gallons, during the shutdown. *Includes Altadena. Recycled Water Project Moves Forward A recycled water program that will help provide a sustainable source of water by bringing recycled (non-potable) water from Glendale to Pasadena continued to move forward with completion of the design for Phase 1, which includes storage reservoirs, a pipeline, and connection to initial customers. The project will help reduce reliance on imported water by using recycled water to irrigate public landscaped areas. Construction is scheduled to begin once funding is secured. 6 PASADENA WATER AND POWER ANNUAL REPORT 2011

103 Water Rate Increase & Refunds To better manage water resources and positively impact water conservation, PWP implemented the second of three consecutive Distribution & Customer (D&C) annual water rate increases in Fiscal Year The rate increase covers operational costs, maintenance, upgrades, and customer service. PWP also implemented a Purchased Water Adjustment Charge (PWAC) to help offset an MWD water-cost increase that went into effect January 2011 with another PWAC increase scheduled for PWP helped its water customers by refunding $1.75 million in credits resulting from lower-than-expected purchased water costs. Through the generous response of customers who were given the option to donate their refunds to support local public education, PWP was able to provide over $23,000 to Pasadena Learns, a program for Pasadena students during non-school hours. Interns from PUSD tour the Power Plant. Students watch a demonstration at Water Awareness Day. Community Programs & Events Almost 100 PWP-coordinated outreach events, meetings, and educational workshops every year engage the public in energy and water issues that impact Pasadena. PWP is committed to helping its customers manage energy and water use wisely and save money on their utility bills. PWP s efforts to encourage energy efficiency and water conservation earned water and power customers over $4 million through rebates and direct services. During the year, PWP also launched a water shortage public education campaign and video series, offered energy use evaluations, and continued to promote green power and energy efficiency programs. Major events included Greening the Earth Day, Public Power Day, Water Awareness Day, the Pasadena Earth and Arts Festival, and a variety of workshops focusing on solar energy, water conservation, and irrigation. In the summer of 2011, free home energy reports were sent to 25,000 randomly selected electric customers as part of a new pilot program aimed at reducing home energy use. PWP will monitor the results over the next two years and may expand the program to all residential customers in the future. Rebate programs for power customers in Fiscal Year 2011 included: Commercial: Over $1.3 million in rebates and direct installs provided through Energy Efficient Partnering and Direct Install Emerging Technologies programs saved over 8,700 MWh (8,700,000 kwh) and reduced peak demand by over 1.6 MW (1,600 kw). Residential/Low Income: Over $1.1 million in cash rebates, direct installs, rate assistance, and energy services. Energy Star, Efficient Cooling, Cool Trees, Refrigerator Replacement, and Pool Pump rebate programs, as well as Rate Assistance, Refrigerator Replacement, and online and on-site audits saved approximately 2,219 MWh (2,219,000 kwh) and reduced peak demand by 0.5 MW (500 kw). Pasadena Solar Initiative (PSI): Over $1.5 million in cash rebates for 95 commercial and residential solar installations with a capacity of 2 MW (2,000 kw). PWP has also implemented a solar customer compensation program to provide payments to solar customers for excess generation. Rebate programs for water customers in Fiscal Year 2011 included: Commercial/Multifamily: Over $39,000 in rebates for purchasing high efficiency water-saving devices through the Save A Buck program, with an estimated savings of 24 acrefeet annually. Residential: Over $124,000 in rebates through the SoCal WaterSmart program, with an estimated savings of 84 acre-feet annually. PUSD Internship Program In a collaborative effort that included PWP, Pasadena Unified School District (PUSD), and Pasadena City College (PCC), nine PUSD high school students participated in PWP s first internship program. This community-based partnership allowed students to rotate through various divisions within the Utility to gain operational insight as well as learn about opportunities in public service. PASADENA WATER AND POWER ANNUAL REPORT

104 Master Plan Update Pasadena residents rely on PWP to deliver an average of 24.5 million gallons of water and 3,148 megawatts of electricity every day. To keep the City s water and power delivery systems running smoothly and reliably, and to restore aging systems back to prime condition, PWP expended a total of $20.5 million in capital investment funds in Fiscal Year Power Highlights $12.8M In Fiscal Year 2011, the implementation of the 20-Year, $202 million Electric Distribution System Master Plan focused on improving system efficiency and reliability, upgrading infrastructure to accommodate future demand, and making necessary repairs to ensure safety throughout the electrical system. millions $25.0 $20.0 $15.0 $10.0 $5.0 $0 ACTUAL EXPENDITURES Power Master Plan Projects $22.5 $22.8 $21.2 $19.3 FY 07 FY 08 FY 09 FY 10 $12.8 FY 11 Projects in the Power Capital Improvement Program (CIP) included completion of emergency repairs of the Azusa Conduit at Garcia Canyon, repair of 20 underground vaults, construction of an oil containment facility at Chester Substation, civil and electrical construction for Los Robles Utility Underground District, and conversion of multiple 4kV circuit segments to 17kV. PWP also replaced 75 underground and 80 overhead transformers, 18 miles of distribution cable and wires, 50 underground switches, and 25 overhead poles. Preparing for the Smart Grid PWP initiated two innovative pilot projects to determine the effectiveness of various Smart Grid-related equipment choices on the Utility s electrical system infrastructure. One project was a joint venture with the Electric Power Research Institute for a high-speed device that quickly restores power, while the other is partially funded by a grant from the American Public Power Association and will install special meters on selected lines to gather planning data. Water Highlights $7.7M Implementation of the 18-year, $234 million Water Distribution System Master Plan focused on increasing groundwater supply and the continuation of efforts to upgrade infrastructure and keep the water system operating reliably. millions $14.0 $12.0 $10.0 $8.0 $6.0 $4.0 $2.0 $0 ACTUAL EXPENDITURES Water Master Plan Projects $12.1 $12.2 $11.4 $9.1 $7.7 FY 07 FY 08 FY 09 FY 10 FY 11 Projects in the Water Capital Improvement Program included completion of the Monk Hill Perchlorate Treatment Plant along with a disinfection facility. In addition to the ongoing meter replacement program, approximately 2.6 miles of aging water distribution mains were replaced. Build America Bonds Finance CIP projects PWP utilized Build America Bonds (BABs) to finance certain capital improvements related to the Water System in Fiscal Year BABs are federally subsidized taxable bonds created by the American Recovery and Reinvestment Act of 2009 (the Stimulus Act ). In December 2010, PWP issued approximately $4.6 million of Water Revenue Bonds, Series 2010A, and approximately $25.4 million of tax-exempt Water Revenue Bonds, Series 2010B BABs. The U.S. Treasury provides a 35-percent subsidy on interest payments to the issuer of the BABs. PWP issued BABs to lower its net cost of financing after the federal subsidy, specifically for the bonds with maturities longer than ten years. PWP field crews replace water mains. 8 PASADENA WATER AND POWER ANNUAL REPORT 2011

105 PWP committed to working smarter and more efficiently for our customers City facilities to the GIS system, making it easier to target and analyze conservation programs and their effectiveness. The Department also piloted mobile GIS solutions to put powerful, intuitive mapping tools into the hands of field crews. Customer Communication Upgrades PWP continued to improve the capabilities of the City s Interactive Voice Response/Interactive Web Response (IVR/IWR) system to enhance customer service. Utility customers can now initiate, transfer, and stop service as well as make credit card payments on PWP s website 24/7. The system is also in the process of being upgraded for PWP outbound calling and outreach to customers. PWP s IVR/IWR upgrade provides new features for customer convenience. New Looks, New Tools From an environmentally sensitive new building to refurbishment of a historically significant icon, PWP continues to invest in projects that enhance its ability to serve the community, both now and into the future. Parallel to these ongoing investments, new technology solutions provide important tools that enable PWP to work smarter, faster, and more effectively for its customers. Glenarm Fountain Gets New Life Since 1938, residents have admired what has become one of Pasadena s landmarks, the Glenarm Fountain located on the grounds of the historic Glenarm Power Plant Building. Designed to function as a cooling unit for the generating equipment, the fountain operates by recirculating water in the basin. Underground mechanical, plumbing, and structural components have been replaced while a new filtration system reduces water usage and will keep the fountain operating cleanly and efficiently. Green PWP Building Open for Business In February 2011, PWP occupied its newly completed two-story, 31,400 sq. ft. operations building. Located at the City Yards, the building houses PWP s field staff and the Water Quality Lab and has since earned LEED certification. The facility will also serve as a seismically sound location and vital communication hub for Pasadena s primary Emergency Operations Center (EOC) in the event of an emergency or disaster. Advanced sustainability features of the building include a rainwater collection system, perforated metal panels to dissipate glare and heat, a two-story glass curtain wall to provide full daylighting of indoor space, and a reflective and green vegetated roof to provide additional cooling. Ongoing GIS Implementation PWP has been positioning itself in the past few years to more effectively capture and manage asset data via state-of-the-art Geographic Information System (GIS) technology. It gives PWP an accurate picture of its water and power systems to better allocate resources, plan improvements, and schedule maintenance. In Fiscal Year 2011, PWP converted utility information for all Glenarm Fountain after recent repairs. PASADENA WATER AND POWER ANNUAL REPORT

106 INDEPENDENT AUDITORS REPORT City Council City of Pasadena Pasadena, California We have audited the accompanying financial statements of the Water and Power Enterprise Funds of the City of Pasadena, California, as of and for the year ended June 30, 2011, as listed in the table of contents. These financial statements are the responsibility of the management of the City of Pasadena, California. Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial 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 of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. As discussed in Note 1, the financial statements of present only the Water and Power Enterprise Funds and do not purport to, and do not present fairly the financial position of the City of Pasadena, California, as of June 30, 2011, and the changes in financial position and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the Water and Power Enterprise Funds of the City of Pasadena, California, as of June 30, 2011, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. During the year ended June 30, 2011, the City changed the manner in which it accounts for congestion revenue rights and similar contracts in accordance with a supplemental release to the Comprehensive Implementation Guide released from the Governmental Accounting Standards Board. Pursuant to the release, the contracts are considered normal purchase or normal sales and are no longer required to be recorded and deferred at their fair value. Previous years information was reversed during the fiscal year to conform to these changes. Accounting principles generally accepted in the United States of America require that the managements discussion and analysis 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 financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in 10 PASADENA WATER AND POWER ANNUAL REPORT 2011

107 accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with managements responses to our inquiries, the basic financial statements, and other knowledge we 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. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Water and Power Enterprise Funds of the City of Pasadena, California. The introductory section and supplementary information are presented for purposes of additional analysis and are not a required part of the basic financial statements. The introductory and supplementary information have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any assurance on them. BROWN ARMSTRONG ACCOUNTANCY CORPORATION By: Eric S. Berman Pasadena, California December 29, 2011 PASADENA WATER AND POWER ANNUAL REPORT

108 CITY OF PASADENA WATER ENTERPRISE FUND Management s Discussion and Analysis June 30, 2011 The Management of Pasadena Water and Power (PWP), a department of the City of Pasadena (City) and also referred to in this report as Utility, offers the following overview and analysis of the basic financial statements of the Water Enterprise Fund (Water Fund) for the fiscal year ended June 30, We encourage readers to utilize the information presented here in conjunction with the accompanying basic financial statements. Unless otherwise indicated, all amounts are expressed in thousands of dollars. Overview of the Basic Financial Statements Management has elected to provide not only highlights to the basic financial statements, but also vital statistics and other relevant data and information associated with the Water Fund. Because the utility is a business-like activity of the City of Pasadena, an enterprise fund is used to account for its water utility operations. Information on City-wide financial results is available in the City of Pasadena Comprehensive Annual Financial Report as of June 30, The Water Fund s basic financial statements are comprised of two components: 1) financial statements and 2) notes to the financial statements. Included as part of the financial statements are the Statement of Net Assets; Statement of Revenues, Expenses and Changes in Net Assets; and Statement of Cash Flows. The Statement of Net Assets presents the assets and liabilities with the difference between the two reported as net assets. The Statement of Revenues, Expenses, and Changes in Net Assets details the changes in the Water Fund s net assets during the past two fiscal years. Operating results are recorded under the accrual basis of accounting in which all changes in net assets are reported as underlying events occur, regardless of the timing of cash flows. Thus, these statements reflect revenues and expenses that will generate cash flows during future fiscal periods, i.e. accounts payable and accounts receivable. The Statement of Cash Flows presents the flow of cash and cash equivalents during the last two fiscal years, including certain restricted amounts. The Notes to Basic Financial Statements provides additional infor-mation that is essential to the full understanding of the data provided in the basic financial statements. Financial Highlights At the close of Fiscal Year 2011 (FY 2011), the Water Fund s assets exceeded its liabilities by $104.6 million. Of this amount, $9.6 million was available to meet the Utility s near-term obligations and approximately $2.8 million was available for contribution to the City s General Fund. Revenues from retail sales exceeded the prior year s results due to rate increases implemented during the year. This increase was offset by a 4.3% decrease, equivalent to 537,596 billing units, in total water sold due to water conservation and the economic environment. A billing unit is equivalent to 748 gallons of water. Financial Analysis The Condensed Statement of Net Assets for the Water Fund is as follows: Restated (in thousands) FY 2011 FY 2010 Change Assets Current assets $ 21,508 20,485 1,023 Non-current assets 32,085 6,101 25,984 Capital assets 146, ,134 6,603 Total assets 200, ,720 33,610 Liabilities Current liabilities 12,929 15,269 (2,340) Long-term liabilities 82,813 55,236 27,577 Total liabilities 95,742 70,505 25,237 Net assets Invested in capital assets, net of related debt 92,211 87,406 4,805 Restricted: Contribution to General Fund 2,773 2, Unrestricted net assets 9,604 6,245 3,359 Total net assets $104,588 96,215 8,373 The total assets of the Water Fund increased by $33.6 million primarily due to increases of approximately $25.9 million in restricted cash and investments, $6.6 million in the net property and plant and equipment, $1.1 million in net accounts receivable, and $0.6 million in inventory. These increases were offset by a decrease in cash and investments of approximately $0.6 million. Total net assets at the end of the year were $104.6 million, an increase of $8.4 million or 8.7%. 12 PASADENA WATER AND POWER ANNUAL REPORT 2011

109 CITY OF PASADENA WATER ENTERPRISE FUND Management s Discussion and Analysis June 30, 2011 Depreciation expense and accumulated depreciation for Fiscal Year 2010 have been restated. Depreciation Expense was restated to $4,451,443 from $4,443,238 resulting in an increase of $8,205. Accumulated Depreciation was restated to $61,206,370 from $62,508,010 resulting in a decrease of approximately $1.3 million. The ending Net Assets balance for FY 2010 was restated to $96.2 million. The total net assets of the Utility as of FY 2011 increased by the net income of $8.4 million from the restated FY 2010 results. The Statement of Revenues, Expenses, and Changes in Net Assets for the Water Fund is as follows: Restated (in thousands) FY 2011 FY 2010 Change Operating revenues: Sales within City limits $ 29,769 26,731 3,038 Sales outside City limits 5,965 5, Municipal Sales & Fire Protection 2,500 1, Capital Improvement Charge 7,628 7,948 (320) Miscellaneous Other Revenues 1,275 1,360 (85) Total operating revenues 47,137 43,480 3,657 Operating expenses: Purchased Water 14,862 13,646 1,216 Purchased Power 2,384 2, Other operating expenses 8,295 7,059 1,236 Administrative & general 5,939 5, Depreciation 4,801 4, Total operating expenses 36,281 33,118 3,163 Operating income 10,856 10, Non-operating income (expense): Investment earnings (incl. net change in fair market of investments) (93) Other income (expense), net 3,337 3,922 (585) Interest expense (3,680) (2,752) (928) Total non-operating expenses (128) 1,478 (1,606) Income before contributions and transfers 10,728 11,840 (1,112) Contributions and transfers: Capital contributions Transfers out to the City General Fund (3,104) (3,066) (38) Change in net assets 8,373 9,425 (1,052) Net assets, beginning of year, as restated 96,215 86,790 9,425 Net assets, end of year $104,588 96,215 8,373 Operating revenues for FY 2011 totaled $47.1 million, an increase of $3.7 million or 8.4% over the prior year due to increases in the Distribution and Customer Charge (D&C) and Purchased Water Adjustment Charge (PWAC). Operating expenses increased by $3.2 million or 9.5% compared to FY Purchased water costs increased by $1.2 million or 8.9% due to wholesale water rate increases imposed by the Metropolitan Water District. Net operating income increased $0.5 million or 4.8%. Sales revenue generated inside City limits increased by $3.0 million or 11.4% while sales revenue generated outside City limits increased by $0.4 million or 8.0% compared to the prior year. Municipal and fire protection sales revenue also increased by $0.6 million or 30.4% due to the reclassification of the fire protection surcharge from non-operating to operating revenue. In addition, Capital Improvement Charge (CIC) revenue was $0.3 million or 4.0% lower than FY 2010 due to lower retail sales. The CIC is a volumetric charge. Total investment earnings, including net change in fair market value of investments, decreased by approximately $0.1 million or 29.8%. Capital contribution in aid of construction received from developers increased by $0.1 million or 15.0%. Other nonoperating income decreased by $0.6 million primarily due to reduced reimbursement from the United States Federal Emergency Management Administration (FEMA) for emergency services-related costs. The total transfer out to the City s General Fund was $3.1 million, similar to the FY 2010 contribution. The Water Fund s contribution to the General Fund represents 6% of the total operating revenue received during the prior year, excluding sales to other utilities. Sources of Funds Non-Operating & Misc. Others 9% Purchased Water Adjustment Charge 1% Capital Improvements Charge 15% Municipal & Others 5% Outside City 12% Inside City 58% PASADENA WATER AND POWER ANNUAL REPORT

110 CITY OF PASADENA WATER ENTERPRISE FUND Management s Discussion and Analysis June 30, 2011 Purchased water expenses increased by approximately $1.2 million or 8.9% to $14.9 million despite a 3.8% reduction in the amount of water purchased. This increase was mainly due to water rate increases implemented by the Metropolitan Water District (MWD) in January 2011 for full service treated water. PWP purchased 18,965 acre-feet from MWD in FY 2011, representing about 65% of the total water production for the year. Purchased power costs associated with pumping water increased by approximately $0.2 million or 8.4% to about $2.4 million mainly due to increased local water production. Other operating expenses, which include source of supply, water treatment, pumping maintenance and transmission, and distribution expenses, increased by approximately $1.2 million or 17.5% to $8.3 million due to higher operating costs. Total administrative and general expense was about $5.9 million, which was $0.2 million or 3.1% higher than the prior year. Uses of Funds Depreciation 9% General Fund Transfer 6% Interest 7% Purchased Water 29% Restated Capital Assets (in thousands) FY 2011 FY 2010 Land $ 1,411 1,411 Buildings & Improvements 4,403 4,899 Water Mains, Machinery & Equipment 181, ,533 Construction Work in Progress 25,245 23,497 Accumulated Depreciation (65,456) (61,206) Net capital assets $146, ,134 Long-Term Debt Long-term debt increased by $27.7 million or 48.5% to about $84.8 million primarily due to the issuance of the 2010 Water Revenue Bonds, Series 2010A (Taxable Build America Bonds) in the amount of $25.4 million and Series 2010B (Tax Exempt Bonds) in the amount of $4.6 million. This increase was offset by $2.3 million in principal payments on the outstanding Water Revenue Bonds. At the end of the fiscal year, the Water Fund s current long-term outstanding debt due within a year was $2.4 million, while noncurrent long-term debt was approximately $82.5 million. The debt was backed by the revenue of the Utility. The Water Fund maintained an AA rating from Standard and Poor s and AA+ from Fitch. Outstanding Long-Term Debt (in thousands) FY 2011 FY 2010 Net Income 16% Administrative & General 12% Direct Operating 16% Purchased Power 5% Capital Assets and Debt Administration As of June 30, 2011, the Water Fund s net utility plant and equipment amounted to $146.7 million, an increase of 4.7% over the prior year. This includes investments in production, transmission, facilities-related distribution, and general items such as equipment, furniture, etc. The increase is primarily attributable to an increase in water mains, machinery, and equipment Water Revenue Bonds $34,970 36, Water Revenue Bonds 19,875 20, Water Revenue Bonds 30,000 0 Total Long-Term Debt 84,845 57,145 Current Long-Term Debt 2,390 2,300 Non-Current Long-Term Debt $82,455 54,845 Requests for Information This financial report is designed to provide a general overview of the Water Fund s finances. Questions concerning information provided in this report should be addressed to the Assistant General Manager, Finance, Administration and Customer Service Business Unit, Pasadena Water and Power, 150 S. Los Robles Avenue, Suite 200, Pasadena, California PASADENA WATER AND POWER ANNUAL REPORT 2011

111 CITY OF PASADENA POWER ENTERPRISE FUND Management s Discussion and Analysis June 30, 2011 The Management of Pasadena Water and Power (PWP), a department of the City of Pasadena (City) and also referred to in this report as Utility, offers the following overview and analysis of the basic financial statements of the Power Enterprise Fund (Power Fund) for the fiscal year ended June 30, We encourage readers to utilize the information presented here in conjunction with the accompanying basic financial statements. All amounts, unless otherwise indicated, are expressed in thousands of dollars. Overview of the Basic Financial Statements Management has elected to provide not only highlights to the basic financial statements, but also vital statistics and other relevant data and information associated with the Power Fund. Because the utility is a business-like activity of the City of Pasadena, an enterprise fund is used to account for its power utility operations. Information on City-wide financial results is available in the City of Pasadena Comprehensive Annual Financial Report as of June 30, The Power Fund s basic financial statements are comprised of two components: 1) financial statements and 2) notes to the financial statements. Included as part of the financial statements are the Statement of Net Assets; Statement of Revenues, Expenses and Changes in Net Assets; and Statement of Cash Flows. The Statement of Net Assets presents the assets and liabilities with the difference between the two reported as net assets. The Statement of Revenues, Expenses, and Changes in Net Assets details the changes in the Power Fund s net assets during the past two fiscal years. Operating results are recorded under the accrual basis of accounting. In this basis, all changes in net assets are reported as underlying events occur, regardless of the timing of cash flows. Thus, revenues and expenses are reported in these statements for some items that will generate cash flows during future fiscal periods, i.e. accounts payable and accounts receivable. The Statement of Cash Flows presents the flow of cash and cash equivalents during the last two fiscal years, including certain restricted amounts. The Notes to Basic Financial Statements provides additional information that is essential to the full understanding of the data provided in the basic financial statements. Financial Highlights At the close of Fiscal Year 2011 (FY 2011), the Power Fund s assets exceeded its liabilities by $514.3 million, an increase of $20.3 million or 4.1% from the prior year. Of this amount, approximately $160.9 million was classified as unrestricted net assets. The total retail electric energy sold was approximately 1.16 million megawatt hours, a 2.1% decrease compared to the prior fiscal year. Total operating revenue for FY 2011 was $187.0 million, an increase of $3.3 million or 1.8%. Total operating expense was $161.1 million, an increase of $9.6 million or 6.3% compared to the prior year. Investment earnings for the year were about $6.1 million, a decrease of 26.3% due to lower market returns. A total of $13.5 million was transferred from the Power Fund to the City s General Fund. Financial Analysis The Condensed Statement of Net Assets for the Power Fund is as follows: Restated (in thousands) FY 2011 FY 2010 Change Assets Current assets $152, ,272 8,044 Non-current assets 171, ,625 (12,346) Capital assets 352, ,812 6,697 Total assets 676, ,709 2,395 Liabilities Current liabilities 16,587 14,897 1,690 Long-term liabilities 145, ,797 (19,577) Total liabilities 161, ,694 (17,887) Net assets Invested in capital assets, net of related debt 204, ,449 10,826 Restricted: Contribution to General Fund 12,688 12,742 (54) Stranded Investment 133, ,058 (4,143) Other Purposes 2,496 2, Unrestricted net assets 160, ,672 13,251 Total net assets $514, ,015 20,282 PASADENA WATER AND POWER ANNUAL REPORT

112 CITY OF PASADENA POWER ENTERPRISE FUND Management s Discussion and Analysis June 30, 2011 The Power Fund s total assets increased by about $2.4 million primarily due to increases of approximately $11.5 million in cash and investments, $6.7 million in net property and plant and equipment, $2.1 million in net accounts receivable, and $0.5 million in inventory. These increases were offset by a decrease of approximately $10.8 million in deferred outflow due to a change in the accounting treatment of derivative instruments classifying outstanding Congestion Revenue Rights (CRR) as normal purchase-normal sales. Assets were further offset by decreases of $4.3 million in notes receivable, $2.1 million in non-current assets that include restricted assets and prepaid expenses, and $1.2 million due from other funds. The total net assets of the Utility increased by the net income of $20.3 million from the restated FY 2010 results. As of June 30, 2011, the Stranded Investment Reserve (SIR) Fund had a balance of approximately $63.7 million to cover any stranded costs resulting from the uncertainty associated with longterm commitments for energy from Intermountain Power Project (IPP). In FY 2010, PWP defeased some of its outstanding debt service requirements for Intermountain Power Authority (IPA) bonds and received subordinate notes from IPA. In FY 2011 the Power Fund received $3.2 million in interest income from the IPA relating to the subordinate notes. Participating Transmission Owners (PTO) revenues received from the California Independent System Operator to cover the Power Fund s Transmission Revenue Requirement (TRR) was $12.2 million, an increase of $0.9 million or 7.8% compared to the prior year. Depreciation expense and accumulated depreciation for FY 2010 have been restated. Depreciation expense was restated to $17,490,565 from $17,489,647 resulting in an increase of $918. Accumulated depreciation was restated to $281,355,228 from $281,561,663, resulting in a decrease of $206,435. The ending net asset balance for FY 2010 was restated to $494,015,482. The total net assets of the utility increased by a net income of $20.3 million from the restated FY 2010 results. The Power Fund s operating revenue was $187.0 million, an increase of $3.3 million or 1.8% over the prior year mainly due to an increase in accrued unbilled revenues. Revenue from wholesale transactions was approximately $7.2 million, which is consistent with the prior year amount. Combined investment earnings and change in fair value of investments decreased by $2.2 million or 26.3% to $6.1 million due to lower investment returns. Total The Statement of Revenues, Expenses, and Changes in Net Assets for the Power Fund is as follows: Restated (in thousands) FY 2011 FY 2010 Change Operating revenues: Retail $167, ,102 2,464 Wholesale 7,198 7,251 (53) Miscellaneous/ Other Revenues 12,229 11, Total operating revenues 186, ,712 3,281 Operating expenses: Purchased power and fuel - Retail 95,078 85,837 9,241 Purchased power and fuel - Wholesale 4,921 4, Other operating expenses 21,469 20,095 1,374 Administrative & general 21,494 23,453 (1,959) Depreciation 18,184 17, Total operating expenses 161, ,526 9,620 Operating income 25,847 32,186 (6,339) Non-operating income (expense): Investment earnings (incl. net change in fair market of investments 6,055 8,215 (2,160) Other income (expense), net 5,667 7,365 (1,698) Interest expense (6,021) (7,205) 1,184 Total non-operating revenues 5,701 8,375 (2,674) Income before contributions and transfers 31,548 40,561 (9,013) Contributions and transfers: Capital contributions 1,732 3,311 (1,579) Transfers in from the City General Fund 494 2,744 (2,250) Transfers out to the City General Fund (13,492) (16,973) 3,481 Change in net assets 20,282 29,643 (9,361) Net assets, beginning of year, as restated 494, ,372 29,643 Net assets, end of year $514, ,015 20,282 capital contributions received from developers was $1.7 million, a decrease of $1.6 million or 47.7%. Due to fewer electrical undergrounding capital projects, transfer from the City s General Fund for utility undergrounding projects was approximately $0.5 million, a decrease of $2.2 million or 82.0% compared to the prior fiscal year. In compliance with the City Charter, PWP transferred approximately $13.5 million to the City s General Fund during FY This represents a decrease of approximately $3.5 million or 20.5% compared to FY The prior fiscal year transfer amount included an additional $2.0 million. 16 PASADENA WATER AND POWER ANNUAL REPORT 2011

113 CITY OF PASADENA POWER ENTERPRISE FUND Management s Discussion and Analysis June 30, 2011 Sources of Funds Residential 24% Non-Operating & Misc. Others 11% General Fund Transfer 7% ISO-PTO 6% Net Income 10% Interest 3% Commercial & Industrial 54% Municipal & Others Wholesale 1% Sales 4% Total operating expenses amounted to approximately $161.1 million, a 6.3% increase over the prior year. A majority of the increase was due to higher energy costs associated with renewable energy required to meet PWP s Renewable Electricity Standard (RES) goals. Total administrative and general expense was $21.5 million, a 8.3% or $2.0 million reduction from the prior year. This amount includes finance operations and customer services such as customer accounts, records and collections, and meter reading. Depreciation expense was about $18.2 million, an increase of $0.7 million or 4.0% over the prior year. Total interest expense was $6.0 million, a decrease of 1.2 million or 16.4%, which was mainly due to the refunding of the 2002 Electric Revenue Bonds. Income before contributions and transfers was $31.5 million, a decrease of $9.0 million or 22.2% primarily due to an increase in energy costs and lower return on investments. Net assets increased by $20.3 million or 4.1% to $514.3 million. Uses of Funds Purchased Power 45% Capital Assets and Debt Administration As of June 30, 2011, the Power Fund s net utility plant and equipment, which includes investments in production, transmission, dis-tribution facilities, and general items such as equipment and furniture, was $352.5 million, an increase of $6.7 million or 1.9% over the prior year. Restated Capital Assets (in thousands) FY 2011 FY 2010 Land $ 2,837 2,837 Buildings & Improvements 41,110 41,800 Utility Lines, Machinery & Equipment 525, ,242 Construction Work in Progress 70,442 58,288 Accumulated Depreciation (286,950) (281,355) Net capital assets $352, ,812 Long-Term Debt Long-term debt was $150.8 million at the end of FY 2011, a decrease of $4.7 million or 3.0% over the prior year. The decrease is attributable to the issuance of 2010 Electric Revenue Refunding Bonds in the amount of $36.3 million for the advance refunding of a portion of outstanding 2002 Electric Revenue Bonds. At the end of the fiscal year, the Power Fund s current long-term outstanding debt due within a year was $7.9 million while non-current long-term debt was $142.9 million. The debt was backed by the revenue of the Utility. PWP s Power Enterprise Fund maintained an AA- rating from Standard and Poor s and AA from Fitch. Outstanding Long-Term Debt (in thousands) FY 2011 FY Electric Revenue/Refunding Bonds $ Electric Revenue Bonds 12,605 51, Electric Revenue Bonds 6,485 6, Electric Revenue Bonds 55,190 56, Electric Revenue/Refunding Bonds 40,655 40, Electric Revenue/Refunding Bonds 35,905 0 Total Long-Term Debt 150, ,510 Current Long-Term Debt 7,945 4,905 Non-Current Long-Term Debt $142, ,605 Depreciation 9% Administrative & general 11% Direct Operating 10% Fuel Expense 5% Requests for Information This financial report is designed to provide a general overview of the Power Fund s finances. Questions concerning information provided in this report should be addressed to the Assistant General Manager, Finance, Administration and Customer Service Business Unit, Pasadena Water and Power, 150 S. Los Robles Avenue, Suite 200, Pasadena, California PASADENA WATER AND POWER ANNUAL REPORT

114 CITY OF PASADENA WATER AND POWER ENTERPRISE FUNDS Statement of Net Assets June 30, 2011 Light & Power Water Assets Current assets: Cash and investments (note 2) $112,469,736 1,640,449 Accounts receivable, net (note 3) 20,562,604 7,837,426 Notes receivable current (note 4) 4,516,250 Due from other funds 3,800,000 Inventories 10,034,302 11,643,805 Prepaids and other assets 933, ,246 Total current assets 152,316,141 21,507,926 Noncurrent assets: Restricted assets cash and investments: To finance stranded investments (notes 2 and 8) 63,651,067 Other restricted cash and investments (note 2) 4,930,494 30,677,733 Notes receivable (note 4) 57,487,917 Prepaid long-term assets 28,209,626 1,407,539 Accounts receivable from Independent System Operator (ISO), net 17,000,000 Capital assets (note 5) 639,459, ,193,179 Less accumulated depreciation (286,950,419) (65,456,250) Net property, plant and equipment 352,508, ,736,929 Total noncurrent assets 523,787, ,822,201 Total assets 676,103, ,330,127 Liabilities Current liabilities: Accounts payable and accrued liabilities 6,782,789 6,555,514 Deposits 806, ,151 Due to other funds 3,800,000 Deferred Revenue 1,053,032 22,121 Revenue bonds current (notes 6 and 7) 7,945,000 2,390,000 Total current liabilities 16,587,074 12,928,786 Long-term liabilities: Revenue bonds long-term (notes 6 and 7) 142,900,000 82,455,000 Unamortized premium (discount) 2,319, ,412 Total long-term liabilities 145,219,432 82,813,412 Total liabilities 161,806,506 95,742,198 Net Assets Invested in capital assets, net of related debt 204,274,751 92,211,250 Restricted: Contribution to General Fund 12,688,412 2,772,634 Stranded Investment 133,914,544 Other purposes 2,496,442 Unrestricted 160,923,279 9,604,045 Total net assets $514,297, ,587,929 See accompanying notes to the basic financial statements. 18 PASADENA WATER AND POWER ANNUAL REPORT 2011

115 CITY OF PASADENA WATER AND POWER ENTERPRISE FUNDS Statement of Revenues, Expenses, and Changes in Net Assets For Fiscal Year Ended June 30, 2011 Light & Power Water Operating revenues: Charges for services: Light and power operating revenue $ 50,562,722 Recovered transmission and energy cost 110,343,576 Public benefit charge 6,659,506 Sales to other utilities 7,198,514 ISO-PTO 12,228,981 Water sales within City limits 29,768,810 Water sales outside City limits 5,965,229 Municipal and Fire Protection Services 2,499,813 Capital improvement charge 7,627,767 Miscellaneous others 1,275,385 Total operating revenues 186,993,299 47,137,004 Operating expenses: Fuel retail 5,587,366 Fuel wholesale 4,165,947 Purchased power retail 89,490,366 2,383,797 Purchased power wholesale 755,076 Purchased water 14,861,747 Other production costs 7,781,924 Hydro-electric power generation 41,362 Sources of supply 966,399 Pumping 533,210 Water treatment 1,503,964 Transmission and distribution 13,645,947 5,291,526 Administrative and general expenses 11,457,780 4,455,001 Customer and commercial expenses 10,036,580 1,484,531 Depreciation 18,184,297 4,800,816 Total operating expenses 161,146,645 36,280,991 Operating income (loss) 25,846,654 10,856,013 Non-operating revenues (expenses): Investment earnings 6,351, ,508 Net change in fair value of investments (296,452) 9,447 Interest expense (6,021,433) (3,679,994) Gain (loss) on disposal of assets (274,371) (140,438) Other non-operating revenues (expenses) 5,941,699 3,477,095 Total non-operating revenues (expenses) 5,701,380 (127,382) Income (loss) before transfers and contributions 31,548,034 10,728,631 Capital contributions 1,731, ,003 Transfers from City of Pasadena (note 9) 494,376 Transfers to City of Pasadena (note 9) (13,492,353) (3,104,243) Net income (loss) 20,281,946 8,373,391 Net assets at beginning of year, as restated 494,015,482 96,214,538 Net assets at end of year $514,297, ,587,929 See accompanying notes to the basic financial statements. PASADENA WATER AND POWER ANNUAL REPORT

116 CITY OF PASADENA WATER AND POWER ENTERPRISE FUNDS Statement of Cash Flows For Fiscal Year Ended June 30, 2011 Light & Power Water Cash flows from operating activities: Cash received from customers $184,000,966 44,458,870 Cash payments to suppliers for goods and services (108,166,723) (18,038,870) Cash payments to employees for services (33,381,125) (12,830,629) Cash payments to other funds for services (1,950,837) (1,228,975) Cash payments from other funds for services 187,650 89,870 Other non-operating revenues (expenses) 7,210,368 2,948,021 Net cash provided by (used for) operating activities 47,900,299 15,398,287 Cash flows from non-capital financing activities: Transfers from other funds 494,376 Transfers to other funds (13,492,353) (3,104,243) Cash received (paid) on loans to other funds 1,200,000 Cash received (paid) on loans from other funds (1,200,000) Intergovernmental revenues 29, ,204 Net cash provided by (used for) non-capital financing activities (11,768,048) (3,865,039) Cash flows from capital and related financing activities: Proceeds from long-term debt 35,392,640 30,000,000 Acquisition and construction of capital assets (25,155,423) (11,544,205) Cash received from developers 1,731, ,003 Principal paid on debt (40,985,000) (2,300,000) Interest paid on debt (6,261,036) (3,518,154) Net cash used for capital and related financing activities (35,276,930) 13,386,644 Cash flows from investing activities: Purchase of investments (79,547,933) (12,074,980) Proceeds from sale of investments 68,062,235 Investment earnings 5,541, ,482 Payments received from notes receivable 4,289,583 Net cash provided by investing activities (1,654,448) (11,738,498) Net increase (decrease) in cash and cash equivalents (799,127) 13,181,394 Cash and cash equivalents at beginning of year 122,492,555 2,382,125 Cash and cash equivalents at end of year $121,693,428 15,563,519 Reconciliation of cash and cash equivalents to amounts reported on the Statement of Net Assets: Cash and investments $112,469,736 1,640,449 Stranded investments 63,651,067 Other restricted cash and investments 4,930,494 30,677,733 Less non-cash equivalents (59,357,869) (16,754,663) Cash and cash equivalents at end of year $121,693,428 15,563, PASADENA WATER AND POWER ANNUAL REPORT 2011

117 CITY OF PASADENA WATER AND POWER ENTERPRISE FUNDS Statement of Cash Flows (continued) For Fiscal Year Ended June 30, 2011 Light & Power Water Reconciliation of operating income (loss) to net cash provided by (used for) operating activities: Operating income (loss) $25,846,654 10,856,013 Adjustments to reconcile operating income (loss) to net Depreciation 18,184,297 4,800,816 Amortization of prepaid long-term assets 1,257,195 Other non-operating revenues (expenses) 5,911,770 3,037,891 (Increase) decrease in accounts receivable 3,374,346 (1,221,865) Increase (decrease) in allowance for uncollectible accounts (4,991,761) 31,925 (Increase) decrease in inventories (363,536) (560,997) (Increase) decrease in prepaids and other assets (33,434) (6,772) (Increase) decrease in prepaids and long-term assets (114,010) Increase (decrease) in accounts payable and accrued liabilities (1,428,762) 78,375 Increase (decrease) in deferred charges 111,330 (1,488,194) Increase (decrease) in deposits payable 32,200 (14,895) Total Adjustments 22,053,645 4,542,274 Net cash provided by (used for) operating activities $47,900,299 15,398,287 Non-cash investing, capital and financing related activity Non-cash changes in fair value of investments $ 348,277 9,447 See accompanying notes to the basic financial statements. PASADENA WATER AND POWER ANNUAL REPORT

118 NOTES TO THE BASIC FINANCIAL STATEMENTS For the Fiscal Year Ended June 30, 2011 (1) Summary of Significant Accounting Policies The following is a summary of significant accounting policies of the City of Pasadena (the City) as they pertain to the City s Water and Power Enterprise Funds. (a) Basis of Accounting The City s Water and Power Enterprise Funds are used to account for the construction, operation, and maintenance of the Cityowned water and power utilities. Enterprise Funds are presented using the accrual basis of accounting. Revenues are recognized when they are earned and expenses are recognized when the related goods or services are delivered. Enterprise Funds are presented using the economic resources measurement focus. This means that all assets and all liabilities (whether current or noncurrent) associated with their activity are included on their balance sheets. Enterprise Fund operating statements present increases (revenues) and decreases (expenses) in total net assets. Operating revenues and expenses generally result from providing services, and producing and delivering goods in connection with an Enterprise Fund s principal ongoing operations. The principal operating revenues of the Water and Power Funds are charges to customers for sales and services. Operating expenses for the Enterprise Funds include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenue and expenses not meeting this definition are reported as non-operating revenues and expenses. Amounts paid to acquire capital assets are capitalized as assets in the financial statements. Proceeds of long-term debt are recorded as a liability in the financial statements. Amounts paid to reduce long-term indebtedness are reported as a reduction of the related liability. When both restricted and unrestricted resources are combined in a fund, expenses are considered to be paid first from restricted resources, and then from unrestricted resources. Financial reporting is based upon all Governmental Accounting Standards Board (GASB) pronouncements, as well as the Financial Accounting Standards Board (FASB) Statements and Interpretations, Accounting Principles Boards (APB) Opinions, and Accounting Research Bulletins that were issued on or before November 30, 1989 that do not conflict with or contradict GASB pronouncements. FASB Pronouncements issued after November 1989 are not followed in the preparation of the accompanying financial statements. (b) Major Funds The accompanying financial statements report the following major funds: Light and Power Fund Used to account for the operations of the City s electric utility; a self-supporting activity that renders services on a user-charge basis to residents and businesses as prescribed by the City Charter. Water Fund Used to account for the operations of the City s water utility; a self-supporting activity that renders services on a user-charge basis to residents and businesses as prescribed by the City Charter. (c) (d) Cash Equivalents For purposes of the statement of cash flows, cash equivalents are defined as short-term, highly liquid investments that are both readily convertible to known amounts of cash or so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Cash equivalents also represent the Enterprise Fund s share in the City s cash and investment pool. Cash equivalents have an original maturity date of three months or less from the date of purchase. Cash and Investments Investments are reported in the accompanying financial statements at fair value based on quoted market prices, except for certain certificates of deposit, money market investments that mature within one year of acquisition and investment contracts that are reported at cost because they are not transferable, they have terms that are not affected by changes in market interest rates, and provided that the fair value of those investments is not significantly affected by the impairment of the credit standing of the issuer or by other factors. Both realized and unrealized changes in fair value that occur during a fiscal year are recognized and recorded as net changes in fair value of investments. Investment earnings include interest earnings and all other investment income. 22 PASADENA WATER AND POWER ANNUAL REPORT 2011

119 NOTES TO THE BASIC FINANCIAL STATEMENTS For the Fiscal Year Ended June 30, 2011 (e) (f) (g) (h) Inventories Inventories held for consumption by the Light and Power and Water Funds are carried at the lower of weighted average cost or market computed on a first-in/first-out basis. Inventory items are accounted for as an expenditure or expense when consumed. Prepaids Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepaid assets. Restricted Cash and Investments The City considers all cash and investments from bond proceeds in Enterprise Funds as restricted. The City is legally mandated under bond indentures to use these resources only for the purposes specified. Also included as restricted cash and investments are amounts accumulated in the Light and Power Fund for the purpose of meeting future contractual commitments. Capital Assets Capital assets greater than $10,000 are capitalized and recorded at cost or at the estimated fair value of the assets at the time of acquisition where complete historical records have not been maintained. Contributed capital assets are valued at their estimated fair market value at the date of the contribution. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend assets lives are not capitalized. Depreciation has been provided using the straight-line method over the estimated useful life of the asset. A summary of the estimated useful lives of capital assets is as follows: Light and Power Fund Water Fund Production Plant 20 to 40 years Source of Supply 20 to 50 years Transmission Plant 25 to 40 years Pumping Plant 10 to 50 years Distribution Plant 20 to 40 years Treatment Plant 10 to 20 years General Plant 10 to 40 years Transmission and Equipment 4 to 10 years Distribution Plant 10 to 80 years General Plant 6 to 50 years Equipment 4 to 10 years (i) (j) Bond Premiums/Discounts/Issuance Costs Bond premiums and discounts, as well as issuance costs, are deferred and amortized over the life of the bonds using the straight-line method. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenditures. The City has made certain estimates and assumptions relating to the revenues due and expenditures incurred through fiscal year end, collectability of its receivables, the valuation of property held for resale, the useful lives of the capital assets, and the ultimate outcome of claims and judgments. Actual results may differ from those estimates and assumptions. PASADENA WATER AND POWER ANNUAL REPORT

120 NOTES TO THE BASIC FINANCIAL STATEMENTS For the Fiscal Year Ended June 30, 2011 (2) Cash and Investments Cash and investments as of June 30, 2011 are classified in the accompanying financial statements as follows: Statement of net assets: Cash and investments Light and Power $112,469,736 Water 1,640,449 Restricted cash and investments: To finance stranded investments 63,651,067 Other restricted cash and investments 4,930,494 30,677,733 Total cash and investments $181,051,297 32,318,182 Cash and investments as of June 30, 2011 consist of the following: Light and Power Water Cash on hand $7, Investment in City of Pasadena Pool 112,462,736 1,639,949 Investments 68,581,561 30,677,733 Total cash and investments $181,051,297 32,318,182 Investments Authorized by the California Government Code and the City s Investment Policy The table below identifies the investment types that are authorized for the City by the California Government Code and the City s investment policy. The table also identifies certain provisions of the California Government Code (or the City s investment policy, if more restrictive) that address interest rate risk, credit risk, and concentration of credit risk. This table does not address investments of debt proceeds held by bond trustee that are governed by the provisions of debt agreements of the City, rather than the general provisions of the California Government Code or the City s investment policy. Investment Types Authorized by State Law Authorized by Investment Policy *Maximum Maturity *Maximum Percentage of Portfolio *Maximum Investment in One Issuer Local Agency Bonds + Yes 5 years None None U.S. Treasury Obligations + Yes 5 years None None U.S. Agency Securities + Yes 5 years None None Banker s Acceptances Yes 180 days 40% 30% Commercial Paper Yes 270 days 15% 10% Negotiable Certificates of Deposit Yes 5 years 25% None Repurchase Agreements Yes 1 year None None Reverse Repurchase Agreements Yes 92 days 20% of base value None Medium-Term Notes Yes 5 years 30% 5% Mutual Funds Yes N/A 20% 10% Money Market Mutual Funds Yes N/A 20% 10% Mortgage Pass-Through Securities Yes 5 years 20% None County Pooled Investment Funds Yes N/A None None Local Agency Investment Fund (LAIF) Yes N/A None None JPA Pools (other investment pools) Yes N/A None None * Based on state law requirements or investment policy requirements, whichever is more restrictive. + With the exception of the Power Reserve and Bond Reserve Funds with consent of the bond insurers, these type of investments can be held for more than five years. 24 PASADENA WATER AND POWER ANNUAL REPORT 2011

121 NOTES TO THE BASIC FINANCIAL STATEMENTS For the Fiscal Year Ended June 30, 2011 Investments Authorized by Debt Agreements Investments of debt proceeds held by bond trustee are governed by provisions of the debt agreements, rather than the general provisions of the California Government Code or the City s investment policy. The table below identifies the investment types that are authorized for investments held by bond trustee. The table also identifies certain provisions of these debt agreements that address interest rate risk, credit risk, and concentration of credit risk. Authorized Investment Type U.S. Treasury Obligations U.S. Agency Securities Banker s Acceptances Commercial Paper Money Market Mutual Funds Investment Contracts Pre-refunded Municipal Bonds Repurchase Agreements Local Agency Investment Fund (LAIF) General Obligations Bonds Maximum Maturity None None 360 days 270 days N/A years None 1 year N/A None Disclosures Relating to Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment, the greater the sensitivity of its fair value to changes in market interest rates. One of the ways that the City manages its exposure to interest rate risk is by purchasing a combination of shorter term and longer term investments and by timing cash flows from maturities so that a portion of the portfolio is maturing or coming close to maturity evenly over time as necessary to provide the cash flow and liquidity needed for operations. Information about the sensitivity of the fair values of the City s investments (including investments held by bond trustee) to market interest rate fluctuations is provided by the following table that shows the distribution of the City s investments by maturity: Investment Type Total 12 Months or Less Remaining Maturity (in Months) 13 to 24 Months 25 to 60 Months More Than 60 Months Light and Power Corporate Bonds $6,068,820 1,034,777 5,034,043 Federal Agency Securities 47,560,505 44,106,882 3,453,623 Municipal Bond 5,728,544 5,728,544 Investment in City Pool 112,462, ,462,736 Money Market Fund 2,997,162 2,997,162 State Investment Pool 6,226,530 6,226,530 Total $181,044, ,721,205 49,140,925 9,182,167 PASADENA WATER AND POWER ANNUAL REPORT

122 NOTES TO THE BASIC FINANCIAL STATEMENTS For the Fiscal Year Ended June 30, 2011 Investment Type Total 12 Months or Less Remaining Maturity (in Months) 13 to 24 Months 25 to 60 Months More Than 60 Months Water Federal Agency Securities $10,206,866 4,734,489 5,472,377 Investment in City Pool 1,639,949 1,639,949 Money Market Fund 4,161,826 4,161,826 State Investment Pool 9,376,809 9,376,809 Held by bond trustee: Federal Agency Securities 1,868,115 1,868,115 Investment Contracts 4,679,682 4,679,682 Money Market Funds 384, ,435 Total $32,317,682 15,563,019 4,734,489 5,472,377 6,547,797 Disclosures Relating to Credit Risk Generally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. Presented below is the minimum rating required by (where applicable) the California Government Code, the City s investment policy, or debt agreements, and the actual rating as of year end for each investment type. Rating as of Year End Minimum Not Investment Type Total Legal Rating AAA Aa A Rated Light and Power Corporate Bonds $6,068,820 A 5,546, ,700 Federal Agency Securities 47,560,505 N/A 47,560,505 Municipal Bond 5,728,544 N/A 5,728,544 Investment in City Pool 112,462,736 N/A 112,462,736 Money Market Fund 2,997,162 A 2,997,162 State Investment Pool 6,226,530 N/A 6,226,530 Total $181,044,297 50,557,667 5,546,120 6,251, ,689,266 Water Federal Agency Securities $10,206,866 N/A 10,206,866 Investment in City Pool 1,639,949 N/A 1,639,949 Money Market Fund 4,161,826 A 4,161,826 State Investment Pool 9,376,809 N/A 9,376,809 Held by bond trustee: Federal Agency Securities 1,868,115 A 1,868,115 Investment Contracts 4,679,682 N/A 4,679,682 Money Market Funds 384,435 A 384,435 Total $32,317,682 21,300,924 11,016,758 N/A Not applicable 26 PASADENA WATER AND POWER ANNUAL REPORT 2011

123 NOTES TO THE BASIC FINANCIAL STATEMENTS For the Fiscal Year Ended June 30, 2011 Concentration of Credit Risk The investment policy of the City contains no limitations on the amount that can be invested in any one issuer beyond that stipulated by the California Government Code. Investments in any one issuer (other than U.S. Treasury securities, mutual funds, and external investment pools) that represent 5% or more of total Entity investments are as follows: Investment Reported Issuer Type Amount Light and Power Investment in City Pool Various $112,462,736 GE Capital Corp Corporate Bonds 3,524,810 Federal Home Loan Bank Federal Agency Securities 18,459,388 Federal National Mortgage Assn Federal Agency Securities 29,101,117 Local Agency Investment Fund State Investment Pool 6,226,530 State of California GO Bonds Municipal Bonds 5,642,600 Water Investment in City Pool Various $1,639,949 East West Bank Money Market Fund 4,161,577 Federal Farm Credit Bank Federal Agency Securities 2,233,764 Federal Home Loan Bank Federal Agency Securities 4,471,770 Federal Home Loan Mortgage Corp Federal Agency Securities 2,500,725 Local Agency Investment Fund State Investment Pool 9,376,809 Federal National Mortgage Assn Federal Agency Securities 1,868,115 Bank of America Investment Investment Contracts 3,390,132 Custodial Credit Risk Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, a government will not be able to recover its deposits or will not be able to recover collateral securities that are in the possession of an outside party. The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty (e.g., broker-dealer) to a transaction, a government will not be able to recover the value of its investment or collateral securities that are in the possession of another party. The California Government Code and the Entity s investment policy do not contain legal or policy requirements that would limit the exposure to custodial credit risk for deposits or investments, other than the following provision for deposits: The California Government Code requires that a financial institution secure deposits made by state or local governmental units by pledging securities in an undivided collateral pool held by a depository regulated under state law (unless so waived by the governmental unit). The market value of the pledged securities in the collateral pool must equal at least 110% of the total amount deposited by the public agencies. California law also allows financial institutions to secure City deposits by pledging first trust deed mortgage notes having a value of 150% of the secured public deposits. For investments identified herein as held by bond trustee, the bond trustee selects the investment under the terms of the applicable trust agreement, acquires the investment, and holds the investment on behalf of the reporting government. Investment in State Investment Pool The City is a voluntary participant in the Local Agency Investment Fund (LAIF) that is regulated by the California Government Code under the oversight of the Treasurer of the State of California. The fair value of the City s investment in this pool is reported in the accompanying financial statements at amounts based upon the Entity s pro-rata share of the fair value provided by LAIF for the entire LAIF portfolio (in relation to the amortized cost of that portfolio). The balance available for withdrawal is based on the accounting records maintained by LAIF, which are recorded on an amortized cost basis. PASADENA WATER AND POWER ANNUAL REPORT

124 NOTES TO THE BASIC FINANCIAL STATEMENTS For the Fiscal Year Ended June 30, 2011 Investment in City of Pasadena Investment Pool The Water and Power Enterprise Funds are voluntary participants in the City of Pasadena s investment pool managed by the City of Pasadena. This pool is governed by and under the regulatory oversight of the Investment Policy adopted by the City Council of the City of Pasadena. The Water and Power Enterprise Funds have not adopted an investment policy separate from that of the City of Pasadena. The fair value of the Water and Power Enterprise Funds investment in this pool is reported in the accompanying financial statements at amounts based upon the Water and Power Enterprise Funds pro-rata share of the fair value calculated by the City for the entire City portfolio. This pool is unrated. Further information about the composition, maturities, and concentrations associated with this pool can be found in the Comprehensive Annual Financial Report of the City. (3) Accounts Receivable As of June 30, 2011, the accounts receivable are categorized in part as follows: Light and Power Water Accounts receivable $33, ,095 Accrued revenue receivable 9,710,187 4,579,747 Interest receivable 1,159,883 44,526 Utility receivable 10,272,022 2,915,898 21,175,325 8,011,266 Less: allowance for uncollectible accounts (612,721) (173,840) Total $20,562,604 7,837,426 (4) Notes Receivable In January 2009, Light and Power utilized $80.0 million of Reserve for Stranded Investment and in return received Subordinated Notes totaled $70.0 million from Intermountain Power Agency (IPA) to defease some of IPA s outstanding debt service requirement for Intermountain Power Project (IPP) bonds. These notes have various maturity dates, and the proceeds, when mature, will be used to stabilize future energy costs. The balance of the notes as of June 30, 2011 is $62,004,167. (5) Capital Assets Balance at Balance at Light and Power Fund June 30, 2010 Additions Deletions June 30, 2011 Depreciable assets: Buildings and improvements $41,800, ,049 (1,058,010) 41,110,167 Utility lines, machinery and equipment 524,242,142 12,632,999 (11,805,468) 525,069,673 Total cost of depreciable assets 566,042,270 13,001,048 (12,863,478) 566,179,840 Less accumulated depreciation: Buildings and improvements* (31,029,936) (876,535) 999,913 (30,906,558) Utility lines, machinery and equipment* (250,325,292) (17,307,762) 11,589,193 (256,043,861) Total accumulated depreciation (281,355,228) (18,184,297) 12,589,106 (286,950,419) Net depreciable assets 284,687,042 (5,183,249) (274,372) 279,229,421 Capital assets not depreciated: Land 2,837,247 2,837,247 Construction in progress 58,287,645 25,110,630 (12,956,254) 70,442,021 Capital assets, net $345,811,934 19,927,381 (13,230,626) 352,508,689 *Beginning balances have been restated by a total amount of $206,435 due to prior year accumulated depreciation adjustment. Depreciation expense for the year ended June 30, 2011 was $18,184, PASADENA WATER AND POWER ANNUAL REPORT 2011

125 NOTES TO THE BASIC FINANCIAL STATEMENTS For the Fiscal Year Ended June 30, 2011 Balance at Balance at Water Fund June 30, 2010 Additions Deletions June 30, 2011 Depreciable assets: Buildings and improvements $4,898, ,507 (637,121) 4,403,088 Water mains, machinery and equipment 171,533,123 9,654,556 (54,251) 181,133,428 Total cost of depreciable assets 176,431,825 9,796,063 (691,372) 185,536,516 Less accumulated depreciation: Buildings and improvements* (3,082,282) (111,011) 509,697 (2,683,596) Water mains, machinery and equipment* (58,124,088) (4,689,805) 41,239 (62,772,654) Total accumulated depreciation (61,206,370) (4,800,816) 550,936 (65,456,250) Net depreciable assets 115,225,455 4,995,247 (140,436) 120,080,266 Capital assets not depreciated: Land 1,411,424 1,411,424 Construction in progress 23,497,098 11,496,481 (9,748,340) 25,245,239 Capital assets, net $140,133,977 16,491,728 (9,888,776) 146,736,929 *Beginning balances have been restated by a total amount of $1,301,640 due to prior year accumulated depreciation adjustment. Depreciation expense for the year ended June 30, 2011 was $4,800,816. (6) Changes in Long-Term Debt Balance at Balance at Due Within Light and Power Fund: June 30, 2010 Additions Reductions June 30, 2011 One Year Revenue bonds: 1998 Electric Revenue/Refunding Bonds $5,000 5, Electric Revenue Bonds 51,555,000 (38,950,000) 12,605,000 3,450, Electric Revenue Bonds 6,940,000 (455,000) 6,485, , Electric Revenue Bonds 56,355,000 (1,165,000) 55,190,000 1,215, Electric Revenue/Refunding Bonds 40,655,000 40,655,000 2,265, A Electric Revenue/Refunding Bonds 36,320,000 (415,000) 35,905, ,000 Total Light and Power Fund long-term liabilities $155,510,000 36,320,000 (40,985,000) 150,845,000 7,945,000 Water Fund: Revenue bonds: 2003 Water Revenue Bonds $36,825,000 (1,855,000) 34,970,000 1,930, Water Revenue Bonds 20,320,000 (445,000) 19,875, , A Water Revenue Bonds 25,425,000 25,425, B Water Revenue Bonds 4,575,000 4,575,000 Total Water Fund long-term liabilities $57,145,000 30,000,000 (2,300,000) 84,845,000 2,390,000 PASADENA WATER AND POWER ANNUAL REPORT

126 NOTES TO THE BASIC FINANCIAL STATEMENTS For the Fiscal Year Ended June 30, 2011 (7) Revenue Bonds Light and Power Fund 1998 Electric Revenue/Refunding Bonds On August 24, 1998, the City issued $70,635,000 of Electric Revenue/Refunding Bonds 1998 Series. The proceeds of the refunding bonds were used to advance refund the 1990, 1992, 1993, and 1994 Series Revenue Bonds of the Light and Power Fund s outstanding revenue bonds that were originally issued to finance costs of acquisition and construction of certain improvements to the electric system of the City. Interest on the 1998 Bonds is payable semi-annually on February 1 and August 1 commencing February 1, The fixed rates of interest vary from 3.464% to 4.075% per annum. A portion of the bonds were advance refunded by 2009 Electric Revenue/Refund Bonds on November 24, The principal of $5,000 is payable on August 1, This debt issue is subject to a reserve requirement in conjunction with non-subordinate (parity) debt issued by the City. The City is in compliance with the revenue rate covenant requiring net income of the electric system to be at least equal to 1.10 times the amount necessary to pay principal and interest on the bonds and all other parity bonds Electric Revenue Bonds On July 15, 2002, the City issued $82,320,000 of 2002 Electric Revenue Bonds to finance the costs of the 2002 Project, which consists of two parts: Re-powering Project and the construction and installation of the San Rafael transmission line. Interest is payable semi-annually on December 1 and June 1 commencing June 1, The rate of interest varies from 3.0% to 4.75% per annum. Principal is payable in annual installments ranging from $3,060,000 to $5,535,000 commencing June 1, 2002 and ending June 1, A portion of the bonds were advance refunded by Electric Revenue/Refunding Bonds, 2010A Series, on August 3, This debt issue is subject to a reserve requirement in conjunction with non-subordinate (parity) debt issued by the City. The City is in compliance with the revenue rate covenant requiring net income of the electric system to be at least equal to 1.10 times the amount necessary to pay principal and interest on the bonds and all other parity bonds Electric Revenue Bonds On August 11, 2003, the City issued $9,905,000 of 2003 Electric Revenue Bonds to finance the costs of the Local Generation Re-powering Project (the 2003 ). Interest is payable semi-annually on December 1 and June 1 commencing June 1, The rate of interest varies from 1.0% to 4.92% per annum. Principal is payable in annual installments ranging from $450,000 to $730,000 commencing June 1, 2004 and ending June 1, This debt issue is subject to a reserve requirement in conjunction with non-subordinate (parity) debt issued by the City. The City is in compliance with the revenue rate covenant requiring net income of the electric system to be at least equal to 1.10 times the amount necessary to pay principal and interest on the bonds and all other parity bonds Electric Revenue Bonds On January 28, 2008, the City issued $58,555,000 of 2008 Electric Revenue Bonds to finance the costs of the acquisition and construction of additions to, and extensions and improvements of the City s Power distribution system identified in the Power Master Plan, the modernization of the existing warehouse facility. Interest is payable semi-annually on December 1 and June 1 commencing June 1, The rate of interest varies from 4.0% to 5.0% per annum. Principal is payable in annual installments ranging from $1,080,000 to $3,450,000 commencing June 1, 2009 and ending June 1, This debt issue is subject to a reserve requirement in conjunction with non-subordinate (parity) debt issued by the City. The City is in compliance with the revenue rate covenant requiring net income of the electric system to be at least equal to 1.10 times the amount necessary to pay principal and interest on the bonds and all other parity bonds. Outstanding at June 30, 2011 $5,000 12,605,000 6,485,000 55,190, PASADENA WATER AND POWER ANNUAL REPORT 2011

127 NOTES TO THE BASIC FINANCIAL STATEMENTS For the Fiscal Year Ended June 30, 2011 Light and Power Fund (continued) 2009 Electric Revenue/Refunding Bonds On November 24, 2009, the City issued $40,655,000 of 2009 Electric Revenue/Refunding Bonds to advance refund a portion of the City s outstanding 1998 Electric Revenue /Refunding Bonds and pay the costs of issuance of the 2009 Electric Revenue/Refunding Bonds. The refunding has generated a net present value savings of $3.62 million or 8.33% savings of the refunded Bonds. Interest is payable semi-annually on February 1 and August 1 commencing February 1, The rate of interest varies from 4.0% to 5.0% per annum. Principal is payable in annual installments ranging from $2,160,000 to $3,510,000 commencing August 1, 2011 and ending August 1, This debt issue is subject to a reserve requirement in conjunction with nonsubordinate (parity) debt issued by the City. The City is in compliance with the revenue rate covenant requiring net income of the electric system to be at least equal to 1.10 times the amount necessary to pay principal and interest on the bonds and all other parity bonds. This refunding was undertaken to reduce total debt service payments over the next 15 years by $5,002,513 and resulted in an economic gain of $3,621, Electric Revenue/Refunding Bonds On August 3, 2010, the City issued $36,320,000 of 2010A Series Electric Revenue/Refunding Bonds, to refund a portion of the outstanding 2002 Electric Revenue Bonds and pay the issuance costs of the 2010 Electric Revenue/Refunding Bonds. The refunding has generated a net present value savings of $3.18 million or 8.9% savings of the refunded Bonds. Interest is payable semi-annually on June 1 and December 1 commencing December 1, 2010 at rates varying from 2.0% to 4.0% per annum. Principal is payable in annual installments ranging from $180,000 to $5,000,000 commencing June 1, 2011 and ending June 1, This debt issue is subject to a reserve requirement in conjunction with non-subordinate (parity) debt issued by the City. The City is in compliance with the revenue rate covenant requiring net income of the electric system to be at least equal to 1.10 times the amount necessary to pay principal and interest on the bonds and all other parity bonds. This refunding was undertaken to reduce total debt service payments over the next 11 years by $4.19 million and resulted in an economic gain of $3.18 million. Total Light and Power Fund revenue bonds Outstanding at June 30, ,655,000 35,905,000 $150,845,000 Water Fund 2003 Water Revenue Bonds On August 4, 2003, the City issued $47,425,000 of 2003 Water Revenue and Refunding Bonds to finance the costs of acquisition and construction of certain capital improvements to the Water System, and refund all of the City s outstanding 1993 and 1994 Water Revenue Bonds. Interest is payable semi-annually on December 1 and June 1 commencing June 1, The rate of interest varies from 1.01% to 5.08% per annum. Principal is payable in annual installments ranging from $1,190,000 to $2,480,000 commencing June 1, 2004 and ending June 1, This debt issue is subject to a reserve requirement in conjunction with non-subordinate (parity) debt issued by the City. The City is in compliance with the revenue rate covenant requiring net income of the water system to be at least equal to 1.10 times the amount necessary to pay principal and interest on the bonds and all other parity bonds Water Revenue Bonds On April 23, 2007, the City issued $21,550,000 of 2007 Water Revenue Bonds to finance the costs of acquisition and construction of certain capital improvements to the Water System. Interest is payable semi-annually on December 1 and June 1 commencing June 1, The rate of interest varies from 3.5% to 4.44% per annum. Principal is payable semi-annually on December 1 and June 1 commencing June 1, The rate of interest varies from 3.5% to 4.44% per annum. Principal is payable in annual installments ranging from $395,000 to $1,155,000 commencing June 1, 2008 and ending June 1, This debt issue is subject to a reserve requirement in conjunction with non-subordinate (parity) debt issued by the City. The City is in compliance with the revenue rate covenant requiring net income of the water system to be at least equal to 1.10 times the amount necessary to pay principal and interest on the bonds and all other parity bonds. $34,970,000 19,875,000 PASADENA WATER AND POWER ANNUAL REPORT

128 NOTES TO THE BASIC FINANCIAL STATEMENTS For the Fiscal Year Ended June 30, Water Revenue Bonds On December 23, 2010, the City issued $30,000,000 of 2010 Water Revenue Bonds consisting of $25,425,000 of 2010A Series Taxable Build America Bonds ( 2010A Bonds ) and $4,575,000 of 2010B Series Tax-Exempt ( 2010B Bonds ). The 2010 Water Revenue Bonds were issued to finance the costs of acquisition and construction of certain capital improvements to the Water System, to make an additional deposit to the Parity Reserve Fund, and to pay costs of issuance of the Bonds. Interest on the 2010A Bonds, which varies from 6.0% to 7.3% per annum, is payable semi-annually on June 1 and December 1 commencing June 1, Principal is payable in annual installments ranging from $775,000 to $1,910,000 commencing June 1, 2021 and ending June 1, Interest on the 2010B Bonds, with rates varying from 3.0% to 5.0% per annum, is payable semi-annually on June 1 and December 1 commencing June 1, Principal is payable in annual installments ranging from $585,000 to $740,000 commencing June 1, 2014 and ending June 1, This debt issue is subject to a reserve requirement in conjunction with non-subordinate (parity) debt issued by the City. The City is in compliance with the revenue rate covenant requiring net income of the water system to be at least equal to 1.10 times the amount necessary to pay principal and interest on the bonds and all other parity bonds. Total Water Fund revenue bonds Outstanding at June 30, ,000,000 $84,845,000 The annual requirements to amortize outstanding revenue bonds as of June 30, 2011 are as follows: Year Ending June Total payments Light and Power Principal Interest $7,945,000 8,850,000 8,735,000 9,005,000 9,410,000 50,845,000 25,290,000 12,165,000 15,150,000 3,450,000 $150,845,000 6,180,754 5,818,754 5,460,379 5,133,460 4,752,498 18,250,414 9,375,174 5,952,175 2,967, ,500 64,063,481 Water Principal Interest 2,390,000 2,490,000 3,195,000 3,320,000 3,470,000 16,270,000 14,250,000 16,500,000 15,815,000 7,145,000 84,845,000 4,529,091 4,432,916 4,312,616 4,172,441 4,011,641 17,682,106 14,118,431 10,065,562 5,294,371 1,333,710 69,952,887 (8) Stranded Investments In November 2006, the City Council approved the Stranded Investment Reserve (SIR) Utilization Plan (Plan). In January 2009 in accordance with the Plan and a previously approved Prepayment Agreement (Agreement), PWP utilized approximately $80.0 million of the reserve funds to complete an economic defeasance of selected bonds for IPP. As authorized in the Agreement, the Intermountain Power Agency (IPA) issued approximately $70.0 million of subordinated notes to PWP, the payments for which will offset a portion of the debt service associated with the economically defeased bonds, thereby reducing the cost of energy purchased from IPP. As of June 30, 2011, the Stranded Investment Reserve balance was $133.9 million. The details of the additions and subtractions from the Reserve that occurred during fiscal year 2011 are shown below. 32 PASADENA WATER AND POWER ANNUAL REPORT 2011

129 NOTES TO THE BASIC FINANCIAL STATEMENTS For the Fiscal Year Ended June 30, 2011 Restricted Cash and Investment Beginning balance $62,816,322 Interest earnings 1,070,365 Market gain/losses (235,620) Restricted cash and investment ending balance $63,651,067 IPA Subordinated Notes Balance at Balance at June 30, 2010 Reduction June 30, 2011 Notes Receivable $66,293,750 (4,289,583) 62,004,167 Premium/Discount 8,763,587 (674,122) 8,089,465 Cost of Issuance 183,999 (14,154) 169,845 Total IPA Subordinated Notes $75,241,336 (4,977,859) 70,263,477 Restricted for Stranded Investments at June 30, 2011 $133,914,544 (9) Transfers The following is a summary of transfers in and out for the year ended June 30, 2011: Transfers From Transfers To Amount Light and Power Fund City of Pasadena $13,492,353 (1) Water Fund City of Pasadena 3,104,243 (2) City of Pasadena Light and Power Fund 494,376 (3) (1) Light and Power contributed $12,742,353 to the General Fund for any of the following purposes: the payment of interest and principal on City bonds, municipal improvements and other municipal uses; $750,000 was transferred to the Project Management Fund for capital improvements. (2) The Water Fund transferred $3,104,243 to the General Fund. Of this amount, $2,564,243 is based on 6% of gross operating revenue as authorized by the City s Charter, and the remaining $540,000 is for the Hahamongna Watershed Park. (3) The Project Management Fund and Special Revenue Fund transferred $194,376 and $300,000 respectively to the Light and Power Fund to cover costs of certain electrical under-grounding projects. (10) Self-Insurance The City maintains self-insurance programs for workers compensation and general liability. Liability claims are self-administered. Public Safety (Fire and Police) workers compensation claims are administered by a Third Party Administrator and the remainder of City s workers compensation claims are self-administered. For the period October 29, 2008 to June 30, 2011, excess liability insurance has been purchased with limits of $20 million excess of a $5 million self insured retention. No excess insurance for workers compensation has been purchased. The City bought All Risk Property Insurance on all its buildings with a total scheduled insured value of $1,182,227,520 with limits of $1,000,000,000 per occurrence with certain sub-limits, including $25,000,000 for course of construction. The basic deductible was $25,000. Exclusions include earthquake, pollution clean-up, and mold. The program has 19 insurance companies or facilities participating in the coverage, with Lexington Insurance Company (a member of the AIG group of insurance companies) being the company with the first $25,000,000 of coverage. The City had a major Fire claim during the past year at the power plant, collecting an advance payment of $6.3 million with the remainder of the loss still being evaluated. Additional information regarding the City s self-insurance program can be found in the City s Comprehensive Annual Financial Report. PASADENA WATER AND POWER ANNUAL REPORT

130 NOTES TO THE BASIC FINANCIAL STATEMENTS For the Fiscal Year Ended June 30, 2011 (11) Pension Plans Each full-time employee and each part-time employee (with 1,000 hours or more of service) of Pasadena Water and Power is a member of either the Fire or Police Retirement System ( FPRS ) or California Public Employees Retirement System (CalPERS). The City has issued pension bonds to fund the unfunded pension obligation of the City. A portion of this debt is attributable to Pasadena Water and Power employees. Additional information regarding the City s defined benefit pension plans and related pension obligation bonds can be found in the City s Comprehensive Annual Financial Report. (12) Commitments and Contingencies Jointly Governed Organizations Take or Pay Contracts The City s electric operation has entered into seven Take or Pay contracts to provide for current and future electric generating capacity and transmission of energy for City customers. The City is obligated to pay the amortized cost of indebtedness regardless of the ability of the contracting agency to provide electricity and/or transmission, as applicable. The original indebtedness will be amortized by adding the financing costs to purchase energy over the life of the contract. A summary of the City of Pasadena Take or Pay contracts by project as of June 30, 2011, and its estimated contractual obligations through 2036, based on projected energy prices (in millions) are as follows: (in millions) SCPPA Projects IPA Project Palo Verde STS Mead- Adelanto Mead- Phoenix Magnolia Milford I Prepaid Natural Gas Bonds and Notes sold (outstanding) $2, Interest Combined total debt service 3, , City percentage 6.0% 4.4% 5.9% 8.6% 13.9% 6.4% 2.5% 16.5% City obligations $ Intermountain Power Authority The Intermountain Power Authority (IPA), a subdivision of the State of Utah, was formed in January 1974 to finance the construction of a 1,800-MegaWatt (MW) coal-fueled generating plant consisting of two generating units located near Lynndyl, Utah. The City has two separate contracts with the IPA and certain Utah participants, namely the Power Sales Entitlement contract and the Excess Sales contract, which currently provide the City with a 108 MW (6%) entitlement in the facility. The City, through the Power Sales contract, is obligated for 79 MW or 4.409% of the generation. The Excess Sales Agreement with IPA, agent for the Utah Municipal Purchasers and the Cooperative Purchasers, entitles the City to an additional share of 29 megawatts or 1.591%. Approximately 750 GWh of energy are delivered to the City from IPP each year. Southern California Public Power Authority The City of Pasadena Light and Power Fund joined the Southern California Public Power Authority (SCPPA) on November 1, This authority, consisting of the cities of Los Angeles, Pasadena, Anaheim, Azusa, Banning, Riverside, Colton, Vernon, Burbank, Glendale, Cerritos, San Marcos, and the Imperial Irrigation District, was formed for the purpose of planning, financing, developing, acquiring, and constructing future power and transmission resources. The Joint Powers Agreement has a term of fifty years. The City entered into seven projects with SCPPA. Palo Verde Nuclear Generating Station The first project SCPPA participated in is a 3,810-MegaWatt nuclear fuel generation plant in Arizona (Palo Verde). The Palo Verde Nuclear Project consists of three (3) units, each having an electric output of approximately 1,270 MW. Units 1 and 2 began commercial operation in February and September 1986, respectively; and Unit 3 began commercial operation in January PASADENA WATER AND POWER ANNUAL REPORT 2011

131 NOTES TO THE BASIC FINANCIAL STATEMENTS For the Fiscal Year Ended June 30, 2011 Southern Transmission System (STS) SCPPA financed a second project called the Southern Transmission System (STS), which transmits power from the IPP to Southern California. The 500 kv DC is rated at 1,920 MW. The City s share of the line is 5.883% or approximately 141 MW. STS commenced commercial operations in July Mead-Adelanto Transmission System SCPPA financed a third project called the Mead-Adelanto Transmission System consisting of a 202-mile long 500 kv AC transmission line extending between the Adelanto substation in Southern California and the Marketplace substation in Nevada. Commercial operations commenced in April Nine members own one-third of Mead-Adelanto through SCPPA. The City is obligated for 75 MW or 8.589% of the SCPPA entitlement. Mead-Phoenix Transmission System SCPPA financed a fourth project called the Mead-Phoenix Transmission System consisting of a 256-mile long 500 kv AC transmission line extending between the Westwing substation in Arizona and the Marketplace substation in Nevada. Commercial operations commenced in April SCPPA has executed an ownership agreement providing it with a % member-related ownership share in the Westwing Mead project component, a % member-related ownership share in the Mead Substation project component, and a % member-related ownership share in the Mead Marketplace project component. The City has entered into a transmission service contract with SCPPA, which obligates the City to pay the cost of its share of the transfer capability of % or 158 combined MW. Magnolia Project SCPPA financed a fifth project called the Magnolia Power Project consisting of a natural gas-fired generating facility with a nominally rated net base capacity of 242 MW to be located on an existing generating site in the City of Burbank, California, including necessary and appurtenant facilities and equipment thereto, the applicable portion of any common facilities and interconnection facilities. The Project was being constructed for the primary purpose of providing the participants in the Project with firm capacity and energy to help meet their power and energy requirements in 2005 and thereafter. Commercial operations commenced September SCPPA owns the Magnolia Power Project, and six SCPPA members have contracted with SCPPA for 100% of its output. The City of Pasadena s indenture cost share is 6.400% or MW of base capacity. Milford I Wind Project In April 2007, the City approved participation in the Milford Wind Corridor Phase I, LLC Wind Generation Project, a new 200 MW windgenerating facility to be constructed in Millard County, Utah and a power sales agreement with SCPPA for a 5 MW or 2.5% of 200 MW share of the project. The project serves the goals established by the City s Renewable Portfolio Standard for PWP and aids the City in achieving its environmental goals. The project began commercial operation in November Natural Gas Development Project On July 1, 2004, nine SCPPA members, including Pasadena, signed a Development Agreement to jointly examine the feasibility and economies of purchasing a share in a natural gas reserve field. On July 1, 2005, Pasadena and five out of the eight original interested parties signed a first agreement with SCPPA, which entitled the City to purchase up to 1,000 MMBtu/day output share of natural gas reserves. Prepaid Natural Gas Project On October 2007, SCPPA and the City of Pasadena along with the Cities of Anaheim, Burbank, Colton, and Glendale entered into separate Prepaid Natural Gas Program Gas Supply Agreements (Gas Project No.1). Gas Project No.1 primarily consists of the acquisition by SCPPA of the right to receive an aggregate amount of approximately 135 billion cubic feet of natural gas from J. Aron pursuant to the terms of the Prepaid Natural Gas Sales Agreements. The gas is delivered by J. Aron to SCPPA at designated Delivery Points on the natural gas pipelines that serves each City in specified daily quantities each month beginning July 1, 2008, over approximately a 30-year term of each of the Prepaid Natural Gas Sales Agreements. Gas sold under the agreement is priced at the applicable Monthly Index Price for the primary Delivery Point less a specified discount. Each agreement provides for the sale to the Cities, on a pay-asyou-go basis. The electric utility systems owned by each City in part provide gas-fired electric utility service to retail consumers located in their respective areas. The City of Pasadena s participation share is 16.5% or an average daily quantity of 2,000 million British thermal units (MMBtu). Anschutz-Pinedale Gas Reserves Project On July 1, 2005, SCPPA successfully closed the first transaction to purchase an interest in natural gas reserves under the Natural Gas Development Project to help ensure a stable fuel supply for Pasadena Water and Power s (PWP) power plants. It will help ensure a stable supply for PWP s power plants and stabilize the most volatile component of PWP s operating expenses. SCPPA and other PASADENA WATER AND POWER ANNUAL REPORT

132 NOTES TO THE BASIC FINANCIAL STATEMENTS For the Fiscal Year Ended June 30, 2011 participants, including Los Angeles Department of Water and Power and the Turlock Irrigation District, signed a purchase agreement with Anschutz Pinedale Corp. in Denver to buy a portion of the company s natural gas reserves in Wyoming for $300 million. Other participating cities include Anaheim, Burbank, Colton, and Glendale. The agreement gives PWP a 2.13% ownership in the acquisition at a total cost of $6.5 million including development and transaction costs. Barnett Gas Reserves Project On October 26, 2006, SCPPA secured a second property interest in a natural gas reserve field under the Gas Development Agreement located at the Barnett Shale Formation in Texas. Pasadena s SCPPA partners in this project include the cities of Anaheim, Burbank, and Colton. The Barnett property, in its early stages of development, initially provided up to 250 MMBtu per day of gas at less than $6 per MMBtu. However, additional capital development (drilling) of the property resulted in greater daily volumes available for participants. Additional financial information on the SCPPA may be obtained by contacting the City of Pasadena Department of Water and Power at 150 South Los Robles, Suite 200, Pasadena, CA Challenges In response to California Assembly Bill 1890 ( AB1890 ), the City chose to open its market to competition on January 1, The City has long-term contracts with IPA and SCPPA, most of which obligate the City to purchase power and/or services at cost, which was projected to be higher than market in a deregulated environment. As a result, the City was faced with a stranded investment with a net present value estimated to be approximately $145.5 million in AB1890 provided for the recovery of this stranded investment through a Competition Transition Charge on each customer s utility bill. The City stopped collecting this charge after July 1, A competitive financial strategy, which includes a ten-year financial planning model developed in 1996 and updated annually, serves as the blueprint for managing the Utility through the open market transition. The strategy includes recovery and elimination of the stranded investment with minimal impact on customer rates over approximately five years. As of June 30, 2011, the City s Reserve for Stranded Investment fund balance was approximately $133.9 million. The City has implemented the approved Stranded Investment Utilization Plan by direct defeasance of the debt service of IPP outstanding bonds and mitigation of variable energy costs. Other Certain federal and state revenues are received for specific purposes and are subject to audit by the grantor agencies. City management is of the opinion that adjustments, if any, resulting from such audits will not be significant. Litigation A number of suits and claims are pending against Pasadena Water and Power arising in the normal course of operations. In the opinion of management, the results of such legal actions will not have a material adverse effect on the financial position or results of operations of Pasadena Water and Power. California ISO Receivable The Light and Power Fund carries a net account receivable of $17,000,000 that represents energy sales to the California Independent System Operator during the California electrical crisis, which occurred approximately October 2000 to June The electrical crisis has resulted in numerous legal actions, some of which have involved Pasadena Water and Power. The City received the net account receivable in July (13) Pledged Revenue Pasadena Water and Power has a number of outstanding debt issuances that are collateralized by pledged electric and water revenues. The amount and term of the remainder of these outstanding debts are presented in Note 7. The purpose of the debt issuances was for the financing of certain Light and Power and Water projects. For the current year, debt service payments as a percentage of the pledged gross revenue (net of certain expenses) are indicated in the table on the following page. These percentages also approximate the relationship of debt service of pledged revenues for the remainder of the term of these debts: Description of Pledged Revenue Annual Amount of Pledged Revenue (net of expenses where required) (in thousands) Annual Debt Service Payments (in thousands) Debt Service as a Percentage of Pledged Revenue Light & Power Revenues $49,047 11,581 24% Water Revenues 15,873 5,818 37% 36 PASADENA WATER AND POWER ANNUAL REPORT 2011

133 NOTES TO THE BASIC FINANCIAL STATEMENTS For the Fiscal Year Ended June 30, 2011 (14) Derivative Instruments On July 1, 2009, PWP adopted Governmental Accounting Standards Board (GASB) Statement No. 53, Accounting and Financial Reporting for Derivative Instruments (GASB 53). As a result, PWP recorded congestion revenue rights (CRRs) associated with power transmission within the California Independent System Operator (CAISO) as derivative instruments on the Statement of Net Assets in FY The accounting treatment of the derivative instruments was changed in FY 2011 according to a supplement to Comprehensive Implementation Guide issued by GASB in December The CRRs are considered normal purchase or normal sales and are not required to be recorded and deferred at the fair value of the CRRs. The transactions recorded in FY 2010 were reversed in FY (15) Implementation of New Accounting Principles The City adopted Governmental Accounting Standards Board (GASB) Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions. This new accounting standard enhances the usefulness of fund balance information by providing clearer fund balance classifications that can be more consistently applied and by clarifying the existing governmental fund by definitions. Since this GASB only applies to governmental funds, it does not apply to PWP, which has enterprise funds. Provisions of the following GASB statements are effective for financial statements for fiscal year ending June 30, The City has elected not to early implement the GASB statements and has not determined their effects on the City s financial statements: GASB Statement No. 60: Accounting and Financial Reporting for Service Concession Arrangements GASB Statement No. 61: the Financial Reporting Entity: Omnibus- an amendment of GASB Statements No.14 and No. 34 GASB Statement No. 62: Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements GASB Statement No. 63: Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position GASB Statement No. 64: Derivative Instruments: Application of Hedge Accounting Termination Provisions, and amendment of GASB Statement No. 53 (16) Subsequent Events 2011A Water Revenue Refunding Bonds On November 14, 2011, the City Council approved the issuance of Water Revenue Refunding Bonds and authorized a not-to-exceed amount of $35 million in bonds. On December 12, 2011, the City sold on a competitive basis $29,770,000 Water Revenue Refunding Bonds, 2011A Series (2011A Bonds). The bonds were issued to refund a portion of the City s Water Revenue and Refunding Bonds, 2003 Series, and pay for the cost of issuance of the 2011A Bonds. The purpose of the refunding was for pure economic reasons. The City realized a present value savings of $3.47 million or 11.36% present value savings rate. The true interest cost on the financing was 2.838%. Windstorm 2011 Late November 30, 2011 and early December 1, 2011, the City and neighboring areas experienced gale-force Santa Ana winds, which generated significant calls for service for fallen trees, downed power lines, roadway obstructions, traffic light outages, and damage to vehicles, businesses, and homes. The City of Pasadena and Los Angeles County declared a local state of emergency on December 1, The windstorm caused as much as $75,000,000 damage primarily in the San Gabriel Valley. Pasadena s damages have been estimated to be as high as $30,000,000 if personal and commercial losses are included. (17) Restatement of Beginning Net Assets The accompanying financial statements reflect adjustments that resulted in the restatement of beginning net assets of the Light and Power Fund and Water Fund. The following schedule summarizes the effect of the prior period adjustment to the beginning net assets as of July 1, 2010: Light and Power Water Net Assets at July 1, 2010 $493,809,047 94,912,898 Accumulated Depreciation Adjustment 206,435 1,301,640 Net Assets at July 1, 2010, as restated $494,015,482 96,214,538 PASADENA WATER AND POWER ANNUAL REPORT

134 SUPPLEMENTARY INFORMATION Water System Water Division Ten-Year Operations Summary Fiscal Year FINANCIAL DATA (thousands) Operating Revenue $47,137 43,480 43,095 39,560 39,943 34,508 34,267 31,860 28,958 26,519 Other Income 4,302 4,880 3,837 3,122 3,141 3,061 3,018 2,291 1,864 1,856 Total Revenues 51,439 48,360 46,932 42,682 43,084 37,569 37,285 34,151 30,822 28,375 Purchased Water 14,862 13,646 12,997 14,001 12,155 9,600 11,369 10,570 11,192 9,804 Sources of Supply Pumping 2,917 2,695 3,044 2,821 3,181 2,753 2,609 2,891 2,532 3,049 Water Treatment 1,504 1,263 1,383 1,256 1,155 1, Transmission and Distribution 5,292 4,815 5,421 4,355 4,307 5,149 4,521 4,414 3,503 3,352 Administrative & General Expenses 4,455 4,322 5,055 5,512 4,353 3,872 3,282 3,277 3,925 3,549 Commercial Expenses 1,485 1,440 1,560 1,699 1,715 1,604 2,615 2,588 2,072 2,158 Depreciation 4,801 4,451 3,854 3,253 3,055 2,768 2,545 2,427 2,367 2,322 Interest Expense 3,680 2,752 2,853 2,949 2,248 2,165 2,235 1,976 1,302 1,369 Transfer to General Fund* 3,104 3,066 2,872 2,923 2,599 2,057 1,916 1,845 1,670 1,516 Total Expenses 43,066 38,936 39,749 39,318 35,344 31,927 32,790 31,356 30,115 28,488 Net Income 8,373 9,424 7,183 3,364 7,740 5,642 4,495 2, (113) Total Net Assets at end of year 104,588 96,215 85,480 78,297 74,933 67,193 61,551 57,056 54,261 53,554 Total Long-Term Debt Outstanding $84,845 $57,145 59,340 61,435 63,430 43,400 44,850 46,235 23,850 24,755 *Includes Hahamongna Transfer of $540. OPERATING AND CONSUMPTION DATA (thousands of billing units) Production Pumped Water 4,778 4,609 5,169 5,085 5,952 5,985 5,978 6,407 5,564 6,371 Purchased Water 8,261 8,590 9,860 11,110 11,025 9,403 9,671 10,587 10,707 9,993 Total Production 13,039 13,199 15,029 16,195 16,977 15,388 15,649 16,994 16,271 16,364 Water Sold 11,969 12,504 14,574 15,390 16,088 14,622 14,705 15,485 16,113 15,832 Water System Losses + 1, , Number of Services 38,067 37,586 37,602 37,783 37,457 37,135 37,359 37,143 37,933 37,643 System Peak Increase in water use due to startup testing of the Monk Hill Treatment Plant. 38 PASADENA WATER AND POWER ANNUAL REPORT 2011

135 SUPPLEMENTARY INFORMATION Water System Water Division Sales Comparison Inside Outside Revenue from Sales of Water Year Ended June $29,768,810 5,965,229 1,102,215 10,300,750 47,137, ,730,723 5,523, ,374 10,296,964 43,480,019 Increase (Decrease) $3,038, , ,841 3,786 3,656,985 Percent Change 11.4% 8.0% 18.7% 0.0% 8.4% Billing Units Sold Year Ended June ,975,919 1,631, ,316 28,181 11,969, ,436,826 1,743, ,351 9,009 12,506,625 Increase (Decrease) (460,907) (111,826) 15,965 19,172 (537,596) Percent Change -4.4% -6.4% 5.0% 212.8% -4.3% Average Price per Billing Unit Year Ended June $ _ _ Increase (Decrease) $ _ Percent Change 16.5% 15.4% 13.1% n/a 13.3% Average Number of Services Year Ended June ,336 6, _ 38, ,818 6, _ 37,586 Increase (Decrease) 518 (21) (16) _ 481 Percent Change 1.7% -0.3% -5.3% n/a 1.3% Average Annual Billing Unit per Service** Year Ended June ,165 _ ,051 _ 333 Increase (Decrease) (21) (17) 114 _ (19) Percent Change -6.2% -6.3% 10.8% n/a -5.7% City Fire Service and Miscellaneous* Total *Includes a) Unbilled Revenue $325,764 b) Sales to Other Agencies 2,722 c) Misc Revenues 180,781 d) Fire Protection-Private 980,420 e) Fire Protection Surcharge Inside City 365,892 Outside City 51,286 f) PWAC Inside City 661,435 Outside City 104,683 g) CIC Inside City 6,285,239 Outside City 1,342,528 Total $10,300,750 **One billing unit equals 100 cubic feet of water, or 748 gallons. PASADENA WATER AND POWER ANNUAL REPORT

136 SUPPLEMENTARY INFORMATION Water System Water Data Retail Revenue Breakdown (per billing unit FY 2011) Retail Expense Breakdown (per billing unit FY 2011) System Peak Demand (in acre feet) Total = $3.94 Total = $ FY07 FY08 FY09 FY10 FY11 Other Commodity (incl PWAC) CIC Customer & Distribution Labor & Supplies Depreciation and Interest Expense Purchased Fuel Power Purchased Water General Fund Transfer (includes Hahamongna) (in millions) Water Production and Purchases (in acre feet) $3.5 $3.0 $2.5 $2.6 $2.9 $2.9 $3.1 $3.1 FY 2007 FY ,664 25,310 11,674 25,505 11,867 22,635 $2.0 FY ,581 19,721 $1.5 FY ,968 18,965 $1.0 FY 2011 $ ,000 20,000 30,000 40,000 50,000 $0 Production Purchased FY07 FY08 FY09 FY10 FY11 40 PASADENA WATER AND POWER ANNUAL REPORT 2011

137 SUPPLEMENTARY INFORMATION Power System Power Division Ten-Year Operations Summary Fiscal Year FINANCIAL DATA (thousands) Operating Revenue $167, , , , , , , , , ,690 Sales to Other Utilities 7,199 7,251 10,774 14,114 5,012 5,662 5,500 9,825 8,065 12,874 PTO TRR* 12,229 11,343 7,298 8,340 10,581 10,621 4,418 Other Income** 13,948 21,652 14,263 17,639 23,412 11,604 18,101 5,720 16,275 17,091 Total Revenues 200, , , , , , , , , ,655 Fuel Retail 5,587 9,182 17,800 12,958 8,188 8,025 6,745 10,238 11,270 9,465 Wholesale 4,166 4,575 1,667 1, ,284 3, ,182 Purchased Power Retail 89,490 76,655 78,575 90,519 80,000 84,209 68,561 66,834 61,940 66,357 Wholesale ,332 3,388 1, Other Production 7,823 7,033 7,797 6,624 6,533 5,834 5,793 5,594 5,278 5,250 Transmission and Distribution 13,646 13,063 12,505 12,444 9,757 9,857 8,926 7,816 6,910 6,379 Administrative and General Expenses 11,458 11,552 10,947 9,053 8,922 8,477 7,940 8,263 8,143 8,714 Commercial Expenses 10,037 11,901 13,348 7,597 6,432 6,497 6,452 5,694 5,568 6,786 Depreciation 18,184 17,490 16,737 15,708 14,654 14,227 13,858 8,970 8,869 8,442 Interest Expense 6,021 7,205 7,720 6,508 5,914 5,937 6,300 6,523 6,058 3,123 Transfer to General Fund 13,492 16,973 12,922 11,341 5,898 21,167 16,658 11,496 11,751 6,257 Total Expenses 180, , , , , , , , , ,537 Net Income 20,282 29,644 23,886 28,623 40,445 (5,962) 14,226 5,851 15,590 6,118 Total Net Assets at end of year 514, , , , , , , , , ,506 Total Long-Term Debt Outstanding $150, , , , , , , , ,515 65,595 OPERATING AND USAGE DATA (MWh) Energy Generated 106, , ,556 86,898 57,562 78,796 79, , , ,184 Energy Purchased 1,286,858 1,295,905 1,429,363 1,526,635 1,495,239 1,345,876 1,342,791 1,369,944 1,153,123 1,129,807 Total Energy Delivered 1,393,005 1,419,662 1,548,919 1,613,533 1,552,801 1,424,672 1,422,064 1,512,169 1,319,796 1,235,991 Total Retail Energy Sales (MWh)*** 1,159,581 1,184,344 1,245,009 1,231,414 1,243,943 1,187,621 1,171,029 1,175,908 1,160,272 1,086,146 Total Wholesale Energy Sales 169, , , , ,496 27, , ,919 50, ,715 Total Energy Sales 1,328,983 1,348,559 1,363,240 1,546,898 1,366,439 1,215,437 1,296,279 1,289,827 1,210,521 1,230,861 System Peak (MWh) Number of Retail Services 63,950 63,843 63,590 62,885 62,799 62,250 61,389 60,795 59,601 58,519 Average Annual Residential Usage (kwh) 5,781 5,947 6,156 6,231 6,221 5,820 5,895 5,829 5,566 5,320 *Initial year as a Participating Transmission Owner (PTO). **Includes transfer-in from City, Contribution in Aid of Construction (CIAC), and interest income. ***Includes unbilled MWh. PASADENA WATER AND POWER ANNUAL REPORT

138 SUPPLEMENTARY INFORMATION Power System Power Division Sales Comparison Wholesale Energy Sales to Other Utilities* Residential Commercial & Industrial Retail Electricity Sales Street Lights & Traffic Signals** Other*** Total Total Sales Revenue from Sales of Electricity Year Ended June $7,198,514 47,820, ,736,701 2,048,314 21,189, ,794, ,993, ,250,765 48,241, ,922,163 2,115,272 17,182, ,461, ,712,423 Increase (Decrease) $(52,251) (421,843) (185,462) (66,958) 4,007,390 3,333,127 3,280,876 Percent Change -0.7% -0.9% -0.2% -3.2% 23.3% 1.9% 1.8% Megawatt-Hours Sold Year Ended June , , ,566 15,640 10,697 1,159,581 1,328, , , ,413 16,272 6,339 1,184,344 1,348,559 Increase (Decrease) 5,187 (8,642) (19,847) (632) 4,358 (24,763) (19,576) Percent Change 3.2% -2.6% -2.4% -3.9% 68.7% -2.1% -1.5% Average Billing Price per Kilowatt-Hour Year Ended June N/A N/A N/A 2010 N/A N/A N/A Increase (Decrease) N/A N/A N/A Percent Change N/A 2.0% 2.3% 0.8% N/A 4.0% N/A Average Number of Services Year Ended June ,302 8,648 N/A N/A 63,950 63, ,206 8,632 N/A N/A 63,838 63,843 Increase (Decrease) N/A N/A Percent Change -20.0% 0.2% 0.2% N/A N/A 0.2% 0.2% Average Annual Use per Customer (kwh) Year Ended June N/A 5,781 94,076 N/A N/A 18,133 20, N/A 5,947 96,549 N/A N/A 18,552 21,123 Increase (Decrease) N/A (167) (2,474) N/A N/A (420) (343) Percent Change N/A -2.8% -2.6% N/A N/A -2.3% -1.6% *Includes energy, ancillary, deviation & transmission revenues. **Street Lights and Traffic Signals average number of services are included under the Commercial & Industrial category. ***Includes a) Unbilled revenue (10,697 MWh) $(2,301,154) b) Public Benefits Charge 6,659,506 c) ISO-PTO Revenue 12,228,981 Total $21,189, PASADENA WATER AND POWER ANNUAL REPORT 2011

139 SUPPLEMENTARY INFORMATION Power System Power Data General Fund Transfer (in millions) $18.0 $16.0 $17.0 Retail Revenue Breakdown (per kwh FY 2011) Retail Expense Breakdown (per kwh FY 2011) $14.0 $12.0 $10.0 $8.0 $6.0 $4.0 $2.0 $0 $12.9 $11.3 $5.9 FY 07 FY 08 FY 09 FY 10 $12.7 FY System Peak Demand (in MWh) Total = $ Total = $ PBC Customer Charge Distribution Charge Transmission Charge Energy Charge Depreciation Expense Interest Expense Operating & Maintenance Fuel & Gas Purchased Power Energy Generated and Purchased (in MWh) 270 FY 07 FY 08 FY 09 FY 10 FY 11 57,562 1,495,239 FY ,898 1,526,635 FY ,556 1,429,363 FY ,757 1,295,905 FY ,147 1,286,858 FY , ,000 1,200,000 1,600,000 Generated Purchased 250, , , ,000 50,000 0 Renewable Energy Sources (in MWh) 13,962 15,590 1,586 34,174 FY 07 Geothermal Wind Hydro Landfill 10,722 25, ,441 FY 08 13,144 13, ,256 FY 09 17,743 25,353 4,758 59,334 FY 10* 16,975 67,700 1, ,967 FY 11 *Landfill for FY10 has been corrected from the prior report. PASADENA WATER AND POWER ANNUAL REPORT

140 SUPPLEMENTARY INFORMATION Water and Power Systems Pledged-Revenue Coverage Business-Type Activity Debt Last Ten Fiscal Years (in thousands) Light & Power Revenue Bonds Fiscal Year Ended June 30 Light & Power Revenue 1 Less Operating Expenses 2 Net Available Revenue Debt Service 3 Principal Interest Coverage 2002 $128, ,715 18,765 1,760 3, % , ,434 37,961 7,400 5, % , ,410 35,289 7,470 6, % , ,701 41,645 7,575 6, % , ,899 36,205 6,740 6, % , ,616 59,084 6,940 5, % , ,503 57,728 7,205 6, % 2009* 202, ,971 56,641 7,210 7, % 2010* 191, ,035 57,892 7,510 7, % , ,002 49,047 5,320 6, % Water Revenue Bonds Fiscal Year Ended Water Less Operating Net Available Debt Service 3 June 30 Revenue 1 Expenses 2 Revenue Principal Interest Coverage 2002 $26,934 22,822 4, , % ,099 24,326 4, , % ,487 24,659 7,828 2,430 1, % ,008 25,502 9,506 1,385 2, % ,971 24,396 10,575 1,450 2, % ,571 27,442 13,129 1,520 2, % 2008** 40,874 30,192 10,682 1,995 2, % ,552 30,170 13,382 2,095 2, % 2010* 43,788 28,667 15,121 2,195 2, % ,353 31,480 15,873 2,300 3, % 1 Total operating revenues including investment earnings. 2 Total operating expenses exclusive of depreciation. 3 Requirements are reported on a cash basis, excluding premiums. Note: Details regarding the City s outstanding debt can be found in the notes to the basic financial statements. Operating expenses do not include interest or depreciation expenses. *Amount restated. **2008 interest revised. 44 PASADENA WATER AND POWER ANNUAL REPORT 2011

141 Directory City of Pasadena Bill Bogaard Margaret McAustin Victor M. Gordo Chris Holden Steve Madison Gene Masuda Jacque Robinson Terry Tornek Michael J. Beck Mayor Vice Mayor Council Member Council Member Council Member Council Member Council Member Council Member City Manager Pasadena Water and Power Phyllis E. Currie General Manager Eric R. Klinkner Assistant General Manager, Chief Deputy, Customer Relations Shari M. Thomas Assistant General Manager, Finance and Administration Joe Awad Assistant General Manager, Power Delivery Gurcharan Bawa Assistant General Manager, Power Supply Shan Kwan Assistant General Manager, Water Delivery

142 150 S. Los Robles Avenue Suite 200 Pasadena, California printed on recycled paper

143 APPENDIX C BOOK-ENTRY SYSTEM The description that follows of the procedures and recordkeeping with respect to beneficial ownership interests in the 2012A Bonds, payment of principal of and interest on the 2012A Bonds to Participants or Beneficial Owners, confirmation and transfer of beneficial ownership interests in the 2012A Bonds, and other 2012A Bonds-related transactions by and between DTC, Participants and Beneficial Owners, is based on information furnished by DTC which the City believes to be reliable, but the City takes no responsibility for the completeness or accuracy thereof. The Depository Trust Company ( DTC ), New York, NY, will act as securities depository for the 2012A Bonds (the 2012A Bonds ). The 2012A Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered security certificate will be issued for each maturity of the 2012A Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC. DTC, the world s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a banking organization within the meaning of the New York Banking Law, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of Section 17A of the Securities Exchange Act of DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-u.s. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC s participants ( Direct Participants ) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ( DTCC ). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ( Indirect Participants ). DTC has Standard & Poor s highest rating of AA+. The DTC Rules applicable to DTC s Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at The information on such website is not incorporated herein by reference. Purchases of the 2012A Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the 2012A Bonds on DTC s records. The ownership interest of each actual purchaser of each 2012A Bond ( Beneficial Owner ) is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the 2012A Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the 2012A Bonds, except in the event that use of the book-entry system for the 2012A Bonds is discontinued. C-1

144 To facilitate subsequent transfers, all 2012A Bonds deposited by Direct Participants with DTC are registered in the name of DTC s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of 2012A Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the 2012A Bonds. DTC s records reflect only the identity of the Direct Participants to whose accounts such 2012A Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of the 2012A Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the 2012A Bonds, such as redemptions, defaults and proposed amendments to the Fiscal Agent Agreement. For example, Beneficial Owners of 2012A Bonds may wish to ascertain that the nominee holding the 2012A Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the Bond Registrar and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the 2012A Bonds are being redeemed, DTC s practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed. Neither DTC nor Cede & Co. (nor such other DTC nominee) will consent or vote with respect to 2012A Bonds unless authorized by a Direct Participant in accordance with DTC s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. s consenting or voting rights to those Direct Participants to whose accounts 2012A Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Principal, redemption price and interest payments on the 2012A Bonds will be made to Cede & Co. or such other nominee as may be requested by an authorized representative of DTC. DTC s practice is to credit Direct Participants accounts upon DTC s receipt of funds and corresponding detail information from the City or the Fiscal Agent, on each payment date in accordance with their respective holdings shown on DTC s records. Payments by Direct and Indirect Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in street name, and will be the responsibility of such Participant and not of DTC, the Fiscal Agent or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal, redemption price and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City or the Fiscal Agent, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to Beneficial Owners is the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as depository with respect to the 2012A Bonds at any time by giving reasonable notice to the City or the Fiscal Agent. Under such circumstances, in the event that a successor depository is not obtained, the 2012A Bond certificates are required to be printed and delivered. The City may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, the 2012A Bond certificates will be printed and delivered. C-2

145 APPENDIX D SUMMARY OF CERTAIN PROVISIONS OF THE FISCAL AGENT AGREEMENT Certain provisions of the Fiscal Agent Agreement are summarized below. The summary does not purport to be complete or definitive and is qualified in its entirety by reference to the full terms of the Fiscal Agent Agreement. Definitions Accreted Value means, with respect to any Capital Appreciation Indebtedness or any Convertible Capital Appreciation Indebtedness, the amount representing principal and interest on (i) such Capital Appreciation Indebtedness at or prior to the maturity date thereof or (ii) such Convertible Capital Appreciation Indebtedness at and prior to the expiration of the Accretion Period thereof, being, in either case, as of any date of computation an amount equal to the principal amount of such Capital Appreciation Indebtedness or Convertible Capital Appreciation Indebtedness at its initial offering plus the interest accrued thereon from the date of delivery thereof to the dates specified in the Supplemental Fiscal Agent Agreement or other document providing for such Capital Appreciation Indebtedness or Convertible Capital Appreciation Bond, such interest to accrue at the rate per annum established as provided in a Supplemental Fiscal Agent Agreement or other document providing for such Capital Appreciation Indebtedness or Convertible Capital Appreciation Indebtedness, compounded periodically, plus, with respect to matters relating to the payment upon redemption of such Capital Appreciation Indebtedness or Convertible Capital Appreciation Indebtedness, if such date of computation shall not be one of such specified dates, the ratable portion of the difference between the Accreted Value as of the immediately preceding such specified date (or the date of delivery thereof if the date of computation is prior to the first such specified date succeeding the date of delivery) and the Accreted Value as of the immediately succeeding such specified date, calculated based on the assumption that the Accreted Value accrues during any period in equal daily amounts on the basis of a year of twelve 30-day months. Accretion Period means, with respect to any particular Convertible Capital Appreciation Indebtedness, the period from the date of delivery thereof through the date specified in the Supplemental Fiscal Agent Agreement or other document providing for such Convertible Capital Appreciation Indebtedness (which date must be prior to the maturity date thereof), after which interest accruing on such Convertible Capital Appreciation Indebtedness will be payable semiannually, with the first such payment date being the applicable interest payment date immediately succeeding the expiration of the Accretion Period. Annual Debt Service means for any Fiscal Year the aggregate amount of principal and interest on all Bonds and Parity Obligations becoming due and payable during such Fiscal Year calculated using the principles and assumptions set forth under the definition of Debt Service. Assumed Debt Service means for any Fiscal Year the aggregate amount of principal and interest which would be payable on all Bonds and Parity Obligations if each Excluded D-1

146 Principal Payment were amortized for a period specified by the City (but no longer than thirty (30) years from the date of the issuance of the Bonds or Parity Obligations to which such Excluded Principal Payment relates) on a substantially level debt service basis, calculated based on a fixed interest rate equal to the rate at which the City could borrow for such period, as certified by a certificate of a financial advisor or investment banker delivered to the Fiscal Agent, who may rely conclusively on such certificate, within thirty (30) days of the date of calculation. Authorized City Representative means any officer or agent of the City duly authorized to perform any function required of such person under the Fiscal Agent Agreement. Average Annual Debt Service means, as of any date of calculation, an amount equal to (i) the Debt Service remaining to be paid on all Bonds and Parity Obligations on the date of calculation, divided by (ii) the number of Fiscal Years (or partial years) commencing with the Fiscal Year of the date of calculation to and including the Fiscal Year which includes the first date on which none of such Bonds or Parity Obligations remains Outstanding. Such interest and principal will be calculated on the assumption that no Bonds or Parity Obligations at the date of calculation will cease to be Outstanding except by reason of the payment when due of each principal installment (including mandatory sinking account payments). Bond Obligation means, as of any given date of calculation, (1) with respect to any Outstanding Bond or Parity Obligation which is Current Interest Indebtedness or Convertible Capital Appreciation Indebtedness after the expiration of the Accretion Period thereof, the principal amount thereof, and (2) with respect to any Outstanding Bond or Parity Obligations which is Capital Appreciation Indebtedness or Convertible Capital Appreciation Indebtedness at and prior to the expiration of the Accretion Period thereof, the Accreted Value thereof. Bonds means the City of Pasadena, California Electric Revenue Bonds, authorized by, and at any time Outstanding pursuant to, the Fiscal Agent Agreement and any Supplemental Fiscal Agent Agreement. Business Day means any day other than (1) a Saturday, Sunday, or a day on which banking institutions in the State or the State of New York are authorized or obligated by law or executive order to be closed, and (2) for purposes of payments and other actions relating to Bonds secured by a letter of credit, a day upon which commercial banks in the city in which is located the office of the issuing bank at which demands for payment under the letter of credit are to be presented are authorized or obligated by law or executive order to be closed. Capital Appreciation Indebtedness means Bonds and Parity Obligations on which interest is compounded and paid less frequently than annually (not constituting Convertible Capital Appreciation Indebtedness). Certificate, Statement, Request, Requisition and Order of the City mean, respectively, a written certificate, statement, request, requisition or order signed in the name of the City by an Authorized City Representative or any other person authorized by an Authorized City Representative to execute such instruments. Charter means the Charter of the City, as it may be amended from time to time. D-2

147 Code means the Internal Revenue Code of 1986, and the regulations issued thereunder, as the same may be amended from time to time, and any, successor provisions of law. Reference to a particular section of the Code will be deemed to be a reference to any successor to any such section. Continuing Disclosure Agreement means any Continuing Disclosure Agreement relating to any Series of Bonds. Convertible Capital Appreciation Indebtedness means any Bonds and Parity Obligations as to which interest accruing is not paid prior to the expiration of the specified Accretion Period and, prior thereto, is compounded periodically on certain designated dates. Costs of Issuance means, with respect to each Series of Bonds, all items of expense directly or indirectly payable by or reimbursable to the City and reasonably related to the authorization, issuance, sale and delivery of each Series of Bonds, including but not limited to advertising and printing costs, costs of preparation and reproduction of documents, legal fees and charges, fees and disbursements of consultants and professionals, rating agency fees, fees and charges for preparation, execution, transportation and safekeeping of each Series of Bonds and any other cost, charge or fee in connection with the original issuance of each Series of Bonds. Current Interest Indebtedness means the Bonds and Parity Obligations on which interest is paid at least annually. Debt Service means the amount of principal and interest becoming due and payable on all Bonds and Parity Obligations; provided, however, that for the purposes of computing Debt Service: (a) Excluded Principal Payments will be excluded from such calculation and Assumed Debt Service will be included in such calculation; (b) if the Bonds or Parity Obligations are Variable Rate Indebtedness, the interest rate thereon for periods when the actual interest rate cannot yet be determined will be assumed to be equal to the rate that is ninety percent (90%) of the average RBI during the twelve (12) calendar month period immediately preceding the date in which the calculation is made (the assumed RBI-based rate ); (c) principal and interest payments on Bonds and Parity Obligations will be excluded to the extent such payments are to be paid from amounts on deposit with the Fiscal Agent or another fiduciary in escrow specifically therefor and to the extent that such interest payments are to be paid from the proceeds of Bonds or Parity Obligations held by the Fiscal Agent or another fiduciary as capitalized interest; (d) in determining the principal amount, payment will (unless a different provision of this definition applies for purposes of determining principal maturities or amortization) be assumed to be made in accordance with any amortization schedule established for such debt, including any mandatory sinking account payments or any scheduled redemption or payment of Bonds or Parity Obligations constituting Capital Appreciation Indebtedness or Convertible Capital Appreciation Indebtedness at or prior D-3

148 to the expiration of the Accretion Period on the basis of Accreted Value, and for such purpose, the redemption payment or payment of Accreted Value will be deemed a principal payment and interest that is compounded and paid as Accreted Value will be deemed due on the scheduled redemption or payment date of such Capital Appreciation Indebtedness or Convertible Capital Appreciation Indebtedness at or prior to the expiration of the Accretion Period; (e) if any interest rate swap agreement is in effect with respect to, and is payable on a parity with, the Bonds or Parity Obligations to which it relates, no amounts payable under such interest rate swap agreement will be included in the calculation of Debt Service unless the sum of (1) interest payable on such Bonds or Parity Obligations, plus (2) amounts payable by the City under such interest rate swap agreement, less (3) amounts receivable by the City under such interest rate swap agreement are greater than the interest payable on the Bonds or Parity Obligations to which it relates, then, in such instance, the amount of such payments to be made that exceed the interest to be paid on the Bonds or Parity Obligations will be included in such calculation. For such purposes, the variable amount under any such interest rate swap agreement will be assumed to be equal to the assumed RBI-based rate; and (f) if any Bonds or Parity Obligations include an option or an obligation to tender all or a portion of such Bonds or Parity Obligations to the City, the Fiscal Agent or another fiduciary or agent and require that such Bonds or Parity Obligations or portion thereof be purchased if properly presented, then for purposes of determining the amounts of principal and interest due, the options or obligations to tender will be treated as a principal maturity occurring on the first date on which holders or owners thereof may or are required to tender, except that any such option or obligation to tender will be ignored and not treated as a principal maturity, if (1) such Bonds or Parity Obligations are rated in one of the two highest long-term Rating Categories by Fitch and Standard Poor s or such Bonds or Parity Obligations are rated in the highest short-term, note or commercial paper Rating Categories by Fitch and Standard & Poor s and (2) funds for the purchase price are to be provided by a letter of credit or standby bond purchase agreement and the obligation of the City with respect to the provider of such letter of credit or standby bond purchase agreement, other than its obligations on such Bonds or Parity Obligations, will be subordinated to the obligation of the City on the Bonds and Parity Obligations. Electric System means the entire system and facilities of the City for the development, transmission and distribution of electric energy and power for light, heat and power purposes as said system now exists and including all additions, extensions and improvements later constructed or acquired. Excluded Principal Payments means each payment of principal (or the principal component of lease or installment purchase payments) of Bonds or Parity Obligations which the City determines on a date not later than the date of issuance thereof that the City intends to pay with moneys which are not Gross Revenues or Net Income but from the proceeds of future debt obligations of the City and the Fiscal Agent may rely conclusively on such determination of the City. D-4

149 Federal Securities means (i) direct obligations of the United States of America (including obligations held or issued in book-entry form on the books of the Department of the Treasury of the United States of America and CATS and TIGRS) or (ii) obligations the timely payment of the principal of and interest on which are fully guaranteed by the United States of America. Fiscal Agent means The Bank of New York Mellon Trust Company, N.A., acting as successor Fiscal Agent under the Fiscal Agent Agreement, or a future successor, as Fiscal Agent as provided in the Fiscal Agent Agreement. Fiscal Agent Agreement means the Electric Revenue Bond Fiscal Agent Agreement, dated as of August 1, 1998, by and between the Fiscal Agent and the City, as originally executed or as it may from time to time be supplemented or amended by any Supplemental Fiscal Agent Agreement delivered pursuant to the provisions of the Fiscal Agent Agreement. Fiscal Year means any twelve (12) consecutive calendar months commencing with the first day of July and ending on the last day of the following June or such other twelve-month period as the City Council may designate. Fitch means Fitch IBAC, Inc., a corporation duly organized and existing under and by virtue of the laws of the State of Delaware, and its successors and assigns, except that if such a corporation will be dissolved or liquidated or will no longer perform the functions of a securities rating agency, then the term Fitch will be deemed to refer to any other nationally recognized securities rating agency selected by the City Gross Revenues means all revenues (as defined in Section of the Government Code, which include all charges received for and all other income and receipts derived by the Department from the operation of the Electric System or arising from the Electric System) received by the Department from the services, facilities, energy and distribution of electric energy by the Department, including (i) income from investments, and (ii) for the purposes of determining compliance with certain covenants in the Fiscal Agent Agreement only, the amounts on deposit in the Stranded Investment Reserve Fund or in any other unrestricted funds of the Electric System designated by the City Council by resolution (or by approval of a budget of the Light and Power Fund providing for such transfer) and available for the purpose of paying Maintenance and Operating Expenses and/or debt service on the Bonds and/or any Parity Obligations, but excepting therefrom (a) all reimbursement charges and deposits to secure service and (b) any charges collected by any person to amortize or otherwise relating to the payment of the uneconomic portion of costs associated with assets and obligations ( stranded costs ) of the Electric System or of any joint powers agency in which the City participates which the City has dedicated to the payment of obligations other than the Bonds or any Parity Obligations then outstanding, the payments of which obligations will be applied to or pledged to or otherwise set aside for the reduction or retirement of outstanding obligations of the City or any joint powers agency in which the City participates relating to such stranded costs of the City or of any such joint powers agency to the extent such stranded costs are attributable to, or the responsibility of, the City. D-5

150 Information Services means Financial Information, Incorporated s Daily Called Bonds Service, 30 Montgomery Street, 10 th Floor, Jersey City, New Jersey 07302, Attention: Editor; Kenny Information Services, Called Bond Service, 55 Broad Street, 28 th Floor, New York, New York 10004; Moody s Investors Service s Municipal and Government, Center Drive, Suite 150, Charlotte, NC 28217, Attention: Called Bonds Department; and Standard & Poor s Corporation s Called Bond Record, 25 Broadway, 3 rd Floor, New York, New York 10004; or, in accordance with then current guidelines of the Securities and Exchange Commission, such other addresses and/or such other services providing information with respect to called bonds has the City may designate. Investment Securities means (i) any permissible investments of funds of the City as stated in its current investment policy and to the extent then permitted by law; (ii) a repurchase agreement with a state or nationally chartered bank or trust company or a national banking association or government bond dealer reporting to, trading with, and recognized as a primary dealer by the Federal Reserve Bank of New York, provided that the following conditions are satisfied: (1) The agreement is secured by any direct obligations of the United States of America (including obligations issued or held in book entry form on the books of the. United States Department of the Treasury) and obligations, the payment and principal of and interest on which are directly or indirectly guaranteed by the United States of America; (2) The underlying securities are required by the repurchase agreement to be held by a bank, trust company, or primary dealer having a combined capital and surplus of at least one hundred million dollars and which is independent of the issuer of the repurchase agreement; and (3) The underlying securities are maintained at a market value, as determined on a marked-to-market basis calculated at least weekly, of not less than 104 percent of the amount so invested; and (iii) an investment agreement or guaranteed investment contract with, or guaranteed by, a financial institution the long-term unsecured obligations of which are rated in the top two rating categories by Moody s and S&P at the time of initial investment. Light and Power Fund means the fund derived from (i) the payment for electrical energy generated by the Power Division of the Department and any service rendered in connection therewith; (ii) the sale, lease or other disposition of any property acquired with funds or property of said utility; (iii) the proceeds of any bonds issued for the purpose of said utility; or (iv) any special taxes at any time authorized for the purpose of said utility. Maintenance and Operating Expenses means the amount required to pay the reasonable expenses of management, repair and other costs, of the nature of costs which have historically and customarily been accounted for as such, necessary to operate, maintain and preserve the Electric System in good repair and working order, including but not limited to, the cost of supply and transmission of electric energy under long-term contracts or otherwise and the D-6

151 expenses of conducting the Power Division of the Department, but excluding depreciation. Maintenance and Operating Expenses will include all amounts required to be paid by the City under contract with a joint powers agency for purchase of capacity, energy, transmission capability or any other commodities or services in connection with the foregoing, which contract requires payments by the City to be made under the Fiscal Agent Agreement to be treated as Maintenance and Operating Expenses. Moody s means Moody s Investors Service, a corporation duly organized and existing under and by virtue of the laws of the State of Delaware, and its successors and assigns, except that if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, then the term Moody s shall be deemed to refer to any other nationally recognized securities rating agency selected by the City. Net Income means the amount of the Gross Revenues less the Maintenance and Operating Expenses. Opinion of Bond Counsel means a written opinion of counsel of recognized national standing in the field of law relating to municipal bonds, appointed and paid by the City and satisfactory to and approved by the Fiscal Agent (who will be under no liability by reason of such approval). Outstanding, when used as of any particular time with reference to the Bonds means all the Bonds issued and delivered by the City under the Fiscal Agent Agreement except: (a) Bonds cancelled or surrendered for cancellation; (b) Bonds for the payment or redemption of which money or securities in the necessary amount shall have been deposited in trust (whether at or prior to the maturity or Redemption Date of such Bonds); provided that if such Bonds are to be redeemed prior to the maturity thereto, notice of such redemption shall have been given in the proper manner; and (c) Bonds in lieu of, or in substitution for which, other Bonds shall have been issued and delivered by the City pursuant to the Fiscal Agent Agreement. Owner or Bond Owner or Bondowner, whenever used in the Fiscal Agent Agreement with respect to a Bond, means the person in whose name such Bond is registered. Parity Obligations means any revenue bonds, revenue notes or other similar evidences of indebtedness heretofore or hereafter issued, or any interest rate swap agreement incurred, for the acquisition, construction and financing or refinancing of additions to, and extensions and improvements of, the Electric System, payable out of the revenues derived therefrom by the Department and which, pursuant to their terms and in accordance with the Fiscal Agent Agreement and any Supplemental Fiscal Agent Agreement, rank on a parity with the Bonds. Rating Category means (i) with respect to any long-term rating category, all ratings designated by a particular letter or combination of letters, without regard to any numerical D-7

152 modifier, plus or minus sign or other modifier and (ii) with respect to any short-term or commercial paper rating category, all ratings designated by a particular letter or combination of letters and taking into account any numerical modifier, but not any plus or minus sign or other modifier. RBI means the Bond Buyer Revenue Bond Index or comparable index of long-term municipal obligations chosen by the City, and, if no comparable index can be obtained, eighty percent (80%) of the interest rate on actively traded thirty (30) year United States Treasury obligations. Redemption Price means, with respect to any Bond (or portion thereof) the Bond Obligation thereof (or portion thereof) plus the applicable premium, if any, payable upon redemption thereof pursuant to the provisions of such Bond and the Fiscal Agent Agreement. Securities Depositories means The Depository Trust Company, 711 Stewart Avenue, Garden City, New York 11530, Fax-(516) or 4190; Midwest Securities Trust Company, Capital Structures-Call Notification, 440 South LaSalle Street, Chicago, Illinois 60605, Fax-(312) ; and Philadelphia Depository Trust Company, Reorganization Division, 1900 Market Street, Philadelphia, Pennsylvania 19103, Attention: Bond Department, Fax-(215) ; or, in accordance with then current guidelines of the Securities and Exchange Commission, such other securities depositaries as the City may designate. Series whenever used in the Fiscal Agent Agreement with respect to Bonds, means all of the Bonds designated as being of the same series, authenticated and delivered in a simultaneous transaction, regardless of variations in maturity, interest rate, redemption and other provisions, and any Bonds thereafter authenticated and delivered upon transfer or exchange or in lieu of or in substitution for (but not to refund) such Bonds as provided in the Fiscal Agent Agreement. Standard & Poor s means Standard & Poor s, a corporation duly organized and existing under and by virtue of the laws of the State of New York, and its successors and assigns, except that if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, then the term Standard & Poor s will be deemed to refer to any other nationally recognized securities rating agency selected by the City. Stranded Investment Reserve Fund means the Reserve for Stranded Investment established by the City pursuant to Ordinance No of the City Council adopted on November 25, Supplemental Fiscal Agent Agreement means any fiscal agent agreement hereafter duly executed and delivered, supplementing, modifying or amending the Fiscal Agent Agreement, but only if and to the extent that such Supplemental Fiscal Agent Agreement is specifically authorized under the Fiscal Agent Agreement. Tax Certificate means the Tax Certificate concerning certain matters pertaining to the use and investment of proceeds of a Series of Bonds executed and delivered by the City on the date of initial delivery of such Series of Bonds, including any and all exhibits attached thereto. D-8

153 Variable Rate Indebtedness means any indebtedness the interest rate on which is not fixed at the time of incurrence of such indebtedness, and has not at some subsequent date been fixed, at a single numerical rate for the entire remaining term of the indebtedness. Pledge of Net Income; Light and Power Fund The Bonds will not constitute an indebtedness of the City, but will constitute obligations that will be payable as to both principal and interest, and any premium upon redemption thereof prior to maturity, exclusively from the Light and Power Fund and such other funds as provided in the Fiscal Agent Agreement or in any Supplemental Fiscal Agent Agreement; provided, however, that this will not preclude the payment thereof from the proceeds of bonds issued to refund the Bonds, nor preclude the use of any sum received as premium or accrued interest on the sale of the Bonds to pay principal and interest thereof, nor payment from certain other funds or moneys as provided in Subdivision 4 of Section 1414 of Article XIV of the Charter. All Net Income is pledged to secure the payment of the principal of and redemption premium, if any, and interest on the Bonds and any Parity Obligations in accordance with their terms, subject only to the provisions of the Fiscal Agent Agreement permitting the application thereof for the purposes and on the terms and conditions set forth in the Fiscal Agent Agreement. Said pledge will constitute a first lien on the Net Income and will be valid and binding from and after delivery by the City of the Bonds or Parity Obligations, without any physical delivery thereof or further act. Nothing in the Fiscal Agent Agreement will restrict the issuance of additional bonds under Article XIV of the City Charter, subject to the limitations set forth in the Fiscal Agent Agreement, payable from the Light and Power Fund and ranking on a parity with or subordinate to the Bonds. Application of Net Income In order to carry out and effectuate the obligation of the City contained in the Fiscal Agent Agreement, the City agrees and covenants that all Gross Revenues received by it will be deposited when and as received in the Light and Power Fund pursuant to Section 1404 of the City Charter, and all money on deposit in the Light and Power Fund will be applied and used only as provided in the Fiscal Agent Agreement. The City will pay all Maintenance and Operating Expenses (including amounts reasonably required to be set aside in contingency reserves for Maintenance and Operating Expenses the payment of which is not then immediately required) from the Light and Power Fund as they become due and payable, and all remaining money on deposit in the Light and Power Fund will be set aside and deposited by the City at the following times in the following order of priority: (1) Parity Obligation Payment Fund; Deposits. On or before the third Business Day before each date on which interest or principal becomes due and payable (whether after maturity or prior redemption or otherwise) on the Bonds or any Parity Obligation, the City will, from the money in the Light and Power Fund, deposit in the City of Pasadena Electric System Parity Obligation Payment Fund (the Parity Obligation Payment Fund ), which fund is established by the Fiscal Agent D-9

154 Agreement pursuant to Section 1413 of Article XIV of the Charter and which fund the City agrees and covenants to maintain separate and apart from other moneys of the City so long as any Bonds or Parity Obligations remain unpaid, a sum equal to the amount of interest and principal becoming due and payable under all Bonds and Parity Obligations on such due date, except that no such deposit need be made if the City then holds money in the Parity Obligation Payment Fund at least equal to the amount of interest and principal (including mandatory sinking account payments) becoming due and payable on all Bonds or Parity Obligations on the next succeeding date on which interest or principal becomes due and payable on the Bonds or any Parity Obligation. Moneys on deposit in the Parity Obligation Payment Fund will be transferred by the City to make and satisfy the payments due on the next applicable date on which interest or principal (including mandatory sinking account payments) becomes due and payable on the Bonds or any Parity Obligation at least one Business Day prior to such next applicable due date. (2) Parity Reserve Fund; Deposits. On or before the third Business Day before each date on which interest or principal becomes due and payable on the Bonds or any Parity Obligation, the City will, from the remaining money on deposit in the Light and Power Fund after deposits and transfers pursuant to paragraph (1) above, deposit in the Parity Reserve Fund, which fund is established by the Fiscal Agent Agreement pursuant to Section 1413 of Article XIV of the Charter and will be maintained by the City so long as any Bonds are Outstanding, that sum, if any, necessary to restore the Parity Reserve Fund to an amount equal to the Reserve Fund Requirement. After making the deposits and transfers required to be made above, the City may apply any remaining moneys in the Light and Power Fund for any lawful purpose of the City, including for the payment of any subordinate obligations in accordance with the instruments authorizing such subordinate obligations, and on a basis subordinate thereto, for the transfer of such remaining moneys, if any, to the General Fund of the City pursuant to Article XIV of the Charter. Parity Reserve Fund The City agrees and covenants to maintain the Parity Reserve Fund in an amount equal to the Reserve Fund Requirement so long as any Bonds or Parity Obligations to be secured by the Parity Reserve Fund remain outstanding under the Fiscal Agent Agreement. Amounts on deposit in the Parity Reserve Fund are pledged to the payment of the Bonds and any Parity Obligations secured by the Parity Reserve Fund and will be applied only for such purposes as permitted in the Fiscal Agent Agreement. Moneys on deposit in the Parity Reserve Fund will be transferred by the City to the Parity Obligation Payment. Fund to pay principal of and interest on the Bonds and Parity Obligations secured by the Parity Reserve Fund in the event amounts on deposit therein are insufficient for such purposes. If and to the extent that the Parity Reserve Fund has been funded with a combination of cash and one or more surety bonds, insurance policies or letters of credit as permitted pursuant to the definition of Reserve Fund Requirement, except as provided below, all cash shall be used (including any investments purchased with such cash, D-10

155 which shall be liquidated and the proceeds thereof applied as required under the Fiscal Agent Agreement) prior to any drawing under a surety bond, insurance policy or letter of credit, and repayment of any amounts owing to any provider of such surety bond, insurance policy or letter of credit shall be made in accordance with the terms thereof prior to any replenishment of any such cash amounts. After first applying all cash and investment Securities held in the Parity Reserve Fund to pay the principal of and interest on the Bonds and Parity Obligations secured by the Parity Reserve Fund when required by the Fiscal Agent Agreement, the City or the Fiscal Agent, as applicable, shall, on a pro rata basis with respect to the portion of the Parity Reserve Fund held in the form of surety bonds, insurance policies and letters of credit (calculated by reference to the maximum amounts of such surety bonds, insurance policies and letters of credit), draw under each surety bond, insurance policy or letter of credit issued with respect to the Parity Reserve Fund, in a timely manner and pursuant to the terms of such surety bonds, insurance policy or letter of credit to the extent necessary in order to obtain sufficient funds on or prior to the date such funds are needed to pay the Bonds and Parity Obligations secured by the Parity Reserve Fund when due. Notwithstanding anything to the contrary contained in the Fiscal Agent Agreement, in the event a surety bond, insurance policy, letter of credit or cash deposit has been provided with respect to a specified Series of Bonds only, the Fiscal Agent shall draw on such insurance policy, surety bond, letter of credit or cash deposit in any amount equal to the pro rata amount of deficiency in the Parity Obligation Payment Fund allocable to such Series of Bonds at the same time that the Fiscal Agent applies any cash or Investment Securities held in the Parity Reserve Fund to the payment of the principal of and interest on any Bonds or Parity Obligations not so secured by such insurance policy, surety bond or letter of credit or with respect to which such cash deposit was not made. All amounts due and owing any provider of any such surety bond, insurance policy or letter of credit shall be paid in accordance therewith prior to any discharge of the Fiscal Agent Agreement pursuant to the terms thereof. Amounts on deposit in the Parity Reserve Fund in excess of the Reserve Fund Requirement will be withdrawn from the Parity Reserve Fund and transferred to the Light and Power Fund. Investments of Moneys in Funds and Accounts All moneys in any of the funds and accounts held by the City and established pursuant to the Fiscal Agent Agreement will be invested solely in Investment Securities. Unless otherwise provided in the Fiscal Agent Agreement or in a Supplemental Fiscal Agent Agreement with respect to any fund or account created pursuant to that Supplemental Fiscal Agent Agreement, Investment Securities purchased as an investment of moneys in any fund or account created under the provisions of the Fiscal Agent Agreement will be deemed at all times to be a part of such fund, account or subaccount and any profit realized from the liquidation of such investment and any income or interest received on account of such investment will be credited to, and any loss resulting from the liquidation of such investment will be charged to, such account. Notwithstanding anything to the contrary contained in this paragraph, an amount of interest received with respect to any Investment Security equal to the amount of accrued interest, if any, paid as part of the purchase price of such Investment Security will be credited to the fund or account from which such accrued interest was paid. In computing the amount in any account created under the provisions of the Fiscal Agent Agreement or a Supplemental Fiscal Agent Agreement for any purpose provided in the Fiscal Agent Agreement or a Supplemental Fiscal Agent Agreement, Investment Securities purchased D-11

156 as an investment of moneys therein will be valued no less frequently than annually at the amortized cost of such obligations (including accrued interest), except that Investment Securities purchased as an investment of moneys in the Parity Reserve Fund will be valued at the market value thereof. In addition, Investment Securities purchased as an investment of moneys in the Parity Reserve Fund may not have maturities extending beyond five (5) years. Except as otherwise provided in the Fiscal Agent Agreement or a Supplemental Fiscal Agent Agreement, the City will sell at the best price obtainable or present for prepayment or transfer as provided in the next sentence any obligation so purchased as an investment whenever it will be requested in writing by an Authorized City Representative to do so or whenever it will be necessary in order to provide moneys to meet any payment or transfer from any account held by it. In lieu of such sale or presentment for prepayment, the City may, in making the payment or transfer from any account mentioned in the preceding sentence, transfer such investment obligations or interest appertaining thereto if such investment obligations will mature or be collectable at or prior to the time the proceeds thereof will be needed and such transfer of investment obligations may be made in book-entry form. The City will not be liable or responsible for making any such investment in the manner provided above or for any loss resulting from any such investment. Covenants Pursuant to the Fiscal Agent Agreement, the City has covenanted as follows: Operation of Electric System; Insurance. The City covenants and agrees to operate Electric System in an efficient and economical manner and to operate, maintain and preserve the Electric System in good repair and working order. Subject in each case to the condition that insurance is obtainable at rates deemed reasonable by the City and upon terms and conditions deemed reasonable by the City, the City will procure and maintain at all times: (i) insurance on the Electric System against such risks as and in such amounts as the City deems prudent taking into account insurance coverage for similar utilities, and (ii) public liability insurance, including self-insurance, as appropriate, in such amounts as the City deems prudent taking into account insurance coverage for similar utilities. Light and Power Fund. All receipts by the City from the sale of electric energy or otherwise derived from the Electric System of the City or the Power Division of the Water and Power Department will be credited to the Light and Power Fund. Disbursements may be made from said fund for the payment of the Maintenance and Operating Expenses of conducting the Department prior to the payment of principal or interest (including premiums, if any, upon redemption) for any revenue bonds (including the Bonds and the Parity Obligations) issued under Article XIV of the Charter. After any transfer or transfers required to be made in any month for the payment of principal or interest (including premiums, if any, upon redemption and including transfers to the Parity Reserve Fund) of revenue bonds (including the Bonds and the Parity Obligations) payable from the Light and Power Fund and issued under said Article XIV of said Charter have been made, moneys in said Fund may be used for any purpose authorized under Article XIV of said Charter. D-12

157 Rates and Charges. The rates to be charged for services furnished by the Electric System will be fixed so as to provide Gross Revenues at least sufficient to pay, as the same become due, the principal of and interest on the Bonds and Parity Obligations and all other obligations and indebtedness payable from the Light and Power Fund (including the payment of any amounts owing to any provider of any surety bond, insurance policy or letter of credit with respect to the Bonds or any Parity Obligations, which amounts are payable from the Light and Power Fund) or from any fund derived therefrom, and also the necessary Maintenance and Operating Expenses, and will be so fixed that the Net Income of the Electric System will be at least equal to 1.10 times the amount necessary to pay principal and interest (including mandatory sinking account redemption payments) as the same become due, on all Bonds and Parity Obligations. The City will have in effect at all times rules and regulations requiring each consumer or customer located on any premises connected with the Electric System to pay the rates and charges applicable to the Electric System provided to such premises and providing for the billing thereof and for a due date and a delinquency date for each bill. The City will not permit any part of the Electric 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 of California and any city, county, district, political subdivision, public corporation or agency of any thereof). Nothing in the Fiscal Agent Agreement will prevent the City, in its sole and exclusive discretion, from permitting other parties to sell electricity to retail customers within the service area of the Electric System; provided, however, that permitting such sales will not relieve the City of its obligations under the Fiscal Agent Agreement. Additional Bonds. Except for bonds issued under Article XIV of the Charter, or otherwise, to refund Bonds or Parity Obligations, payable from the Light and Power Fund issued under Article XIV of the Charter which may be issued at any time without meeting the test set forth below, no additional indebtedness of the City payable out of the Light and Power Fund on a parity with the Bonds and any Parity Obligations (collectively referred to in this provision as parity indebtedness ) will be created or incurred unless: (1) the Net Income during any twelve (12) consecutive calendar months out of the immediately preceding eighteen (18) calendar month period, plus, at the option of the City, any or all of the items designated as (a) and (b) below, shall have amounted to at least equal to one hundred ten percent (110%) of the aggregate of the (i) amount of interest to accrue and (ii) payments of principal required to be made in that one of the Fiscal Years ending thereafter in which such aggregate will be the greatest on all Bonds and such Parity Obligations to be Outstanding immediately subsequent to the incurring of such additional parity indebtedness, as certified by a Certificate of the City; or (2) the projected Net Income during the first complete Fiscal Year following issuance of such parity indebtedness when the improvements to the Electric System financed with the proceeds of the parity indebtedness shall be in operation, plus, at the option of the City, any or all of the items designated as (a) and (b) below, shall have amounted to at least one hundred ten percent (110%) of the aggregate of the (i) amount of interest to accrue and (ii) payments of principal required to be made in that one of the Fiscal Years ending thereafter in which such aggregate D-13

158 will be the greatest on all Bonds and such Parity Obligations to be Outstanding immediately subsequent to the incurring of such additional parity indebtedness, as certified by a Certificate of the City. The items any or all of which may be added to such Net Income for the purpose of meeting either of the requirements set forth in paragraphs (1) or (2) above are the following: (a) An allowance for any increase in Net Income (including, without limitation, a reduction in Maintenance and Operating Expenses) which may arise from any additions to and extensions and improvements of the Electric System to be made or acquired with the proceeds of such additional parity indebtedness or with the proceeds of bonds previously issued, and also for Net Income from any such additions, extensions or improvements which have been made or acquired with moneys from any source but which, during all or any part of such Fiscal Year or such twelve (12) consecutive calendar month period out of the immediately preceding eighteen (18) calendar month period, were not in service, all in an amount equal to the estimated additional average annual Net Income (or estimated average annual reduction in Maintenance and Operating Expenses) to be derived from such additions, extensions and improvements for the first thirty-six (36) month period in which each addition, extension or improvement is respectively to be in operation, all as shown by the Certificate of the City. (b) An allowance for earnings arising from any increase in the charges made for the use of the Electric System which has become effective prior to the incurring of such addition parity indebtedness but which, during all or any part of such Fiscal Year or such twelve (12) consecutive calendar month period out of the immediately preceding eighteen (18) calendar month period, was not in effect, in an amount equal to the amount by which the Net Income would have been increased if such increase in charges had been in effect during the whole of such Fiscal Year or such twelve (12) consecutive calendar month period out of the immediately preceding eighteen (18) calendar month period, as shown by the Certificate of the City. Nothing in the Fiscal Agent Agreement will limit the ability of the City to issue or incur obligations that are junior and subordinate to the payment of the principal, premium, interest and reserve fund requirements for the Bonds and all Parity Obligations and which subordinated obligations are payable as to principal, premium, interest and reserve fund requirements, if any, only out of Net Income after the prior payment of all amounts then due and required to be paid or set aside under the Fiscal Agent Agreement from Net Income for principal, premium, interest and reserve fund requirements for the Bonds and all Parity Obligations, as the same become due and payable and at the times and in the manner as required in the Fiscal Agent Agreement or any documents providing for the issuance or incurrence of Parity Obligations. Against Encumbrances. No bonds will be issued pursuant to Article XIV of the Charter, or under any other provisions of the Charter, or under any law of the State of California, having any priority in payment of principal or interest out of the revenues of the Power Division of the Department (that is, the revenues derived from the Electric System) over the Bonds authorized by the Fiscal Agent Agreement to be issued and payable out of said revenues. The City will not create any pledge, lien or charge upon any of the Net Income having priority over the lien of the D-14

159 Bonds; provided, however, that nothing in the Fiscal Agent Agreement will be construed to limit the ability of the City to issue or incur obligations secured by charges, not constituting Net Income, collected by any person to amortize or otherwise relating to the payment of the stranded costs of the Electric System or of any joint powers agency in which the City participates which the City has dedicated to the payment of obligations other than the Bonds, the payments of which charges will be applied to or pledged to or otherwise set aside for the reduction or retirement of outstanding obligations of the City or any joint powers agency in which the City participates relating to such stranded costs of the City or of any such joint powers agency to the extent such stranded costs are attributable to, or the responsibility of, the City. The City covenants that in order to fully preserve and protect the priority and security of the Bonds the City will pay from the Light and Power Fund and discharge all lawful claims for labor, materials and supplies furnished for or in connection with the Electric System which, if unpaid, may become a lien or charge upon the revenues prior or superior to the lien of the Bonds and impair the security of the Bonds. The City will also pay from the Light and Power Fund all taxes and assessments or other governmental charges lawfully levied or assessed upon or in respect of the Electric System or upon any part thereof or upon any of the revenues therefrom. Sale of Electric System. The Electric System will not be sold or leased or otherwise disposed of as a whole, or substantially as a whole, unless such sale, lease or other disposition be so arranged as to provide for a continuance of payments into the Light and Power Fund sufficient in amount to permit payment therefrom of the principal of and interest on, and premiums, if any, due upon the redemption of, all Bonds and Parity Obligations (including, if applicable, the imposition of any charges collected by any person to amortize or otherwise relating to the payment of stranded costs of the Electric System or of any joint powers agency in which the City participates which the City has dedicated to the payment of the Bonds the imposition of which will amortize the payment in full of such Outstanding Bonds through the maturity thereof) payable out of the Light and Power Fund, or to provide for such payments into some other fund charged with such payments. None of the works, plant, properties, facilities or other part of the Electric System or any real or personal property comprising a part of the Electric System will be sold, leased or otherwise disposed of if such sale, lease or disposition would cause the City to be unable to satisfy the requirements of the Fiscal Agent Agreement. Accounting Records. The City will cause the books and accounts of the Power Division of the Department to be audited annually by an independent certified public accountant or firm of certified public accountants and will make available for inspection by the Owners, at the office of the City Clerk and at the Department of Finance of the City, a copy of the report of such accountants and will also furnish a copy thereof upon request to any Owner. Tax Covenants. The City covenants with the Owners of the Bonds that, notwithstanding any other provisions of the Fiscal Agent Agreement, it will not take any action, or fail to take any action, if any such action or failure to take action would adversely affect the exclusion from gross income of interest on the Bonds under Section 103 of the Code. The City will not, directly or indirectly, use or permit the use of proceeds of the Bonds or any of the property financed or refinanced with proceeds of the Bonds, or any portion thereof, by any person other than a governmental unit (as such term is used in Section 141 of the Code), in such manner or to such D-15

160 extent as would result in the loss of exclusion from gross income for federal income tax purposes of interest on the Bonds. The City will not take any action, or fail to take any action, if any such action or failure to take action would cause the Bonds to be private activity bonds within the meaning of Section 141 of the Code, and in furtherance thereof, will not make any use of the proceeds of the Bonds or any of the property financed or refinanced with proceeds of the Bonds, or any portion thereof, or any other funds of the City, that would cause the Bonds to be private activity bonds within the meaning of Section 141 of the Code. To that end, so long as any Bonds are Outstanding, the City, with respect to such proceeds and property and such other funds, will comply with applicable requirements of the Code and all regulations of the United States Department of the Treasury issued thereunder, to the extent such requirements are, at the time, applicable and in effect. The City will establish reasonable procedures necessary to ensure continued compliance with Section 141 of the Code and the continued qualification of the Bonds as governmental bonds. The City will not, directly or indirectly, use or permit the use of any proceeds of any Bonds, or of any property financed or refinanced thereby, or other funds of the City, or take or omit to take any action, that would cause the Bonds to be arbitrage bonds within the meaning of Section 148 of the Code. To that end, the City will comply with all requirements of Section 148 of the Code and all regulations of the United States Department of the Treasury issued thereunder to the extent such requirements are, at the time, in effect and applicable to the Bonds. The City will not make any use of the proceeds of the Bonds or any other funds of the City, or take or omit to take any other action, that would cause the Bonds to be federally guaranteed within the meaning of Section 149(b) of the Code. In furtherance of the foregoing tax covenants, the City covenants that it will comply with the provisions of the Tax Certificate, which is incorporated in the Fiscal Agent Agreement as if fully set forth therein. These covenants will survive payment in full or defeasance of the Bonds. Further Assurances. The City will make, execute and deliver any and all such instruments and assurances as may be reasonably necessary or proper to carry out the intention or to facilitate the performance of the Fiscal Agent Agreement and for the better assuring and confirming unto the Owners of the Bonds of the rights and benefits provided in the Fiscal Agent Agreement. Continuing Disclosure Agreement. The City will comply with and carry out all of its obligations under any Continuing Disclosure Agreement executed in connection with a Series of Bonds. Upon the failure of the City to comply with the Continuing Disclosure Agreement relating to any Series of Bonds, the Fiscal Agent may (and, at the request of any Participating Underwriter (as defined in the respective Continuing Disclosure Agreement) or the Owners of at least 25% in aggregate Bond Obligation of the related Series of Bonds, will) or any Owner or Beneficial Owner may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the City, to comply with its obligations under this covenant. For purposes of this covenant, Beneficial Owner will have the meaning D-16

161 prescribed thereto in the respective Continuing Disclosure Agreement relating to such Series of Bonds. Events of Default and Remedies Events of Default. The following events will be Events of Default under the Fiscal Agent Agreement: (a) Default by the City in the due and punctual payment of the principal of or premium, if any, on any Bond or Parity Obligation (whether at maturity, by acceleration, call for redemption or otherwise); (b) Default by the City in the due and punctual payment of the interest on any Bond or Parity Obligation; (c) Failure of the City to observe and perform any of its other covenants, conditions or agreements under the Fiscal Agent Agreement or in the Bonds for a period of 90 days after written notice from the Owners of 25% in aggregate Bond Obligation of Bonds then Outstanding, specifying such failure and requesting that it be remedied, or in the case of any such default that cannot with due diligence be cured within such 90 day period, failure of the City to proceed promptly to cure the same with due diligence; (d) (1) Failure of the City generally to pay its debts as the same become due, (2) commencement by the City of a voluntary case under the Federal bankruptcy laws, as now or hereafter constituted, or any other applicable Federal or state bankruptcy, insolvency or other similar law, (3) consent by the City to the appointment of a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official for the City, the Electric System or any substantial part of the City s property, or to the taking possession by any such official of the Electric System or any substantial part of the City s property, (4) making by the City of any assignment for the benefit of creditors, or (5) taking of corporate action by the City in furtherance of any of the foregoing; (e) The entry of any (1) decree or order for relief by a court having jurisdiction over the City or its property in an involuntary case under the Federal bankruptcy laws, as now or hereafter constituted, or any other applicable Federal or state bankruptcy, insolvency or other similar law, (2) appointment of a receiver, liquidator, assignee, trustee, custodian, sequestrator or similar official for the City, the Electric System or any substantial part of the City s property, or (3) order for the termination or liquidation of the City of its affairs; or (f) Failure of the City within 90 days after the commencement of any proceedings against it under the Federal bankruptcy laws or any other applicable Federal or state bankruptcy, insolvency or similar law, to have such proceedings dismissed or stayed. The provisions of paragraph (c) above are subject to the limitation that if by reason of force majeure the City is unable in whole or in part to observe and perform any of its covenants, conditions or agreements under the Fiscal Agent Agreement, the City will not be deemed in D-17

162 default during the continuance of such disability. The term force majeure as used in the Fiscal Agent Agreement will include without limitation acts of God; strikes, lockouts or other industrial disturbances; acts of public enemies; orders of any kind of the government of the United States of America or of the State of California or any of their departments, agencies, political subdivisions or officials, or any civil or military authority; insurrections; riots; epidemics; landslides; lightning; earthquakes; fires; hurricanes; storms; floods; washouts; droughts; arrests; restraint of government and people; civil disturbances; explosions; breakage or accident to machinery, transmission pipes or canals; partial or entire failure of utilities; or any other cause or event not reasonably within the control of the City. The City will, however, remedy with all reasonable dispatch the cause or causes preventing it from carrying out its agreements, provided that the settlement of strikes, lockouts and other industrial disturbances will be entirely within the discretion of the City, and the City will not be required to make settlement of strikes, lockouts and other industrial disturbances by acceding to the demands of the opposing party or parties when such course is in the judgment of the City unfavorable to it. Bond Owner s Committee. If an Event of Default shall have occurred and be continuing, the Owners of 25% in aggregate Bond Obligation of Bonds then Outstanding may call a meeting of the Bond Owners for the purpose of electing a bondowners committee (a Bond Owners Committee ). At such meeting the Owners of not less than a majority in aggregate Bond Obligation of Bonds then Outstanding must be present in person or by proxy in order to constitute a quorum for the transaction of business, less than a quorum, however, having power to adjourn from time to time without any other notice than the announcement thereof at the meeting. A quorum being present at such meeting, the Owners present in person or by proxy may, by a majority of the votes cast, elect one or more persons, who may or may not be Owners, to the Bond Owners Committee. The Owners present in person or by proxy at such meeting, or at any adjourned meeting thereof (i) will prescribe the manner in which the successors of the persons elected to the Bond Owners Committee will be elected or appointed, (ii) may prescribe rules and regulations governing the exercise by the Bond Owners Committee of the power conferred upon it in the Fiscal Agent Agreement, and (iii) may provide for the termination of the existence of the Bond Owners Committee. The Bond Owners Committee is declared to be Fiscal Agent for the Owners of all Bonds then Outstanding, and are empowered to exercise in the name of the Bond Owners Committee as Fiscal Agent all the rights and powers conferred in the Fiscal Agent Agreement on any Owners; provided, however, that whenever any provision of the Fiscal Agent. Agreement requires the consent, approval or concurrence of the Owners of a specified percentage of Bond Obligation of Bonds, in order to exercise the right or power conferred in the Fiscal Agent Agreement on the Owners to which such percentage obtains, the Bond Owners Committee either shall have been elected by or their election shall have been approved by or concurred in, and such committee will then represent, the Owners of such specified percentage of Bond Obligation of Bonds. A certificate of the election of the Bond Owners Committee, including the names and addresses of its chairman and other members, will be filed with the City Clerk. Acceleration. Upon the concurrence and continuation of an Event of Default specified in paragraphs (d), (e) or (f) above, the Bond Owners Committee or, if there is none, the Owners of 25% in aggregate Bond Obligation of Bonds then Outstanding may, by written notice to the City, declare the entire unpaid principal of the Bonds due and payable and, thereupon, the entire unpaid principal of the Bonds will forthwith become due and payable. Upon any such D-18

163 declaration the City will forthwith pay to the Owners of the Bonds the entire unpaid principal of, premium, if any, and accrued interest on the Bonds, but only from Net Income and other moneys specifically pledged for such purpose. If at any time after such a declaration and before the entry of a final judgment or decree in any suit, action or proceeding instituted on account of such default or before the completion of the enforcement of any other remedy under the Fiscal Agent Agreement, the principal of all Bonds that have matured or been called for redemption pursuant to any sinking fund provision and all arrears of interest have been paid and any other Events of Default which may have occurred have been remedied, then the Bond Owners Committee or, if there is none, the Owners of 25% in aggregate Bond Obligation of Bonds then Outstanding may, by written notice to the City, rescind or annul such declaration and its consequences. No such rescission or annulment will extend to or affect any subsequent default or impair any right consequent thereon. Receiver. Upon the occurrence and continuation of an Event of Default for a period of 90 days, the Bond Owners Committee or, if there is none, the Owners of 25% in aggregate Bond Obligation of Bonds then Outstanding will be entitled to the appointment of a receiver upon application to any court of competent jurisdiction in the State of California. Any receiver so appointed may enter and take possession of the Electric System, operate, maintain and repair the same, to the extent permitted by law impose and prescribe rates, fees and other charges, and receive and apply all Net Income thereafter arising therefrom in the same manner as the City itself might do. No bond will be required of such receiver. Other Remedies; Rights of Bond Owners. Upon the occurrence and continuation of an Event of Default the Owners may proceed to protect and enforce their rights by mandamus or other suit, action or proceeding at law or in equity, including an action for specific performance of any agreement contained in the Fiscal Agent Agreement. No remedy conferred by the Fiscal Agent Agreement upon or reserved to the Owners is intended to be exclusive of any other remedy, but each such remedy will be cumulative and will be in addition to any other remedy given to the Bond Owners under the Fiscal Agent Agreement or now or hereafter existing at law or in equity or by statute. No delay or omission to exercise any right or power accruing upon any default or Event of Default will impair any such right or power or will be construed to be a waiver of any such default or Event of Default or acquiescence therein, and every such right and power may be exercised from time to time and as often as may be deemed expedient. No waiver of any default or Event of Default by the Owners will extend to or will affect any subsequent default or Event of Default or will impair any rights or remedies consequent thereon. Unconditional Right To Receive Principal, Accreted Value, Premium and Interest. Nothing in the Fiscal Agent Agreement will, however, affect or impair the right of any Owner to enforce, by action at law, payment of the principal and Accreted Value of, premium, if any, or interest on any Bond at and after the maturity thereof, or on the date fixed for redemption or upon the same being declared due prior to maturity as provided in the Fiscal Agent Agreement, or the obligation of the City to pay the principal and Accreted Value of, premium, if any, and D-19

164 interest on each of the Bonds issued to the respective holders thereof at the time and place, from the source and in the manner expressed in the Fiscal Agent Agreement and in the Bond. The Fiscal Agent Appointment; Duties, Immunities and Liabilities of Fiscal Agent. The Fiscal Agent is authorized and directed to mail interest payments to the Owners. The Fiscal Agent is authorized and directed to pay the principal of and, where applicable, premium on the Bonds when the same are duly presented to it for payment at maturity or on call and redemption, to provide for the registration of transfer and exchange of Bonds presented to it for such purposes, to provide for the cancellation of Bonds all as provided in the Fiscal Agent Agreement and any Supplemental Fiscal Agent Agreement, and to provide for the authentication of Bonds, and will perform all other duties assigned to or imposed on it as provided in the Fiscal Agent Agreement and any Supplemental Fiscal Agent Agreement. The Fiscal Agent will keep accurate records of all funds administered by it and all Bonds paid and discharged by it. The Fiscal Agent initially appointed and any successor thereof may be removed by the City and a successor or successors appointed; provided that each such successor will be a bank or a trust company doing business in and having an office in the city where the predecessor did business and had an office. So long as any Bonds are Outstanding and unpaid, the Fiscal Agent or any successor thereof designated by the City will continue to be the Fiscal Agent of the City for all of said purposes until the designation of a successor as Fiscal Agent. A Fiscal Agent appointed under the Fiscal Agent Agreement may resign at any time upon 90 days written notice and after appointment of a successor. Upon merger, consolidation, or reorganization of a Fiscal Agent, the City will appoint a new Fiscal Agent, which may be the corporation resulting from such reorganization. Liability of Fiscal Agent. The recitals of fact and all promises, covenants and agreements contained in the Fiscal Agent Agreement and in the Bonds will be taken as statements, promises, covenants and agreements of the City, and the Fiscal Agent assumes no responsibility for the correctness of the same and makes no representations as to the validity or sufficiency of the Fiscal Agent Agreement or of the Bonds, and will incur no responsibility in respect thereof, other than in connection with its duties or obligations in the Fiscal Agent Agreement or in the Bonds or in the certificate of authentication assigned to or imposed upon the Fiscal Agent. The Fiscal Agent will be under no responsibility or duty with respect to the issuance of the Bonds for value. The Fiscal Agent will not be liable in connection with the performance of its duties under the Fiscal Agent Agreement, except for its own gross negligence or default. Modification or Amendment of the Fiscal Agent Agreement Amendments Permitted. The Fiscal Agent Agreement and the rights and obligations of the City, the Owners of the Bonds and the Fiscal Agent may be modified or amended from time to time and at any time by a Supplemental Fiscal Agent Agreement, which the City and the Fiscal Agent may enter into when the written consent of the Owners of a majority in aggregate amount of Bond Obligation of the Bonds (or, if such Supplemental Fiscal Agent Agreement is only applicable to a Series of Bonds, such Series of Bonds) then Outstanding has been filed with the Fiscal Agent; provided that if such modification or amendment will, by its terms, not take D-20

165 effect so long as any Bonds of any particular maturity remain Outstanding, the consent of the Owners of such Bonds will not be required and such Bonds will not be deemed to be Outstanding for the purpose of any calculation of Bonds Outstanding under the Fiscal Agent Agreement. In lieu of satisfying certain requirements of the Fiscal Agent Agreement, the Fiscal Agent Agreement and the rights and obligations of the City and of the Owners of the Bonds and of the Fiscal Agent may also be modified or amended at any time by a Supplemental Fiscal Agent Agreement entered into by the City and the Fiscal Agent which will become binding when the written consents of each provider of a letter of credit or a policy of bond insurance for the Bonds have been filed with the Fiscal Agent, provided that at such time the payment of all the principal of and interest on all Outstanding Bonds shall be insured by a policy or policies of municipal bond insurance or payable under a letter of credit the provider of which is not in default under any such policy of municipal bond insurance or letter of credit. A copy of each such Supplemental Fiscal Agent Agreement will be sent by the City to Fitch and Standard & Poor s. No such modification or amendment will (a) extend the fixed maturity of any Bond, or reduce the amount of principal thereof, or extend the time of payment or reduce the amount of any mandatory sinking account payment provided for the payment of any Bond, or reduce the rate of interest thereon, or extend the time of payment of interest thereon, or reduce any premium payable upon the redemption thereof, without the consent of the Owner of each Bond so affected, or (b) reduce the aforesaid percentage of Bond Obligation the consent of the Owners of which is required to effect any such modification or amendment, or permit the creation of any lien on the Net Income prior to or on a parity with the lien created by the Fiscal Agent Agreement, or deprive the Owners of the Bonds of the lien created by the Fiscal Agent Agreement on such Net Income (in each case, except as expressly provided in the Fiscal Agent Agreement), without the consent of the Owners of all of the Bonds then Outstanding. It will not be necessary for the consent of the Bond Owners to approve the particular form of any Supplemental Fiscal Agent Agreement, but it will be sufficient if such consent shall approve the substance thereof. Promptly after the execution and delivery by the Fiscal Agent and the City of any Supplemental Fiscal Agent Agreement pursuant to these provisions, the Fiscal Agent will mail a notice, setting forth in general terms the substance of such Supplemental Fiscal Agent Agreement to the Owners of the Bonds at the addresses shown on the registration books of the Fiscal Agent. Any failure to give such notice, or any defect therein, will not, however, in any way impair or affect the validity of any such Supplemental Fiscal Agent Agreement. The Fiscal Agent Agreement and the rights and obligations of the City, of the Fiscal Agent and of the Owners of the Bonds may also be modified or amended from time to time and at any time by a Supplemental Fiscal Agent. Agreement, which the City and the Fiscal Agent may enter into without the consent of any Bond Owners or any providers of any letter of credit or policy of municipal bond insurance for the Bonds but only to the extent permitted by law and only for any one or more of the following purposes: (1) to add to the covenants and agreements of the City contained in the Fiscal Agent Agreement other covenants and agreements thereafter to be observed, to pledge or assign additional security for the Bonds (or any portion thereof), or to surrender D-21

166 Defeasance any right or power reserved in the Fiscal Agent Agreement to or conferred upon the City; (2) to make such provisions for the purpose of curing any ambiguity, inconsistency or omission, or of curing or correcting any defective provision, contained in the Fiscal Agent Agreement, or in regard to matters or questions arising under the Fiscal Agent Agreement, as the City may deem necessary or desirable, and that will not materially and adversely affect the interests of the Owners of the Bonds; (3) to modify, amend or supplement the Fiscal Agent Agreement in such manner as to permit its qualification under the Trust Fiscal Agent Agreement 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, and that will not materially and adversely affect the interests of the Owners of the Bonds; (4) to make modifications or adjustments necessary, appropriate or desirable to provide for the issuance of Variable Rate Indebtedness, Capital Appreciation Indebtedness, Convertible Capital Appreciation Indebtedness or Parity Obligations with such interest rate, payment, maturity and other terms as the City may deem desirable that does not adversely affect the interests of the Owners of any Series of Bonds then Outstanding; (5) to provide for the issuance of Bonds in book-entry form or bearer form, provided that no such provision will materially and adversely affect the interests of the Owners of the Bonds; (6) to maintain the exclusion of interest on a Series of Bonds from gross income for purposes of federal income taxation and to make such provisions as are necessary or appropriate to ensure such exclusion; (7) to provide for the issuance of an additional Series of Bonds; and (8) for any other purpose that does not materially and adversely affect the interests of the Owners of the Bonds. Discharge of Fiscal Agent Agreement. The Bonds may be paid by the City in any of the following ways: (a) by paying or causing to be paid the Bond Obligations of and interest on such Outstanding Bonds, as and when the same become due and payable; (b) by depositing with the Fiscal Agent, an escrow agent or other fiduciary, in trust, at or before maturity, money or securities in the necessary amount (as provided in the Fiscal Agent Agreement) to pay or redeem such Outstanding Bonds; or D-22

167 (c) Bonds. by delivering to the Fiscal Agent, for cancellation by it, such Outstanding If the City shall pay all Series for which any Bonds are Outstanding and also pay or cause to be paid all other sums payable under the Fiscal Agent Agreement by the City, then and in that case, at the election of the City (evidenced by a Certificate of the City, filed with the Fiscal Agent, signifying the intention of the City to discharge all such indebtedness and the Fiscal Agent Agreement), and notwithstanding that any Bonds shall not have been surrendered for payment, the Fiscal Agent Agreement and the pledge of Net Income made under the Fiscal Agent Agreement and all covenants, agreements and other obligations of the City under the Fiscal Agent Agreement will cease, terminate, become void and be completely discharged and satisfied. In such event, upon Request of the City, the Fiscal Agent will cause an accounting for such period or periods as may be determined by the City to be prepared and filed with the City and will execute and deliver to the City all such instruments as may be necessary or desirable to evidence such discharge and satisfaction, as evidenced by a verification report, are not required for the payment or redemption of Bonds not theretofore surrendered for such payment or redemption. Discharge of Liability on Bonds. Upon the deposit with the Fiscal Agent, escrow agent or other fiduciary, in trust, at or before maturity, of money or securities in the necessary amount (as provided in the Fiscal Agent Agreement) to pay or redeem any Outstanding Bond (whether upon or prior to its maturity or the redemption date of such Bond), provided that, if such Bond is to be redeemed prior to maturity, notice of such redemption shall have been given as provided in the Fiscal Agent Agreement or provision shall have been made for the giving of such notice, then all liability of the City in respect of such Bond will cease, terminate and be completely discharged, provided that the Owner thereof will thereafter be entitled to the payment of the principal of and premium, if any, and interest on the Bonds, and the City will remain liable for such payment, but only out of such money or securities deposited with the Fiscal Agent as aforesaid for their payment, subject, however, to the continuing duties of the Fiscal Agent under the Fiscal Agent Agreement. The City may at any time surrender to the Fiscal Agent for cancellation by it any Bonds previously issued and delivered, which the City may have acquired in any manner whatsoever, and such Bonds, upon such surrender and cancellation, will be deemed to be paid and retired. Deposit of Money or Securities with Fiscal Agent. Whenever in the Fiscal Agent Agreement it is provided or permitted that there be deposited with or held in trust by the Fiscal Agent, an escrow agent or other fiduciary in trust, money or securities in the necessary amount to pay or redeem any Bonds, the money or securities so to be deposited or held may include money or securities held by the Fiscal Agent, an escrow agent or other fiduciary in trust, will be: (a) lawful money of the United States of America in an amount equal to the Bond Obligation of such Bonds and all unpaid interest thereon to maturity, except that, in the case of Bonds which are to be redeemed prior to maturity and in respect of which notice of such redemption shall have been given as provided in the Fiscal Agent Agreement or provision satisfactory to the Fiscal Agent shall have been made for the giving of such notice, the amount to be deposited or held will be the Bond Obligation or D-23

168 Redemption Price of such Bonds and all unpaid interest thereon to the Redemption Date; or (b) Federal Securities, the principal of and interest on which when due will, in the opinion of an independent certified public accountant delivered to the Fiscal Agent (upon which opinion the Fiscal Agent may conclusively rely), provide money sufficient to pay the Bond Obligation or Redemption Price of and all unpaid interest to maturity, or to the redemption date, as the case may be, on the Bonds to be paid or redeemed, as such Bond Obligation or Redemption Price and interest become due, provided that, in the case of Bonds which are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as in provided in the Fiscal Agent Agreement or provision satisfactory to the Fiscal Agent shall have been made for the giving of such notice; provided, in each case, that the Fiscal Agent shall have been irrevocably instructed (by the terms of the Fiscal Agent Agreement or by Request of the City) to apply such money to the payment of such Bond Obligation or Redemption Price and interest with respect to such Bonds, Special Insurance Provisions So long as the payment of principal of and interest on any Bond is insured by a municipal bond insurance policy issued simultaneously with the delivery of that Series of Bonds, notwithstanding anything in the Fiscal Agent Agreement to the contrary, the bond insurer may be deemed to be the sole Owner of the Bonds it insures for the purpose of exercising any remedies or any voting right or privilege or giving any consent or direction or taking any other action that the Owner of a Bond may be entitled to take pursuant to the Fiscal Agent Agreement. D-24

169 APPENDIX E FORM OF CONTINUING DISCLOSURE AGREEMENT This Continuing Disclosure Agreement (the Disclosure Agreement ), dated as of October 1, 2012, is executed and delivered by the City of Pasadena (the Issuer ) and Digital Assurance Certification, L.L.C., as exclusive Disclosure Dissemination Agent (the Disclosure Dissemination Agent or DAC ) for the benefit of the Holders (hereinafter defined) of the Bonds (hereinafter defined) in order to provide certain continuing disclosure with respect to the Bonds in accordance with Rule 15c2-12 of the United States Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time (the Rule ). The services provided under this Disclosure Agreement solely relate to the execution of instructions received from the Issuer through use of the DAC system and do not constitute advice within the meaning of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act ). DAC will not provide any advice or recommendation to the Issuer or anyone on the Issuer s behalf regarding the issuance of municipal securities or any municipal financial product as defined in the Act and nothing in this Disclosure Agreement shall be interpreted to the contrary. SECTION 1. Definitions. Capitalized terms not otherwise defined in this Disclosure Agreement shall have the meaning assigned in the Rule or, to the extent not in conflict with the Rule, in the Official Statement (hereinafter defined). The capitalized terms shall have the following meanings: Annual Report means an Annual Report described in and consistent with Section 3 of this Disclosure Agreement. Annual Filing Date means the date, set in Sections 2(a) and 2(f), by which the Annual Report is to be filed with the MSRB. Annual Financial Information means annual financial information as such term is used in paragraph (b)(5)(i) of the Rule and specified in Section 3(a) of this Disclosure Agreement. Audited Financial Statements means the financial statements (if any) of the Issuer for the prior fiscal year, certified by an independent auditor as prepared in accordance with generally accepted accounting principles or otherwise, as such term is used in paragraph (b)(5)(i) of the Rule and specified in Section 3(a)(i) of this Disclosure Agreement. Bonds means the bonds as listed on the attached Exhibit A, with the 9-digit CUSIP numbers relating thereto. Certification means a written certification of compliance signed by the Disclosure Representative stating that the Annual Report, Audited Financial Statements, Notice Event notice, Failure to File Event notice, Voluntary Event Disclosure or Voluntary Financial Disclosure delivered to the Disclosure Dissemination Agent is the Annual Report, Audited Financial Statements, Notice Event notice, Failure to File Event notice, Voluntary Event Disclosure or Voluntary Financial Disclosure required to be submitted to the MSRB under this Disclosure Agreement. A Certification shall accompany each such document submitted to the Disclosure Dissemination Agent by the Issuer and include the full name of the Bonds and the 9-digit CUSIP numbers for all Bonds to which the document applies. E-1

170 Disclosure Representative means the Director of Finance of the Issuer or his or her designee, or such other person as the Issuer shall designate in writing to the Disclosure Dissemination Agent from time to time as the person responsible for providing Information to the Disclosure Dissemination Agent. Disclosure Dissemination Agent means Digital Assurance Certification, L.L.C., acting in its capacity as Disclosure Dissemination Agent hereunder, or any successor Disclosure Dissemination Agent designated in writing by the Issuer pursuant to Section 9 hereof. Failure to File Event means the Issuer s failure to file an Annual Report on or before the Annual Filing Date. Force Majeure Event means: (i) acts of God, war, or terrorist action; (ii) failure or shut-down of the Electronic Municipal Market Access system maintained by the MSRB; or (iii) to the extent beyond the Disclosure Dissemination Agent s reasonable control, interruptions in telecommunications or utilities services, failure, malfunction or error of any telecommunications, computer or other electrical, mechanical or technological application, service or system, computer virus, interruptions in Internet service or telephone service (including due to a virus, electrical delivery problem or similar occurrence) that affect Internet users generally, or in the local area in which the Disclosure Dissemination Agent or the MSRB is located, or acts of any government, regulatory or any other competent authority the effect of which is to prohibit the Disclosure Dissemination Agent from performance of its obligations under this Disclosure Agreement. Fiscal Agent means The Bank of New York Mellon Trust Company, N.A., as successor fiscal agent under that Electric Revenue Bond Fiscal Agent Agreement, dated as of August 1, 1998, by and between the Issuer and the Fiscal Agent, as amended and supplemented, including as amended and supplemented by the Seventh Supplement to Electric Revenue Bond Fiscal Agent Agreement, dated as of October 1, 2012, by and between the Issuer and the Fiscal Agent, relating to Bonds. Holder means any person (a) having the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Bonds (including persons holding Bonds through nominees, depositories or other intermediaries) or (b) treated as the owner of any Bonds for federal income tax purposes. Information means, collectively, the Annual Reports, the Audited Financial Statements (if any), the Notice Event notices, the Failure to File Event notices, the Voluntary Event Disclosures and the Voluntary Financial Disclosures. MSRB means the Municipal Securities Rulemaking Board established pursuant to Section 15B(b)(1) of the Securities Exchange Act of 1934 or any other entity designated or authorized by the Securities and Exchange Commission to receive reports pursuant to the Rule. Until otherwise designated by the MSRB or the Securities and Exchange Commission, filings with the MSRB are to be made through the Electronic Municipal Marketplace Access (EMMA) website of the MSRB, currently located at Notice Event means any of the events enumerated in paragraph (b)(5)(i)(c) of the Rule and listed in Section 4(a) of this Disclosure Agreement. Obligated Person means any person, including the Issuer, who is either generally or through an enterprise, fund, or account of such person committed by contract or other arrangement to support E-2

171 payment of all, or part of the obligations on the Bonds (other than providers of municipal bond insurance, letters of credit, or other liquidity facilities). With respect to the Bonds, only the Issuer constitutes the Obligated Person. Official Statement means that Official Statement dated September 24, 2012 prepared by the Issuer in connection with the Bonds, as listed on Appendix A. Voluntary Event Disclosure means information of the category specified in any of subsections (e)(vi)(1) through (e)(vi)(11) of Section 2 of this Disclosure Agreement that is accompanied by a Certification of the Disclosure Representative containing the information prescribed by Section 7(a) of this Disclosure Agreement. Voluntary Financial Disclosure means information of the category specified in any of subsections (e)(vii)(1) through (e)(vii)(9) of Section 2 of this Disclosure Agreement that is accompanied by a Certification of the Disclosure Representative containing the information prescribed by Section 7(b) of this Disclosure Agreement. SECTION 2. Provision of Annual Reports and Other Reports. (a) The Issuer shall provide, annually, an electronic copy of the Annual Report and Certification to the Disclosure Dissemination Agent, together with a copy for the Fiscal Agent, not later than 30 days prior to the Annual Filing Date. Promptly upon receipt of an electronic copy of the Annual Report and the Certification, the Disclosure Dissemination Agent shall provide an Annual Report to the MSRB not later than 185 days after the end of the Issuer s Fiscal Year (presently June 30), commencing with the report for Fiscal Year Such date and each anniversary thereof is the Annual Filing Date. The Annual Report must be submitted in electronic format, accompanied by such identifying information as is prescribed by the MSRB. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may cross-reference other information as provided in Section 3 of this Disclosure Agreement. (b) If on the fifteenth (15th) day prior to the Annual Filing Date, the Disclosure Dissemination Agent has not received a copy of the Annual Report and Certification, the Disclosure Dissemination Agent shall contact the Disclosure Representative by telephone and in writing (which may be by ) to remind the Issuer of its undertaking to provide the Annual Report pursuant to Section 2(a). Upon such reminder, the Disclosure Representative shall either (i) provide the Disclosure Dissemination Agent with an electronic copy of the Annual Report and the Certification) no later than two (2) business days prior to the Annual Filing Date, or (ii) instruct the Disclosure Dissemination Agent in writing that the Issuer will not be able to file the Annual Report within the time required under this Disclosure Agreement, state the date by which the Annual Report for such year will be provided and instruct the Disclosure Dissemination Agent that a Notice Event as described in Section 4(a)(12) has occurred and to immediately provide a notice to the MSRB in substantially the form attached as Exhibit B. (c) If the Disclosure Dissemination Agent has not received an Annual Report and Certification by 6:00 p.m. Eastern time on Annual Filing Date (or, if such Annual Filing Date falls on a Saturday, Sunday or holiday, then the first business day thereafter) for the Annual Report, a Failure to File Event shall have occurred and the Issuer irrevocably directs the Disclosure Dissemination Agent to immediately send a notice to the MSRB in substantially the form attached as Exhibit B. (d) If Audited Financial Statements of the Issuer are prepared but not available prior to the Annual Filing Date, the Issuer shall, when the Audited Financial Statements are available, provide in a E-3

172 timely manner an electronic copy to the Disclosure Dissemination Agent, accompanied by a Certification, together with a copy for the Fiscal Agent, for filing with the MSRB. (e) The Disclosure Dissemination Agent shall: (i) (ii) (iii) verify the filing specifications of the MSRB each year prior to the Annual Filing Date; upon receipt, promptly file each Annual Report received under Sections 2(a) and 2(b) with the MSRB; upon receipt, promptly file each Audited Financial Statement received under Section 2(d) with the MSRB; upon receipt, promptly file the text of each Notice Event received under Sections 4(a) and 4(b)(ii) with the MSRB, identifying the Notice Event as instructed by the Issuer pursuant to Section 4(a) or 4(b)(ii) (being any of the categories set forth below) when filing pursuant to Section 4(c) of this Disclosure Agreement: 1. Principal and interest payment delinquencies; 2. Non-Payment related defaults, if material; 3. Unscheduled draws on debt service reserves reflecting financial difficulties; 4. Unscheduled draws on credit enhancements reflecting financial difficulties; 5. Substitution of credit or liquidity providers, or their failure to perform; 6. Adverse tax opinions, IRS notices or events affecting the tax status of the security; 7. Modifications to rights of securities holders, if material; 8. Bond calls, if material; 9. Defeasances; 10. Release, substitution, or sale of property securing repayment of the securities, if material; 11. Rating changes; 12. Tender offers; 13. Bankruptcy, insolvency, receivership or similar event of the obligated person; 14. Merger, consolidation, or acquisition of the obligated person, if material; and E-4

173 15. Appointment of a successor or additional trustee, or the change of name of a trustee, if material; (iv) (v) upon receipt (or irrevocable direction pursuant to Section 2(c) of this Disclosure Agreement, as applicable), promptly file a completed copy of Exhibit B to this Disclosure Agreement with the MSRB, identifying the filing as Failure to provide annual financial information as required when filing pursuant to Section 2(b)(ii) or Section 2(c) of this Disclosure Agreement; upon receipt, promptly file the text of each Voluntary Event Disclosure received under Section 7(a) with the MSRB, identifying the Voluntary Event Disclosure as instructed by the Issuer pursuant to Section 7(a) (being any of the categories set forth below) when filing pursuant to Section 7(a) of this Disclosure Agreement: 1. amendment to continuing disclosure undertaking; 2. change in obligated person; 3. notice to investors pursuant to bond documents; 4. certain communications from the Internal Revenue Service; 5. secondary market purchases; 6. bid for auction rate or other securities; 7. capital or other financing plan; 8. litigation/enforcement action; 9. change of tender agent, remarketing agent, or other on-going party; 10. derivative or other similar transaction; and 11. other event-based disclosures; (vi) upon receipt, promptly file the text of each Voluntary Financial Disclosure received under Section 7(b) with the MSRB, identifying the Voluntary Financial Disclosure as instructed by the Issuer pursuant to Section 7(b) (being any of the categories set forth below) when filing pursuant to Section 7(b) of this Disclosure Agreement: 1. quarterly/monthly financial information; 2. change in fiscal year/timing of annual disclosure; 3. change in accounting standard; 4. interim/additional financial information/operating data; 5. budget; E-5

174 6. investment/debt/financial policy; 7. information provided to rating agency, credit/liquidity provider or other third party; 8. consultant reports; and 9. other financial/operating data. (vii) provide the Issuer evidence of the filings of each of the above when made, which shall be by means of the DAC system, for so long as DAC is the Disclosure Dissemination Agent under this Disclosure Agreement. (f) The Issuer may adjust the Annual Filing Date upon change of its fiscal year by providing written notice of such change and the new Annual Filing Date to the Disclosure Dissemination Agent, Trustee (if any) and the MSRB, provided that the period between the existing Annual Filing Date and new Annual Filing Date shall not exceed one year. (g) Any Information received by the Disclosure Dissemination Agent before 6:00 p.m. Eastern time on any business day that it is required to file with the MSRB pursuant to the terms of this Disclosure Agreement and that is accompanied by a Certification and all other information required by the terms of this Disclosure Agreement will be filed by the Disclosure Dissemination Agent with the MSRB no later than 11:59 p.m. Eastern time on the same business day; provided, however, the Disclosure Dissemination Agent shall have no liability for any delay in filing with the MSRB if such delay is caused by a Force Majeure Event provided that the Disclosure Dissemination Agent uses reasonable efforts to make any such filing as soon as possible. SECTION 3. Content of Annual Reports. (a) The Issuer s Annual Report shall contain or include by reference the following: (i) (ii) (iii) The Issuer s annual Comprehensive Annual Financial Report (the CAFR ) which shall include the audited financial statements of the Issuer s Light and Power Fund for the prior fiscal year, prepared in accordance with generally accepted accounting principles as promulgated to apply to governmental entities from time to time by the Governmental Accounting Standards Board. If the Issuer s audited financial statements are not available by the time the Annual Report is required to be filed pursuant to Section 2(a), the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the final Official Statement, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available; Pasadena Water and Power s most recently published Annual Report, not previously filed with the MSRB; Updated information comparable to the information in the following tables as they appear in the Official Statement relating to the Bonds: 1. Table 3 entitled TOTAL POWER GENERATED AND PURCHASED: PEAK DEMAND (MWh); E-6

175 2. Table 4 entitled POWER SUPPLY RESOURCES; 3. Table 7 entitled CUSTOMERS, ENERGY SALES AND REVENUES; 4. Table 9 entitled OUTSTANDING DEBT OF JOINT ACTION AGENCIES; and 5. Table 10 entitled HISTORICAL OPERATING RESULTS AND DEBT SERVICE COVERAGE; (b) Any or all of the items listed above may be included by specific reference from other documents, including official statements of debt issues with respect to which the Issuer is an Obligated Person, which have been previously filed with the MSRB or the Securities and Exchange Commission or available to the public on the MSRB Internet website. If the document incorporated by reference is a final official statement, it must be available from the MSRB. The Issuer will clearly identify each such document so incorporated by reference. Any Annual Financial Information containing modified operating data or financial information is required to explain, in narrative form, the reasons for the modification and the impact of the change in the type of operating data or financial information being provided. SECTION 4. Reporting of Notice Events. (a) Reporting of Notice Events. Event: The occurrence of any of the following events with respect to the Bonds constitutes a Notice 1. Principal and interest payment delinquencies; 2. Non-payment related defaults, if material; 3. Unscheduled draws on debt service reserves reflecting financial difficulties; 4. Unscheduled draws on credit enhancements reflecting financial difficulties; 5. Substitution of credit or liquidity providers, or their failure to perform; 6. Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the Bonds, or other material events affecting the tax status of the Bonds; 7. Modifications to rights of Bond holders, if material; 8. Bond calls, if material, and tender offers; 9. Defeasances; E-7

176 10. Release, substitution, or sale of property securing repayment of the Bonds, if material; 11. Rating changes; 12. Bankruptcy, insolvency, receivership or similar event of the Obligated Person; Note to subsection (a)(12) of this Section 4: For the purposes of the event described in subsection (a)(12) of this Section 4, the event is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for an Obligated Person in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the Obligated Person, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the Obligated Person. 13. The consummation of a merger, consolidation, or acquisition involving an Obligated Person or the sale of all or substantially all of the assets of the Obligated Person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and 14. Appointment of a successor or additional trustee or the change of name of a trustee, if material. The Issuer shall, in a timely manner not in excess of ten business days after its occurrence, notify the Disclosure Dissemination Agent in writing of the occurrence of a Notice Event. Such notice shall instruct the Disclosure Dissemination Agent to report the occurrence pursuant to subsection (c) and shall be accompanied by a Certification. Such notice or Certification shall identify the Notice Event that has occurred (which shall be any of the categories set forth in Section 2(e)(iv) of this Disclosure Agreement), include the text of the disclosure that the Issuer desires to make, contain the written authorization of the Issuer for the Disclosure Dissemination Agent to disseminate such information, and identify the date the Issuer desires for the Disclosure Dissemination Agent to disseminate the information (provided that such date is not later than the tenth business day after the occurrence of the Notice Event). (b) The Disclosure Dissemination Agent is under no obligation to notify the Issuer or the Disclosure Representative of an event that may constitute a Notice Event. In the event the Disclosure Dissemination Agent so notifies the Disclosure Representative, the Disclosure Representative will within two business days of receipt of such notice (but in any event not later than the tenth business day after the occurrence of the Notice Event, if the Issuer determines that a Notice Event has occurred), instruct the Disclosure Dissemination Agent that (i) a Notice Event has not occurred and no filing is to be made or (ii) a Notice Event has occurred and the Disclosure Dissemination Agent is to report the occurrence pursuant to subsection (c) of this Section 4, together with a Certification. Such Certification shall identify the Notice Event that has occurred (which shall be any of the categories set forth in Section 2(e)(iv) of E-8

177 this Disclosure Agreement), include the text of the disclosure that the Issuer desires to make, contain the written authorization of the Issuer for the Disclosure Dissemination Agent to disseminate such information, and identify the date the Issuer desires for the Disclosure Dissemination Agent to disseminate the information (provided that such date is not later than the tenth business day after the occurrence of the Notice Event). (c) If the Disclosure Dissemination Agent has been instructed by the Issuer as prescribed in subsection (a) or (b)(ii) of this Section 4 to report the occurrence of a Notice Event, the Disclosure Dissemination Agent shall promptly file a notice of such occurrence with the MSRB in accordance with Section 2(e)(iv) hereof. SECTION 5. CUSIP Numbers. Whenever providing information to the Disclosure Dissemination Agent, including but not limited to Annual Reports, documents incorporated by reference to the Annual Reports, Audited Financial Statements, Notice Event notices, Failure to File Event notices, Voluntary Event Disclosures and Voluntary Financial Disclosures, the Issuer shall indicate the full name of the Bonds and the 9-digit CUSIP numbers for the Bonds as to which the provided information relates. SECTION 6. Additional Disclosure Obligations. The Issuer acknowledges and understands that other state and federal laws, including but not limited to the Securities Act of 1933 and Rule 10b-5 promulgated under the Securities Exchange Act of 1934, may apply to the Issuer, and that the failure of the Disclosure Dissemination Agent to so advise the Issuer shall not constitute a breach by the Disclosure Dissemination Agent of any of its duties and responsibilities under this Disclosure Agreement. The Issuer acknowledges and understands that the duties of the Disclosure Dissemination Agent relate exclusively to execution of the mechanical tasks of disseminating information as described in this Disclosure Agreement. SECTION 7. Voluntary Filings. (a) The Issuer may instruct the Disclosure Dissemination Agent to file a Voluntary Event Disclosure with the MSRB from time to time pursuant to a Certification of the Disclosure Representative. Such Certification shall identify the Voluntary Event Disclosure (which shall be any of the categories set forth in Section 2(e)(vi) of this Disclosure Agreement), include the text of the disclosure that the Issuer desires to make, contain the written authorization of the Issuer for the Disclosure Dissemination Agent to disseminate such information, and identify the date the Issuer desires for the Disclosure Dissemination Agent to disseminate the information. If the Disclosure Dissemination Agent has been instructed by the Issuer as prescribed in this Section 7(a) to file a Voluntary Event Disclosure, the Disclosure Dissemination Agent shall promptly file such Voluntary Event Disclosure with the MSRB in accordance with Section 2(e)(vi) hereof. (b) The Issuer may instruct the Disclosure Dissemination Agent to file a Voluntary Financial Disclosure with the MSRB from time to time pursuant to a Certification of the Disclosure Representative. Such Certification shall identify the Voluntary Financial Disclosure (which shall be any of the categories set forth in Section 2(e)(vii) of this Disclosure Agreement), include the text of the disclosure that the Issuer desires to make, contain the written authorization of the Issuer for the Disclosure Dissemination Agent to disseminate such information, and identify the date the Issuer desires for the Disclosure Dissemination Agent to disseminate the information. If the Disclosure Dissemination Agent has been instructed by the Issuer as prescribed in this Section 7(b) to file a Voluntary Financial Disclosure, the Disclosure Dissemination Agent shall promptly file such Voluntary Financial Disclosure with the MSRB in accordance with Section 2(e)(vii) hereof. E-9

178 (c) The parties hereto acknowledge that the Issuer is not obligated pursuant to the terms of this Disclosure Agreement to file any Voluntary Event Disclosure pursuant to Section 7(a) hereof or any Voluntary Financial Disclosure pursuant to Section 7(b) hereof. (d) Nothing in this Disclosure Agreement shall be deemed to prevent the Issuer from disseminating any other information through the Disclosure Dissemination Agent using the means of dissemination set forth in this Disclosure Agreement or including any other information in any Annual Report, Audited Financial Statements, Notice Event notice, Failure to File Event notice, Voluntary Event Disclosure or Voluntary Financial Disclosure, in addition to that required by this Disclosure Agreement. If the Issuer chooses to include any information in any Annual Report, Audited Financial Statements, Notice Event notice, Failure to File Event notice, Voluntary Event Disclosure or Voluntary Financial Disclosure in addition to that which is specifically required by this Disclosure Agreement, the Issuer shall have no obligation under this Disclosure Agreement to update such information or include it in any future Annual Report, Audited Financial Statements, Notice Event notice, Failure to File Event notice, Voluntary Event Disclosure or Voluntary Financial Disclosure. SECTION 8. Termination of Reporting Obligation. The obligations of the Issuer and the Disclosure Dissemination Agent under this Disclosure Agreement shall terminate with respect to the Bonds upon the legal defeasance, prior redemption or payment in full of all of the Bonds, when the Issuer is no longer an obligated person with respect to the Bonds, or upon delivery by the Disclosure Representative to the Disclosure Dissemination Agent of an opinion of nationally recognized bond counsel to the effect that continuing disclosure is no longer required. SECTION 9. Disclosure Dissemination Agent. The Issuer has appointed Digital Assurance Certification, L.L.C. as exclusive Disclosure Dissemination Agent under this Disclosure Agreement. The Issuer may, upon thirty days written notice to the Disclosure Dissemination Agent and the Fiscal Agent, replace or appoint a successor Disclosure Dissemination Agent. Upon termination of DAC s services as Disclosure Dissemination Agent, whether by notice of the Issuer or DAC, the Issuer agrees to appoint a successor Disclosure Dissemination Agent or, alternately, agrees to assume all responsibilities of Disclosure Dissemination Agent under this Disclosure Agreement for the benefit of the Holders of the Bonds. Notwithstanding any replacement or appointment of a successor, the Issuer shall remain liable until payment in full for any and all sums owed and payable to the Disclosure Dissemination Agent. The Disclosure Dissemination Agent may resign at any time by providing thirty days prior written notice to the Issuer. SECTION 10. Remedies in Event of Default. In the event of a failure of the Issuer or the Disclosure Dissemination Agent to comply with any provision of this Disclosure Agreement, the Holders rights to enforce the provisions of this Agreement shall be limited solely to a right, by action in mandamus or for specific performance, to compel performance of the parties obligation under this Disclosure Agreement. Any failure by a party to perform in accordance with this Disclosure Agreement shall not constitute a default on the Bonds or under any other document relating to the Bonds, and all rights and remedies shall be limited to those expressly stated herein. SECTION 11. Duties, Immunities and Liabilities of Disclosure Dissemination Agent. (a) The Disclosure Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Agreement. The Disclosure Dissemination Agent s obligation to deliver the information at the times and with the contents described herein shall be limited to the extent the Issuer has provided such information to the Disclosure Dissemination Agent as required by this Disclosure Agreement. The Disclosure Dissemination Agent shall have no duty with respect to the content of any disclosures or notice made pursuant to the terms hereof. The Disclosure Dissemination Agent shall have E-10

179 no duty or obligation to review or verify any Information or any other information, disclosures or notices provided to it by the Issuer and shall not be deemed to be acting in any fiduciary capacity for the Issuer, the Holders of the Bonds or any other party. The Disclosure Dissemination Agent shall have no responsibility for the Issuer s failure to report to the Disclosure Dissemination Agent a Notice Event or a duty to determine the materiality thereof. The Disclosure Dissemination Agent shall have no duty to determine, or liability for failing to determine, whether the Issuer has complied with this Disclosure Agreement. The Disclosure Dissemination Agent may conclusively rely upon certifications of the Issuer at all times. The obligations of the Issuer under this Section shall survive resignation or removal of the Disclosure Dissemination Agent and defeasance, redemption or payment of the Bonds. (b) The Disclosure Dissemination Agent may, from time to time, consult with legal counsel (either in-house or external) of its own choosing in the event of any disagreement or controversy, or question or doubt as to the construction of any of the provisions hereof or its respective duties hereunder, and shall not incur any liability and shall be fully protected in acting in good faith upon the advice of such legal counsel. The fees and expenses of such counsel shall be payable by the Issuer. (c) All documents, reports, notices, statements, information and other materials provided to the MSRB under this Disclosure Agreement shall be provided in an electronic format and accompanied by identifying information as prescribed by the MSRB. SECTION 12. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement, the Issuer and the Disclosure Dissemination Agent may amend this Disclosure Agreement and any provision of this Disclosure Agreement may be waived, if such amendment or waiver is supported by an opinion of counsel expert in federal securities laws acceptable to both the Issuer and the Disclosure Dissemination Agent to the effect that such amendment or waiver does not materially impair the interests of Holders of the Bonds and would not, in and of itself, cause the undertakings herein to violate the Rule if such amendment or waiver had been effective on the date hereof but taking into account any subsequent change in or official interpretation of the Rule; provided neither the Issuer nor the Disclosure Dissemination Agent shall be obligated to agree to any amendment modifying their respective duties or obligations without their consent thereto. Notwithstanding the preceding paragraph, the Disclosure Dissemination Agent shall have the right to adopt amendments to this Disclosure Agreement necessary to comply with modifications to and interpretations of the provisions of the Rule as announced by the Securities and Exchange Commission from time to time by giving not less than 20 days written notice of the intent to do so together with a copy of the proposed amendment to the Issuer. No such amendment shall become effective if the Issuer shall, within 10 days following the giving of such notice, send a notice to the Disclosure Dissemination Agent in writing that it objects to such amendment. SECTION 13. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of the Issuer, the Fiscal Agent of the Bonds, the Disclosure Dissemination Agent, the participating underwriter (as defined in the Rule), and the Holders from time to time of the Bonds, and shall create no rights in any other person or entity. SECTION 14. Governing Law. This Disclosure Agreement shall be governed by the laws of the State of California (other than with respect to conflicts of laws). E-11

180 SECTION 15. Counterparts. This Disclosure Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. The Disclosure Dissemination Agent and the Issuer have caused this Continuing Disclosure Agreement to be executed, on the date first written above, by their respective officers duly authorized. DIGITAL ASSURANCE CERTIFICATION, L.L.C., as Disclosure Dissemination Agent By: Name: Title: CITY OF PASADENA, CALIFORNIA, as Issuer By: Andrew Green Director of Finance E-12

181 EXHIBIT A NAME AND CUSIP NUMBERS OF BONDS Name of Issuer Obligated Person(s) Name of Bond Issue: City of Pasadena, California City of Pasadena, California $11,780,000 Electric Revenue Refunding Bonds, 2012A Series Date of Issuance: October 4, 2012 Date of Official Statement: September 24, 2012 CUSIP Number: CUSIP Number: CUSIP Number: CUSIP Number: CUSIP Number: CUSIP Number: CUSIP Number: CUSIP Number: CUSIP Number: CUSIP Number: NG NH NJ NK NL NM NN NP NQ NR2 E-13

182 EXHIBIT B NOTICE TO MSRB OF FAILURE TO FILE ANNUAL REPORT Issuer: Obligated Person: Name of Bond Issue: City of Pasadena, California City of Pasadena, California $11,780,000 Electric Revenue Refunding Bonds, 2012A Series Date of Issuance: October 4, 2012 NOTICE IS HEREBY GIVEN that the Issuer has not provided an Annual Report with respect to the above-named Bonds as required by the Continuing Disclosure Agreement, dated as of October 1, 2012, between the Issuer and Digital Assurance Certification, L.L.C., as Disclosure Dissemination Agent. The Issuer has notified the Disclosure Dissemination Agent that it anticipates that the Annual Report will be filed by. Dated: DIGITAL ASSURANCE CERTIFICATION, L.L.C., on behalf of the City of Pasadena, California By: cc: Director of Finance, City of Pasadena E-14

183 APPENDIX F PROPOSED FORM OF OPINION OF BOND COUNSEL Upon issuance of the 2012A Bonds, Fulbright & Jaworski L.L.P., Los Angeles, California, Bond Counsel, proposes to render its final opinion with respect to the 2012A Bonds in substantially the following form: October 4, 2012 City of Pasadena Pasadena, California Ladies and Gentlemen: $11,780,000 City of Pasadena, California Electric Revenue Refunding Bonds, 2012A Series We have acted as bond counsel to the City of Pasadena, California (the City ) in connection with the issuance of the City s Electric Revenue Refunding Bonds, 2012A Series (the 2012A Bonds ) in the aggregate principal amount of $11,780,000. The 2012A Bonds are being issued pursuant to the Charter of the City, as amended (the Charter ), including Article XIV thereof, Ordinance No (the Ordinance ), adopted by the City Council of the City (the Council ) on August 13, 2012, and by an Electric Revenue Bond Fiscal Agent Agreement, dated as of August 1, 1998, by and between the City and The Bank of New York Mellon Trust Company, N.A. (successor to BNY Western Trust Company), as fiscal agent (the Fiscal Agent ), as amended and supplemented, including as amended and supplemented by a Seventh Supplement to Electric Revenue Bond Fiscal Agent Agreement, dated as of October 1, 2012, each by and between the City and the Fiscal Agent (collectively, the Fiscal Agent Agreement ). In our capacity as bond counsel, we have reviewed the Charter, the Ordinance, resolutions adopted by the City Council, the Fiscal Agent Agreement, certifications of the City, the Fiscal Agent and others, opinions of counsel to the City and the Fiscal Agent, and such other documents, opinions and instruments as we deemed necessary to render the opinions set forth herein. Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Fiscal Agent Agreement. We have assumed the genuineness of all documents and signatures presented to us. We have not undertaken to verify independently, and have assumed, the accuracy of the factual matters represented, warranted or certified in such documents. Furthermore, we have assumed compliance with all covenants and agreements contained in the Fiscal Agent Agreement, including (without limitation) covenants and agreements compliance with which is necessary to assure that future actions, omissions or events will not cause interest on the 2012A Bonds to be included in gross income for federal income tax purposes. F-1

184 Based on and subject to the foregoing, and in reliance thereon, as of the date hereof, we are of the following opinions: 1. The City is authorized and empowered by law, including the Charter, to adopt the Ordinance, to execute and deliver the Fiscal Agent Agreement, to issue the 2012A Bonds, to use the proceeds from the sale thereof for the purposes stated in the Ordinance and the Fiscal Agent Agreement and to pledge the Net Income of the Electric System to the payment of the 2012A Bonds. 2. The Fiscal Agent Agreement has been, pursuant to law, including the Charter and the Ordinance, duly authorized, executed and delivered by, and constitutes the valid and binding obligation of, the City. The Fiscal Agent Agreement creates a valid pledge, to secure the payment of the principal of and interest on the 2012A Bonds, of the Net Income as and to the extent set forth in the Fiscal Agent Agreement and subject to the provisions of the Fiscal Agent Agreement permitting the application thereof for the purposes and on the terms and conditions set forth therein. 3. The 2012A Bonds are valid and binding special obligations of the City and are payable exclusively from the Light and Power Fund of the City s Water and Power Department and certain other funds as provided in the Fiscal Agent Agreement, and are secured by a pledge of and lien upon Net Income of the Electric System on a parity with other obligations of the Electric System payable from Net Income of the Electric System and issued from time to time pursuant to the Fiscal Agent Agreement. The general fund of the City is not liable for the payment of any 2012A Bonds, any premium thereon upon redemption prior to maturity or their interest, nor is the credit or taxing power of the City pledged for the payment of any 2012A Bonds, any premium thereon upon redemption prior to maturity or their interest. The Owner of any 2012A Bond may not compel the exercise of the taxing power by the City or the forfeiture of any of its property. The principal of and interest on any 2012A Bonds and any premiums upon the redemption of any thereof prior to maturity are not a debt of the City nor a legal or equitable pledge, charge, lien or encumbrance upon any of its property or upon any of its income, receipts or revenues, except the Net Income and other funds, security or assets which are pledged to the payment of the 2012A Bonds, interest thereon and any premiums upon redemption. 4. Under existing law, interest on the 2012A Bonds is exempt from personal income taxes of the State of California and, assuming compliance with the covenant described below, interest on the 2012A Bonds is excluded pursuant to section 103(a) of the Internal Revenue Code of 1986 (the Code ) from the gross income of the owners thereof for federal income tax purposes. The 2012A Bonds are not specified private activity bonds within the meaning of section 57(a)(5) of the Code and, therefore, the interest on the 2012A Bonds is not treated as an item of tax preference for purposes of computing the alternative minimum tax imposed by section 55 of the Code; however, the receipt or accrual of interest on the 2012A Bonds owned by a corporation may affect the computation of its alternative minimum taxable income, upon which the alternative minimum tax is imposed. The Code imposes certain requirements that must be met subsequent to the issuance and delivery of the 2012A Bonds for interest thereon to be and remain excluded from the gross income of the owners thereof for federal income tax purposes. Noncompliance with such requirements could cause the interest on the 2012A Bonds to be included in gross income retroactive to the date of issue of the 2012A Bonds. The City has covenanted in the Fiscal Agent Agreement to maintain the exclusion of interest on the 2012A Bonds from the gross income of the owners thereof for federal income tax purposes. F-2

185 The opinions expressed in paragraphs 2 and 3 above are qualified to the extent that the enforceability of the 2012A Bonds and the Fiscal Agent Agreement may be limited by applicable bankruptcy, insolvency, debt adjustment, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors rights generally or as to the availability of any particular remedy. The enforceability of the 2012A Bonds and the Fiscal Agent Agreement is subject to the effect of general principles of equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing, to the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law, and to the limitations on legal remedies against governmental entities in California (including, but not limited to, rights of indemnification). Our opinions expressed in paragraph 4 above are rendered in reliance on representations and certifications of the City made in a Tax Certificate dated the date hereof pertaining to the use, expenditure, and investment of the proceeds of the 2012A Bonds. Except as stated in paragraph 4 above, we express no opinion as to any federal or state tax consequences of the ownership or disposition of the 2012A Bonds. Furthermore, we express no opinion as to any federal, state or local tax law consequences with respect to the 2012A Bonds, or the interest thereon, if any action is taken with respect to the 2012A Bonds or the proceeds thereof upon the advice or approval of other counsel. Our opinions are based on existing law, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may hereafter come to our attention or to reflect any changes in any law that may hereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service; rather, such opinions represent our legal judgment based upon our review of existing law that we deem relevant to such opinions and in reliance upon the representations and covenants referenced above. No opinion is expressed herein on the accuracy, completeness or sufficiency of the Official Statement or other offering material relating to the 2012A Bonds. Very truly yours, F-3

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188 CITY OF PASADENA, CALIFORNIA ELECTRIC REVENUE REFUNDING BONDS, 2012A SERIES